Abstract

This study investigated the effect of equity on tax evasion. Two groups of subjects were compared to each other in a simulated business computer game. One group was college students and the other group was small business owners. It was expected that the judgment of vertical equity is strongly influenced by personal norms and values regarding distributive justice, whereas the judgment of horizontal equity is more a function of the balance in actual outcomes. It was also expected that the college students' judgment of equity is strongly influenced by personal norms and value, whereas the equity judgment of business owners is more influenced by the actual outcomes. With the two groups, the following hypotheses were tested: (1) College students react sensitively to vertical inequity and show a greater degree of tax evasion when vertical equity is violated than when other types of equity are violated; (2) business owners react sensitively to horizontal inequity and show a greater degree of tax evasion when horizontal equity is violated than when other types of equity are violated. Both hypotheses were clearly supported. In addition, the results showed that violation of any type of equity increases tax evasion regardless of the type of the subject. Policy implications of the results were discussed.