Dynamic behavioural changes in an agent-based econophysics tax compliance model: bomb crater versus target effects and efficient audit strategies

Abstract

We investigate a heterogeneous Ising model in the context of tax evasion dynamics, where different types of agents are parameterised via local temperatures and magnetic fields. Our work focuses on the dynamic behavioural change of agents after an audit, which either corresponds to a temporal reduction or enhancement of compliance, also known under the terms of ‘bomb crater effect’ and ‘target effect’, respectively. We analyse this effect for different types of agents: endogenously non-compliant types; agents that have a tendency to copy (non-)compliant behaviour from their social environment; ethical agents with strong endogenous moral attitudes; and random types that show large fluctuations between compliant and non-compliant behaviour. Each type influences overall tax evasion differently and our model predicts that, interestingly, increasing the audit probability can have the counter-intuitive effect of increasing tax evasion under certain circumstances. We analyse audit strategies that can suppress this effect, and thus contribute to the burgeoning literature on the actual impact of tax audits.