Economic and equity effects on tax reporting decisions

Abstract

This study examines reporting in a tax setting for which the typical empirical findings cannot be explained either by conventional economic theory or by equity theory alone. Instead, our results show that both conventional economic forces and equity considerations play important roles in reporting decisions. We extend previous research relating perceptions of inequity to reporting decisions by demonstrating that, in the absence of perceptions of inequity, reporting decisions are consistent with the conventional economic prediction. When perceptions of exchange inequity are experimentally induced, reporting decisions are inconsistent with the conventional economic prediction, but consistent with features of actual tax reporting in the field. Further analysis demonstrates that the reason these reporting decisions are inconsistent with the economic prediction is that exchange inequity effects induce taxpayers to report less income, thereby offsetting the economic forces that provide incentive for individuals to report more income. Building on earlier work, our study offers a more comprehensive explanation for why conventional economic analysis fails to accurately predict reporting decisions in the field. © 2004 Elsevier Ltd. All rights reserved.