Tax evasion and heuristics: A research note

doi:10.1016/0047-2727(85)90009-X

Journal of Public Economics

Volume 26, Issue 2, March 1985, Pages 263-267

https://doi.org/10.1016/0047-2727(85)90009-X Get rights and content

Abstract

The paper examines the heuristics which taxpayers use in making tax evasion decisions. The following propositions are tested in an experiment using students. First, the taxpaper's own level of evasion will be positively related to what he perceives as the levels of evasion by others. Second, taxpayers who have been audited are more likely to assess the probability of audit as higher and therefore decrease their levels of evasion. The experimental results fail to support the first proposition but do support the second suggesting the presence of an ‘availability’ effect.

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Cited by (81)

Private firms’ tax aggressiveness and lightweight pre-tax-audit interventions by the tax administration
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This study examines private companies’ tax aggressiveness and its changes in response to interventions by the government tax administration. While scholars have researched authorities’ interventions extensively, this study is the first to consider the “light” technique of tax adjustments made by the tax administration immediately after the firm submits its tax return. We utilized a large-scale proprietary dataset obtained from Finland’s tax administration (covering 85,155 firm–years), the hypotheses addressed the relationship between the firm’s level of tax aggressiveness and the tax-administration intervention (H1) and that between the intervention and companies’ response to it (H2). The empirical findings support both hypotheses. Its lightweight nature notwithstanding, the pre-tax-audit intervention can serve as a tool for ameliorating firms’ overly tax-aggressive behavior. Finally, we present management implications that should be of interest to tax administrations and regulatory authorities, related to the potential effectiveness of a tax administration’s monitoring processes in mitigating the tax aggressiveness of private companies.
Audits, audit effectiveness, and post-audit tax compliance
2022, Journal of Economic Behavior and Organization
Citation Excerpt :
However, these theories make conflicting predictions on the effect of audits on subsequent compliance. First, audited taxpayers might assess the probability of a future audit by the ease of recalling their previous audit (Spicer and Hero, 1985). This availability heuristic (Kahneman and Tversky, 1973) predicts that the audit effectiveness (or the share of undeclared income that the tax agency detected in an audit) of a previous audit should affect a taxpayer's assessment of the risk of a future audit.
This study uses a laboratory experiment to investigate the effect of audit effectiveness, or the share of undeclared income that the tax agency detects in an audit, on post-audit tax compliance. We also study whether the effects of audits depend on a taxpayer's reporting behavior prior to the audit. Our findings show that tax audits have differential effects on post-audit compliance and that the effectiveness of audits determines these responses; that is, while effective audits increase post-audit tax compliance, ineffective audits have the opposite effect. We also find that relatively compliant taxpayers exhibit the strongest behavioral response to audits. Our results indicate that the specific deterrent effects of tax audits are more ambiguous than standard and behavioral models of tax compliance suggest, with these effects dependent on the effectiveness of audits and on the taxpayer's prior reporting behavior.
Impact of institutional environment quality on tax evasion: A comparative investigation of old versus new EU members
2018, Journal of International Accounting, Auditing and Taxation
Citation Excerpt :
More recent studies investigate the determinants of tax evasion (Chau & Leung, 2009; Khlif & Achek, 2015; Pickhardt & Prinz, 2014; Riahi-Belkaoui, 2004; Richardson, 2006), and the impact of culture on tax evasion (Putnam, Abdelfattah, Bagchi, & Braun, 2016; Réthi, 2012; Richardson, 2008; Tsakumis et al., 2007). Political perspectives (Feld & Tyran, 2002; Katz & Owen, 2013) and behavioural aspects of tax evasion have also been analyzed (Wenzel, 2005, Casal, Kogler, Mittone, & Kirchler, 2016; Groenland & Van Veldhoven, 1983; Kaplanoglou & Rapanos, 2015; Litina & Palivos, 2016; Pickhardt & Prinz, 2014; Spicer & Hero, 1985; Torgler & Valev, 2010). Several studies adopt the Slippery Slope Framework, a tax compliance model that links tax payments to the level of trust in governments and the power of tax authorities (Kastlunger, Lozza, Kirchler, & Schabmann, 2013; Kirchler, Hoelzl, & Wahl, 2008; Wahl, Kastlunger, & Kirchler, 2010).
This paper aims at comparatively investigating the impact of institutional environment quality (IEQ) on tax evasion in old (pre-2004) and new (post-2004) European Union (EU) member states. IEQ is measured by the World Bank’s Worldwide Governance Indicators, which include voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption. The size of their shadow economy is used as a proxy for tax evasion. Using a linear mixed model to analyze the data, the results indicate a higher level of tax evasion in new member states compared to the old member states. Further, our analysis indicates that tax evasion is decreasing in the old member states, but at a lower rate compared to the new EU members. Overall, our results indicate that the relationship between IEQ and tax evasion is different between old and new member states. Specifically, our results indicate that while regulatory quality, voice and accountability, control of corruption, political stability, and government effectiveness are significant determinants of tax evasion levels in older EU members, government effectiveness is the only significant factor in the new EU member states.
The bomb-crater effect of tax audits: Beyond the misperception of chance
2017, Journal of Economic Psychology
Citation Excerpt :
As a matter of fact, the link between prior audits and compliance has been the subject of a large body of experimental studies. As documented by Maciejovsky, Kirchler, and Schwarzenberger (2007), the traditional experimental literature (e.g. Spicer & Hero, 1985; Webley, 1987) shows that compliance increases with the personal experience of being audited. A possible explanation is the so-called availability-heuristic effect (Tversky & Kahneman, 1975) which can be defined as the increase that prior audits generate in the subjective salience of audits and punishments, which leads to more compliance in the future.
The experimental literature has identified the Bomb Crater Effect (BoCE), i.e., the fact that tax compliance drops immediately after a taxpayer is audited. From a theoretical perspective, BoCE has been explained either by the misperception of chance, also known as the gambler’s fallacy, or by the loss repair effect. The aim of this paper is to look more closely at the former. We run a laboratory experiment in which the information set is relatively rich but the implementation of the Bayesian updating process is fairly simple. By doing so, we are able to elicit a range of consistent but heterogeneous probability beliefs and to distinguish between Bayesian and non-Bayesian subjects. We obtain two major results concerning Bayesian subjects. First, they exhibit a strong and robust short-run BoCE. Second, they are seemingly not affected by the audits of other taxpayers in their compliance decision. These results are robust to different definitions of Bayesianity as well as to different specifications and conflict with the evidence that Bayesian agents correctly perceive the chance of being audited. In turn, these findings suggest that the existing explanations of the BoCE are not satisfactory and that alternative theories are needed.
Commitment to tax compliance: Timing effect on willingness to evade
2016, Journal of Economic Psychology
Experimental and empirical literature on individual decision-making has shown a remarkable difference between planning and ongoing decisions: when asked to plan their actions, people overweight events with low probability; on the contrary, in ongoing decisions, they tend to ignore them. We report on a laboratory experiment designed to explore the presence of this decisional inconsistency in taxpayers’ behavior, by means of a commitment system for compliance. In line with the overweighting of events with small probabilities (i.e. fiscal audits), we find that planning induces the majority of people not only to adopt a mechanism of commitment to tax compliance, but also to actually comply.
The impact of safety audit timing and framing of the production outcomes on safety-related rule violations in a simulated production environment
2015, Safety Science
Citation Excerpt :
With respect to the impact of audit timing, it can be assumed that safety audits that are implemented comparatively early on lead to significantly fewer rule violations, as people will easily remember their last audit experience and will overestimate the probability of future audits. The impact of audit experience on the amount of rule violations committed afterwards has already been investigated in the context of tax evasion (Spicer and Hero, 1985; Mittone, 2006). In the investigation by Spicer and Hero (1985), participants had the possibility to violate a rule in a total of 10 rounds.
In an experimental study, participants (n = 79) assumed the role of control room operator of a simulated plant. For a total of 36 times, they had to decide whether to violate a safety-related rule to maximise their own salary, or to comply with it at the cost of a lower income. The experimental variation was the timing of audits in the simulated production year (“early” = audits accomplished within weeks 13–30 versus “late” = audits accomplished within weeks 31–48) and framing of production outcomes and salary (gain versus loss). Results show that early-audited participants committed significantly fewer rule violations in the early period than those who had not yet been audited. Later on, the early-audited participants began to violate the rule, whereas the late-audited participants continued violating even though they had now been audited. Participants who experienced a loss-framed production outcome committed significantly more violations than participants in the gain-framed condition.

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Tax evasion and heuristics: A research note

Abstract

Journal of Public Economics

Journal of Economic Psychology

Journal of Public Economics

Income tax evasion: A theoretical analysis

Journal of Public Economics

The origin of predictable behavior

The American Economic Review