Can Strategic Uncertainty Help Deter Tax Evasion? – An Experiment on Auditing Rules

Fangfang Tan and Andrew Yim

Working Papers from Max Planck Institute for Tax Law and Public Finance

Abstract: This paper adds to the economic-psychological research on tax compliance by experimentally testing a simple auditing rule that induces strategic uncertainty among taxpayers. Under this rule, termed the bounded rule, taxpayers are informed of the maximum number of audits by a tax authority, so that the audit probability depends on the joint decisions among the taxpayers. We compare the bounded rule to the widely studied flat-rate rule, where taxpayers are informed that they will be audited with a constant probability. The experimental evidence shows that, as theoretically predicted, the bounded rule induces the same level of compliance as the flat-rate rule when strategic uncertainty is low, and a higher level of compliance when strategic uncertainty is high. The bounded rule also suppresses the "bomb crater" effect often observed in prior studies. The results suggest that strategic uncertainty due to interactions among taxpayers could be an effective device to deter tax evasion.

Keywords: Tax auditing; Tax compliance; Strategic uncertainty; Behavioral dynamics; Labaratory experiment (search for similar items in EconPapers)
JEL-codes: C72 C9 H26 M42 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2011-12
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http://www.tax.mpg.de/RePEc/mpi/wpaper/Tax-MPG-RPS-2011-21.pdf Full text (original version) (application/pdf)

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Journal Article: Can strategic uncertainty help deter tax evasion? An experiment on auditing rules (2014)
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