Information processing in tax decisions: a MouselabWEB study on the deterrence model of income tax evasion

• Published in: Journal of behavioral decision making Vol. 35; no. 4
• Main Authors: Kogler, Christoph, Olsen, Jerome, Müller, Martin, Kirchler, Erich
• Format: Journal Article
• Language: English
• Published: Chichester Wiley Periodicals Inc 01-10-2022
• Subjects: Audits; Compliance; Conformity; Deterrence; expected value; Expected values; Income taxes; Information processing; Mouselab; process tracing; Rates of return; rational choice; tax compliance; Tax evasion; Tax rates; Taxation
• ISSN: 0894-3257; 1099-0771
• DOI: 10.1002/bdm.2272

The highly influential Allingham and Sandmo model of income tax evasion assumes that taxpayers are driven by utility maximization, choosing evasion over compliance if it yields a higher expected profit. We test the main assumptions of this so‐called deterrence approach considering both compliance decisions and the process of information acquisition using MouselabWEB. In an incentivized experiment, 109 participants made 24 compliance decisions with varying information presented for four within‐subject factors (the four central model parameters: income, tax rate, audit probability, and fine level). Additionally, explicit expected value information was indicated in one of two conditions. The results reveal that participants attended to all relevant information, a prerequisite for expected value‐like calculations. As predicted by the deterrence model, choices were clearly influenced by audit probability and fine level. Against the model assumptions, the presented parameters were not integrated adequately, indicated by a non‐monotonic increase of evasion with rising expected rate of return from evasion. Additionally, more transitions between information necessary for calculating expected values did not result in higher model conformity, just as presenting explicit information on expected values. We conclude that deterrence information clearly influences tax compliance decisions in our setting but observed deviations from the deterrence model can be attributed to failures to properly integrate all relevant parameters.