On Individual Tax Compliance With Bounded Rationality

The government can gain fiscal revenue and achieve the goal of macroeconomic such as collocation of resources and redistribution by taxation. And it is necessary for most of the taxpayers to pay their taxes honestly. Therefore, studying why the taxpayers come to a decision of tax compliance or noncompliance is important to promote the level of tax compliance in theory and practice. Traditional economic theory assumes rational agents maximize their expected utility while behavioral studies have shown that individual's responses are bounded rationality. This dissertation investigates the psychology of individual in tax compliance from the bounded rationality perspective. The results of the control experiment, mathematical model and computable framework can reveal the reality in tax compliance decision process and contribute to the area of tax compliance.First, the dissertation explores the major factors in tax compliance. These factors include the standard elements of tax rate, audit rate, penalty rate and income, as emphasized by the classical tax evasion models. They also include factors such as tax moral, the perception of tax regime equity, demographic variable, supply of public goods and tax compliance cost. These factors show that only the classical tax evasion models which assume the rational agent can not explore tax compliance. The dissertation analyzes the shortcoming of rational decision making theory and lists the anomalies such as tax compliance puzzle, withholding phenomenon and framing effect which exist in tax compliance decision making and can not be explained by classical tax evasion study. Further, prospect theory which is the representative in bounded rationality decision making theory is introduced and the reference point which is the main difference from expected utility theory is discussed.Second, a control experiment is designed to identify whether the individual taxpayers have bounded rationality characters and follow the usual results of prospect theory or not. The results of experiments show that framing effect exists in tax compliance decision making process and the power to detect framing effect is greater when the audit rate is low. The results are consistent with the predictions of prospect theory which means that prospect theory can account for tax compliance decision making process and the reference point that Chinese taxpayer used is current asset position.Third, prospect theory is applied to construct a tax compliance model which uses current asset poison as the reference point, and the model gives a quantitative description of the withholding phenomenon and framing effect. The results of the model show that when the taxpayer does not prepay any taxes noncompliance will be induced. However, if the advance payment is high enough and the penalty is severe full compliance may be induced. Moreover, when the advance payment is set lower than taxpayer's true liability and penalty is severe, the amount of prepayment and penalty rate have positive relationship with tax compliance level while tax rate has negative relationship. When the advance payment is greater than the true liability and penalty is slight, the amount of prepayment has negative relationship with tax compliance level while tax rate and penalty rate have positive relationship. The model can also be used to calculate the optimal compliance level and the results are consistent with the reality, thus the tax compliance puzzle can be explained.Moreover, the dissertation proposes an emotion-based cognitive model about how tax compliance decisions are made which takes emotion as an independent factor. Within the general computational framework the influence of both immediate emotion and expected emotion are included. The study also give a formalized description of the model to make it computable and domain-independent.Last, combining the results of experiment and models with the situation of China tax compliance, the dissertation gives some suggestions about how to promote the compliance level which emphasize on the tax levy regime and taxpayer's emotion.