The Tax Compliance Game: Toward an Interactive Theory of Law Enforcement

The existing paradigm for the economic analysis of tax compliance provides an inadequate theory of the revenue collection process. Even as a purely economic model, its exclusive focus on individual taxpayers' decision-making promotes an unduly restrictive vision of the compliance problem and potential responses to it. In this paper we outline a more comprehensive theoretical basis for analyzing tax compliance, and illustrate it with a simple model. We believe our approach to be a significant improvement in the economic theory of law enforcement because it views the noncompliance problem as an interactive system. In our theoretical construct, individual decision-making not only depends upon and responds to the detection and punishment structure, but, unlike prior models, we also explicitly include the law enforcement agency--in this case the Internal Revenue Service--as an important interactive element. Initially we outline our general approach and its differences from the existing economic law enforcement paradigm. We then detail a simple model and its results and compare these results both to the prior literature and to some of our ongoing research in an effort to illustrate how our theoretical construct may affect predictions. Finally, we describe potential extensions of the model, examine its robustness with respect to various underlying assumptions and offer suggestions for further research, including possible applications to other law enforcement contexts

A Model of Tax Compliance Under Budget-Constrained Auditors

In the midst of various taxpayer "revolts" and federal budget deficits of unprecedented magnitude, noncompliance with federal and state income tax laws has become an issue of significant policy concern. If the IRS' budget is limited, the probability that any individual taxpayer will be audited depends on the behavior of other taxpayers. Thus the problem of compliance involves a "congestion" effect, which generates strategic interaction among taxpayers as well as between taxpayers and the IRS. This paper reflects an initial attempt to explore how the combination of a strategic IRS and asymmetric information affects the traditional theoretical results on tax compliance behavior

Expert Opinions and Taxpayer Compliance: A Strategic Analysis

In this paper we examine the incentives for taxpayers to claim risky deductions and to solicit expert opinions to support their positions, and for the tax agency to distinguish among individuals who do and do not solicit expert opinions for the purposes of auditing. We also consider the implications of an ex ante constraint on the tax agency which requires it to treat all taxpayers who take the deduction alike in terms of audit rates, whether or not they solicit an expert opinion. Finally, we examine the effects of regulations which limit the degree of riskiness for which a supporting opinion can be justified as well as the effects of changes in various penalty rates

The tax compliance game: Toward an interactive theory of law enforcement

[No abstract

A Model of Tax Compliance Under Budget-Constrained Auditors

In the midst of various taxpayer "revolts" and federal budget deficits of unprecedented magnitude, noncompliance with federal and state income tax laws has become an issue of significant policy concern. If the IRS' budget is limited, the probability that any individual taxpayer will be audited depends on the behavior of other taxpayers. Thus the problem of compliance involves a "congestion" effect, which generates strategic interaction among taxpayers as well as between taxpayers and the IRS. This paper reflects an initial attempt to explore how the combination of a strategic IRS and asymmetric information affects the traditional theoretical results on tax compliance behavior

The Tax Compliance Game: Toward an Interactive Theory of Law Enforcement

The existing paradigm for the economic analysis of tax compliance provides an inadequate theory of the revenue collection process. Even as a purely economic model, its exclusive focus on individual taxpayers' decision-making promotes an unduly restrictive vision of the compliance problem and potential responses to it. In this paper we outline a more comprehensive theoretical basis for analyzing tax compliance, and illustrate it with a simple model. We believe our approach to be a significant improvement in the economic theory of law enforcement because it views the noncompliance problem as an interactive system. In our theoretical construct, individual decision-making not only depends upon and responds to the detection and punishment structure, but, unlike prior models, we also explicitly include the law enforcement agency--in this case the Internal Revenue Service--as an important interactive element. Initially we outline our general approach and its differences from the existing economic law enforcement paradigm. We then detail a simple model and its results and compare these results both to the prior literature and to some of our ongoing research in an effort to illustrate how our theoretical construct may affect predictions. Finally, we describe potential extensions of the model, examine its robustness with respect to various underlying assumptions and offer suggestions for further research, including possible applications to other law enforcement contexts

Expert Opinions and Taxpayer Compliance: A Strategic Analysis

In this paper we examine the incentives for taxpayers to claim risky deductions and to solicit expert opinions to support their positions, and for the tax agency to distinguish among individuals who do and do not solicit expert opinions for the purposes of auditing. We also consider the implications of an ex ante constraint on the tax agency which requires it to treat all taxpayers who take the deduction alike in terms of audit rates, whether or not they solicit an expert opinion. Finally, we examine the effects of regulations which limit the degree of riskiness for which a supporting opinion can be justified as well as the effects of changes in various penalty rates