The Research Of Tax Compliance Based On Prospect Theory

Tax compliance is as old as taxes themselves. Characterizing and explaining the tax noncompliance, and ultimately finding ways to reduce it, are of obvious importance to nations around the world. From the point of view of public finance, tax compliance reflects the notions of equity, efficiency and incidence. For instance, some taxpayers can always escape the larger percentage of tax, so the actual tax equity will have some degree of deviation with the legislated one. At the same time, tax evasion makes it more complicated to measure the distortion effect---given a fixed revenue requirement, tax evasion means higher distortion on reported income, while unreported income escapes taxation and the distortion effects. In addition, tax evasion can also affect tax incidence for those who can easily escape the tax only pay a small part of tax.Expect utility theory has been applied in analysis that how taxpayers make their decisions under uncertain conditions in academic. This classic model and its conclusion provide a good theory and analysis method that is worth using for reference, but the model itself has shortages. For example, according to the expected utility theory, if the fine is proportional to tax rate, then the increase of tax rate will not produce substitution effect but only income effect. Rational taxpayers will follow the absolute risk aversion decrease principle, which could indicate that higher tax rates make income less, and thereby taxpayers tend to pay taxes honestly. However, pretty of empirical study show that the higher tax rate is, the greater the taxpayer noncompliance shows. In addition, a series of assumptions such as fixed detection probability does not conform to reality.The author thinks that the research of tax compliance should focus on "why taxpayers pay tax honestly" but not "why taxpayers would evade tax". Under the guidance of this concept, it is necessary to consider taxpayers in psychological and use it as an important variable in the decision models of tax compliance. This paper plans to use prospect theory to revise traditional tax compliance model, in order to make it stronger ability to explain for the taxpayers'decision-making behavior in uncertain risk. The main research contents include as follows: 1. The paper states the tax confusion based on the expected utility theory, with low tax rate taxpayers will also show high degree of tax compliance; Even if the rate of return for avoiding tax reaches more than 100%, the degree of tax compliance will not come to 0; higher tax rates will not bring higher degree of tax compliance actually. Those people that have high earnings were supposed to be the main body of the tax, however in they became the main body of tax noncompliance.2. The paper uses questionnaire to collect data to support the assumption "decision makers show different risk attitude facing gains and loses" in prospect theory. Taxpayers often show limited rationality even irrational in actual decision making. According to the analysis with prospect theory and practical sampling data, taxpayers show risk averse when facing gains and show risk seeking when facing loses.3. The paper proposes several suggestions on how to eliminate or change the stimulus and how to promote the degree of tax compliance based on analysis of the relationship between taxes noncompliance and the influencing factors in the preceding chapter. First, construct a appropriate "earnings prospects", let the taxpayer feel that he would get returns if pay tax honestly, on the contrary, it will lead to damaged interests; Second, we put forward the idea that tax authority should carry out higher tax rate than the actual tax rate when withholding tax, and the extra part should be returned at the end of the tax year if they are reviewed as honest declaration; Third. the tax authorities should take both tax deterrence and tax service to change the present situation of tax compliance.