Authors: Vasileios Fourlas, George Peppas, Augustinos Dimitras

Title: The ‘leverage effect’ of audits on compliance: Evidence from Greek micro-businesses

Abstract

Despite the large volume of studies on tax compliance, the optimal deterrence policy remains ambiguous since behavioural responses to tax audits are undeniably contradictory. In this light, we present the findings from a real-world country-level survey of 1,761 micro-firms in Greece investigating the motivational processes that drive tax behaviour depending on audit experience, audit outcome and audit type. Employing logistic regression analysis, we find that the compliance motivation depends on the audit outcome and type. Audits that result in additional tax assessments have a positive ‘leverage effect’ on overall compliance by causing robust behavioural responses. Operational targeted audits are almost 2.5 times more likely to induce a higher compliance tendency than random audits. Furthermore, women exhibit significantly higher levels of compliance intentions compared to men. Therefore, tax authorities need to adjust their deterrence regime by incorporating more operational audits, focusing at the same time on trust-building strategies.