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Tax Compliance as an Evolutionary Coordination Game: An Agent-Based Approach

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  • Kim Bloomquist

    (Internal Revenue Services Office of Research in Washington, D.C, Kim.Bloomquist@irs.gov)

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    Abstract

    Tax reporting compliance by small business owners is modeled in an agent-based framework using concepts and methods based on evolutionary dynamics. A business owner’s ‘‘fitness’’ is a function of net after tax (and post-audit) income. Business owners exhibit heterogeneous tax morale and compliance propensity following four stochastically assigned behavioral ‘‘archetypes’’: Honest, Strategic, Defiant, and Random. The model is calibrated to observations from laboratory experiments and taxpayer random audits. The calibrated model is used to simulate evolutionary changes in a static population of 10,000 small business owners. A simulation using realistic parameters for the probability of audit and penalty rate finds that after fifteen time periods, the initial number of Honest business owners declines by approximately one-third and are displaced by proprietors having either Defiant or Strategic compliance behaviors.

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    Bibliographic Info

    Article provided by in its journal Public Finance Review.

    Volume (Year): 39 (2011)
    Issue (Month): 1 (January)
    Pages: 25-49

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    Handle: RePEc:sae:pubfin:v:39:y:2011:i:1:p:25-49

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    Related research

    Keywords: tax compliance; agent-based modeling; evolutionary game theory; laboratory experiments; random taxpayer audits;

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    Cited by:
    1. Hokamp, Sascha, 2014. "Dynamics of tax evasion with back auditing, social norm updating, and public goods provision – An agent-based simulation," Journal of Economic Psychology, Elsevier, Elsevier, vol. 40(C), pages 187-199.
    2. Pickhardt, Michael & Seibold, Goetz, 2014. "Income tax evasion dynamics: Evidence from an agent-based econophysics model," Journal of Economic Psychology, Elsevier, Elsevier, vol. 40(C), pages 147-160.
    3. Pickhardt, Michael & Prinz, Aloys, 2014. "Behavioral dynamics of tax evasion – A survey," Journal of Economic Psychology, Elsevier, Elsevier, vol. 40(C), pages 1-19.
    4. James Alm & Kim M. Bloomquist & Michael McKee, 2013. "When You Know Your Neighbor Pays Taxes: Information, Peer Effects, and Tax Compliance," Working Papers, Department of Economics, Appalachian State University 13-22, Department of Economics, Appalachian State University.
    5. Alm, James & Cherry, Todd L. & Jones, Michael & McKee, Michael, 2012. "Social programs as positive inducements for tax participation," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 84(1), pages 85-96.

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