The Tax Audit System Based On Taxpayer Behavior Study

According to theories in public finance, tax is the price of public products based on which the relationship among the taxpayer, the tax collector and tax user is formed. The state is the tax user who provides public products and services to the public while citizens pay tax in exchange for the right to consume public products. The tax collectors are agents of the state to collect tax from citizens, whose tax collecting behavior provides capital for public products. The relationship between the state and the taxpayer is in fact a benefit exchange relationship based on contract. In the tax collection process, the taxpayer and the tax collector are standing on two opposite sides, whose rights and obligations differ but behaviors are restricted by the taxation law. The taxpayer and collector share common collective interest with independent individual benefits in the same time. Therefore, the taxpayer inevitably hopes to enjoy"free riding"to avoid infringement of individual benefits while enjoys public products. However, the unique features of non-exclusiveness and non-competitiveness of public products inevitably brings about the problems of free riding and prisoner's dilemma in taxpaying behaviors. Although tax collection is related with everyone's welfare, still people have strong motivations to evade tax. Therefore, tax auditing is a means for tax collection organizations to monitor taxpayers'tax paying behaviors with the aim to punish those who do not behave properly in order to ensure justice in tax collection process and that the state can collect as much tax as possible. Tax auditing is not only a means for tax collectors to manage the taxpayer's behaviors, but also a relationship of interest allocation between the collector and the payer. By analysis with the game theory, the author has concluded that tax auditing institution is a set of institution formed after many times of games, a set of behavioral mode for the tax collector and payer to obey in interaction..Since the state, the tax collector and taxpayer are three independent benefit entities with interactive influences and the exterior environment is complicated, it is impossible to fully ensure the taxation benefit of the state. Therefore, the practical objective of the taxation auditing institution should be not only purely increase national tax revenue, but also regulate tax auditing behavior. This can on the one hand check the incompliant behavior of the taxpayer and on the other hand solve the conflict between individual rationality and collective rationality through institutional arrangement in order to ensure the benefit balance among the state, the tax collector and the taxpayer, thus reducing tax collection transaction cost. The performance of the tax auditing institution is liable to taxpayer behavior, tax auditing behavior and national legislation restrictions. Judging from the tax auditing behavior, improper tax auditing behavior would break the balance and increase cost. Inadequate tax auditing will lead to the reduction of state tax revenue while excess tax auditing will not only increase audit cost and lead to harm the state interests, but also increase taxpayer burden and lead to legal unfair. There are some factors which lead to improper auditing behavior: auditors'quality, audit policy, imperfect incentive and restrictive mechanism, incomplete information, and etc.Based on this, the author discussed the future policy orientation for tax auditing institution reform assuming the improvement of tax auditing institution performance as objective and taking the interactive relation between tax auditing institution and taxpayer behaviors as main clue, applying theories in practice in the same time. The main body is divided into seven chapters as follows:In chapter one, the author briefly reviewed the research literature on institution and taxpayer compliance behavior, including the connotation and origin of institution, domestic research on functions of tax auditing, theoretical and empirical studies on taxpayer compliance behavior.In the second chapter, the author generalized the fundamental theories in tax auditing institution. Firstly, I analyzed the tax paying and collecting relationship from the perspective of public finance theories and the components of transaction cost in tax collection process. Then, the thesis studied the origin of tax auditing institution from the perspective of the game theory and further analyzed the structure of tax auditing institution on this basis. Finally, from the perspective of division of labor between the tax auditing organization and other organizations in the tax administration system, the thesis points out the position of tax auditing organization in the tax collection management system, the three basic functions of tax auditing institution and their importance in constructing a harmonious relationship between the tax collector and the taxpayer.In the third chapter, the author adopted the transformation theory in New Institutional Economics to analyze the transformation process of China's tax auditing institution. Based on literature analysis on tax collection and administration institution, the thesis has pointed out the transformation path of Chinese tax collection institution and argues that the Chinese tax auditing institution transformed in a process of continuously restructuring tax organization, adjusting the rights and obligations of various organizations and related procedures based on the principle of minimum transaction cost with the pay collector as the initial action group.In chapter four, the author analyzed the impact of tax auditing institution on the incompliant behavior of taxpayers with the expected utility theory. The thesis assumed that both the taxpayers and the tax auditors are"economic beings"seeking after maximization of expected utilities in new institutional economics. Based on this, starting from the basic model of incompliant behavior of the taxpayer, the thesis added the other factors affecting the incompliant behaviors of the taxpayer step by step: the taxpayer's comprehension of the taxation stipulations, tax auditing possibility policy, tax auditing competence and legal limitations. Through comparative static analysis of various models, the thesis concluded the effects of tax auditing institution in checking incompliant behavior of the taxpayers.In chapter five, the author then went on to test the applicability of the mathematical models in practical Chinese environment by conducting field study with questionnaires. The results have shown that the conclusions in chapter four is applicable in China and the transaction cost of both the tax auditing organization and the taxpayer influences their respective behaviors. The results have also shown that there still is room for improvement in checking the incompliant behavior of the taxpayer and motivating and restraining the behaviors of tax auditors.In chapter six, the study proposed a performance appraisal criterion of the Chinese tax auditing institution. In view of hard access of relevant data, effectiveness of selecting returns in audition process was used as the criterion of evaluate the performance of tax auditing institution. In other words, whether or not the most incompliant taxpayer can be screened and audited by the tax auditors is the symbol for effective tax auditing screening policy. Furthermore, using probability theory the study conducted a model to test the auditing selecting policy and concluded the selecting returns process was not very effective through 1996 to 2002.In chapter seven, the author looks forward to the future changes in the environment of tax auditing institution. Because the changing institutional environment will surely affect the demand of tax auditing institution, in order to avoid imbalance of demand and supply, the author thinks it is necessary to prepare for the changes and thus making some suggestions on the reforms in tax auditing organizational structure, implementation organism and human resources management.Based on previous research, the author has made some attempts in innovation as follows:(1)Innovation in terms of research perspectives: The author always studied the tax auditing institution in the context of the interactive relationship among the state, tax collecting organizations and the taxpayer. This study has broadened the horizon of the research by extending the previous research focused mainly on working procedures of tax auditing and relative regulations to the study on the subject"man". The author has also conducted quantitative analysis on the situations most likely to generate incompliant behavior, conducted empirical and qualitative research on how to improve the work performance of tax auditing, not only extending the depth and scope of theoretical research, but also providing feasible policy suggestions for the decision makers.(2)Innovation of research content: New research perspectives surely bring about new research contents. The author innovatively conducted a dynamic research on the influential factors of tax auditing institution transformation from the perspective of institution evolution and behavioral changes of the taxpayer. Through analysis of the demand and supply of tax auditing institution, the author has concluded that the taxpayer's nature of the"economic being"has been strengthened and opportunistic behavior increased, as a result the demand for tax auditing institution also has been growing since the economic reform. The subject of the tax auditing institution is the state, tax auditing organization and the taxpayer. The tax collector is the initial action group, which pushes forward the institutional innovation in tax auditing. Therefore, the tax collector will still needs to initiate the future improvement measurements.(3)Innovation of research methods: The author is one of the first to conduct empirical research on tax auditing institution performance. The author has used questionnaires and quantitative analytical instruments to conduct the research from the macro and micro perspectives and has made the conclusion that the motivation and restriction organism are weak in the present Chinese tax auditing institution, the transaction cost of both the tax collector and taxpayer is too high and therefore the present institution needs to be improved.(4)Innovation of the quantitative model: The author used the probability theory to establish a mathematical model to evaluate the effectiveness of tax auditing case selection policy. The theoretical support for this model is that the function of tax auditing is to check the incompliant behavior of the taxpayer, therefore the performance will be improved if the most incompliant taxpayer can be selected in priority. Thus, the criterion for evaluating the effectiveness of tax auditing case selection and tax auditing institution performance is whether the case selection is random and whether the most incompliant taxpayer can be selected in priority. The design of the model is based on the thinking that tax auditing is a kind of sampling behavior by selecting some taxpayers from all taxpayers. Thus the author used this sampling concept in statistics to establish the model to test the possibility of nonrandom case selection in tax auditing practice. And also because it is not easy to obtain information on the incompliant behavior of the taxpayer, this model allows the incompliant behavior of the taxpayer being audited and the taxpayer not audited to be estimated. Meanwhile, this model also tests the factors affecting the taxpayer incompliant level at different times, including the changes of possibility to be audited by the taxpayer and other systematic factors.Of course, there are also some limitations in this thesis. Further research needs to be conducted in the following two aspects:Firstly, research on how to strengthen formal binding on tax auditing institution. Tax auditing institution includes formal and informal bindings. Formal binding mainly refers to the legislation design of the tax auditing institution and selection of tax auditing system. Informal binding refers to improving sense of responsibility in taxpayers and service level of the tax auditors, thus building mutual confidence with proper measures. Informal binding measures are of great significance to improve the behaviors of taxpayer and tax auditors, to improve the degree of institutional demand for tax auditing organization and taxpayers, as well as to reduce moral hazards and reverse selection. Hence, it can be concluded that the supply level of informal binding measures directly decides the supply and implementation of formal binding measures. However, it is easier said than done. It is highly difficult to improve taxpayers'sense of responsibility and service level of the tax auditors. The author felt it's a great pity not having the time to make more in-depth research into this topic in this thesis.Secondly, since China only uses several indexes including check coverage, penalty coverage and revenue, it is only possible for the author to adopt one index, which is the validity of return selection as the evaluation criterion for Chinese tax auditing institution. Although the thesis has already tried to make up for the lack of data by using questionnaires, yet it is still not enough for a complete appraisal of tax auditing institution performance.