Information processing in tax decisions: A MouselabWEB study on the Allingham and Sandmo model of income tax evasion

The highly influential Allingham and Sandmo model of income tax evasion framed the decision whether to comply or to evade taxes as a decision under uncertainty, assuming that taxpayers are driven by utility-maximization. Accordingly, they should choose evasion over compliance if it yields a higher expected profit. We test the main assumptions of this model considering both compliance decisions and the process of information acquisition applying MouselabWEB. In an incentivized experiment, 109 participants made 24 compliance decisions with varying information presented for four within-subject factors (income, tax rate, audit probability, and fine level). Additional explicit expected value information was manipulated between-subjects. The results reveal that participants attended to all relevant information, a prerequisite for expected value like calculations. As predicted by the Allingham and Sandmo model, choices were clearly influenced by deterrence parameters. Against the assumptions, these parameters were not integrated adequately, as evasion did not increase with rising expected rate of return. More transitions between information necessary for calculating expected values did not result in higher model conformity, just as presenting explicit information on expected values. We conclude that deterrence information clearly influences tax compliance decisions in our setting, but observed deviations from the model can be attributed to failure to integrate all relevant parameters.