An experimental investigation of how ethical orientations, tax rates, penalty rates, and audit rates affect tax compliance decisions

This study examines whether the ethical orientations of idealism and/or relativism influence an individual's decision to honestly report his/her tax liability. In addition, this research uses Spicer's model to investigate whether the tax rate, audit rate, or the penalty rate interact with either ethical orientation to affect an individual's tax compliance.

Forsyth's (1980) Ethics Position Questionnaire (EPQ) was used to measure each subject's level of idealism and relativism. The constructs of relativism and idealism were used as covariates in the analysis. The three independent variables or factors were: tax rate (25% or 50%), the audit rate (10% or 30%), and the penalty rate (20% or 80%). The dependent variable is the compliance rate, computed by dividing the declared taxable income by the actual taxable income. An experiment was conducted in a computer laboratory using 120 subjects. A computer simulation provided revenue and expense amounts for each subject. In addition, the subjects used the computer to file several simplified tax reports.

The results from the experiment revealed that tax rate, idealism, and relativism were significant explanatory variables. Low idealists (high relativists) attempted more tax evasion than high idealists (low relativists). Thus, moral attitudes do affect tax compliance. Furthermore, the results imply an increase in the tax rate will increase tax noncompliance. In addition, the results indicate that the tax rate and idealism interact significantly. The lower an individual's idealism, the more noncompliant he/she becomes as the tax rate increases. Finally, neither the audit rate nor penalty rate were found to be strongly related to tax compliance in this experiment.