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Can strategic uncertainty help deter tax evasion? An experiment on auditing rules

  • Tan, Fangfang
  • Yim, Andrew

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 induces distinctive tax evasion dynamics compared to the flat-rate rule. The results suggest that increasing the level of strategic uncertainty among taxpayers could be an effective device to deter tax evasion.

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Article provided by Elsevier in its journal Journal of Economic Psychology.

Volume (Year): 40 (2014)
Issue (Month): C ()
Pages: 161-174

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Handle: RePEc:eee:joepsy:v:40:y:2014:i:c:p:161-174
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