Tax compliance as a coordination game

This paper uses laboratory experiments to investigate compliance behavior when returns are selected for audit based upon the deviation of each individual's tax report from the average report of all other taxpayers. Our experimental results indicate that individuals find it difficult to coordinate on the zero-compliance equilibrium. However, pre-game communication that mimics information-sharing provided by tax guides provides a mechanism that allows such coordination. Nevertheless, the tax authority is able to overcome this taxpayer coordination by a subtle change is its audit rule, a change that targets the audits in a different way without increasing the number of audits. (C) 2003 Elsevier B.V. All rights reserved.