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

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 ‡at-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 ‡at-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"e¤ect often observed in prior studies. The results suggest that strategic uncertainty due to interactions among taxpayers could be an e¤ective device to deter tax evasion.

Game Theory Applied to Business Decision Making under Fiscalization in Croatia: Analysis, Equilibrium, and Policy Recommendations

“…They find that honest taxpayers who are willing to pay taxes play crucial role in a long-run equilibrium. Tan and Yim (2014) consider the effect of uncertainty on taxpayers' decisions and find that 'increasing the level of strategic uncertainty among taxpayers could be an effective device to deter tax evasion. ' Tsebelis (1991) argues that a better approach to modelling probabilities is to derive them from maximization functions rather than assume them prior.…”

“…Given the results, the right way to fight evasion is to increase the business's perceived risk of control and belief of being caught, through an increase in the number of controls. That is only partially inclined with Tan and Yim (2014), who claim that increasing the strategic level of uncertainty could negatively affect tax evasion. Our findings suggest that it is necessary to increase perception of the certainty of being caught.…”

The Effect of Corporate Tax Governance, Audit Quality and Tax Exposure on Audit Fee for Companies Enlisted in Indonesia Stock Exchange

“…An experimental study conducted by [33] proves that random tax assessments conducted by fiscus cause the highincome taxpayers to calculate first the risk of assessment. If the risk is small, the high-income taxpayers will report their tax payable not in compliance with the regulations.…”

Using behavioural insights for citizen compliance and cooperation

“…This result has since been backed up by several other studies: Kleven et al (2011) found in a randomised trial in Denmark that prior audits and threat of audits had a significant impact on self-reported income, but no effect on third-party reported income, possibly because the blame is entirely on the individual with self-reported income. Tan and Yim (2014) also experimented on a previous auditing rule (the 'bounded rule'), where taxpayers are informed of the maximum number of audits and it is then up to the taxpayers to decide on the probability of audit as a group. In their RCT, compared with the flat rate rule where taxpayers are informed of the constant probability of audit, they found that when uncertainty is high, compliance also tends to be high.…”