Tax compliance under tax regime changes

Heinemann, Friedrich and Kocher, Martin G. (March 2010): Tax compliance under tax regime changes. Discussion Papers in Economics 2010-17

Abstract

In this paper we focus on the compliance effects of tax regime changes. According to the economic model of tax evasion, a tax reform should affect compliance through its impact on tax rates and incentives. Our findings demonstrate the importance of at least two further effects not covered by the traditional model: First, reform losers tend to evade more taxes after the reform. Second, a reform from a proportionate to a progressive system decreases compliance compared to a switch in the reverse direction. However, the level of compliance is generally higher under a progressive than under a proportionate regime.

• Item Type: Paper
• Form of publication: Preprint
• Keywords: tax reforms, tax compliance, experiment
• Faculties: Economics; Economics > Munich Discussion Papers in Economics; Economics > Munich Discussion Papers in Economics > Behavioral Economics; Economics > Munich Discussion Papers in Economics > Institutional Economics; Economics > Chairs > Chair of Empirical Economics
• Subjects: 300 Social sciences > 300 Social sciences, sociology and anthropology; 300 Social sciences > 330 Economics
• JEL Classification: C72, C91, H26
• Language: English

References

Allingham, M. and Sandmo, A. (1972). Income tax evasion: a theoretical analysis. Journal of Public Economics, 1: 323-338.

Alm, J., Jackson, B. R. and McKee, M. (1992). Estimating the determinants of taxpayer compliance with experimental data. National Tax Journal, 45 (1): 107-114.

Alm, J., Jackson, B. R. and McKee, M. (1992). Getting the word out: Increased enforcement, audit information dissemination, and compliance behavior. Journal of Public Economics, 93:392-402.

Alm, J., McClelland, G. H. and Schulze, W. D. (1992). Why do people pay taxes? Journal of Public Economics, 48: 21-38.

Alm, J., Sanchez, I. and De Juan, A. (1995). Economic and noneconomic factors in tax compliance. Kyklos, 48: 3-18.

Anderhub, V., Giese, S., Güth, W., Hoffmann, A., Otto, T. (2001). Tax evasion with earned income - an experimental study. Finanzarchiv, 58: 188-206.

Andreoni, J., Erard, B. and Feinstein, J. (1998). Tax compliance. Journal of Economic Literature, 36: 818-860.

Babcock, L. and Loewenstein, G. (1997). Explaining bargaining impasse: The fole of self-serving biases. Journal of Economic Perspectives, 11: 109-126

Bobek, D. and Hatfield, R. C. (2001). The effect of policy objectives, complexity, and self-interest on individuals’ comparative fairness judgments of a flat tax. Advances in Taxation, 13: 1-25.

Bolton, G. und Ockenfels, A. (2000). ERC, A theory of equity, reciprocity and competition. American Economic Review, 90: 166-193.

Charness, G. and Rabin, M. (2002). Understanding social preferences with simple tests. Quarterly Journal of Economics, 117: 817-869.

Croson, R., and Gneezy, U. (2009). Gender differences in preferences. Journal of Economic Literature, 47: 448-74.

Fehr, E. and Gächter, S. (2000). Fairness and retaliation: The economics of reciprocity. Journal of Economic Perspectives, 14 (3): 159-181.

Fehr, E. and Schmidt, K. (1999). A theory of fairness, competition and cooperation. Quarterly Journal of Economics, 114: 817-868.

Feld, L. and Frey, B. (2002). Trust breeds trust: How taxpayers are treated. Economics of Governance, 3 (2): 87-99.

Feld, L. and Frey, B. (2007). Tax compliance as the result of psychological contract: The role of incentives and responsive regulation. Law and Policy, 29 (1), 102-120.

Fischbacher, U. (2007). z-Tree - zurich toolbox for readymade economic experiments - experimenter's manual. Experimental Economics 10, 171-178.

Fischbacher, U. and Gächter, S. (2009). Social preferences, beliefs, and the dynamics of free riding in public good experiments. American Economic Review, forthcoming.

Fischbacher, U., Gächter, S. and Fehr, E. (2001). Are people conditionally cooperative? Evidence from a public goods experiment. Economic Letters 71: 397-404.

Gorodnichenko, Y., Martinez-Vasquez, J. and Peter, K. S. (2009). Myth and reality of flat tax reform: Micro estimates of tax evasion responses and welfare effects in Russia. Quarterly Journal of Economics, 117: 504-554.

Greiner, B. (2004). An online recruitment system for economic experiments. In: Kremer, K., and V. Macho (eds.). Forschung und wissenschaftliches Rechnen 2003. GWDG Bericht 63, Göttingen Ges. für Wiss. Datenverarbeitung: 79-93.

Holt, C. and Laury, S. (2002). Risk aversion and incentive effects. American Economic Review, 92: 1644-1655.

Ivanova, A., Keen, M. and Klemm, A. (2005). The Russian “flat tax” reform. Economic Policy, 20: 397-444.

Keen, M., Kim, Y. and Varsano, R. (2008). The “flat tax(es)”: principles and experience. International Tax and Public Finance, 15: 712-751.

Kirchler, E. (2007). The economic psychology of tax compliance. Cambridge: Cambridge University Press.

Kocher, M. G., Cherry, T. L., Kroll, S., Netzer, J. and Sutter, M. (2008), Conditional cooperation on three continents. Economics Letters, 101: 175–78.

Maciejovsky, B., Kirchler, E. and Schwarzenberger, H. (2007). Misperception of chance and loss repair: on the dynmics of tax compliance. Journal of Economic Psychology, 28: 678-691.

OECD (2006). Fundamental reform of personal income tax. OECD Tax Policy Studies No. 13, OECD Paris.

Riedl, A. and van Winden, F. (2007). An experimental investigation of wage taxation and unemployment in closed and open economies. European Economic Review 51: 871-900.

Spicer, M. W. and Becker, L. A. (1980). Fiscal inequity and tax evasion: An experimental approach. National Tax Journal, 33: 171-175.

Torgler, B. (2002). Speaking to theorists and searching for facts: tax morale and tax compliance in experiments. Journal of Economic Surveys, 16: 657-683.

Torgler, B. (2005). Tax morale and direct democracy. European Journal of Political Economy, 21 (2): 525-531.

Torgler, B. (2007). Tax compliance and tax morale: A theoretical and empirical analysis. Cheltenham: Elgar.

Trautmann, S. T. (2009). A tractable model of process fairness under risk. Journal of Economic Psychology, 30: 803–813.

Ytzhaki, S. (1974). A note on income tax evasion: A theoretical analysis. Journal of Public Economics, 3: 201-202.