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Published September 15, 2017 | Submitted
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The Tax Compliance Game: Toward an Interactive Theory of Law Enforcement


The existing paradigm for the economic analysis of tax compliance provides an inadequate theory of the revenue collection process. Even as a purely economic model, its exclusive focus on individual taxpayers' decision-making promotes an unduly restrictive vision of the compliance problem and potential responses to it. In this paper we outline a more comprehensive theoretical basis for analyzing tax compliance, and illustrate it with a simple model. We believe our approach to be a significant improvement in the economic theory of law enforcement because it views the noncompliance problem as an interactive system. In our theoretical construct, individual decision-making not only depends upon and responds to the detection and punishment structure, but, unlike prior models, we also explicitly include the law enforcement agency--in this case the Internal Revenue Service--as an important interactive element. Initially we outline our general approach and its differences from the existing economic law enforcement paradigm. We then detail a simple model and its results and compare these results both to the prior literature and to some of our ongoing research in an effort to illustrate how our theoretical construct may affect predictions. Finally, we describe potential extensions of the model, examine its robustness with respect to various underlying assumptions and offer suggestions for further research, including possible applications to other law enforcement contexts.

Additional Information

We would like to thank Kim Border, Jules Coleman, Alvin Klevorick, Stan Koppleman and members of Workshops at Boston University Law School, Caltech and Yale and anonymous referees for helpful comments. The financial support provided by National Science Foundation Grant Nos. SES-8315422 and SFS-8420681 are gratefully acknowledged (by Reinganum and Wilde). Published as Graetz, Michael J., Jennifer F. Reinganum, and Louis L. Wilde. "The tax compliance game: Toward an interactive theory of law enforcement." Journal of Law, Economics, & Organization 2.1 (1986): 1-32.

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