nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2020‒10‒12
six papers chosen by

  1. Audits, Audit Effectiveness, and Post-audit Tax Compliance By Matthias Kasper; James Alm
  2. The Tax Elasticity of Financial Statement Income: Implications for Current Reform Proposals By Dhammika Dharmapala
  3. Who Responds? Disentangling the Effects of Audits on Individual Tax Compliance Behavior By James Alm; Ali Enami; Michael McKee
  4. Global Firms, National Corporate Taxes: An Evolution of Incompatibility By Shafik Hebous
  5. Returns to intangible capital in global value chains: New evidence on trends and policy determinants By Ali Alsamawi; Charles Cadestin; Alexander Jaax; Joaquim Guilhoto; Sébastien Miroudot; Carmen Zurcher
  6. 40 Years of Tax Evasion Games: A Meta-Analysis By James Alm; Antoine Malézieux

  1. By: Matthias Kasper (Tulane Economics and University of Vienna); James Alm (Tulane Economics)
    Abstract: This study uses a laboratory experiment to investigate the effect of tax audits on post-audit tax compliance. An important feature of our experimental design is the addition of audit ”effectiveness” to our audit mechanism, where effectiveness is defined as the share of undeclared income that the tax agency detects in an audit. This addition allows us to examine the effects of audit effectiveness on post-audit compliance. We also study whether tax audits have differential effects on different types of taxpayers, as distinguished by their prior reporting behavior. Contrary to theoretical predictions, we find that tax audits have differential effects on post-audit compliance and that the effectiveness of audits determines these responses; that is, while effective audits increase post-audit tax compliance, ineffective audits have the opposite effect. We also find that tax audits (whether effective or not) increase subsequent compliance of noncompliant taxpayers while they reduce compliance among individuals who have been found to report their income correctly. Finally, we find no evidence that tax audits crowd out the intrinsic motivation to comply of honest individuals. Our findings suggest that the specific deterrent effect of tax audits is more ambiguous than much previous analysis suggests, with these effects dependent on the effectiveness of the audit process and on the taxpayer’s prior reporting behavior.
    Keywords: Tax compliance; Audit effectiveness; Specific deterrence; General deterrence; Laboratory experiments.
    JEL: C9 H26 H83
    Date: 2020–09
  2. By: Dhammika Dharmapala
    Abstract: Current reform proposals in international and corporate tax (most notably the OECD’s GloBE proposal) envisage taxing financial statement income. This paper develops a conceptual framework – based on the literature on the elasticity of taxable income – for the welfare analysis of such proposals, and discusses the available evidence on the tax elasticity of financial statement income. The central conclusion is that the most relevant evidence suggests a large responsiveness of financial statement income to taxes (and hence, albeit with significant limitations and caveats, arguably a large deadweight loss). The paper also highlights the need for more evidence on this question.
    Keywords: international taxation, multinational firms, financial statement income, book-tax conformity
    JEL: H25 M41
    Date: 2020
  3. By: James Alm (Tulane Economics); Ali Enami (The University of Akron); Michael McKee (Appalachian State University)
    Abstract: How does individual tax compliance respond to a change in the audit rate? Most all empirical evidence suggests that an increase in the audit rate increases the compliance rate, a result that is also consistent with standard theoretical analysis of the individual compliance decision. However, this empirical evidence is typically based on estimating an average response across all taxpayers, and an average response may conceal much heterogeneity in individual responses. This paper collects individual- level data from identical laboratory experiments across five separate studies with a total of 278 student subjects that generated 8340 individual observations, in which only audit rates are varied, in order to disentangle individual responses to audit rate changes. As with most previous empirical work, our results indicate that the average response across all taxpayers is to increase (decrease) compliance when audit rates increase (decrease). However, this average response conceals enormous heterogeneity in individual responses. When the individual responses are examined in more detail, our data show that many individuals do in fact respond to higher (lower) audit rates by increasing (decreasing) their compliance. However, these individuals represent only about 2/3 of all subjects. In fact, our data also show that many individuals do not respond at all to audit rate changes. Surprisingly, our data further show that some individuals actually decrease their compliance when audit rates increase, and vice versa. All of these different individual responses indicate that government policy interventions must consider the “full house” of individual behaviors when devising appropriate policies.
    Keywords: Tax evasion, Tax compliance, Behavioral economics, Experimental economics.
    JEL: H26 C91
    Date: 2020–09
  4. By: Shafik Hebous
    Abstract: How did the rise of multinational enterprises (MNEs) put pressure on the prevailing international corporate tax framework? MNEs, and firms with market power, are not new phenomena, nor is the corporate income tax, which dates to the early 20th century. This prompts the question, what is distinctly new (about multinational enterprises)—if anything—that has triggered unprecedented recent concerns about vulnerabilities in international tax arrangements and the taxation of MNEs? This paper presents a set of empirical observations and a synthesis of strands of the literature to answer this question. A key message is that MNEs of the 21st century operate differently from prior periods and have evolved to become global firms—with important tax ramifications. The fragility of international tax arrangements was present at the outset of designing international tax rules, but the challenges have drastically intensified with the global integration of business, the increased trade in hard-to-price services and intangibles, and the rapid growth of the digital economy.
    Keywords: multinational enterprises, global firm, tax avoidance, international tax profit shifting
    JEL: F14 F23 H25 H26
    Date: 2020
  5. By: Ali Alsamawi; Charles Cadestin; Alexander Jaax; Joaquim Guilhoto; Sébastien Miroudot; Carmen Zurcher
    Abstract: Intangible capital, a broad category of knowledge-based assets that lack physical embodiment, increasingly shapes the distribution of income in global value chains (GVCs). While some intangible assets are reported in national accounts (e.g. R&D or computer software and databases), others are hard to detect in conventional statistics (e.g. brand value or organisational capital). In this paper, we combine information on factor income from national accounts with the OECD Inter-Country Input-Output tables in order to estimate returns to measured (i.e. included in national accounts) and ‘unmeasured’ intangible capital (captured as a residual) in GVCs. We find that total intangible capital accounts for about 27% of income in manufacturing GVCs and that this share has increased between 2005 and 2015 in OECD countries. The paper highlights differences across GVC stages and specific types of GVCs. A significant share of income is captured at the distribution stage, particularly in buyer-driven value chains. An econometric analysis suggests that trade and investment openness are important determinants of patterns in returns to intangible capital in GVCs. Direct public funding of R&D and the quality of intellectual property protection are associated with higher returns to intangible assets.
    JEL: E1 E22 F23 F68
    Date: 2020–09–30
  6. By: James Alm (Tulane Economics); Antoine Malézieux (Burgundy School of Business)
    Abstract: We collect individual participant data from 70 papers that use laboratory experiments to examine individual tax evasion behavior (or "Tax Evasion Games"), in order to use meta-analysis to estimate the impacts of different public policy, experimental design and individual level variables on tax evasion choices. Our results show that standard enforcement variables like audits (including audit rules) and fines perform differently on the extensive and intensive margins. We find that other fiscal variables like a flat tax system, tax rates, and tax amnesties have unambiguous negative impacts on tax compliance, and that specific features of the experimental setting, such as how subjects are directed to report income, or whether taxes are redistributed to the participants or to a real life public good, have significant impacts on tax compliance. Our results also indicate that the demographic characteristics of the subjects (e.g., gender, experimental income, occupation, risk attitude) affect compliance.
    Keywords: Tax evasion, Tax compliance, Meta-Analysis.
    JEL: C9 H0 H3
    Date: 2020–08

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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.