How Government Spending Impacts Tax Compliance

Abstract

This study examines how taxpayer level of goal congruence (the extent to which a taxpayer’s interests align with the interests of the tax collecting agency) can improve tax compliance. While there is ample evidence on the deterrent effect of audit probability on taxpayer noncompliance, there is no evidence related to the potential role that goal congruence may have on compliance behavior. Results of our study indicate that goal congruence influences taxpayer compliance decisions, in that those with higher goal congruence (i.e., greater support for how tax dollars are spent) report higher amounts of taxable income. In addition, we find that audit probability only influences taxpayer compliance decisions when there is support for the government’s use of tax dollars. When taxpayers do not support government programs, their compliance is lower regardless of the audit probability. This highlights the importance of gaining taxpayer support for government programs, and that attempts to align the goals of taxpayers with those of the government may increase voluntary compliance among taxpayers. We also examine the role that Machiavellianism, a measure of moral obligation, plays in taxpayers’ compliance decisions. We find that for certain individuals who are motivated more by self-interest (those with high Machiavellianism), a high audit rate as well as support for a program may be necessary to improve compliance behavior. Theoretical and practical implications of these findings are discussed.

Keywords: tax compliance, goal congruency

JEL Classification: D82, H26, M49