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Tax Compliance With Two-Sided Uncertainty

Author

Listed:
  • Mark B. Cronshaw

    (University of Colorado at Boulder)

  • James Alm

    (University of Colorado at Boulder)

Abstract

Does government concealment of its audit policies increase or decrease taxpayer compliance? This article analyzes the impact of uncertainty about government audit policies on compliance using a game-theoretic model. The taxpayer is assumed to possess private information about his or her income, but does not know the tax agency's true audit capabilities. Similarly, the tax agency is assumed to possess private information about its audit technology (e.g., the cost of an audit or the probability that an audit will discover unreported income), but does not know a taxpayer's true income. The equilibrium of this game with two-sided uncertainty is determined and analyzed. The equilibrium is also compared to that of a game in which the taxpayer knows the tax agency's audit parameters. The results show that uncertain audit policies may well lead to less compliance, so that a government policy of concealment may be counterproductive.

Suggested Citation

  • Mark B. Cronshaw & James Alm, 1995. "Tax Compliance With Two-Sided Uncertainty," Public Finance Review, , vol. 23(2), pages 139-140, April.
    • Handle: RePEc:sae:pubfin:v:23:y:1995:i:2:p:139-140
    DOI: 10.1177/109114219502300201
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    Cited by:

    1. Kim, Sangheon, 2008. "Does political intention affect tax evasion?," Journal of Policy Modeling, Elsevier, vol. 30(3), pages 401-415.
    2. Noam Goldberg & Isaac Meilijson & Yael Perlman, 2024. "Dynamic history-dependent tax and environmental compliance monitoring of risk-averse firms," Annals of Operations Research, Springer, vol. 334(1), pages 469-495, March.
    3. Alm, James & Shimshack, Jay, 2014. "Environmental Enforcement and Compliance: Lessons from Pollution, Safety, and Tax Settings," Foundations and Trends(R) in Microeconomics, now publishers, vol. 10(4), pages 209-274, December.
    4. Buechel, Berno & Feess, Eberhard & Muehlheusser, Gerd, 2020. "Optimal law enforcement with sophisticated and naïve offenders," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 836-857.
    5. Yoshio Kamijo, 2014. "A theory of strategic auditing: How should we select one member from a homogeneous group?," Working Papers SDES-2014-1, Kochi University of Technology, School of Economics and Management, revised Oct 2014.
    6. Lang, Matthias & Wambach, Achim, 2013. "The fog of fraud – Mitigating fraud by strategic ambiguity," Games and Economic Behavior, Elsevier, vol. 81(C), pages 255-275.
    7. James Alm, 2019. "What Motivates Tax Compliance?," Journal of Economic Surveys, Wiley Blackwell, vol. 33(2), pages 353-388, April.
    8. repec:tur:wpaper:1 is not listed on IDEAS
    9. Arthur Snow & Ronald S. Warren Jr., 2007. "Audit Uncertainty, Bayesian Updating, and Tax Evasion," Public Finance Review, , vol. 35(5), pages 555-571, September.
    10. Kotowski, Maciej H. & Weisbach, David A. & Zeckhauser, Richard J., 2014. "Signaling with Audits: Mimicry, Wasteful Expenditures, and Non-compliance in a Model of Tax Enforcement," Working Paper Series rwp14-001, Harvard University, John F. Kennedy School of Government.
    11. Jannett Highfill & Douglas Thorson & William V. Weber, 1998. "Tax Overwithholding as a Response To Uncertainty," Public Finance Review, , vol. 26(4), pages 376-391, July.
    12. Simone Pellegrino & Massimiliano Piacenza & Gilberto Turati, 2008. "The Runaway Taxpayer or: Is Prior Tax Notice Effective against Scofflaws?," Working papers 01, Former Department of Economics and Public Finance "G. Prato", University of Torino.
    13. Philipp Meyer-Brauns, 2014. "Optimal Auditing with Heterogeneous Audit Perceptions," Working Papers tax-mpg-rps-2014-06, Max Planck Institute for Tax Law and Public Finance.
    14. James, Simon & Edwards, Alison, 2010. "An annotated bibliography of tax compliance and tax compliance costs," MPRA Paper 26106, University Library of Munich, Germany.

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