25 Pages Posted: 12 Dec 2013 Last revised: 21 May 2015
Date Written: April 18, 2014
The classic deterrence theory model of income tax evasion first articulated in 1972 has met significant criticism because it does not comport with the observed rate of tax compliance. This article argues that the classic expected utility model and its various progeny, including nonexpected utility models, employ too general a notion of taxpayers’ probability of audit by equating the latter to the frequency with which the government audits tax returns. Given that audit probabilities vary significantly based on whether taxpayers underreport tax on their returns, these models should be revised to reflect the conditional nature of audit probability from the taxpayers’ perspective. If one applies this perspective-dependent definition of audit probability to both expected and nonexpected utility models, the theoretical results will more closely reflect the observed rate of tax compliance.
Keywords: tax evasion, tax compliance, audit probability, tax salience, taxpayer perception, heuristics
JEL Classification: C11, C51, C54, H26, K34, K42, P16, Z18
Suggested Citation: Suggested Citation
Manhire, Jack, Toward a Perspective-Dependent Theory of Audit Probability for Tax Compliance Models (April 18, 2014). 33 Virginia Tax Review 629 (2014). Available at SSRN: https://ssrn.com/abstract=2366325 or http://dx.doi.org/10.2139/ssrn.2366325