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

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  • Tan, Fangfang
  • Yim, Andrew

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 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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  • Tan, Fangfang & Yim, Andrew, 2014. "Can strategic uncertainty help deter tax evasion? An experiment on auditing rules," Journal of Economic Psychology, Elsevier, vol. 40(C), pages 161-174.
  • Handle: RePEc:eee:joepsy:v:40:y:2014:i:c:p:161-174 DOI: 10.1016/j.joep.2012.11.005
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    Cited by:

    1. Christoph Engel, 2016. "Experimental Criminal Law. A Survey of Contributions from Law, Economics and Criminology," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2016_07, Max Planck Institute for Research on Collective Goods.
    2. repec:exl:22evid:v:2017:y:2017:i:1:p:- is not listed on IDEAS
    3. Dai, Zhixin & Hogarth, Robin M. & Villeval, Marie Claire, 2015. "Ambiguity on audits and cooperation in a public goods game," European Economic Review, Elsevier, vol. 74(C), pages 146-162.
    4. Carsten J. Crede & Liang Lu, 2016. "The effects of endogenous enforcement on strategic uncertainty and cartel deterrence," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 16-08, School of Economics, University of East Anglia, Norwich, UK..
    5. Markussen, Thomas & Putterman, Louis & Tyran, Jean-Robert, 2016. "Judicial error and cooperation," European Economic Review, Elsevier, vol. 89(C), pages 372-388.
    6. Ralph-C. Bayer, 2017. "The Double Dividend of Relative Auditing – Theory and Experiments on Corporate Tax Enforcement," School of Economics Working Papers 2017-14, University of Adelaide, School of Economics.

    More about this item

    Keywords

    Tax auditing; Tax compliance; Strategic uncertainty; Behavioral dynamics; Laboratory experiment;

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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