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Mental accounting and the impact of tax penalty and audit frequency on the declaration of income: An experimental analysis

Author

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  • Maciejovsky, Boris
  • Kirchler, Erich
  • Schwarzenberger, Herbert

Abstract

We investigate (i) whether traders on an experimental asset market form different and separate mental accounts for sale revenues and for dividend earnings and whether (ii) an increase in tax penalty or (iii) an increase in audit frequency increases tax compliance. The results indicate that participants did not form separate mental accounts for sale revenues and for dividend earnings. However in line with prospect theory, it can be shown that a purchase of assets is perceived as a subjective loss that one tries to repair by risk seeking behavior. Participants who increased their net asset holdings declared less income to the tax authorities. Furthermore, the results indicate that an increase in tax penalties as well as an increase in audit frequency increased compliance. In addition, it was found that tax compliance was lower after an audit, especially after the first audit, and that it was lower for participants with high incomes.

Suggested Citation

  • Maciejovsky, Boris & Kirchler, Erich & Schwarzenberger, Herbert, 2001. "Mental accounting and the impact of tax penalty and audit frequency on the declaration of income: An experimental analysis," SFB 373 Discussion Papers 2001,16, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  • Handle: RePEc:zbw:sfb373:200116
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    Cited by:

    1. Kirchler, Erich & Maciejovsky, Boris & Schneider, Friedrich, 2003. "Everyday representations of tax avoidance, tax evasion, and tax flight: Do legal differences matter?," Journal of Economic Psychology, Elsevier, vol. 24(4), pages 535-553, August.
    2. Fochmann, Martin & Kroll, Eike B., 2016. "The effects of rewards on tax compliance decisions," Journal of Economic Psychology, Elsevier, vol. 52(C), pages 38-55.

    More about this item

    Keywords

    mental accounting; tax evasion; prospect theory;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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