Audit Selection vs. Audit Intensity: Taxpayer and Tax Agency Strategies in the Presence of Imperfect Detection

Tax Administration Research Centre (TARC)

Speaker:Mark Phillips, University of Southern California
Date: Friday 21 November 2014
Time: 16:15
Location: Bateman Lecture Theatre, Building: One

Further details

I assess how imperfect detection of tax noncompliance during an audit impacts taxpayer evasion and tax agency enforcement strategies. I do so by introducing a detection technology function into the sequential tax evasion game. Heterogeneous taxpayers can reduce detection rates via less egregious noncompliance. The tax agency can increase detection rates via more intensive but costlier examinations; therefore, it faces a trade-off between the quantity and effectiveness of audits. The model predicts several taxpayer and tax agency behaviours that are observed in reality but unexplained by other theories.  It also predicts that evasion and enforcement strategies lead to a progressive bias in effective tax rates, a novel ending. Simulations of the model demonstrate the effects of improvements in the detection technology.  Although total tax revenues increase, exam revenues may decrease due to greater voluntary compliance; therefore, tax agency performance measures that focus solely on exam revenues may be highly misleading.

Keywords: tax evasion; tax enforcement; audit selection; audit effectiveness; sequential game