Attitudes, Incentives, and Tax Compliance

Abstract

Data published by the Canada Revenue Agency show that tax compliance at the most basic level (filing and remitting on time) is quite satisfactory, while the more significant levels of tax compliance, as measured by the proportion of taxpayers judged to be at “substantive risk of non-compliance”, shows more problems. Whether increased audits and penalties are the best way to deal with this non-compliance depends on the reasons why taxpayers fail to comply. If taxpayers care only about incentives and are “playing the audit lottery”, increasing penalty and audit rates should improve compliance. But if psychological factors (including moral and ethical concerns) are important, improved compliance might instead be achieved by strategies that change taxpayers ’ attitudes towards the tax system such as increasing its perceived fairness and making it easier to comply with the tax laws. This study contributes to the compliance literature by studying the appropriate measure of tax compliance to use in research aimed at determining those changes in tax laws which would encourage higher levels of compliance. In the past some studies have used measures based on questions about tax compliance in hypothetical situations while others have used measures based on the experimental economics methodology. This paper finds that experimental economics