Who Responds? Disentangling the Effects of Audits on Individual Tax Compliance Behavior

How does individual tax compliance respond to a change in the audit rate? Most all empirical evidence suggests that an increase in the audit rate increases the compliance rate, a result that is also consistent with standard theoretical analysis of the individual compliance decision. However, this empirical evidence is typically based on estimating an average response across all taxpayers and an average response may conceal much heterogeneity in individual responses. This paper collects individual-level data from identical laboratory experiments across five separate studies with a total of 278 student subjects that generated 8340 individual observations, in which only audit rates are varied, in order to disentangle individual responses to audit rate changes. As with most previous empirical work, the results indicate that the average response across all taxpayers is to increase (decrease) compliance when audit rates increase (decrease). However, this average response conceals enormous heterogeneity in individual responses. When the individual responses are examined in more detail, the data show that many individuals do in fact respond to higher (lower) audit rates by increasing (decreasing) their compliance. However, these individuals represent only about two-thirds of all subjects. In fact, many individuals do not respond at all to audit rate changes. Surprisingly, some individuals actually decrease their compliance when audit rates increase and vice versa. All of these different individual responses indicate that government policy interventions must consider the range of individual behaviors when devising appropriate policies.