Is the effort exerted to earn taxable income considered in compliance decisions? And if so, is hard-earned income or easy money more likely to be concealed from authorities? While economic theory postulates that prior costs should not affect present decisions. psychological research shows that prior investments of money. time, or effort do matter. Findings from previous Studies on the impact of effort on abstract decision tasks suggest two contradictory predictions Cor the context of tax compliance decision: Either taxable income earned by high effort is subjectively of higher value, and therefore more likely to be evaded, or investments of effort cause a shift of the reference point through the establishment of an aspiration level, resulting in honest declaration of income. Two experiments were conducted to test these predictions. In a business simulation, taxable income was obtained by different levels of effort and consequently had to be reported to authorities. Results show that tax evasion was more pronounced in low-effort conditions. This suggests that effort Changes the reference point rather than the slope, and provides evidence that in tax compliance decisions aspiration levels serve as reference points. Implications Cor tax audits are discussed.
