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

14 Pages Posted: 28 Dec 2011 Last revised: 30 Apr 2014

See all articles by Fangfang Tan

Fangfang Tan

Tilburg University - Department of Economics

Andrew Yim

Cass Business School, City, University of London

Date Written: November 20, 2012

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 flat-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 flat-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" effect often observed in prior studies. The results suggest that strategic uncertainty due to interactions among taxpayers could be an effective device to deter tax evasion.

Keywords: tax auditing, tax compliance, strategic uncertainty, behavioral dynamics, laboratory experiment

JEL Classification: H26, M42, C9, C72

Suggested Citation

Tan, Fangfang and Yim, Andrew, Can Strategic Uncertainty Help Deter Tax Evasion? An Experiment on Auditing Rules (November 20, 2012). Journal of Economic Psychology, Volume 40 (2014), Special Issue (February), 161-174. , Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2011-21, Available at SSRN: https://ssrn.com/abstract=1977420 or http://dx.doi.org/10.2139/ssrn.1977420

Fangfang Tan (Contact Author)

Tilburg University - Department of Economics ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands
+49 89 24246 5252 (Phone)
+49 89 24246 5299 (Fax)

HOME PAGE: http://www.tax.mpg.de/en/pub/public_economics/public_economics_people/fangfang_tan.cfm

Andrew Yim

Cass Business School, City, University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://www.cass.city.ac.uk/faculties-and-research/experts/andrew-yim

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