Eliciting Taxpayer Preferences Increases Tax Compliance
Executive Summary — Most citizens dislike paying taxes. In the United States, for example, tax noncompliance is estimated to amount to some $385 billion annually. Many other governments also suffer from a "tax gap" in their national accounts. A meaningful portion of tax aversion can be understood and addressed by considering psychological characteristics of the tax process. To explore this possibility the authors design and carry out a set of experiments that allow taxpayers to express advisory preferences regarding the use of their tax dollars. They then assess the effects of this taxpayer agency treatment on tax compliance as well as satisfaction with tax payment and attitudes towards taxation. Findings show that providing taxpayers with such "taxpayer agency"—giving them a sense of influence over tax spending—significantly increases tax compliance. The authors also observe that agency operates, in part, by bringing together payment and benefit. In addition, agency creates no decrease in tax satisfaction or change in fear of audit, and it may reduce general antitax sentiment among taxpayers. Overall, giving taxpayers a voice may act as a two-way nudge, changing tax payment from a passive experience to a channel of communication between taxpayers and government. Key concepts include:
- Tax noncompliance is a big problem. Research has shown that standard drivers of compliance (such as enforcement rates) do not fully explain individual tax behavior.
- A lack of agency or sense of influence over tax spending may lower tax compliance.
- Individuals are happier to give when they know what they're giving for, and less likely to do so when the outcome of their payment is ill-defined.
- Tax aversion is due in part to the separation of tax payments and the public goods obtained in return. This disconnect places distance between payment and benefit, and therefore decreases taxpayers' perceptions of the tax-funded benefits they receive.
Two experiments show that eliciting taxpayer preferences on government spending -- providing taxpayer agency--increases tax compliance. We first create an income and taxation environment in a laboratory setting to test for compliance with a "lab tax." Allowing a treatment group to express non-binding preferences over tax spending priorities leads to a 16 percent increase in tax compliance. A follow-up online study tests this treatment with a simulation of paying US federal taxes. Allowing taxpayers to signal their preferences on the distribution of government spending results in a 15 percent reduction in the stated take-up rate of a questionable tax loophole. Providing taxpayer agency recouples tax payments with the public services obtained in return, reduces general anti-tax sentiment, and holds satisfaction with tax payment stable despite increased compliance with tax dues. With tax noncompliance costing the US government $385 billion annually, providing taxpayer agency could have meaningful economic impact. At the same time, giving taxpayers a voice may act as a two-way "nudge," transforming tax payment from a passive experience to a channel of communication between taxpayers and government.