The Research Of Individual Tax Compliance Based On Prospect Theory

Tax is an old topic. Along with the generation of it, the problems of tax compliance also emerged. For countries in the world, how to improve the degree of tax compliance has been great concerned, which also plagued economists from all of the countries. In China, the tax loss phenomenon is particularly serious. This leads to reduction in financial income, also affecting the income distribution of the whole society, and ultimately has an extremely negative impact on the national economy. In the field of personal income tax, tax compliance remains the low degree. With the process of national economic development and market process, personal income tax has played an increasingly important role. In recent years, reform of the personal income tax has not stopped. For example, the latest 3500 yuan exemption amount, and seven progressive rates in September 2011 began, which are designed to reduce the tax burden on low-income strata. Even many people still continue to call on the exemption amount increased to six, seven thousand yuan,which can reduce tax for all. However, these policies failed to completely change the current situation with low tax compliance. Our design and collection of personal income tax,which is order to safeguard the national income, do not really understand the taxpayer's motive, nor consider the vital interests of the taxpayers. Based on those,this paper taking the psychological factors of taxpayers into account,with the use of prospect theory in behavioral economics and considering the taxpayer's decision-making behavior,finally make policy recommendations.This paper is divided into five parts. The first part is an introduction, which introduces the background, purpose and meaning, as well as innovation and shortcomings. This section focuses on the research status within abroad,through which can improve my models. The second part introduces the definition and classification of tax compliance and tax non-compliance. Through the presentation and analysis of the definition of the various factors that affect the tax compliance, the ultimate goal is to introduce the various factors to the model of prospect theory. The third section describes the expected utility theory from the start, gradually deepening and eventually lead to the prospect theory. The beginning of this part introduces the classic A-S model, which is the beginning of research on tax compliance based on the expected utility theory. Since then, a lot of people improved the original model, adding new variables, but ultimately did not change the assumption of "perfectly rational people". Because of this, the model can not explain many practical problems, which requires the birth of a new theory. Thus, the prospect theory emerged. This section describes the model of prospect theory,and also take advantage of the conclusion of it to explain the confusion of tax compliance under expected utility theory. The fourth part is to start building my own tax compliance model based on prospect theory,and establish a reference point in the income of prepaid taxes to conside the impact of the system of advance tax payment to tax compliance. Finally, based on the established reference point, this paper will summarize the factors affecting tax compliance in the following:prepaid amount, tax rate, penalty rate. The fifth part is the conclusion based on the model and puts forward relevant policy recommendations.