This paper presents an econometric analysis of taxpayer compliance, exploring its relationship with audit rates, penalties if detected, tax rate schedule, income level, and sources of self-employment income. Using data drawn from theAnnual Report of the Commissioner of Internal Revenue Service [IRS, various] and the Data Book [IRS, various]for 1980 to 1995, the audit rate and penalty rate are both effective deterrents to noncompliance. The effectiveness of these two policy instruments depends upon the individual's level of income. It seems the higher the income level, the more effective these instruments are. In general, compliance increases with the level of income but at a decreasing rate. It is also found that individuals tend to comply less as the marginal tax rate rises. Again, such tendency is more pronounced for high-income taxpayers than for low-income taxpayers. (JEL H20, H24, H26) *University of Kentucky--U.S.A. *" Francis Marion University--U.S.A. The authors are grateful to an anonymous referee for helpful comments and suggestions.
186ALI ET AL.: TAXPAYER COMPLIANCE 187 various]. The audit rate and penalty rate both serve as effective deterrents to noncompliance. The effectiveness of these two policy instruments depends upon the individual's level of income. It seems the higher the income level, the more effective these instruments are. In general, compliance increases with the level of income but at a decreasing rate. It is also found that individuals tend to comply less as the marginal tax rate rises. Again, such tendency is more pronounced for high-income taxpayers than for low-income taxpayers.The plan for this study is as follows. The second section reviews the existing theoretical and empirical literature on tax compliance. The third section develops an econometric model for tax compliance. The fourth section reports the estimated model and presents new empirical evidence on how audit rates, penalty rates and tax rates affect compliance. Some concluding remarks are presented in the fifth section.
The basic purpose of this study was the investigation of the usefulness of Bayesian statistical techniques to problems of estimation in the field of auditing. By using subjective probabilities the auditor can explicitly bring prior knowledge to bear on his problem by incorporating his feelings in the sampling process and thus obtain an efficient method by which refined estimates can be obtained. The results of the study strongly support the premise that the auditor can obtain superior results from the Bayesian model in estimating unknown quantities as opposed to those obtained through either the non-statistical approach or the classical statistical approach.In a recent monograph, the statement was made that "the objectives of Accounting are to provide information for the following purposes: [ 4 ] , which were then outlined. The nub of the monograph is contained in the phrase "to provide (relevant ) information." Just what is information? Shannon's concept of information was the resolvement of Uncertainty.' Using the concept of information as the displacement of uncertainty, we would expect that the standards used in certifying financial statements would have been so rigorously and meticulously defined that there would be no room left for uncertainty. However, upon investigation, we find that this is not the case. For example, "The public is nonplussed where under the same circumstances two or more widely different sets of figures are 'certified by us. To pursue that unmerry way is to make the ground beneath us shaky." 'The above statement is not too surprising, since accountants often work with incomplete data. However, what is surprising is that accountants have not made more use of statistical samples, statistical influence, and other statistical concepts and techniques in reducing areas of uncertainty.Accountants in general and auditors specifically must make decisions or render judgments from limited or partial information.
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