When the State Doesn't Play Dice: Aggressive Audit Strategies Foster Tax Compliance

We experimentally test the effect of aggressive audit strategies on tax compliance. Tax payers first go through a phase of audits managed by a human tax agent who is requested to follow a rule imposed by a fair random device. However, the tax agent can freely decide to break the rule and over-inspect. Afterwards, tax payers are exposed to a genuinely random audit process governed by an al- gorithm, which makes compliance a strategically dominated option. Our main result is that tax payers are generally over-inspected by the human tax agents and react to this with nearly full compliance. Interestingly, these high levels of compliance persist also when con- trols are implemented by the algorithm. We conclude that aggressive audit strategies can effectively be used by tax authorities to raise and sustain tax compliance.