Does the “bomb crater” effect really exist? Evidence from the laboratory

This study uses a laboratory experiment to investigate two behavioral explanations for taxpayers’ tendency to reduce their compliance after an audit (the “bomb crater effect”): the tendency to make up for losses incurred in the past (loss repair), and the incorrect assumption that experiencing an audit decreases the risk of a future audit (misperception of risk). Our findings suggest that audits do not have a strong effect in the aggregate. However, behavioral responses depend on the audit outcome. While taxpayers who were found to report all income correctly are substantially less compliant in their subsequent tax declaration, taxpayers who were found to evade their entire income show the opposite response. These results suggest that audits do not induce a general tendency for loss repair or a general misperception of the risk of a subsequent audit. Moreover, when comparing these changes in reporting behavior to the behavior of taxpayers who did not experience an audit, we find that audits do in fact not induce strong behavioral responses in general, and they do not induce a “bomb crater effect” in particular. Rather, our findings suggest that taxpayers reporting compliance in the laboratory is volatile, even absent any audits. We conclude that experimental studies should use control groups of unaudited taxpayers to identify the causal effect of audits on post-audit tax compliance.