Book contents
- The Cambridge Handbook of Compliance
- The Cambridge Handbook of Compliance
- Copyright page
- Contents
- Figures
- Tables
- Contributors
- 1 Introduction: Compliance as the Interaction between Rules and Behavior
- Part I Compliance Concepts and Approaches
- Part II Deterrence and Incapacitation
- Part III Incentives
- Part IV Legitimacy and Social Norms
- Part V Capacity and Opportunity
- Part VI Compliance and Cognition
- 36 Heuristics and Biases in the Criminology of Compliance
- 37 Prospect Theory and Tax Compliance
- 38 Nudging Compliance
- Part VII Management and Organizational Processes
- Part VIII Measuring and Evaluating Compliance
- Part IX Analysis of Particular Fields
- References
37 - Prospect Theory and Tax Compliance
from Part VI - Compliance and Cognition
Published online by Cambridge University Press: 07 May 2021
Book contents
- The Cambridge Handbook of Compliance
- The Cambridge Handbook of Compliance
- Copyright page
- Contents
- Figures
- Tables
- Contributors
- 1 Introduction: Compliance as the Interaction between Rules and Behavior
- Part I Compliance Concepts and Approaches
- Part II Deterrence and Incapacitation
- Part III Incentives
- Part IV Legitimacy and Social Norms
- Part V Capacity and Opportunity
- Part VI Compliance and Cognition
- 36 Heuristics and Biases in the Criminology of Compliance
- 37 Prospect Theory and Tax Compliance
- 38 Nudging Compliance
- Part VII Management and Organizational Processes
- Part VIII Measuring and Evaluating Compliance
- Part IX Analysis of Particular Fields
- References
Summary
Abstract: This chapter discusses prospect theory as an alternative approach in explaining tax compliance behavior. (Non)Compliance is frequently modeled as the outcome of a decision under risk, that is, the choice between a safe option of being compliant and a risky option of not complying with the law. Noncompliance results in either a better or a worse outcome than compliance, depending on whether the behavior is audited and penalized. The most prominent descriptive model to explain risky decisions is prospect theory. Many of this theory’s core ideas have been applied in theoretical and empirical studies of compliance. After a brief overview of prospect theory, this chapter summarizes empirical studies as examples for prospect theory inspired compliance research. It closes with a summary and critique of this approach.
- Type
- Chapter
- Information
- The Cambridge Handbook of Compliance , pp. 541 - 550Publisher: Cambridge University PressPrint publication year: 2021
References
Allingham, Michael G., and Sandmo, Agnar. 1972. “Income Tax Evasion: A Theoretical Analysis.” Journal of Public Economics 1 (3–4): 323–38.Google Scholar
Alm, James. 1991. “A Perspective on the Experimental Analysis of Taxpayer Reporting.” Accounting Review 66 (3): 577–93.Google Scholar
Alm, James, McClelland, Gary H., and Schulze, William D.. 1992. “Why Do People Pay Taxes?” Journal of Public Economics 48 (1): 21–38.CrossRefGoogle Scholar
Alm, James, Kirchler, Erich, and Muehlbacher, Stephan. 2012. “Combining Psychology and Economics in the Analysis of Compliance: From Enforcement to Cooperation.” Economic Analysis & Policy 42 (2): 133–51.Google Scholar
Andreoni, James, Erard, Brian, and Feinstein, Jonathan. 1998. “Tax Compliance.” Journal of Economic Literature 36 (2): 818–60.Google Scholar
Arkes, Hal R., Joyner, Cynthia A., Pezzo, Mark V., Nash, Jane Gradwohl, Siegel-Jacobs, Karen, and Stone, Eric. 1994. “The Psychology of Windfall Gains.” Organizational Behavior and Human Decision Processes 59 (3): 331–47.Google Scholar
Becker, Gary S. 1968. “Crime and Punishment: An Economic Approach.” Journal of Political Economy 76 (2): 169–217.Google Scholar
Bernasconi, Michele, Corazzini, Luca, and Seri, Raffaello. 2014. “Reference Dependent Preferences, Hedonic Adaptation and Tax Evasion: Does the Tax Burden Matter?” Journal of Economic Psychology 40 (0): 103–18.Google Scholar
Boylan, Scott J., and Sprinkle, Geoffrey B. 2001. “Experimental Evidence on the Relation between Tax Rates and Compliance: The Effect of Earned vs. Endowed Income.” Journal of the American Taxation Association 23 (1): 75–90.Google Scholar
Bühren, Christoph, and Kundt, Thorben C.. 2016. “Does the Level of Work Effort Influence Tax Evasion? Experimental Evidence.” Review of Economics 65 (2): 137–58.Google Scholar
Copeland, Phyllis V., and Cuccia, Andrew D.. 2002. “Multiple Determinants of Framing Referents in Tax Reporting and Compliance.” Organizational Behavior and Human Decision Processes 88 (1): 499–526.Google Scholar
Dhami, Sanjit, and Al-Nowaihi, Ali. 2007. “Why Do People Pay Taxes? Prospect Theory versus Expected Utility Theory.” Journal of Economic Behavior & Organization 64 (1): 171–92.Google Scholar
Duggan, Michael. 2016. “Thinking Tax: Mental [Tax] Accounting and Voluntary Compliance.” Paper presented at 12th International Conference on Tax Administration, Sydney, Australia, March 31–April 1.Google Scholar
Durham, Yvonne, Manly, Tracy S., and Ritsema, Christina. 2014. “The Effects of Income Source, Context, and Income Level on Tax Compliance Decisions in a Dynamic Experiment.” Journal of Economic Psychology 40 (0): 220–33.Google Scholar
Engström, Per, Nordblom, Katarina, Ohlsson, Henry, and Persson, Annika. 2015. “Tax Compliance and Loss Aversion.” American Economic Journal: Economic Policy 7 (4): 132–64.Google Scholar
Fischer, Carol M., Wartick, Martha, and Mark, Melvin M.. 1992. “Detection Probability and Taxpayer Compliance: A Review of the Literature.” Journal of Accounting Literature 11: 1–46.Google Scholar
Fochmann, Martin, and Wolf, Nadja. 2019. “Framing and Salience Effects in Tax Evasion Decisions – An Experiment on Underreporting and Overdeducting.” Journal of Economic Psychology 72: 260–77.Google Scholar
Fox, Craig R., and Poldrack, Russell A.. 2009. “Chapter 11 – Prospect Theory and the Brain.” In Neuroeconomics, edited by Glimcher, Paul W., Camerer, Colin F., Fehr, Ernst, and Poldrack, Russell A., 145–73. London: Academic Press.Google Scholar
Hertwig, Ralph, Barron, Greg, Weber, Elke U., and Erev, Ido. 2004. “Decisions from Experience and the Effect of Rare Events in Risky Choice.” Psychological Science 15 (8): 534–9.Google Scholar
Internal Revenue Service. 2016. Data Book, 2015 (Publication 55B). Washington, DC. www.irs.gov/pub/irs-soi/15databk.pdf.Google Scholar
Kahneman, Daniel, and Tversky, Amos. 1979. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47 (2): 263–92.Google Scholar
Kirchler, Erich. 2007. The Economic Psychology of Tax Behaviour. Cambridge: Cambridge University Press.Google Scholar
Kirchler, Erich, and Maciejovsky, Boris. 2001. “Tax Compliance within the Context of Gain and Loss Situations, Expected and Current Asset Position, and Profession.” Journal of Economic Psychology 22 (2): 179–94.Google Scholar
Kirchler, Erich, Muehlbacher, Stephan, Hoelzl, Erik, and Webley, P.. 2009. “Effort and Aspirations in Tax Evasion: Experimental Evidence.” Applied Psychology: An International Review 58 (3): 488–507.CrossRefGoogle Scholar
Kirchler, Erich, Muehlbacher, Stephan, Kastlunger, Barbara, and Wahl, Ingrid. 2010. “Why Pay Taxes? A Review of Tax Compliance Decisions.” In Developing Alternative Frameworks for Explaining Tax Compliance, edited by Alm, James, Martinez-Vazquez, Jorge, and Torgler, Benno, 15–31. Abingdon, UK: Routledge.Google Scholar
Loewenstein, George, and Issacharoff, Samuel. 1994. “Source Dependence in the Valuation of Objects.” Journal of Behavioral Decision Making 7 (3): 157–68.Google Scholar
Martinez-Vazquez, Jorge, Harwood, Gordon B., and Larkins, Ernest R.. 1992. “Withholding Position and Income Tax Compliance: Some Experimental Evidence.” Public Finance Review 20 (2): 152–74.Google Scholar
Mason, Robert, and Calvin, Lyle D.. 1978. “Study of Admitted Income Tax Evasion.” Law & Society Review 13: 73–89.Google Scholar
Mittone, Luigi. 2006. “Dynamic Behaviour in Tax Evasion: An Experimental Approach.” Journal of Socio-economics 35 (5): 813–35.Google Scholar
Muehlbacher, Stephan, and Kirchler, Erich. 2008. “Arbeitsaufwand, Anspruchsniveau Und Steuerehrlichkeit.” Zeitschrift Für Arbeits- Und Organisationspsychologie 52 (2): 91–96.Google Scholar
Muehlbacher, Stephan, and Kirchler, Erich. 2013. “Mental Accounting of Self-Employed Taxpayers: On the Mental Segregation of the Net Income and the Tax Due.” FinanzArchiv: Public Finance Analysis 69 (4): 412–38.Google Scholar
Muehlbacher, Stephan, Kirchler, Erich, Hoelzl, Erik, Ashby, J., Berti, C., Job, J., Kemp, S., Peterlik, R. U., Roland-Levy, C., and Waldherr, K.. 2008. “Hard-Earned Income and Tax Compliance: A Survey in Eight Nations.” European Psychologist 13 (4): 298–304.Google Scholar
Muehlbacher, Stephan, Hartl, Barbara, and Kirchler, Erich. 2017. “Mental Accounting and Tax Compliance: Experimental Evidence for the Effect of Mental Segregation of Tax Due and Revenue on Compliance.” Public Finance Review 45 (1): 118–39.Google Scholar
Nagel, Hanskje, Huber, Laura Rosendahl, Van Praag, Mirjam, and Goslinga, Sjoerd. 2019. “The Effect of a Tax Training Program on Tax Compliance and Business Outcomes of Starting Entrepreneurs: Evidence from a Field Experiment.” Applying Experimental Methods to Advance Entrepreneurship Research 34 (2): 261–83.Google Scholar
Olsen, Jerome, Kasper, Matthias, Kogler, Christoph, Muehlbacher, Stephan, and Kirchler, Erich. 2019. “Mental Accounting of Income Tax and Value Added Tax among Self-Employed Business Owners.” Journal of Economic Psychology 70 (January): 125–39.Google Scholar
Piolatto, Amedeo, and Rablen, Matthew D.. 2017. “Prospect Theory and Tax Evasion: A Reconsideration of the Yitzhaki Puzzle.” Theory and Decision 82 (4): 543–65.CrossRefGoogle ScholarPubMed
Schepanski, Albert, and Shearer, Teri. 1995. “A Prospect Theory Account of the Income Tax Withholding Phenomenon.” Organizational Behavior and Human Decision Processes 63 (2): 174–86.Google Scholar
Spicer, Michael W., and Hero, Rodney E.. 1985. “Tax Evasion and Heuristics: A Research Note.” Journal of Public Economics 26 (2): 263–7.Google Scholar
Srinivasan, Thirukodikaval N. 1973. “Tax Evasion: A Model.” Journal of Public Economics 2 (4): 339–46.Google Scholar
Thaler, Richard H. 1985. “Mental Accounting and Consumer Choice.” Marketing Science 4 (3): 199–217.Google Scholar
Thaler, Richard H. 1999. “Mental Accounting Matters.” Journal of Behavioral Decision Making 12 (3): 183–206.Google Scholar
Thaler, Richard H., and Johnson, E. J.. 1990. “Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice.” Management Science 36 (6): 643–60.Google Scholar
Tversky, Amos, and Kahneman, Daniel. 1974. “Judgement under Uncertainty: Heuristics and Biases.” Science 185 (4157): 1124–31.Google Scholar
Tversky, Amos, and Kahneman, Daniel. 1981. “The Framing of Decisions and the Psychology of Choice.” Science 211 (4481): 453–8.Google Scholar
Tversky, Amos, and Kahneman, Daniel. 1992. “Advances in Prospect Theory: Cumulative Representation of Uncertainty.” Journal of Risk and Uncertainty 5 (4): 297–323.CrossRefGoogle Scholar
Von Neumann, John, and Morgenstern, Oskar. 1944. Theory of Games and Economic Behavior. Princeton, NJ: Princeton University Press.Google Scholar
Yaniv, Gideon. 1999. “Tax Compliance and Advance Tax Payments: A Prospect Theory Analysis.” National Tax Journal 52 (4): 753–64.Google Scholar
Yitzhaki, Shlomo. 1974. “A Note on Income Tax Evasion: A Theoretical Analysis.” Journal of Public Economics 3: 201–2.Google Scholar
Zeelenberg, M., and van Dijk, E.. 1997. “A Reverse Sunk Cost Effect in Risky Decision Making: Sometimes We Have Too Much Invested to Gamble.” Journal of Economic Psychology 18 (6): 677–91.Google Scholar
- 1
- Cited by