Income level and tax rate as determinants of taxpayer compliance: An experimental examination
Hamm, Jeffrey Lloyd
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Empirical research suggests that the determinants of tax compliance are numerous. At the core of most compliance models is the economics-of-crime model. The basic economics-of-crime model incorporates four variables: the probability of detection, the penalty rate, the tax rate, and the level of income. The choice of the probability of detection and the penalty rate are based on deterrence theory, which is well-founded. Research investigating the effects of the tax rate and income level on taxpayer compliance has been less conclusive. The progressive nature of the U.S. tax system confounds the measurement of the separate effects of the two variables. This dissertation uses an experimental approach to separate the tax rate and income level effects. The results suggest that as the tax rate and income level increase, taxpayer compliance decreases.