Tax Compliance and Advance Tax Payments: A Prospect Theory Analysis

While obligatory advance tax payments do not interfere with the taxpayer's evasion decision under expected utility theory, they do affect the decision to evade under prospect theory. The present paper applies prospect theory to a simple model of tax evasion, exploring the role that advance tax payments may play in enforcing tax laws. The paper demonstrates, as empirically found in the United States, that advance tax payments may substitute for costly detection efforts in enhancing compliance. However, contrary to a recent claim in the tax evasion literature, deliberate high advance tax payments are unlikely to eliminate the incentives for noncompliance.