When the agency wants too much: Experimental evidence on unfair audits and tax compliance

Abstract

This research investigates how unfairness in tax enforcement affects tax compliance. We study how unfair audits that overestimate a taxpayer's true income affect the aggregate compliance level and the post-audit tax compliance of audited taxpayers. Using an online experiment with a representative sample of UK taxpayers, we find that introducing unfair audits has a positive effect on the aggregate compliance level. However, increasing the amount by which audits overestimate true income has no effect. Moreover, we find that the experience of unfairness in tax enforcement reduces post-audit tax compliance in the subsequent tax declaration by at least 7 percentage points. Our findings suggest that threatening taxpayers with unfair audits increases compliance in the aggregate, but behavioral responses to experiencing unfair audits undermine this effect.