We analyze the effect of social norms and enforcement on the dynamics of taxpayer compliance. Specifically, we develop two models to evaluate the movement between classes of compliant and noncompliant taxpayers. Our analysis suggests that the effect on compliance of changing enforcement levels depends on whether the taxpayer population is initially compliant or noncompliant. Compliant populations are insensitive to changes in enforcement policies until enforcement becomes sufficiently lax, when we observe a sudden shift to high levels of noncompliance in equilibrium. In contrast, relatively noncompliant populations respond to increased enforcement by gradually increasing compliance. Then, when enforcement becomes sufficiently harsh, we find a sudden shift in equilibrium to very high levels of compliance. After the taxpayer population shifts from compliance to noncompliance, or vice versa, our models predict that returning to the previous enforcement policy will not cause the population to return to its previous state. On the whole, our models' results help explain why taxpayer compliance varies across time and across geographic regions, even under similar enforcement regimes.

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This study extends the Beck, Davis, and Jung (1992) experimental study by incoqjorating opportunities for taxpayer subjects to purchase advice before making their tax reporting decisions. Tax advice has two roles in the model and experiment. First, tax advice allows taxpayers, to reduce their uncertainty about the amount of taxes owed. This permits us to study the demand for tax advice in conjunction with its effect on tax reporting decisions. Second, the decision to purchase tax advice from an expert provides a means of signaling that may alter tax agency audit policies. The resulting audit policies, in tum, can affect taxpayers' decisions to purchase tax advice. These interdependencies are incorporated m a game-theoretic model and several predictions are tested experimentally. Consistent with theory, subjects sorted themselves into three groups based upon their private information. Another prediction supported by the experiment is that the demand for tax advice increased with the magnitude of an uncertain tax deduction (amount-at-dsk). We also found, as expected, that the effects of tax advice on pre-audit tax revenues depend upon the amount-at-risk. When the amount-at-risk was high, subjects in settings with tax advice reported lower average incomes and paid lower taxes than did those subjects in settings without the opportunity to purchase tax advice. The opposite was true for the low amount-at-risk condition, supporting ouf prediction that tax advice and amount-at-risk would have an interactive effect on tax reporting. Analysis was also performed on post-audit tax collections. Contrary to theory, post-audit tax payments were found to increase when subjects had an opportunity to purchase tax advice. This result apparently was caused by a tendency to over-purchase tax advice and, in some cases, to report a low income regardless of the advice received.Resume. Les auteurs developpent I'ftude exp6nmentale de Beck, Davis et Jung (1992) en y incorporant la possibilite pour les sujets contribuables de solliciter des conseils avant de prendre leurs ddcisions relatives i rinformation qu'ils foumiront aux fins fiscales. Les conseils fiscaux jouent deux roles dans le modele et l'experience. Premierement, ils permettent aux contribuables de reduire leur incertitude relative au montant des impots auxquels ils sont assujettis. Les auteurs peuvent ainsi dtudier la demande de conseils fiscaux en conjonction avec leurs cons6quences sur les decisions relatives a l'information h foumir aux fins fiscales. Deuxiemement, la decision de solliciter les conseils fiscaux d'un * Accepted by Dan Thornton The authon gratefully acknowledge the many detailed and stimulating comments of Joel Sobel, Harry Newman, Robert Tucker, and three anonymous reviewers, as well as discussions with

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Abstract. Economic models of tax reporting were tested experimentally. Subjects were given endowments and made tax reponing decisions subject to monetary penalties for underpayment of taxes and uncertainty about the amount of taxable income and the tax agency's cutoff point for audit selection. Two types of tax audit regimes were considered. In the first (nonstrategic audit regime), subjects faced a fixed probability of audit selection. A second (strategic) audit regime also was examined in which the probability of audit selection varied in response to tax repons as in the Reinganum and Wilde (1988), Beck and Jung (1989b), and Jung (1991a) models. Five hypotheses based on the comparative statics predictions of the models were tested and four were supported by the experimental data. Among the notewonhy findings are that tax rate changes have significant effects on reponing decisions under both audit regimes, rather than just under the strategic audit regime as hypothesized. A reduction (increase) in taxable income uncenainty induces subjects to repon a low level of income significantly more (less) often under strategic auditing, but does not have a significant effect on income reports when audit policies are nonstrategic. The effects of changes in the level of uncenainty about the audit cutoff point are also investigated and found to depend upon the benefit of conducting an audit. Finally, we find that subjects generally repon a low income more frequently than predicted by either the strategic or nonstrategic models.Resume. Les auteurs ont mis a l'epreuve les modeles economiques de presentation de l'information fiscale au moyen de Texpyerimentation. Les sujets se sont vu attribuer une dotation et ont pris des decisions relatives a la presentation de l'information fiscale, decisions assujetties a des penalites monetaires s'appliquant aux impots payes en moins et a l'incenitude relativement au montant du revenu imposable ainsi qu'au seuil de demarcation utilise par les autorites fiscales pour selectionner les entreprises devant faire l'objet d'une verification. IntroductionSeveral recent studies have examined economic models of tax reporting in experimental laboratory settings. For example. Aim, Jackson, and McKee (1992) and Beck, Davis, and Jung (henceforth BDJ) (1991) tested respectively the theoretical predictions of the Aim (1988) and Beck and Jung (henceforth BJ) (1989a) models.• These models assume that the audit probability is fixed (i.e., does not vary with the amount of taxable income reponed) and is known by taxpayers. Despite the simplification advantages, such assumptions about auditing can be criticized for being somewhat unrealistic. For example, recent evidence suggests that audit rates in the United States vary systematically among groups (Erikson and Sullivan, 1988;Dubin, Graetz, and Wilde, 1990), a result consistent with the Intemal Revenue Service's reliance upon discriminant function analysis (rather than random selection of tax retums). We have been told that Revenue Canada uses a stratified...