Delayed feedback on tax audits affects compliance and fairness perceptions

Abstract

In the present study we explore the conflicting finding that delayed feedback on tax audits apparently results in higher tax compliance, although delaying feedback is associated with lower perceptions of procedural fairness. In a repeated rounds design the timing of feedback (delayed vs. immediate) is investigated in combination with a reduction of wealth in some periods, presented either as a rather unfair intervention of the authorities, or due to a comparatively neutral manipulation. The results reveal a strong impact of timing of feedback on tax compliance: participants in conditions of delayed feedback show significantly higher compliance than those in conditions of immediate feedback. In addition, participants receiving delayed feedback are more likely to state that the probability of audit is high as well as that fines in case of detection are severe, but on the other hand perceive the timing of feedback and the authorities as more unfair. No main effect of the reason for the wealth reduction could be identified. The finding that the difference in compliance between delayed and immediate feedback on tax audits develops over time supports the assumption that in decisions based on experience the probabilities of rare events are underweighted, while in decisions based on descriptions people make choices as if they overweight probabilities of rare events.