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)

53 Pages Posted: 19 Apr 2021 Last revised: 22 Feb 2022

See all articles by Tisha King

Tisha King

University of Waterloo - School of Accounting & Finance

Jonathan Farrar

Wilfrid Laurier University - School of Business & Economics

Date Written: April 14, 2021

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

Suggested Citation

King, Tisha and Farrar, Jonathan, 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) (April 14, 2021). Available at SSRN: https://ssrn.com/abstract=3826736 or http://dx.doi.org/10.2139/ssrn.3826736

Tisha King (Contact Author)

University of Waterloo - School of Accounting & Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada

Jonathan Farrar

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

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