Can strategic uncertainty help deter tax evasion? An experiment on auditing rules

• Published in: Journal of economic psychology Vol. 40; pp. 161 - 174
• Main Authors: Tan, Fangfang, Yim, Andrew
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.02.2014; Elsevier Sequoia S.A
• Subjects: Auditing; Behavioral dynamics; Comparative analysis; Compliance; Experimental methods; Laboratory experiment; Public finance; Scandals; Strategic uncertainty; Studies; Tax auditing; Tax audits; Tax compliance; Tax evasion; Tax rates; Uncertainty; Strategic uncertainty; Tax compliance; C9; 4200; Tax auditing; Behavioral dynamics; M42; 3000; Laboratory experiment; H26; C72
• ISSN: 0167-4870; 1872-7719
• DOI: 10.1016/j.joep.2012.11.005

► We examine a bounded rule inducing strategy uncertainty among taxpayers. ► We experimentally compare the bounded rule with a flat-rate audit rule. ► Under the bounded rule, participants are informed of the maximum audit number. ► The bounded rule deters cheaters more effectively when strategic uncertainty is high. ► The evasion dynamics of the bounded rule differs from that of the flat-rate rule. 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 induces distinctive tax evasion dynamics compared to the flat-rate rule. The results suggest that increasing the level of strategic uncertainty among taxpayers could be an effective device to deter tax evasion.