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Can Strategic Uncertainty Help Deter Tax Evasion? – An Experiment on Auditing Rules

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  • Fangfang Tan
  • Andrew Yim

Abstract

This paper adds to the economic-psychological research on tax compliance by experimentally testing a simple auditing rule that induces strategic uncertainty among taxpayers. Under this rule, termed the bounded rule, taxpayers are informed of the maximum number of audits by a tax authority, so that the audit probability depends on the joint decisions among the taxpayers. We compare the bounded rule to the widely studied flat-rate rule, where taxpayers are informed that they will be audited with a constant probability. The experimental evidence shows that, as theoretically predicted, the bounded rule induces the same level of compliance as the flat-rate rule when strategic uncertainty is low, and a higher level of compliance when strategic uncertainty is high. The bounded rule also suppresses the "bomb crater" effect often observed in prior studies. The results suggest that strategic uncertainty due to interactions among taxpayers could be an effective device to deter tax evasion.

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Paper provided by Max Planck Institute for Tax Law and Public Finance in its series Working Papers with number can_strategic_uncertainty_help_deter_tax_evasion.

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Length: 43 pages
Date of creation: Dec 2011
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Handle: RePEc:mpi:wpaper:can_strategic_uncertainty_help_deter_tax_evasion

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Keywords: Tax auditing; Tax compliance; Strategic uncertainty; Behavioral dynamics; Labaratory experiment;

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