Tax Compliance: Giving Voice, By Giving Choice

Here’s a tip for Inland Revenue – even giving the illusion of choice will reduce tax avoidance and under-declaration of income (excerpt):

Can giving taxpayers a voice increase tax compliance?
Cait Lamberton, Jan-Emmanuel De Neve, Michael I. Norton

Non-compliance with tax costs governments billions, in part because people really don't like paying taxes. This column reports two experiments designed to see if it's possible to make people hate taxes a little less and raise tax compliance. The results indicate that if people are given the opportunity to express a preference (though not actually make the final decisions) on how their taxes are spent, they are much less likely to cheat….

…We found that there are two critical dynamics underpinning people’s tax aversion (Lamberton et al. 2014):

• First, taxpayers have little sense of where their money is actually going…
• Second, taxpayers feel that they have no influence in the decision-making as to where their taxes will be spent. As a result, paying taxes can feel like dumping a lot of money into a black hole...

We propose two simple solutions to these two issues.

• The first is to better inform people, bridging the knowledge gap between paying taxes and the public goods that taxpayers receive in return.
• The second is to give taxpayers an opportunity to express their preferences on public spending – to give them increased ‘taxpayer agency.’

In a first experiment…full tax compliance rose from 52% to 68% simply by allowing people to express their preferences. Even better, when we asked them how they felt about the process, people given agency weren’t any less happy – even though they’d given us more of their money. To the contrary, their attitudes towards taxation actually improved.

In a second experiment, we explored whether taxpayer agency might lead people to be less likely to take a questionable tax loophole….As before, we witnessed a big shift – those who played around with the budget were much less inclined – a full 20% less likely – to take the questionable tax loophole.

Interestingly, once we compiled people’s preferences for the US budget, there were no dramatic changes from the current spending distribution….

…Our research shows that these effects occur when taxpayer agency is non-binding….In addition, our results revealed that adding taxpayer agency is substantially stronger than is simply providing information about how taxes are allocated….

Cool experiments, cool results. These experiments need to be replicated to fully confirm the effects on taxpayer behaviour, but if true, would be a cheap way of increasing the income tax yield. All it would need would be an extra page or two on the tax return form, and voila, a not inconsiderable increase in tax revenue.

Technical Notes:

Lamberton, Cait and Jan-Emmanuel De Neve & Michael I. Norton, "Can giving taxpayers a voice increase tax compliance?", VoxEU.org, May 2014 (accessed June 5th, 2014)