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The Effect of Perfect Monitoring of Matched Income on Sales Tax Compliance: An Experimental Investigation

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Author Info
Cathleen Johnson
David Masclet ()
Claude Montmarquette ()

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Abstract

Noncompliance is a quantitatively important phenomenon that affects significantly revenue source for state governments. This phenomenon raises challenging questions about the determinants of tax reporting and also about the appropriate design of a tax system: how many resources should be devoted to auditing? This paper provides specific empirical insights using an experimental approach to measure the effects of systematic sales tax monitoring and the determinants of sales tax compliance. The results indicate that if perfect monitoring is instituted without other complementary policies, an increase in tax revenues is not the likely outcome. A successful policy aiming at reducing fiscal fraud might be a difficult task, once people have decided their equilibrium level of tax compliance. The reference-dependent effect observed in the data suggests that individuals will try to recover their losses following any policy changes even if it means taking more risks.

Les revenus de plusieurs niveaux de gouvernements sont significativement altérés par la fraude fiscale. Découvrir les déterminants de la fraude fiscale est un défi important alors que ce phénomène pose en même temps la question du design du système de taxation. Combien de ressources devons-nous, par exemple, consacrer à l’audit? Cette recherche mobilisant l’économie expérimentale offre une analyse empirique sur les effets d’assurer systématiquement le contrôle de la taxe de vente et d’étudier les déterminants de s’acquitter du paiement de ce type de taxes. Les résultats indiquent que le contrôle parfait de la taxe de vente sans politiques complémentaires n’augmentent pas nécessairement les rentrées fiscales. Une politique efficace pour réduire la fraude fiscale s’avère une tâche difficile si les agents impliqués ont décidé d’un niveau d’équilibre de conformité dans le paiement de leurs taxes. Les données montrent que les participants tendent à recouvrer leurs pertes suite à un changement de politique fiscale même s’ils doivent prendre plus de risques pour y arriver.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2008s-17.

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Date of creation: 01 Jul 2008
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Handle: RePEc:cir:cirwor:2008s-17

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Related research
Keywords: sales tax; perfect monitoring; experimental economics; reference-dependent effect.; taxe de vente; fraude fiscale; économie expérimentale; politiques d’audit.;

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References listed on IDEAS
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  1. Gerxhani, Klarita & Schram, Arthur, 2006. "Tax evasion and income source: A comparative experimental study," Journal of Economic Psychology, Elsevier, vol. 27(3), pages 402-422, June. [Downloadable!] (restricted)
  2. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  3. C. Cadsby & Elizabeth Maynes & Viswanath Trivedi, 2006. "Tax compliance and obedience to authority at home and in the lab: A new experimental approach," Experimental Economics, Springer, vol. 9(4), pages 343-359, December. [Downloadable!] (restricted)
  4. Erard, Brian & Ho, Chih-Chin, 2001. "Searching for ghosts: who are the nonfilers and how much tax do they owe?," Journal of Public Economics, Elsevier, vol. 81(1), pages 25-50, July. [Downloadable!] (restricted)
  5. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November. [Downloadable!] (restricted)
  6. Clotfelter, Charles T, 1983. "Tax Evasion and Tax Rates: An Analysis of Individual Returns," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 363-73, August. [Downloadable!] (restricted)
  7. Marsha Blumenthal & Charles Christian & Joel Slemrod, 1998. "The Determinants of Income Tax Compliance: Evidence from a Controlled Experiment in Minnesota," NBER Working Papers 6575, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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