The Effects of Rewards on Tax Compliance Decisions

28 Pages Posted: 16 May 2014

See all articles by Martin Fochmann

Martin Fochmann

Free University of Berlin; University of Cologne

Eike B. Kroll

Otto-von-Guericke University Magdeburg

Date Written: May 16, 2014

Abstract

We analyze how the redistribution of tax revenues influences tax compliance behavior by applying different reward mechanisms. In our experiment, subjects have to make two decisions. In the first stage, subjects decide on the contribution to a public good. In the second stage, subjects declare their income from the first stage for taxation. Our main results are threefold: First, from an aggregated perspective, rewards have a negative overall effect on tax compliance. Second, we observe that rewards affect the decision of taxpayers asymmetrically. In particular, rewards have either no effect (for those who are rewarded) or a negative effect (for those who are not rewarded) on tax compliance. Thus, if a high compliance rate of taxpayers is preferred, rewards should not be used by the tax authority. Third, we find an inverse u-shaped relationship between public good contribution and tax compliance. In particular, up to a certain level, tax compliance increases with subjects’ own contributions to the public good. Above this level, however, tax compliance decreases with the public good contribution.

Keywords: tax evasion, tax compliance, redistribution of taxes, tax affectation, rewarding, public good, behavioral economics, experimental economics

JEL Classification: C91, D14, H24

Suggested Citation

Fochmann, Martin and Kroll, Eike B., The Effects of Rewards on Tax Compliance Decisions (May 16, 2014). Available at SSRN: https://ssrn.com/abstract=2437778 or http://dx.doi.org/10.2139/ssrn.2437778

Martin Fochmann (Contact Author)

Free University of Berlin ( email )

Thielallee 73
Accounting and Taxation
Berlin, 14195
Germany

University of Cologne ( email )

Albertus-Magnus-Platz
Behavioral Accounting/Taxation/Finance
Cologne, 50923
Germany

HOME PAGE: http://www.taxation.uni-koeln.de/de/team/prof-dr-martin-fochmann/

Eike B. Kroll

Otto-von-Guericke University Magdeburg ( email )

Universitätsplatz 2
Magdeburg, Sachsen-Anhalt 39104
Germany

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