On the path dependence of tax compliance

- We show that reference-dependent preferences may imply path-dependent choices.
- We present evidence for the influence of past incentives on current tax compliance.
- Stricter past enforcement makes a higher declaration likely, all else held equal.
- Path dependence shows when the sanction and the detection probability change.
- Our findings affect the effectiveness of dynamic variations in incentives.

This paper presents experimental evidence that tax compliance is path dependent. For given values of the audit probability and the fine for tax evasion, we compare the income declaration of subjects who faced a change in one of the two parameters to that of subjects who experienced no such parameter change. We show that past tax enforcement regimes continue to have an impact on current income declarations. This finding may be explained by reference-dependent preferences and it has important policy implications. For instance, legal transplants cannot be expected to reliably yield similar behavior in countries with different legal histories.