The Role of Fairness in Tax Compliance : A Game-Theoretical Evidence Using Stackelberg Model

This study addresses the issue of tax evasion from the perspective of the fairness concern by the agents, as these normative considerations make the entire tax policy framework more complex. We model the tax compliance behavior using the structure of Stackelberg game between the fiscal authority (government) and the taxpayer, assuming the taxpayer to be the leader, wherein it may choose to act fairly by complying with the tax code or choose not to comply; while the government as the follower in this computational design can respond by demonstrating fair governance with equal redistribution of the resource or project unfair inefficient governance. Through this method, four scenarios are developed based on the fairness parameter, and the payoffs associated with both the agents are computed and the Nash equilibrium solution of the game is established that favors fair strategy by the government and unfair strategy by the taxpayers. The paper concludes by stating that if the economic agents deviate from the Nash equilibrium strategy by valuing distributional fairness, wherein the taxpayers as the leader comply with the tax rules and voluntarily contribute their fair share, followed by the government participating in fair redistribution of the resources for the welfare of the society and provision of the public good, then it can potentially maximize the joint-profit of both the agents involved in this transaction. Thus, through the Stackelberg model, the paper emphasizes the need for harmonizing the tax coordination rules and imposing tax fairness norms such that it minimizes the behavioral irrationalities