Discussion of The Interrelationship between Estimated Tax Payments and Taxpayer Compliance

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CONTRIBUTION Feltham and Paquette (2002) (hereafter the paper) examine the effect of a taxpayer’s prepayment position on the taxpayer’s reporting strategy and the government’s auditing strategy in a tax compliance game. Chang and Schultz (1990) find a positive association between noncompliance and an underpayment position. Dusenbury (1994) asserts, ‘‘The prepayment level determines the additional payment due or the refund available, but logically should not influence the reported tax liability.’’ Dusenbury (1994) goes on to argue that the link between noncompliance and prepayment position can be explained using prospect theory. This paper offers a competing explanation. The authors argue that because a taxpayer’s prepayment position is endogenously determined, the prepayment itself provides information regarding the taxpayer’s true tax liability to the tax authority, which in turn affects the strategic interaction in the tax compliance game. It shows that behavior that appears to be illogical when tax compliance is framed as a single-person decision theory problem is optimal if one assumes that tax compliance is a multiplayer, strategic game.