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Tax Compliance and Advance Tax Payments: A Prospect Theory Analysis

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  • Yaniv, Gideon

Abstract

While obligatory advance tax payments do not interfere with the taxpayer ’s evasion decision under expected utility theory, they do affect the decision to evade under prospect theory. The present paper applies prospect theory to a simple model of tax evasion, exploring the role that advance tax payments may play in enforcing tax laws. The paper demonstrates, as empirically found in the United States, that advance tax payments may substitute for costly detection efforts in enhancing compliance. However, contrary to a recent claim in the tax evasion literature, deliberate high advance tax payments are unlikely to eliminate the incentives for noncompliance.

Suggested Citation

  • Yaniv, Gideon, 1999. "Tax Compliance and Advance Tax Payments: A Prospect Theory Analysis," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(4), pages 753-764, December.
    • Handle: RePEc:ntj:journl:v:52:y:1999:i:4:p:753-64
    DOI: 10.1086/NTJ41789428
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    References listed on IDEAS

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    1. Elffers, Henk & Hessing, Dick J., 1997. "Influencing the prospects of tax evasion," Journal of Economic Psychology, Elsevier, vol. 18(2-3), pages 289-304, April.
    2. Chang, Otto H. & Nichols, Donald R. & Schultz, Joseph J., 1987. "Taxpayer attitudes toward tax audit risk," Journal of Economic Psychology, Elsevier, vol. 8(3), pages 299-309, September.
    3. James Alm & William Beck, 1990. "Tax Amnesties and Tax Revenues," Public Finance Review, , vol. 18(4), pages 433-453, October.
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