Sweetheart Deals in Tax Bargaining? How Trust Affects Concessionary Behavior

WU International Taxation Research Paper Series No. 2020-15

TRR 266 Accounting for Transparency Working Paper Series No. 41 (2020)

71 Pages Posted: 2 Nov 2020

See all articles by Eva Eberhartinger

Eva Eberhartinger

Vienna University of Economics and Business

Raffael Speitmann

Vienna University of Economics and Business

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business

Yuchen Wu

Vienna University of Economics and Busines

Date Written: November 2020

Abstract

This study analyzes the impact of trust on bargaining between auditor and auditee in a tax setting. We distinguish between interpersonal trust and trust in government, and we study the effect on both taxpayer and tax auditor during the bargaining process regarding ambiguous tax issues. We assess a three-party relationship between the taxpayer, the tax auditor as a government agent, and the government, to examine the taxpayer-tax auditor bargaining behavior in a multi-stage process, and its implications for the resulting tax payment. In a laboratory experiment with variation in pairwise (taxpayer-tax auditor) interpersonal trust and their trust in government, we expect and find evidence that both interpersonal trust and trust in government affect the bargaining behavior, albeit in different ways. Tax auditors show more concessionary behavior with high interpersonal trust, while taxpayers make more concessions under a more trusted government. Our findings demonstrate the importance of trust in the government for tax collection. Further, our findings indicate that a high level of interpersonal trust increases the risk of sweetheart deals, i.e. preferential treatment of trusted taxpayers by auditors. We contribute to research on bargaining, and on auditor behavior. Our results provide understanding about how trust shapes the bargaining between a government agency and a supervised individual, and, more specifically, the auditor-auditee relationship in a tax setting. We provide novel insights for tax authorities who expect higher compliance in an atmosphere of trust. The implications extend to non-tax settings, where a government agency and its representatives encounter bargaining situations with citizens, firms, and their representatives, e.g., in the financial, energy or health sector.

Keywords: Bargaining, behavioral taxation, interpersonal trust, tax audit, trust in government

JEL Classification: C92; D91; M40; H20; H25; H83

Suggested Citation

Eberhartinger, Eva and Speitmann, Raffael and Sureth-Sloane, Caren and Wu, Yuchen, Sweetheart Deals in Tax Bargaining? How Trust Affects Concessionary Behavior (November 2020). WU International Taxation Research Paper Series No. 2020-15, TRR 266 Accounting for Transparency Working Paper Series No. 41 (2020), Available at SSRN: https://ssrn.com/abstract=3723499 or http://dx.doi.org/10.2139/ssrn.3723499

Eva Eberhartinger

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna 1020
Austria

HOME PAGE: http://www.wu.ac.at

Raffael Speitmann

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Caren Sureth-Sloane

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Yuchen Wu (Contact Author)

Vienna University of Economics and Busines ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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