NY Times Article Today Highlights Why People Pay Taxes as Well as Some of My Favorite PT Posts of 2015

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Today’s NY Times has an article If the IRS is Watching You, You’ll Pay Up. The article discusses recent research on cheating, including studies showing that the words that tax administrators send in letters to taxpayers can have a major effect on compliance. The article reminds me of a couple of my favorite 2015 posts from Procedurally Taxing, as well as one of my favorite 2015 law review articles.

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The NYT article dips its toes in the water in the world of tax compliance research, noting that “[a]lthough categorized under the rather unglamorous heading of tax compliance, the studies are really about what motivates human behavior. Our brains are all subject to a stew of greed, shame and honesty, not to mention gut-level notions of fairness and calculated assessments of risk.”

The NYT article refers to research we highlighted last January in Procedurally Taxing, in a post called Can IRS Change Taxpayers From Procrastinators to Payors By Making People Feel Bad? At the time, I pointed to a study done by UK’s Behavioural Insights Team, which injects principles of behavioral economics into issues like what can tax administrators do differently to make people cheat on taxes less often.

As the NYT notes today, and as I discussed last year, the 2014 research study called The Behavioralist as Tax Collector: Using Natural Field Experiments to Enhance Tax Compliance published as an National Bureau of Economics Research (NBER) working paper (link to digest only, NBER Working Paper 20007, March 2014) uses field experiments on hundreds of thousands of UK taxpayers. The study suggests that by drafting letters to delinquent taxpayers that describe that most other taxpayers in the UK pay taxes on time and by personalizing the letters so that the taxpayers understand that they specifically are a distinct minority in the UK that did not pay on time led to a material difference in collections.

I believe that the area of behavioral economics and tax compliance is one that tax administrators will increasingly use to help reduce the tax gap. An article last year in the Boston College Law Review by (former co-guest poster) UNC Law Professor Kathleen Delaney Thomas called The Psychic Cost of Tax Evasion talks about the ways that tax administrators can use the research to increase the discomfort that people feel when they are dishonest. It is a terrific article and I recommend it highly.

In my PT post this year on H&R Block’s proposal to increase the disclosures that accompanied self-prepared EITC returns I discussed some of that research, including work by Dan Ariely and a New Yorker article that also visits the issue:

While there is a cottage industry among social scientists studying the reasons for tax compliance (and honesty and compliance generally), accountability and visibility (backstopped by sanctions) are main drivers for following rules. This is especially true for rules that while somewhat complex are not legally ambiguous, such as the EITC.

Professor Dan Ariely details the power of visibility and accountability (and even perceived visibility and accountability) in his accessible and entertaining 2012 book The (Honest) Truth About Dishonesty. While the book is not freely available (though this animated lecture on the book is terrific and linked at Brain Pickings) an article by Maria Konnikova in New Yorker last year called Inside the Cheater’s Mind nicely summarizes some of the research Ariely discusses in his book. That research suggests that environmental changes that enhance a person’s perception of anonymity will lead to increased dishonesty:

Most modern research on cheating explores the subtle behavioral influences that form the noisy background to our daily choices. In a typical laboratory set-up to measure cheating behavior, people are placed in a situation where they think their actions are anonymous and where there is no chance of getting caught. In reality, of course, what they do is observed. As it turns out, almost anyone will cheat when given even minor, consciously imperceptible behavioral cues. For instance, in a series of three experiments, a group of psychologists found that lighting could affect cheating. In one study, participants in a dimly-lit room cheated more often than those in a lighter one. While both groups performed equally well on a set of math problems, students in the darker room self-reported that they correctly solved, on average, four more problems than the other group—earning $1.85 more as a result, since they were being paid for each correct answer. The authors suggested that the darkness created an “illusory anonymity”: even though you aren’t actually more anonymous in the dark than in the light, you feel as though you are, making you more likely to engage in behaviors you otherwise wouldn’t.

Parting Thoughts

To be sure, changing the design of forms or sending letters alone will likely not impact the most committed of those who are willing to cheat or mislead. Yet in times of tight budgets IRS appears to be using the principles of nudging taxpayer and preparer behavior. To that end, for example, the Return Preparer Office has been sending out thousands of letters to preparers in advance of filing season when it has information suggestive that the preparers submitted returns with questionable positions, including on Schedule C’s and EITC returns. I suspect that we will see more application of some of these principles in practice. While third-party information reporting provides the accountability and visibility that researchers have tied to compliance, some issues (like small business compliance and child-based credits) are not as easily connected to third party reporting. Making taxpayers and preparers more squeamish about doing the wrong thing is a tool that will increasingly be in the tax administrators’ tool kits.

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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