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Tax Evasion and Equity Theory: An Investigative Approach

  • Sharmila King

    ()

  • Steven Sheffrin

    ()

Traditional economic theory assumes rational individuals with stable preferences who, given an array of options and probabilities, maximize their expected utility. However, experimental research finds that individuals make systematic “mistakes” when attempting to maximize their expected utility. The economic psychology approach includes aspects of the traditional economic approach and the psychological approach that emphasizes values, attitudes, norms, conformity and morals. This paper investigates equity theory and tax evasion using the framework of prospect theory pioneered by Tversky and Kahneman. We design an investigation to identify if individual behavior follows the usual results of prospect theory, given a scenario that frames a perception of inequity. The investigation frames a scenario to invoke a controlled tax regime. The frame varies according to which inequity is being measured, exchange or social. Once the scenario is established, a questionnaire is designed to determine how the individual responds when filing taxes. The responses to the control questions are consistent with prospect theory. However, in general the responses to the framed questions, depicting inequity, are more consistent with expected utility theory. Copyright Kluwer Academic Publishers 2002

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File URL: http://hdl.handle.net/10.1023/A:1016528406214
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Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 9 (2002)
Issue (Month): 4 (August)
Pages: 505-521

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Handle: RePEc:kap:itaxpf:v:9:y:2002:i:4:p:505-521
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  1. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
  2. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
  3. Alm, James & Jackson, Betty R. & McKee, Michael, 1993. "Fiscal exchange, collective decision institutions, and tax compliance," Journal of Economic Behavior & Organization, Elsevier, vol. 22(3), pages 285-303, December.
  4. Elffers, Henk & Hessing, Dick J., 1997. "Influencing the prospects of tax evasion," Journal of Economic Psychology, Elsevier, vol. 18(2-3), pages 289-304, April.
  5. Cowell, F. A., 1992. "Tax evasion and inequity," Journal of Economic Psychology, Elsevier, vol. 13(4), pages 521-543, December.
  6. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  7. Alm, James & McClelland, Gary H & Schulze, William D, 1999. "Changing the Social Norm of Tax Compliance by Voting," Kyklos, Wiley Blackwell, vol. 52(2), pages 141-71.
  8. Rabin, Matthew, 1997. "Psychology and Economics," Department of Economics, Working Paper Series qt8jd5z5j2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  9. Vito Tanzi & Parthasrathi Shome, 1993. "A Primeron Tax Evasion," IMF Working Papers 93/21, International Monetary Fund.
  10. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
  11. Wallschutzky, I. G., 1984. "Possible causes of tax evasion," Journal of Economic Psychology, Elsevier, vol. 5(4), pages 371-384, December.
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