Revisiting the tax compliance problem using prospect theory

R. Kavita Rao and Suranjali Tandon of NIPFP have this interesting paper.

Should one file or not file a tax? What are the behavioral implications?

The paper presents a model for tax compliance based on prospect theory wherein an individual makes the decision whether to file, and declare a certain amount of income, or to not file based on a set of policy parameters as well as his/her preferences. The paper poses the question- at what incomes would individuals choose to file a return and answers the same using a model based on prospect theory. Further, simulations are presented to illustrate the impact of changes in tax rates, penalty and audit probability on the individual’s preference to file. The results from the simulation show that for different values of policy parameters there exists crossover income at which individuals would choose to file a return. Given all else, at the exemption threshold of 0.1 million, individuals would choose to file a return at incomes greater than or equal to 0.6 million.

Hmmm…

One would like to also read on an experiment verifying the model..

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