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Tax compliance after an audit: Higher or lower?

Author

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  • Kasper, Matthias
  • Rablen, Matthew D.
Abstract
What is the compliance effect of experiencing a tax audit? Empirical studies typically report a positive effect, while laboratory experiments frequently report a negative effect. We show experimentally that whether a tax audit increases or decreases subsequent compliance hinges on the balance of learning opportunities, misperception of audit risk, and the confounding effect of censoring. After an audit, taxpayers lower their perceived risk of audit – consistent with a bomb-crater effect – when audit selection is exogenous. However, for an endogenous audit rule under which taxpayers can learn to reduce their audit risk by reporting higher income, learning effects outweigh probability misperception, resulting in an increase in post-audit tax compliance. Finally, we show that accounting for censoring effects can eliminate on its own the negative post-audit compliance effect frequently observed in laboratory experiments.

Suggested Citation

  • Kasper, Matthias & Rablen, Matthew D., 2023. "Tax compliance after an audit: Higher or lower?," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 157-171.
    • Handle: RePEc:eee:jeborg:v:207:y:2023:i:c:p:157-171
    DOI: 10.1016/j.jebo.2023.01.013
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    Cited by:

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    2. Simon Columbus & Lars P. Feld & Matthias Kasper & Matthew D. Rablen, 2023. "Behavioural Responses to Unfair Institutions: Experimental Evidence on Rule Compliance, Norm Polarisation, and Trust," CESifo Working Paper Series 10591, CESifo.
    3. James Alm & Lilith Burgstaller & Arrita Domi & Amanda März & Matthias Kasper, 2023. "Nudges, Boosts, and Sludge: Using New Behavioral Approaches to Improve Tax Compliance," Economies, MDPI, vol. 11(9), pages 1-22, September.
    4. Lancee, Bora & Rossel, Lucia & Kasper, Matthias, 2023. "When the agency wants too much: Experimental evidence on unfair audits and tax compliance," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 406-442.
    5. Kotsogiannis, Christos & Salvadori, Luca & Karangwa, John & Mukamana, Theonille, 2024. "Do tax audits have a dynamic impact? Evidence from corporate income tax administrative data," Journal of Development Economics, Elsevier, vol. 170(C).

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    More about this item

    Keywords

    Tax audits; Probability misperception; Learning; Endogenous audit rules; Censoring; Uncertain audit probability; Tax evasion game;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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