Policy and Complex Systems - Volume 2 Number 1 - Spring 2015
Deriving the Expected Value of The Tax Underreporting Rate
J . T . Manhire A
The principal purpose of this paper is to derive an expected value measure of the tax underreporting rate given only tax authority enforcement data . The main result is that the expected value measure of the underreporting rate is a modified geometric mean function of the audit rate and the proportion of audited returns found to contain underreported tax . This result hopefully allows agent-based model designers to create more valid models that explain the macro-level properties of tax compliance . This , in turn , should allow policymakers to be more certain in their political decisions on tax policy .
Keywords : tax , tax compliance , tax avoidance , underreporting , tax audit , complex systems
I - Background
Ideally , policies affecting tax compliance
are the products of political decision making under the Stacey Matrix ( Stacey , 2011 ). Ideal political decision making means policymakers have a high degree of certainty on how best to achieve governmental ends even if the political will of the people and their representatives have very low levels of agreement on what they want from their government . For tax policy , this means policymakers are close to certainty about how tax compliance outcomes are created even if the citizenry is highly divided on which outcomes are desirable .
Yet , in reality , tax policymakers tend to know little about how best to achieve optimal tax compliance outcomes . Cause and effect links are unclear , since none are sure about the effect of even tax audits on compliance . 1 According to the Stacey Matrix , this low level of certainty combined with the low level of agreement by the citizenry lead to a chaotic atmosphere for tax compliance policy making , where disintegration , anarchy and massive avoidance quickly emerge . Traditional methods of planning and decision making are insufficient in these contexts .
Researchers and theorists attempt to move the levels of certainty on tax compliance from low to high , thereby moving related tax policy making from the the “ chaotic ” to the “ political ” field . Many use models to represent tax compliance systems in an attempt to understand the nature and effects of the system . 2 For example , Kim Michael Bloomquist developed a robust agent-based computational model ( ABM ) in an attempt to
A
Texas A & M University School of Law
1
Alm ( 2012 ) and Slemrod ( 2007 ) survey the literature on this disagreement .
2
Other attempts to created ABMs that represent the tax compliance dynamic include ( Antunes et al ., 2007 ; Davis , Hecht , & Perkins , 2003 ; Hokamp & Pickhardt , 2010 ; Korobow , Johnson , & Axtell , 2007 ; Mittone & Patelli , 2000 ; Zaklan et al ., 2009 ).
4
10.18278 / jpcs . 2.1.3