Signing at the Top: The Key to Preventing Tax Fraud?
In filling out self-reported documents such as tax forms, we declare the information truthful with our signature, but usually we sign at the end of the form. Researchers Francesca Gino and Lisa Shu discuss whether governments and companies can bolster honesty simply by moving the honesty pledge and signature line to the top of the form, before people encounter the opportunity to cheat. Key concepts include:
- Moving the signature line from the end to the beginning of a form leads to an increase in truthfulness on the subsequent self-report. This is because the signature will bring one's moral standards into focus from the get-go.
- The research shows how self-awareness can nudge a person's behavior for the better by making one's ethical standards salient.
- A simple form fix might encourage honest reporting and help the US government close the $350 billion tax gap considerably.
- The researchers hope to test their hypotheses further on expense reports, medical information forms, time sheets, insurance forms, and other documents that require people to self-report information.
Among the most worrisome issues for the Internal Revenue Service is the federal tax gap, which is the difference between what Americans should pay on their taxes and what they actually do pay. According to the IRS's most recent estimates the gap amounts to around $350 billion annually, largely due to understatement of income and overstatement of expenses. Obviously, many taxpayers give in to the temptation to cheat on their taxes—in spite of the requirement for them to sign a statement declaring that the information on the form is "true, correct, and complete."
As with most self-reported documents, the signature line is at the end of the tax form, after the form has been filled out and, consequently, after the potential cheating has occurred. (It's analogous to a witness first testifying in a court trial and then swearing on a Bible, "For the last twenty minutes I have told the truth, the whole truth, and nothing but the truth.")
Now research suggests that the federal government might be able to encourage honest reporting simply by moving the signature line to the top of the form, such that signers declare that they will tell the truth rather than that they have told the truth. The findings, based on several experiments, are published in a new paper, When to Sign on the Dotted Line? Signing First Makes Ethics Salient and Decreases Dishonest Self-Reports, written by Lisa L. Shu, Francesca Gino, and Max H. Bazerman of Harvard Business School, Nina Mazar of the University of Toronto, and Dan Ariely of Duke University.
"A lot of prior work has focused on the consequences of unethical decision-making and the factors that lead people to be unethical," says Lisa Shu, a doctoral candidate in Organizational Behavior at HBS. "This drove us to want to explore the flip side. We know a lot about when and why people cheat based on our lab and field studies; we thought it was now time to examine how to prevent people from cheating."
The key, according to the researchers, lies in increasing ethical salience: inducing people to pay greater attention to their moral standards and examine the integrity of their behavior when it counts the most.
"A signature is a way to highlight the fact that you're about to do something important, and that it's going to be a reflection of the self," says Francesca Gino, an associate professor in the Negotiation, Organizations & Markets Unit at HBS. "Attaching a signature to a pledge of honesty is a way of effectively linking identity to morality."
The research team conducted a series of experiments in which participants could benefit financially from dishonest self-reporting. In each case, the researchers compared the effectiveness of signing one's name at the beginning of the form with signing at the end.
In one experiment, they teamed up with an automobile insurance company, manipulating the signature line on the policy review forms that customers receive at the end of each year. The form behooves policyholders to report low mileage because the fewer miles driven, the lower the annual premium—presenting a temptation to lie.
Controlling for the number of cars per policy, the researchers found that the average reported mileage per car was much higher among policyholders who signed at the top of the form than those who signed at the bottom, where the signature line traditionally is located. (The difference averaged 2,747.8 miles per car.)
In another experiment conducted in a university research lab, the researchers tested the possibility of increasing honesty on tax return forms. The 101 participants—mostly students—received instructions to complete an incidental problem-solving task, which included the following information: "For the problem-solving task, you will be paid a higher amount than what we usually pay participants because you will be taxed on your earnings. You will receive more details after the problem-solving task." The instructions went on to say that the participants would receive a tax credit for the cost of their commute to the lab.
After the problem-solving exercise, the participants went into another room and filled out a "research study tax return" form based on the IRS's Form 1040. As with the previous experiment, some participants were asked to sign an honesty statement at the top of the form, while others were asked to sign the statement at the bottom. The experiment also included the added wrinkle of a control group, in which the forms had no place for a signature at all.
By covertly using information from the participants' individual workstations, the researchers could figure out who had understated their earnings or overstated their commuting costs.
Again, the results were significant in indicating the efficacy of a top-of-the-form honesty statement. For the signature-at-the-top group, 13 out of 35 participants cheated on their tax forms (37 percent). For the signature-at-the-bottom group, 26 out of 33 participants cheated—79 percent. This percentage was actually higher than the control group participants who didn't sign at all (64 percent, or 21 out of 33).
"There is a lot of empirical evidence that suggests that we do care, as individual beings, about being good and moral," Gino says. "But there is equally compelling evidence that we often cross ethical boundaries when we have the opportunity to do so. Our research identifies an effective way to curb cheating: We just need to be reminded to care at the right times. This reminder can be a very simple one, and it is something that could be applied in many different contexts."
How practitioners can help
The researchers plan to share their findings with the IRS, with the aim of shrinking the tax gap by moving the honesty pledge to the top of Form 1040. "It's a long shot, but we're hoping they'll be interested," Gino says.
In the meantime, they are looking to test the top-of-the-page signature hypothesis on other self-reported documents such as expense reports, medical information forms, and time sheets.
"My hope is that this practice will be picked up by a lot of businesspeople," Gino says.
Note to executives: Are you interested in finding out how a top-of-the-page signature would increase honesty among your employees as they fill out expense reports and other corporate forms? And would you like to participate in the next phase of the aforementioned research at Harvard Business School? If so, please send a note to professor Francesca Gino at email@example.com and doctoral candidate Lisa Shu at firstname.lastname@example.org.