Who is audited? Experimental study on rule-based and human tax auditing schemes

In this study, we employ a game theoretic framework to formulate and analyze tax audit schemes; we test the theoretical predictions in a laboratory experiment. We compare five audit schemes including three rule-based audits: random audit rule, cut-off audit rule, and lowest income reporter audited rule. The cut-off audit rule is theoretically optimal but, to the best of our knowledge, it has not been experimentally examined. We also employ a novel experimental design for two schemes involving the human auditor conditions. The rule-based audits experimentally enhance tax compliance as predicted, and cut-off yields the highest tax revenue among the three rule-based audits in the lab. Moreover, beyond our prediction, the human auditor conditions maximized tax revenue among the five schemes in the lab. This suggests that auditors’ strategic ambiguity is another route to enhance tax compliance. We also show that subjects’ social norms regarding tax payment influence the choice of tax evasion, in accordance with the experimental literature.