An experimental analysis of individuals' compliance with the Internal Revenue code: The comparative effects of positive and negative reinforcement under varying audit rates as a complement to punishment for noncompliance

Government statistics indicate that taxpayer noncompliance is an important phenomenon leaving unpaid significant amounts of tax dollars especially among sole proprietors, in spite of the fines and/or jail sentences that can result. Moreover, research in the behavioral sciences indicates that a combination of the possibilities of reward and punishment is a more powerful influencer of future behavior than is the possibility of punishment alone.;The current research examined the use of positive reinforcement and negative reinforcement, in addition to penalty, to increase taxpayer compliance. The positive reinforcement was a monetary reward for a subject who reported all of the income and was audited. The negative reinforcement, or reduction of an adverse stimuli, was the reduction of future tax rates for taxpayer subjects found to be compliant upon an audit. A laboratory experiment utilizing a microeconomy was used to gather the data which were analyzed using the analysis of variance with the general linear model.;The final sample consisted of 204 subjects in Western Arkansas of varying ages. The positive reinforcement did not significantly increase taxpayer compliance over the penalty-alone situation although the trend was for an increase in income reported in the positive reinforcement scenario (p =.1040). Likewise, the negative reinforcement and the penalty scenarios did not exhibit significantly different compliance rates (p =.6104). However, positive reinforcement seemed to contribute to taxpayer compliance more than did negative reinforcement (p =.0344).;The age or gender of the subjects did not affect taxpayer compliance separately. Of the other factors measured in the demographic questions or the exit interviews, two of them affected taxpayer compliance in this experiment. These were the awareness that underreporting of income is a violation of the law and the professed fact that the subject would respond similarly in real circumstances.;This study contributes to the body of tax research literature and indicates future research directions. First, the need for an external validity check is highlighted by the difference in reporting in those subjects who would have responded differently in real life. Also, this research indicates that the possibility of reward for taxpayer compliance merits further research.