Tax Auditing as a Public Good Game: An Experimental Study on Punishment and Compliance

Abstract

Prior experimental studies on tax evasion generally assume that the budget and the probability of audit are exogenously given, and ignore taxpayers' incentives to detect evasion and their compliance behaviour under such incentives. The experimental evidence of the present paper shows that, on average, subjects are willing to spend 20 to 30% of their tax revenue on auditing. Compliance is also greatly improved if subjects can determine the budget and, hence, the probability of audit. These findings suggest that taking taxpayers' incentives to detect evasion into consideration is important for the design of compliance‐improvement audit schemes.