Social Behaviors, Enforcement, and Compliance Dynamics

Abstract

This paper provides a theoretical analysis of the impact of social norms and enforcement regime on the dynamics of taxpayer compliance. An aggregate-level model, inspired by epidemic models in mathematical biology, is developed to evaluate the flows between classes of compliant and noncompliant taxpayers. Convergence in theoretical results is sought and found via a second model that emphasizes micro-level agent behavior. Several interesting observations arise from our analysis. In particular, the impact of changing enforcement levels on compliance depends upon whether the initial population is relatively compliant or non-compliant. Compliant populations are insensitive to changes in enforcement policies until the policies become sufficiently lax. Then a sudden shift to high levels of noncompliance is observed. In contrast, relatively noncompliant populations respond to increased enforcement severity by gradually increasing compliance. Then, when enforcement becomes sufficiently harsh, a sudden shift in aggregate behavior is observed, to very high levels of compliance. Once the discontinuous shift in behavior (from compliance to noncompliance or vice versa) occurs, our models predict that a return to the enforcement policy existing immediately before the change in behavior will be insufficient to cause the population to return to its previous state. Finally, over a range of compliance levels, two equilibria are observed that are dependent on the initial compliance behavior of the population. This is consistent with the observation that compliance varies considerably across time and geographically under similar enforcement regimes.

JEL Classification: C62, C63, H26, K42, M4, Z13