Revisiting the tax compliance problem using prospect theory

R. Kavita Rao () and Suranjali Tandon ()
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R. Kavita Rao: National Institute of Public Finance and Policy
Suranjali Tandon: National Institute of Public Finance and Policy

Working Papers from National Institute of Public Finance and Policy

Abstract: The paper presents a model for tax compliance based on prospect theory wherein an individual makes the decision whether to file, and declare a certain amount of income, or to not file based on a set of policy parameters as well as his/her preferences. The paper poses the question- at what incomes would individuals choose to file a return and answers the same using a model based on prospect theory. Further, simulations are presented to illustrate the impact of changes in tax rates, penalty and audit probability on the individual's preference to file. The results from the simulation show that for different values of policy parameters there exists crossover income at which individuals would choose to file a return. Given all else, at the exemption threshold of 0.1 million, individuals would choose to file a return at incomes greater than or equal to 0.6 million.

Keywords: prospect theory; compliance; tax; exemption threshold; crossover income (search for similar items in EconPapers)
JEL-codes: D11 H26 H31 K42 (search for similar items in EconPapers)
Pages: 19
Date: 2016-04
New Economics Papers: this item is included in nep-cmp, nep-iue, nep-law, nep-pub and nep-upt
Note: Working Paper 169, 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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