No. 41: Sweetheart deals in tax bargaining? How trust affects concessionary behavior

Abstract

This study analyzes the impact of trust on bargaining between auditor and auditee in a tax setting. We distinguish between interpersonal trust and trust in government, and we study the effect on both taxpayer and tax auditor during the bargaining process regarding ambiguous tax issues. We assess a three-party relationship between the taxpayer, the tax auditor as a government agent, and the government, to examine the taxpayer-tax auditor bargaining behavior in a multi-stage process, and its implications for the resulting tax payment. In a laboratory experiment with variation in pairwise (taxpayer-tax auditor) interpersonal trust and their trust in government, we expect and find evidence that both interpersonal trust and trust in government affect the bargaining behavior, albeit in different ways. Tax auditors show more concessionary behavior with high interpersonal trust, while taxpayers make more concessions under a more trusted government. Our findings demonstrate the importance of trust in the government for tax collection. Further, our findings indicate that a high level of interpersonal trust increases the risk of sweetheart deals, i.e. preferential treatment of trusted taxpayers by auditors. We contribute to research on bargaining, and on auditor behavior. Our results provide understanding about how trust shapes the bargaining between a government agency and a supervised individual, and, more specifically, the auditor-auditee relationship in a tax setting. We provide novel insights for tax authorities who expect higher compliance in an atmosphere of trust. The implications extend to non-tax settings, where a government agency and its representatives encounter bargaining situations with citizens, firms, and their representatives, e.g., in the financial, energy or health sector.

Participating Institutions

TRR 266‘s main locations are Paderborn University (Coordinating University), HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, WHU – Otto Beisheim School of Management, European School of Management and Technology in Berlin and Goethe University Frankfurt who share the same research agenda.