Advanced Search
MyIDEAS: Login

Who Would Benefit from Simplifying the Tax Code? Frank Knight and Gustave Choquet Meet the Internal Revenue Service

Contents:

Author Info

  • Jean-Louis ARCAND

    ()
    (Institut des Hautes Etudes Internationales et du Développement)

  • Grégoire ROTA-GRAZIOSI

    ()
    (Centre d'Etudes et de Recherches sur le Développement International)

  • Kim BLOOMQUIST

Abstract

We consider the classic Allingham and Sandmo (1972) tax compliance problem in the context of the Choquet-Schmeidler Expected Utility (CSEU) model, using the Non-Extremal Outcome (NEO)-additive capacities proposed by Chateauneuf et al (2002), in which Knightian uncertainty (ambiguity) exists concerning the penalty rate faced in the case of an audit. Pessimistic incarnations of the CSEU model can yield much lower underreporting rates than its Expected Utility (EU) counterpart, and do so without the need for moral sentiments, social stigma or probability perception functions. We confirm previous results, obtained in other contexts, showing that ambiguity-aversion reinforces the incentive effects of risk-aversion. We define the concept of a Risk-preserving increase in ambiguity (RPIA), which allows us to consider a change in the distribution of penalty rates such that (i) a CSEU decisionmaker will perceive a change in her welfare, whereas (ii) an EU decisionmaker will not. We also present simulation results that support the view according to which ambiguity aversion explains the use of accounting firms in preparing tax returns. Finally, by modeling a simple game between the taxpayer and the Internal Revenue Service (IRS), we show that increasing ambiguity in the tax code will not be in the IRS's interest if the associated rise in the cost of auditing is sufficiently large. It is therefore likely that increasing complexity (and therefore ambiguity) will reduce tax receipts, even in the presence of ambiguity-averse taxpayers.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://publi.cerdi.org/ed/2005/2005.09.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CERDI in its series Working Papers with number 200509.

as in new window
Length: 48
Date of creation: 2005
Date of revision:
Handle: RePEc:cdi:wpaper:679

Contact details of provider:
Postal: 65 Bd. F. Mitterrand, 63000 Clermont-Ferrand
Phone: (33-4) 73 17 74 00
Fax: (33-4) 73 17 74 28
Web page: http://cerdi.org/
More information through EDIRC

Related research

Keywords: Choquet expected utility; ambiguity; tax compliance;

Other versions of this item:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cdi:wpaper:679. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Vincent Mazenod).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.