The Effects of Sharing the Consequences of Tax Evasion and Regret Salience on Taxpayer Compliance

This study examines whether sharing the potential tax savings and risk of penalties associated with tax evasion with another individual and the anticipation of potential regret from an adverse IRS audit affect an individual decision maker's propensity to evade taxes. Research on risky decision making suggests that individuals will be less likely to evade taxes when the benefits and costs of evasion are shared, while research on ethical decision making suggests that individuals will be more likely to evade taxes when the benefits of evasion are shared with another individual. Using experimental data obtained from 147 experienced taxpayers throughout the United States, this study finds evidence consistent with the risky decision making literature. Specifically, this study demonstrates that taxpayers are less likely to evade taxes when they share the potential tax savings and risk of penalties with another taxpayer compared to when the tax evasion decision affects solely the decision maker. In addition, this study demonstrates that regret salience decreases a taxpayer's willingness to evade taxes. Specifically, asking taxpayers to anticipate the regret they would experience if they were caught evading taxes before making a reporting decision lowers their likelihood of evasion.