Probability perceptions and taxpayer decision-making behavior

Abstract

This study examines contextual influences on taxpayers’ perceptions of a vague “low” probability of detection and the relationship between taxpayers’ perceptions and their likelihood to take questionable tax deductions. As such, we tie psychological theories that explain differential interpretations of qualitative probability phrases (base rate and support theories) to the taxpayer perception literature. Consistent with our hypotheses, taxpayers’ interpretations of “low” differ both between and within subjects, depending on the context in which deductions are presented. On average, our taxpayer subjects are less likely to take questionable deductions perceived to have a higher probability of detection than those perceived to have a lower detection probability. Our results contribute to existing literature by demonstrating that knowledge of subjects’ assessments of an event's probability is integral to designing experiments and drawing conclusions regarding observed behavior. This appears necessary even when researchers provide assessments of detection probabilities and/or employ scenarios for which systematic differences in probability perceptions are not inherently obvious.