[Since the pioneering work of Hall and Jorgenson (1967), numerous studies (e.g., Bischoff 1971; Chirinko and Eisner 1982; and Coen 1971) have examined the effect of attempts by the tax authority to influence investment decisions through accelerated depreciation or investment tax credits (ITC). This body of research has been fraught with econometric estimation problems, and consequently has failed to provide a clear picture of the effect of tax policies on capital investment. In a review of the literature, Chirinko (1986, 151) concludes that "[w]hile investment may respond significantly to variations in tax parameters, it appears to this author that the supporting empirical evidence has yet to be generated." At the core of the difficulties in the econometric research paradigm is the operationalization of the neoclassical investment function itself. Chirinko (1986) notes that numerous inherent difficulties are introduced, including (1) estimations of the purchase cost of a unit of capital, financial cost of capital net of inflation, rate of depreciation of the capital good, rate of income taxation, rate of investment credit, discounted value of depreciation allowances, net cost of debt finance, and the like; and (2) the inability to control for firms' expectations regarding output, and hence the marginal product of capital. These difficulties highlight the general limitations of econometrics in certain settings. This sentiment was echoed by Chirinko and Eisner (1983, 139) when they concluded that, in the neoclassical tax policy arena, "one can get almost any answer one wants by making sure that the chosen model has specifications appropriate to one's purpose." In response to the inconclusive econometric evidence regarding the effect of tax incentives on capital investment, we adopt an alternative approach in this study, using laboratory markets to overcome the limitations noted above, thereby providing a controlled empirical test of neoclassical predictions. Although the results of our experiments provide no evidence regarding the real-world dollar responses of investment to income tax accounting subsidies, some insight into the ability of theory to predict more general aspects of taxpayer investment behavior is provided. Specifically, the research question addressed is whether capital investment increases when depreciation or investment credits allowed by the tax system result in more rapid deductions than true economic depreciation. Although this question follows directly from neoclassical predictions, we relax the assumption of price taking to permit the more realistic consideration of market price adjustments. The results of our experiments do not support the neoclassical prediction that depreciable asset investment will increase in response to accelerated tax depreciation or to investment tax credits. Demand was unresponsive to tax incentives because the prices of depreciable assets were bid up. That is, tax benefits were captured to some extent by factor suppliers. From a theoretical perspective, the study's results provide a "piece of the puzzle" in light of conflicting or nonexistent econometric evidence. In section I, a description of the experimental setting and administration is provided. Theoretical predictions of investment price and quantity are then derived from our experimental operationalization of a production economy in section II. Finally, results and conclusions are presented in sections III and IV, respectively.]

[Tax law complexity and ambiguity may result in uncertainty about taxable income (Slemrod 1988) and are of concern to policy-making bodies such as the ABA, the AICPA, and the IRS (Sheppard and Evans 1990). Several studies have modeled the effects of uncertainty on taxpayer reporting and the role of tax practitioners in reducing uncertainty (Alm 1988; Shavell 1988; Beck and Jung 1989a, 1989b; Scotchmer 1989a, 1989b; and Scotchmer and Slemrod 1989). Empirical and experimental research, however, have not kept pace. This paper reports experimental tests of the effects of income uncertainty and other economic factors based on tax reporting models in Beck and Jung (1989a). Hypotheses were tested regarding the effects of changes in the uncertainty level, tax rate, penalty rate, and audit probability on reported taxable income. In addition, the explanatory power of the models was evaluated by comparing the taxable income reported by the subjects with model-based predictions. Subjects were endowed with a fictitious currency and were given a range of possible post-audit taxable incomes from which to report. A proportional tax was paid on reported income and, in the event of an audit, a monetary penalty was imposed when the actual taxable income was greater than the amount reported. Incentives were provided by making the subjects' post-experimental remuneration a function of the after-tax income retained from each experimental trial. Since previous theoretical research indicates that taxpayers' reporting decisions are sensitive to risk preferences, three seperate experiments were performed and the results were analyzed by repeated measures ANOVAs. In the first and second experiments, subjects' risk-taking attitudes were controlled by the Berg et al. (1986) mechanism. Risk-neutrality (risk-aversion) was induced in the first (second) experiment, while subjects' preferences in the third experiment were measured ex post, rather than controlled. Two measures of taxpayer reports were employed-the actual income reported by subjects and the corresponding reporting fractile. The experimental results provided support for risk-neutral predictions. First, risk-neutral subjects were found to report higher levels of income when penalty rates and audit probabilities increased. Second, the tax rate did not affect the reporting behavior of risk-neutral subjects. Third, income reports were affected by two interactions: audit probability with uncertainty and penalty rate with uncertainty. Specifically, a reduction in uncertainty led to higher (lower) levels of reported taxable income when penalty rates or audit probabilities were decreased (increased). In addition, the mean reporting fractile did not change with the uncertainty level and the deviation of mean observed reports from predicted levels was small. For the risk-averse model, the predicted tax rate effect was marginally significant for reports and insignificant for fractiles. Furthermore, only a small percentage of the variance was explained by the interaction of tax rate and uncertainty. Report fractiles, however, did increase significantly as predicted when uncertainty was elevated.]

This study extends the Beck, Davis, and Jung (1992) experimental study by incorporating opportunities for taxpayer subjects to purchase advice before making their tax reporting decisions. Tax advice has two roles in the model and experiment. First, tax advice allows taxpayers to reduce their uncertainty about the amount of taxes owed. This permits us to study the demand for tax advice in conjunction with its effect on tax reporting decisions. Second, the decision to purchase tax advice from an expert provides a means of signaling that may alter tax agency audit policies. The resulting audit policies, in turn, can affect taxpayers' decisions to purchase tax advice. These interdependencies are incorporated in a game‐theoretic model and several predictions are tested experimentally. Consistent with theory, subjects sorted themselves into three groups based upon their private information. Another prediction supported by the experiment is that the demand for tax advice increased with the magnitude of an uncertain tax deduction (amount‐at‐risk). We also found, as expected, that the effects of tax advice on pre‐audit tax revenues depend upon the amount‐at‐risk. When the amount‐at‐risk was high, subjects in settings with tax advice reported lower average incomes and paid lower taxes than did those subjects in settings without the opportunity to purchase tax advice. The opposite was true for the low amount‐at‐risk condition, supporting our prediction that tax advice and amount‐at‐risk would have an interactive effect on tax reporting. Analysis was also performed on post‐audit tax collections. Contrary to theory, post‐audit tax payments were found to increase when subjects had an opportunity to purchase tax advice. This result apparently was caused by a tendency to over‐purchase tax advice and, in some cases, to report a low income regardless of the advice received. Résumé. Les auteurs développent l'étude expérimentale de Beck, Davis et Jung (1992) en y incorporant la possibilité pour les sujets contribuables de solliciter des conseils avant de prendre leurs décisions relatives à l'information qu'ils fourniront aux fins fiscales. Les conseils fiscaux jouent deux rôles dans le modèle et l'expérience. Premièrement, ils permettent aux contribuables de réduire leur incertitude relative au montant des impôts auxquels ils sont assujettis. Les auteurs peuvent ainsi étudier la demande de conseils fiscaux en conjonction avec leurs conséquences sur les décisions relatives à l'information à fournir aux fins fiscales. Deuxièmement, la décision de solliciter les conseils fiscaux d'un expert est un signal pouvant influer sur les politiques de vérification des représentants du fisc. À leur tour, ces politiques peuvent influer sur les décisions des contribuables de solliciter des conseils fiscaux. Ces interdépendances ont été intégrées à un modèle de jeu théorique et les auteurs ont vérifié plusieurs prédictions par expérimentation. Conformément à la théorie, les sujets se sont répartis en trois groupes, en fonction de l'information privilégiée dont ils disposaient. L'expérimentation a confirmé une autre prédiction: la demande de conseils fiscaux augmente avec l'importance de la somme dont la déductibilité est incertaine (montant à risque). Les auteurs constatent également, comme ils s'y attendaient, que les effets des conseils fiscaux sur les recettes fiscales antérieures à la vérification dépendent du montant à risque. Lorsque le montant à risque est élevé, les sujets pouvant solliciter des conseils fiscaux font état de revenus moyens inférieurs et paient moins d'impôt que les sujets n'ayant pas la possibilité de solliciter des conseils fiscaux. L'inverse est vrai lorsque le montant à risque est faible, ce qui confirme la prédiction selon laquelle les conseils fiscaux et le montant à risque ont un effet interactif sur l'information fournie aux fins fiscales. Les auteurs analysent également les impôts perçus postérieurement à la vérification. Contrairement à la théorie, ils constatent que les paiements fiscaux postérieurs à la vérification augmentent lorsque les sujets ont eu la possibilité de solliciter des conseils fiscaux. Ce résultat semble être attribuable à une tendance à solliciter des conseils fiscaux avec excès et, dans certains cas, à faire état d'un faible revenu, malgré les conseils reçus.

Economic models of tax reporting were tested experimentally. Subjects were given endowments and made tax reporting decisions subject to monetary penalties for underpayment of taxes and uncertainty about the amount of taxable income and the tax agency's cutoff point for audit selection. Two types of tax audit regimes were considered. In the first (nonstrategic audit regime), subjects faced a fixed probability of audit selection. A second (strategic) audit regime also was examined in which the probability of audit selection varied in response to tax reports as in the Reinganum and Wilde (1988), Beck and Jung (1989b), and Jung (1991a) models. Five hypotheses based on the comparative statics predictions of the models were tested and four were supported by the experimental data. Among the noteworthy findings are that tax rate changes have significant effects on reporting decisions under both audit regimes, rather than just under the strategic audit regime as hypothesized. A reduction (increase) in taxable income uncertainty induces subjects to report a low level of income significantly more (less) often under strategic auditing, but does not have a significant effect on income reports when audit policies are nonstrategic. The effects of changes in the level of uncertainty about the audit cutoff point are also investigated and found to depend upon the benefit of conducting an audit. Finally, we find that subjects generally report a low income more frequently than predicted by either the strategic or nonstrategic models. Résumé. Les auteurs ont mis à l'épreuve les modèles économiques de présentation de l'information fiscale au moyen de l'expérimentation. Les sujets se sont vu attribuer une dotation et ont pris des décisions relatives à la présentation de l'information fiscale, décisions assujetties à des pénalités monétaires s'appliquant aux impôts payés en moins et à l'incertitude relativement au montant du revenu imposable ainsi qu'au seuil de démarcation utilisé par les autorités fiscales pour sélectionner les entreprises devant faire l'objet d'une vérification. Deux types de régimes de vérification fiscale ont été analysés. Dans le premier cas (régime de vérification non stratégique), les sujets avaient affaire à une probabilité fixe d'être sélectionnés en vue d'une vérification. Dans le second (régime de vérification stratégique), la probabilité de sélection variait selon les rapports présentés au fisc, comme dans les modèles de Reinganum et Wilde (1988), Beck et Jung (1989b) et Jung (1991a). Cinq hypothèses fondées sur les prédictions statiques comparatives des modèles ont été testées, et quatre d'entre elles ont été confirmées par les résultats de l'expérience. Parmi les conclusions dignes de mention figure le fait que les modifications du taux d'imposition ont une incidence significative sur les décisions relatives à la présentation de l'information dans les deux régimes de vérification, et non pas seulement dans le régime de vérification stratégique, comme les auteurs l'avaient supposé. Une réduction (augmentation) de l'incertitude relative au revenu imposable incite les sujets à faire état d'un faible niveau de bénéfices beaucoup plus (moins) souvent dans le cas de vérifications stratégiques, mais n'a pas d'incidence marquée sur l'information présentée relativement aux bénéfices lorsque le régime de vérification est non stratégique. Les conséquences des changements dans le niveau d'incertitude relatif au seuil de démarcation de la vérification fiscale ont aussi été analysées, ce qui a permis d'établir qu'elles dépendent des avantages que comporte la vérification. Enfin, les auteurs ont constaté que les sujets faisaient état, en général, de faibles bénéfices plus souvent que prévu par leurs modèles, qu'ils soient stratégiques ou non stratégiques.

*University of Southern California; tUniversity of Colorado at Boulder. We would like to thank Gilbert Bloom of KPMG Peat Marwick, Bob Rosen of Ernst & Young, Wayne Gazur, Robert Jamison, Sally Jones, Stewart Karlinsky, and David Mason for their assistance in validating the instruments; Eugene Willis and the AICPA for allowing us to collect data at the National Tax Education Program; Stephen Conrad of Arthur Andersen, John Lanning of KPMG Peat Marwick, Jerry Marrs of Ernst & Young, and Randy Stein of Coopers & Lybrand for allowing us to collect data at their respective firms; Minou Bohlin, Linda Levy, David Mason, and Paul Walker for their research assistance; and Vairum Arunachalam for his assistance in collecting data. The authors also gratefully acknowledge the helpful comments of three anonymous referees, Alison Ashton, Robert Ashton, C. Brian Cloyd, David Frederick, Joan Luft, Robert Libby, Laureen Maines, Mark Nelson, Michael Roberts, Frank Selto, D. Shores, Ira Solomon, Rick Tubbs, S. Mark Young, and workshop participants at Arizona State University, Cornell University, Duke University, Indiana University, the University of Illinois Tax Symposium, the Journal of Accounting Research Conference, University of Texas at Arlington, University of Utah, and University of Wisconsin. Finally, the financial support of the KPMG Peat Marwick Foundation and the University of Colorado is gratefully acknowledged. 1 We infer expertise in this study from the level of performance in a specific task, here issue identification in tax planning. This inference is consistent with much of the literature on expertise in accounting and other disciplines (e.g., Bonner and Lewis [1990],

The article reports on experimental tests of the effects of income uncertainty and other economic factors based on tax reporting models. Tax law complexity and ambiguity may result in uncertainty about taxable income and are of concern to policy-making bodies such as the ABA, the AICPA and the IRS. Hypotheses were tested regarding the effects of changes in the uncertainty level, tax rate, penalty rate, and audit probability on reported taxable income. In addition, the explanatory power of the models was evaluated by comparing the taxable income reported by the subjects with model-based predictions. Subjects were endowed with a fictitious currency and were given a range of possible post-audit taxable incomes from which to report. A proportional tax was paid on reported income and, in the event of an audit, a monetary penalty was imposed when the actual taxable income was greater than the amount reported. Incentives were provided by making the subjects' post-experimental remuneration a function of the after-tax income retained from each experimental trial.

Since the pioneering work of Hall and Jorgenson (1967), numerous studies (e.g., Bischoff 1971; Chirinko and Eisner 1982; and Coen 1971) have examined the effect of attempts by the tax authority to influence investment decisions through accelerated depreciation or investment tax credits (ITC). This body of research has been fraught with econometric estimation problems, and consequently has failed to provide a clear picture of the effect of tax policies on capital investment. In a review of the literature, Chirinko (1986, 151) concludes that "[w]hile investment may respond significantly to variations in tax parameters, it appears to this author that the supporting empirical evidence has yet to be generated." At the core of the difficulties in the econometric research paradigm Is the operationalization of the neoclassical investment function itself. Chirinko (1986) notes that numerous inherent difficulties are introduced, including (1) estimations of the purchase cost of a unit of capital, financial cost of capital net of inflation, rate of depreciation of the capital good, rate of income taxation, rate of investment credit, discounted value of depreciation allowances, net cost of debt finance, and the like; and (2) the inability to control for firms' expectations regarding output, and hence the marginal product of capital. These difficulties highlight the general limitations of econometrics in certain settings. This sentiment was echoed by Chirinko and Eisner (1983, 139) when they concluded that, in the neoclassical tax policy arena, "one can get almost any answer one wants by making sure that the chosen model has specifications appropriate to one's purpose." In response to the inconclusive econometric evidence regarding the effect of tax incentives on capital investment, we adopt an alternative approach in this study, using laboratory markets to overcome the limitations noted above, thereby providing a controlled empirical test of neoclassical predictions. Although the results of our experiments provide no evidence regarding the real-world dollar responses of investment to income tax accounting subsidies, some insight into the ability of theory to predict more general aspects of taxpayer investment behavior is provided. Specifically, the research question addressed is whether capital investment increases when depreciation or investment credits allowed by the tax system result in more rapid deductions than true economic depreciation. Although this question follows directly from neoclassical predictions, we relax the assumption of price taking to permit the more realistic consideration of market price adjustments. The results of our experiments do not support the neoclassical prediction that depreciable asset investment will increase In response to accelerated tax depreciation or to investment tax credits. Demand was unresponsive to tax incentives because the prices of depreciable assets were bid up. That is, tax benefits were captured to some extent by factor suppliers. From a theoretical perspective, the study's results provide a "piece of the puzzle" in light of conflicting or nonexistent econometric evidence. In section I, a description of the experimental setting and administration is provided. Theoretical predictions of investment price and quantity are then derived from our experimental operationalization of a production economy in section II. Finally, results and conclusions are presented in sections III and IV, respectively.

We analyze the effect of social norms and enforcement on the dynamics of taxpayer compliance. Specifically, we develop two models to evaluate the movement between classes of compliant and noncompliant taxpayers. Our analysis suggests that the effect on compliance of changing enforcement levels depends on whether the taxpayer population is initially compliant or noncompliant. Compliant populations are insensitive to changes in enforcement policies until enforcement becomes sufficiently lax, when we observe a sudden shift to high levels of noncompliance in equilibrium. In contrast, relatively noncompliant populations respond to increased enforcement by gradually increasing compliance. Then, when enforcement becomes sufficiently harsh, we find a sudden shift in equilibrium to very high levels of compliance. After the taxpayer population shifts from compliance to noncompliance, or vice versa, our models predict that returning to the previous enforcement policy will not cause the population to return to its previous state. On the whole, our models' results help explain why taxpayer compliance varies across time and across geographic regions, even under similar enforcement regimes.