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Who is audited? Experimental study on rule-based and human tax auditing schemes

Yoshio Kamijo (), Takehito Masuda and Hiroshi Uemura ()
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Hiroshi Uemura: School of Economics and Management, Kochi University of Technology

No SDES-2015-9, Working Papers from Kochi University of Technology, School of Economics and Management

Abstract: In this study, we employ a game theoretic framework to formulate and analyze tax audit schemes; we test the theoretical predictions in a laboratory experiment. We compare five audit schemes including three rule-based audits: random audit rule, cut-off audit rule, and lowest income reporter audited rule. The cut-off audit rule is theoretically optimal but, to the best of our knowledge, it has not been experimentally examined. We also employ a novel experimental design for two schemes involving the human auditor conditions. The rule-based audits experimentally enhance tax compliance as predicted, and cut-off yields the highest tax revenue among the three rule-based audits in the lab. Moreover, beyond our prediction, the human auditor conditions maximized tax revenue among the five schemes in the lab. This suggests that auditors’ strategic ambiguity is another route to enhance tax compliance. We also show that subjects’ social norms regarding tax payment influence the choice of tax evasion, in accordance with the experimental literature.

Keywords: audit schemes; tax evasion; laboratory experiment; cut-off rule; lowest income reporter audited rule; ambiguity (search for similar items in EconPapers)
JEL-codes: C91 D81 H26 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-exp and nep-iue
Date: 2015-01, Revised 2015-01
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Published in SDE Series, January 2015, pages 1-36

Downloads: (external link) First version, 2015 (application/pdf)

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