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Mental Accounting and Tax Compliance

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  • Stephan Muehlbacher
  • Barbara Hartl
  • Erich Kirchler

Abstract

Taxes are a burdensome and tedious issue for self-employed who have just started their business. The present research suggests mental accounting as a measure for self-employed to keep track of their financial activities. Based on prospect theory, we argue that the mental segregation of taxes due from net income affects a taxpayer’s reference point in the compliance decision and results in higher tax compliance. Findings from a laboratory experiment confirm this prediction. Further, we show that relevance of mental tax accounting is higher when the tax due is not specified externally as it is the case in pay slips provided to employees. The individual tendency toward mental segregation of tax due and net income is positively related to the sex and age of respondents, their attitudes toward taxpaying, and their experiences gathered in the course of the experiment.

Suggested Citation

  • Stephan Muehlbacher & Barbara Hartl & Erich Kirchler, 2017. "Mental Accounting and Tax Compliance," Public Finance Review, , vol. 45(1), pages 118-139, January.
    • Handle: RePEc:sae:pubfin:v:45:y:2017:i:1:p:118-139
    DOI: 10.1177/1091142115602063
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    References listed on IDEAS

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    5. Kirchler,Erich, 2007. "The Economic Psychology of Tax Behaviour," Cambridge Books, Cambridge University Press, number 9780521876742, November.
    6. Henrik Jacobsen Kleven & Martin B. Knudsen & Claus Thustrup Kreiner & Søren Pedersen & Emmanuel Saez, 2011. "Unwilling or Unable to Cheat? Evidence From a Tax Audit Experiment in Denmark," Econometrica, Econometric Society, vol. 79(3), pages 651-692, May.
    7. Stephan Muehlbacher & Erich Kirchler, 2013. "Mental Accounting of Self-Employed Taxpayers: On the Mental Segregation of the Net Income and the Tax Due," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(4), pages 412-438, December.
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    9. repec:bla:jecsur:v:16:y:2002:i:5:p:657-83 is not listed on IDEAS
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