Alchian and Allen Visit the IRS: Costly Audits and Taxpayer Compliance

Abstract

This note reports on the results from a small scale investigation of the compliance effects of a costly pre-audit on tax compliance. The tax compliance game is modeled in three parts: a declaration phase, a pre-selection phase with a cost for taxpayers, and an audit selection phase where all evaded income is discovered. While the theoretical predictions are ambiguous, the data from a series of laboratory experiments demonstrate that the presence of pre-audit costs leads to lower tax compliance.

Keywords: tax evasion, tax compliance, experiment, audit, audit cost

JEL Classification: H26, C91