Mental Accounting and Taxpayer Compliance: Insights into the Referent Point that Separates Honest from Dishonest Behavior

34 Pages Posted: 8 Jan 2018

See all articles by Ian Burt

Ian Burt

Niagara University

Linda Thorne

York University - Schulich School of Business

Jay K. Walker

Old Dominion University - Economics

Date Written: December 25, 2017

Abstract

Empirical results grounded in prospect theory shows that taxpayers’ compliance is a function of whether they are in a tax gain or loss position, being more likely to “cheat” when they perceive that they are in a tax loss as compared to tax gain. Nevertheless, what remains to be determined is how taxpayers mentally determine what is a tax loss or a tax gain. We conduct a field experiment when taxpayers are filing actual returns to better determine the actual referent point that separates tax gains from tax losses. We find that mental categorization of taxes paid and owed is critical to taxpayer determination of their referent point, which takes into account what they anticipate they will owe or receive upon filing their tax return. From a theoretical perspective, our research shows that current perceptions of their expected asset position shapes the referent point. From a practical perspective, our findings suggest that taxpayer honesty depends primarily on how they separate tax withholdings from their current net worth.

Suggested Citation

Burt, Ian and Thorne, Linda and Walker, Jay K., Mental Accounting and Taxpayer Compliance: Insights into the Referent Point that Separates Honest from Dishonest Behavior (December 25, 2017). 2018 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=3098194 or http://dx.doi.org/10.2139/ssrn.3098194

Ian Burt (Contact Author)

Niagara University ( email )

Linda Thorne

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100, x30223 (Phone)

Jay K. Walker

Old Dominion University - Economics ( email )

Norfolk, VA 23529
United States

HOME PAGE: http://www.jaykwalker.com

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