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The Impact of Tax Knowledge and Budget Spending Influence on Tax Compliance

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Author Info

  • Djawadi, Behnud Mir

    ()
    (University of Paderborn)

  • Fahr, René

    ()
    (University of Paderborn)

Abstract

We investigate the impact of trust in authorities on tax compliance within a controlled laboratory setting. Embedded in two hypothetical tax systems with high and low power of authorities respectively, we gradually increase trust in authorities in form of tax knowledge about public expenditures and by allowing taxpayers to decide on what public goods they want their tax dollars to be spend for. To clearly disentangle any effects from factors that are known to influence tax compliance from previous studies, we control for tax commitment, risk attitude, income and effort exerted to earn the income which the taxpayers report truthfully or underreport to the tax authority. Non-parametric statistical analyses as well as multivariate regressions provide clear evidence that tax compliance is higher in tax systems with low power of authorities when providing complete transparency on public expenditures and when taxpayers are given the possibility to decide on the use of their taxes. With a powerful tax authority in place which is reflected in high audit rates, compliance does not change when increasing trust in authorities. Our results have important policy implications as the mere hypothetical possibility to express preferences on budget spending influences tax compliance.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7255.

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Length: 39 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7255

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Related research

Keywords: tax evasion; tax compliance; tax knowledge; budget spending; real effort; experimental economics;

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Cited by:
  1. Victoria Prowse & David Gill, 2009. "A Novel Computerized Real Effort Task Based on Sliders," Economics Series Working Papers 435, University of Oxford, Department of Economics.
  2. Doerrenberg, Philipp & Duncan, Denvil, 2012. "Experimental Evidence on the Relationship between Tax Evasion Opportunities and Labor Supply," IZA Discussion Papers 6914, Institute for the Study of Labor (IZA).

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