Andrew Leigh has posted on what a good idea it would be to do some random tax audits. “Don’t they already do this”, I hear you cry. No they don’t, not in Australia. As part of our ‘we know what we’re doing’ approach, the ATO pursues people whom it’s modelling, and perhaps its hunches suggest will be good targets for an audit – people who’s tax returns or lack thereof suggest that they are more likely than you’re average taxpayer to be cheating.
Nothing wrong with a lot of targeted auditing, but random tax audits would be a useful way of scanning for new patterns and we could use them to observe a bunch of other things as they have elsewhere – as documented in the abstract in Andrew’s post. Now here’s something else we could do to improve compliance, offer to publish the details of those caught cheating as these results (pdf) suggest.
The economics-of-crime approach usually ignores the emotional cost and benefit of cheating. In this paper, we investigate the relationships between emotions, deception, and rational decision-making by means of an experiment on tax evasion. Emotions are measured by skin conductance responses and self-reports. We show that the intensity of anticipated and anticipatory emotions before reporting positively correlates with both the decision to cheat and the proportion of evaded income. The experienced emotional arousal after an audit increases with the monetary sanctions and the arousal is even stronger when the evader’s picture is publicly displayed. We also find that the risk of a public exposure of deception deters evasion whereas the amount of fines encourages evasion. These results suggest that an audit policy that strengthens the emotional dimension of cheating favors compliance.