The Effect of Perfect Monitoring of Matched Income on Sales Tax Compliance: An Experimental Investigation

Tax noncompliance is a quantitatively important phenomenon that significantly affects government revenues and thus raises challenging questions about the determinants of tax reporting and the appropriate design of a tax system. This paper provides empirical insights regarding the nature of tax noncompliance using an experimental approach to evaluate the effects of systematic sales tax monitoring and identify the determinants of sales tax compliance. The results suggest that if perfect monitoring of a single revenue source is introduced without other complementary policies, an increase in tax revenues is not the likely outcome as evasion increases for other revenue sources. That is, the data suggest that once taxpayers have chosen their level of tax compliance, they will try to recover their losses following any policy changes, even if it implies assuming more risk. The authors thank Nathalie Viennot-Briot for her technical assistance in preparing this paper. The comments and suggestions of the referees were very helpful in revising the paper. The usual disclaimer applies. * Corresponding author: [email protected].