Optimism, Pessimism, Audit Uncertainty, and Tax Compliance

Abstract As the tax authority releases or withholds relevant information, it decrease or increases the extent of uncertainty about the audit probability taxpayers perceive, affecting their reporting behavior and expected tax revenues. The effects of an increase in enforcement uncertainty on the expected tax revenues depend on taxpayer pessimism or optimism and on additional information about the audit probability taxpayers receive. The expected tax revenues tend to increase in response to an increase in audit uncertainty, and the tax authority would have little incentive to release more information to the extent that it cares about tax revenues.