What We Dont Know about Tax Compliance

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What We Dont Know about Tax Compliance

• Marsha Blumenthal
• University of St. Thomas
• ATA Mid-Year Conference
• February 23, 2008

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The Holes

• Neoclassical economic model of choice under
  uncertainty predicts more evasion than we
  observe. Why?
• Thorough, line-by-line audits fail to detect
  substantial amounts of evasion. Why?
• Little connection between theoretical and
  empirical work. Why not?

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1. Why Do People Comply?

• Audit/penalty rates are misleading
• Taxpayers overestimate prob(audit)
• Economic models do not account for influence of
• social norms
• obedience to authority
• Most research has focused on individual income
  tax.

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Detecting Evasion

• 1976 TCMP exams and the multiplier.
• Feinsteins Detection Controlled Estimation (DCE)
  techniques
• Change our understanding of the determinants of
  evasion
• Suggest there is heterogeneity across examiners
  in rates of detection
• Suggest detection rates are lower when returns
  are prepared by practitioners

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3. Connecting theoretical and empirical research

• The role of theory is to generate testable
  hypotheses results of empirical tests then
  update theory.
• Beyond Allingham Sandmo
• Expand the utility function guilt, shame,
  intrinsic motivation, fairness, satisfaction
  with fiscal exchange
• Game theoretic models
• Computational agent-based models

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Flavors of Empirical Research

• Tax return data
• Annual reports of IRS Commissioner
• Field experiments
• Laboratory experiments

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Selected References

• Andreoni, James, Brian Erard and Jonathan
  Feinstein. Tax Compliance Journal of Economic
  Literature, Vol. 36, No. 2. (Jun., 1998), pp.
  818-860.
• Alm, J. and McKee, M. Tax Compliance as a
  Coordination Game Journal of Economic Behavior
  and Organization 54(3) 2004 297-312.
• Cadsby, C.B., Maynes, E., Trivedi, V.U. Tax
  Compliance and Obedience to Authority at Home and
  in the Lab a new experimental approach.
  Experimental Economics 9(4) 2006 343-359.
• Dubin, J.A. Criminal Investigation Enforcement
  Activities and Taxpayer Noncompliance Public
  Finance Review 35(4) 2007 500-529.
• Feinstein, Jonathan Detection Controlled
  Estimation Journal of Law Economics 33(1) 1990
  233-276.
• Hasseldine, J., Hite, P., James, S., Toumi, M.
  Persuasive Communications Tax Compliance
  Enforcement Strategies for Sold Proprietors.
  Contemporary Accounting Research 24(1) 2007
  171-194.
• Kim, Y. Audit Misperception, Tax Compliance, and
  Optimal Uncertainty. Journal of Public Economic
  Theory 7(3) 2005 521-541.
• Korobow, A., Johnson, C. Axtell, R. An
  Agent-Based Model of Tax Compliance with Social
  Networks National Tax Journal 60(3) 2007 589-610.
• Torgler, B. Speaking to Theorists and Searching
  for Facts Tax Morale and Tax Compliance in
  Experiments Journal of Economic Surveys 16(5)
  2002 657-683.