The Effect of Perfect Monitoring of Matched Income on Sales Tax Compliance: An Experimental Investigation

42 Pages Posted: 29 Nov 2008 Last revised: 25 Mar 2009

Cathleen A. Johnson

University of Arizona, Philosophy, Politics, Economics and Law Program; Center for Interuniversity Research and Analysis on Organization (CIRANO)

David Masclet

Université de Rennes I; M@rsouin

Claude Montmarquette

Center for Interuniversity Research and Analysis on Organization (CIRANO)

Date Written: July 1, 2008

Abstract

Noncompliance is a quantitatively important phenomenon that significantly affects revenue sources for governments. This phenomenon raises challenging questions about the determinants of tax reporting and about the appropriate design of a tax system. This paper provides specific empirical insights using an experimental approach to evaluate the effects of systematic sales tax monitoring and the determinants of sales tax compliance. The results indicate that if perfect monitoring is instituted without other complementary policies, an increase in tax revenues is not the likely outcome. Once people have chosen their level of tax compliance, a stepped up policy of increased monitoring aimed at reducing fiscal fraud may not necessarily increase tax revenues. The reference-dependent effect observed in the data suggests that individuals will try to recover their losses following any policy changes even if it means taking more risks.

Keywords: sales tax, perfect monitoring, experimental economics, reference-dependent effect

Suggested Citation

Johnson, Cathleen A. and Masclet, David and Montmarquette, Claude, The Effect of Perfect Monitoring of Matched Income on Sales Tax Compliance: An Experimental Investigation (July 1, 2008). CIRANO - Scientific Publications No. 2008s-17. Available at SSRN: https://ssrn.com/abstract=1307746 or http://dx.doi.org/10.2139/ssrn.1307746

Cathleen Amanda Johnson

University of Arizona, Philosophy, Politics, Economics and Law Program ( email )

Social and Behavioral Sciences
Tucson, AZ 85721-0108
United States

Center for Interuniversity Research and Analysis on Organization (CIRANO)

Montreal, Quebec H3C 3J7
Canada

David Masclet

Université de Rennes I ( email )

7, Place Hoche
35065 Rennes Cedex, Rennes
France

M@rsouin ( email )

France

Claude Montmarquette (Contact Author)

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th Floor
Montreal, Quebec H3C 3J7
Canada
(514) 985-4015 (Phone)
(514) 985-4039 (Fax)

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