Tax Evasion and Equity Theory: An Experimental Investigation

Document Type

Article

Publication Title

International Tax and Public Finance

Department

Economics

ISSN

0927-5940

Volume

9

Issue

4

DOI

10.1023/A:1016528406214

First Page

505

Last Page

521

Publication Date

8-1-2002

Abstract

Traditional economic theory assumes rational individuals with stable preferences who, given an array of options and probabilities, maximize their expected utility. However, experimental research finds that individuals make systematic “mistakes” when attempting to maximize their expected utility. The economic psychology approach includes aspects of the traditional economic approach and the psychological approach that emphasizes values, attitudes, norms, conformity and morals.

This paper investigates equity theory and tax evasion using the framework of prospect theory pioneered by Tversky and Kahneman. We design an investigation to identify if individual behavior follows the usual results of prospect theory, given a scenario that frames a perception of inequity. The investigation frames a scenario to invoke a controlled tax regime. The frame varies according to which inequity is being measured, exchange or social. Once the scenario is established, a questionnaire is designed to determine how the individual responds when filing taxes. The responses to the control questions are consistent with prospect theory. However, in general the responses to the framed questions, depicting inequity, are more consistent with expected utility theory.

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