To Punish or Not to Punish? The Impact of Tax Fraud Punishment on Observers’ Tax Compliance (Forthcoming in Journal of Business Ethics https://rdcu.be/cHfDk)

Abstract

We synthesize insights from deterrence theory and social psychology literature on retributive justice to develop and test a theoretical model which predicts how and why observers’ tax compliance intentions are influenced by knowledge of others’ punitive outcomes resulting from tax fraud. We test our model experimentally on a sample of Canadian taxpayers and manipulate perceived responsibility for a fraud and whether a fraud perpetrator is punished. We show that observers’ tax compliance increases when a fraud perpetrator is punished only when the fraud perpetrator is perceived as blameworthy. Furthermore, the psychological process through which this positive influence operates is relatively complex as it includes perceptions of punishment deservingness and affect. We also find that tax compliance decreases when a tax fraud perpetrator is unpunished, regardless of blameworthiness. Our results are robust when we control for economic determinants known to influence fraud. Implications for fraud research and policy are discussed.

Keywords: fraud; retributive justice; punishment reactions; punishment deservingness; responsibility; affective reactions; tax compliance

JEL Classification: M41, M49