THE EFFECT OF TAX STRUCTURE VARIABLES ON THE DECISION FRAME ADOPTED AND THE TAX REPORTING CHOICE: TAXABLE INCOME COMPONENTS AND TAX PAYMENT TIMING

The size of the federal deficit and the resulting budgetary problems of the Internal Revenue Service have prompted tax administrators to consider nontraditional means to increase voluntary tax collections. The purpose of this study is to examine whether two fundamental aspects of the tax structure, the type of taxable income component (whether the item is income or an expense) and tax payment timing, affect taxpayers' tax reporting decisions.; Based on the concepts of integration and segregation from mental accounting, hypotheses are developed that predict that the tax structure variables affect the decision frame adopted by individuals when faced with a tax reporting decision where the proper tax treatment is uncertain. The decision frame, in turn, is predicted to affect the tax reporting choice in a manner consistent with prospect theory. In addition to the indirect effect on the tax reporting choice via the decision frame, the type of taxable income component and tax payment timing were predicted to affect the tax reporting choice directly.; To test these hypotheses, an experiment was conducted. Student subjects participated in a business simulation where the true purpose of the study was disguised. The study was conducted over a four-week period to expose subjects to real time differences in tax payment timing. Subjects earned lottery tickets based on their decisions; the tickets were entered into a drawing and cash prizes were awarded.; The results for the effects of tax structure variables on the decision frame weakly supported the predictions. The expected effect of the decision frame on the preference for aggressive behavior was also weakly supported. The strongest result was for the direct effect that the type of taxable income component had on the tax reporting choice; more aggressive behavior was preferred for expense items even after controlling for differences in uncertainty about the proper tax treatment. Other variables that were consistently associated with the tax reporting choice were the individual's subjective audit rate and risk attitude. The results suggest that efforts to broaden the tax base through reductions in allowable expenses may have unanticipated compliance effects.