Toward a Perspective-Dependent Theory of Audit Probability for Tax Compliance Models
J. T. Manhire
U.S. Department of the Treasury - Treasury Executive Institute
April 18, 2014
33 Virginia Tax Review 629 (2014)
The classic deterrence theory model of income tax evasion first articulated in 1972 has met significant criticism because it does not comport with the observed rate of tax compliance. This article argues that the classic expected utility model and its various progeny, including nonexpected utility models, employ too general a notion of taxpayers’ probability of audit by equating the latter to the frequency with which the government audits tax returns. Given that audit probabilities vary significantly based on whether taxpayers underreport tax on their returns, these models should be revised to reflect the conditional nature of audit probability from the taxpayers’ perspective. If one applies this perspective-dependent definition of audit probability to both expected and nonexpected utility models, the theoretical results will more closely reflect the observed rate of tax compliance.
Number of Pages in PDF File: 25
Keywords: tax evasion, tax compliance, audit probability, tax salience, taxpayer perception, heuristics
JEL Classification: C11, C51, C54, H26, K34, K42, P16, Z18
Date posted: December 12, 2013 ; Last revised: May 21, 2015
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