The Impact of Tax Knowledge and Budget Spending Influence on Tax Compliance

39 Pages Posted: 16 Mar 2013

See all articles by Behnud Mir Djawadi

Behnud Mir Djawadi

Paderborn University

Rene Fahr

University of Paderborn; IZA Institute of Labor Economics

Abstract

We investigate the impact of trust in authorities on tax compliance within a controlled laboratory setting. Embedded in two hypothetical tax systems with high and low power of authorities respectively, we gradually increase trust in authorities in form of tax knowledge about public expenditures and by allowing taxpayers to decide on what public goods they want their tax dollars to be spend for. To clearly disentangle any effects from factors that are known to influence tax compliance from previous studies, we control for tax commitment, risk attitude, income and effort exerted to earn the income which the taxpayers report truthfully or underreport to the tax authority.Non-parametric statistical analyses as well as multivariate regressions provide clear evidence that tax compliance is higher in tax systems with low power of authorities when providing complete transparency on public expenditures and when taxpayers are given the possibility to decide on the use of their taxes. With a powerful tax authority in place which is reflected in high audit rates, compliance does not change when increasing trust in authorities. Our results have important policy implications as the mere hypothetical possibility to express preferences on budget spending influences tax compliance.

Keywords: tax evasion, tax compliance, tax knowledge, budget spending, real effort, experimental economics

JEL Classification: H26, C91

Suggested Citation

Mir Djawadi, Behnud and Fahr, Rene, The Impact of Tax Knowledge and Budget Spending Influence on Tax Compliance. IZA Discussion Paper No. 7255. Available at SSRN: https://ssrn.com/abstract=2234277

Behnud Mir Djawadi (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Rene Fahr

University of Paderborn ( email )

Warburger Str. 100
D-33098 Paderborn
Germany
+49 5251 60 3692 (Phone)

HOME PAGE: http://www.quantitative-cg.de

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany
+49 228 38 94 0 (Phone)
+49 228 38 94 510 (Fax)

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