Authors: Grigorios Lazos, Alkiviadis Karagiorgos

Title: The implementation of expected utility theory in voluntary business tax compliance: Evidence from Greece

Abstract

The aim of the present study is to investigate the voluntary tax compliance of businesses in the Greek tax framework, based on the determinants of tax adjustment economic theory of expected utility. The meaning of voluntary tax compliance essentially refers to all taxes voluntarily paid by taxpayers, during a specified tax period. According to the taxpayer's expected utility model, three primary factors influence their tax behavior, and determine their level of tax compliance. These factors are the probability of detection in the event of tax evasion, the penalties imposed in this case, and the tax rates. From the analysis of the data provided by the Greek Tax Administration, in combination with data from the Hellenic Statistical Authority and the relevant legal framework, it emerges that businesses are more likely to take on the risk of non-payment of taxes attributable to them. This is because, the probability of their being detected in the event of tax evasion multiplied by the rate of tax penalties imposed, has an result that is considerably lower than the tax rate on a case-by-case basis. Furthermore, given that the level of penalties and tax rates are known in advance to businesses, a sample of businesses was surveyed to find out how they perceive the probability that they would be subject to tax audit. The investigation showed that the perceived probability of a tax audit is greater than the actual audit   rate, however its size does not appear to be capable of altering the decision of a business that takes on the risk of taxable income concealment, based on the relationship as stated in the theory of expected utility. In conclusion, taking into account the key determinants of the customized theoretical model of expected utility, it appears that the Greek tax administration, given the level of tax rates, should either increase the penalties imposed or significantly increase the likelihood of being detected through more targeted tax audits, or both at the same time, so that the combination of the two sizes makes it significantly less attractive for businesses to choose to hide their taxable income.

Key Words: Audit Rates, Tax Administration, Tax Penalties, Tax Rates

JEL Classification: H25, H26, M42, M48