The Indirect Effects of Auditing Taxpayers

Empirical studies suggest that the effects of tax audits are not only in terms of recovered unpaid tax (direct effect) but there are also indirect effects in terms of future better compliance that tend to outweigh the direct effect. However, current policy decisions on the allocation of investigation resources across different groups of taxpayers generally neglect the indirect effects, generating a potential resource misallocation issue. With the aim to clarify a possible mechanism through which the indirect effects work, the authors model tax compliance as a social norm and show that taxpayers' interdependencies introduce a multiplier effect to an increase in the audit rate.