The effects of official and unofficial information on tax compliance

The administration of tax policy has shifted its focus from enforcement to complementary instruments aimed at creating a social norm of tax compliance. In this paper we provide an analysis of the effects of information regarding the past degree of tax evasion at the social level on the current individual tax compliance behavior. We build an experiment where subjects declare their income after receiving either a communication of the average tax evasion rate (“official information”) or a private message from a group of randomly matched peers about their tax behavior (“unofficial information”). We use the experimental data to estimate a dynamic econometric model of tax evasion and find three main results. First, tax compliance is very persistent, but less so in the presence of information. Second, the higher the officially communicated past tax evasion rate, the higher the degree of persistence: former evaders are more likely to evade again (and evade more), and former compliant individuals are more likely to comply again (and, when evading, evade less). Third, when an unofficial communication of past evasion (compliance) from all their peers is received, both former evaders and compliant individuals are more likely to evade (comply) again.     

AUDIT STATE DEPENDENT TAXPAYER COMPLIANCE: THEORY AND EVIDENCE FROM COLOMBIA

We develop and analyze a dynamic model of individual taxpayer compliance choice that predicts “audit state dependent taxpayer compliance,” by distinguishing between forward-looking versus myopic versus naïve behavior. We then test experimentally the audit state dependent model by reporting the results from the first tax compliance experiment run in Colombia. We find that subjects' compliance rates increase with greater enforcement. We also find more novel results: fine rates should be increased after an audit, and “nudging” myopic individuals toward reporting a constant rather than a fluctuating proportion of income would benefit both the taxpayer and the tax authority.(JEL H26, C91)     

Empathy,sympathy, and tax compliance

This paper examines the effect of “empathy” and “sympathy” on tax compliance. We run a series of laboratory experiments in which we observe the subjects’ decisions in a series of one-shot Tax Compliance Games presented at once and with no immediate feedback. Importantly, we employ methods to identify subjects’ sympathy, such as the Davis Empathic Concern Scale and questions about frequency of prosocial behaviors; we also use priming in order to promote subjects’ empathy. Our results suggest that the presence of sympathy in most cases encourages more tax compliance. Our results also suggest that priming to elicit empathy also has a positive impact on tax compliance. These results support the inclusion of noneconomic factors in the analysis of tax compliance behavior.     

Crafting the Neoliberal State: Workfare,Prisonfare, and Social Insecurity1

In Punishing the Poor, I show that the ascent of the penal state in the United States and other advanced societies over the past quarter‐century is a response to rising social insecurity, not criminal insecurity; that changes in welfare and justice policies are interlinked, as restrictive “workfare” and expansive “prisonfare” are coupled into a single organizational contraption to discipline the precarious fractions of the postindustrial working class; and that a diligent carceral system is not a deviation from, but a constituent component of, the neoliberal Leviathan. In this article, I draw out the theoretical implications of this diagnosis of the emerging government of social insecurity. I deploy Bourdieu’s concept of “bureaucratic field” to revise Piven and Cloward’s classic thesis on the regulation of poverty via public assistance, and contrast the model of penalization as technique for the management of urban marginality to Michel Foucault’s vision of the “disciplinary society,” David Garland’s account of the “culture of control,” and David Harvey’s characterization of neoliberal politics. Against the thin economic conception of neoliberalism as market rule, I propose a thick sociological specification entailing supervisory workfare, a proactive penal state, and the cultural trope of “individual responsibility.” This suggests that we must theorize the prison not as a technical implement for law enforcement, but as a core political capacity whose selective and aggressive deployment in the lower regions of social space violates the ideals of democratic citizenship.     

Honesty or dishonesty of taxpayer communications in an enforcement regime

In many settings the true likelihood of capture when engaging in an illegal activity, such as tax evasion, is not well known to an individual. “Official” statements from the tax administration regarding enforcement effort provide some information. In addition, “informal”, or “unofficial”, communication among taxpayers can supplement these official announcements, but individuals do not know with certainty whether such unofficial information is honest (or accurate) versus dishonest (or inaccurate). We examine the truthfulness of an individual’s revelation of unofficial information to other individuals, along with the factors that affect any revelation, focusing on the intrinsic motivations for revelations. Our experimental design allows us to examine the type and the honesty of messages that an individual chooses to send to other individuals regarding their own audit outcome and their own compliance behavior. Our results indicate that most individuals send accurate messages about their own audit outcomes and their own compliance behaviors. Nevertheless, many individuals are also systematically dishonest about being audited; that is, we observe a significant tendency for individuals to claim that they were audited when they were not. We also observe a strong interaction between individuals’ audit outcomes and their compliance behaviors, so that individuals who engaged in tax evasion and who were audited were more truthful in their communications than those whose tax evasion went undetected.     

Compliance costs caused by agency action? Empirical evidence and implications for tax compliance

Compliance costs of taxpayers should not only be affected by the tax law itself but also by its implementation through the tax authorities. In this paper we analyze the effect of authority behavior on the burden of complying with tax regulations. Using survey data of Belgian businesses, we develop an estimation strategy to overcome simultaneity bias by the construction of proxy variables. According to our estimate, a customer-unfriendly tax administration increases the average compliance burden by about 27%. Our outcome has interesting implications for further research. First of all, authority behavior does not only affect “soft” tax compliance factors like fairness and trust, but also “hard” aspects like costs. Second, the distribution of administrative cost burdens between the taxpayer side and the authorities may be important regarding the cost-efficiency of the tax system as a whole.     

Public expenditure: Perceptions and preferences

Public preferences for government expenditure form an important part of the literature in public sector economics. However, in the academic literature these preferences have been largely considered as “given”. Exceptions to this are where public preferences expressed referenda (e.g. in California) can directly influence tax revenue and public expenditure levels. The present study follows an earlier one in using a questionnaire to ask individuals directly about their perceptions of and preferences for public spending. Replies from 50 respondents were analysed using multiple regression and analysis of variance techniques in order to ascertain whether public expenditure perceptions and preferences showed consistent and predictable patterns among young individuals with little or no experience of paying tax. The results showed that both perceptions and preferences for a series of seven macro-expenditure items were significantly different from one another and broadly predictable from individuals' self reported positions on ‘left/right’ scales. It is concluded that views about public expenditure may often form part of integrated attitudes with both perceptual and preferential components.     

The Latina/o Racial and Citizenship Divide on Perceptions of the Influence of Immigrant Mobilizations*

In spring 2006, the United States witnessed immigrant marches throughout the nation. Although Latina/os are often depicted as the “face” of the immigrant marches, we know little about how racial and citizenship statuses shaped Latina/os’ perceptions of how the marches influenced public perceptions of undocumented immigrants. Using logistic regression on data from the 2006 National Survey of Latinos, we find that Latina/os identifying as white are less likely to be supportive of the immigrant marches than those who defied standard racial classifications, and instead identified as “Latina/o.” Moreover, Latina/os who are born in the United States are not as supportive of the immigrant marches in comparison with naturalized citizens and non‐citizen Latina/os, accounting for demographic and human capital factors. This study suggests there is a “racial‐ and citizenship divide” among Latina/os that fragments perceptions on the immigrant mobilizations in the United States.     

Tax rules

Tax schemes are more restricted by constitutional rules than subsidies. We introduce a model of public good provision with incentive problems in agenda-setting and identify several advantages of restrictions on tax schemes. In particular, tax rules may prevent the proposal and adoption of inefficient projects that benefit only a small minority. We also propose “redistribution efficiency” as a socially desirable property of proposals and find that tax rules guarantee this kind of efficiency. Moreover, a constitution that requires certain restrictions on both taxes and subsidies satisfies a criterion we label “robustness against counter-proposals.” We provide an axiomatic characterization of this constitution. Finally, we perform utilitarian welfare comparisons.     

Dynamics of tax evasion with back auditing,social norm updating,and public goods provision – An agent-based simulation

Income tax evasion dynamics and social interactions are analyzed with an agent-based model in heterogeneous populations. One novelty is the combined analysis of back auditing and ageing, which allows for incorporating psychological findings with respect to social norm updating over a taxpayer’s life cycle. Another novelty concerns individual’s social behavior regarding a Pareto-optimal provision of public goods. Simulation results support the counterintuitive conclusion drawn elsewhere in the literature that income tax compliance may decrease with raising marginal per capita returns (MPCRs). Yet, back auditing seems to have by far the strongest impact on the dynamics of fiscal fraud and also can help to curb the extent of tax evasion (ETE).     

Income tax evasion dynamics: Evidence from an agent-based econophysics model

We analyze income tax evasion dynamics in a standard model of statistical mechanics, the Ising model of ferromagnetism. However, in contrast to previous research, we use an inhomogeneous multi-dimensional Ising model where the local degrees of freedom (agents) are subject to a specific social temperature and coupled to external fields which govern their social behavior. This new modeling frame allows for analyzing large societies of four different and interacting agent types. As a second novelty, our model may reproduce results from agent-based models that incorporate standard Allingham and Sandmo tax evasion features as well as results from existing two-dimensional Ising based tax evasion models. In this way, such kind of models may become more relevant and useful in economics as well as social psychology. We finally use our model for analyzing income tax evasion dynamics under different enforcement scenarios and point to some policy implications that may also be of interest for psychological research on tax compliance.     

How does inequality aversion affect inequality and redistribution?

We investigate the effects of inequality aversion on equilibrium labor supply, tax revenue, income inequality, and median voter outcomes in a society where agents have heterogeneous skill levels. These outcomes are compared to those which result from the behavior of selfish agents. A variant of Fehr-Schmidt preferences is employed that allows the externality from agents who are “ahead” to differ in magnitude from the externality from those who are “behind” in the income distribution. We find first, that inequality-averse preferences yield distributional outcomes that are analogous to tax-transfer schemes with selfish agents, and may either increase or decrease average consumption. Second, in a society of inequality-averse agents, a linear income tax can be welfare-enhancing. Third, inequality-averse preferences can lead to less redistribution at any given tax, with low-wage agents receiving smaller net subsidies and/or high-wage individuals paying less in net taxes. Finally, an inequality-averse median voter may prefer higher redistribution even if it means less utility from own consumption and leisure.     

Associations,active citizenship,and the quality of democracy in Brazil and Mexico

In many Third Wave democracies large classes of people experience diminished forms of citizenship. The systematic exclusion from mandated public goods and services significantly injures the citizenship and life chances of entire social groups. In democratic theory civil associations have a fundamental role to play in reversing this reality. One strand of theory, known as civic engagement, suggests that associations empower their members to engage in public politics, hold state officials to account, claim public services, and thereby improve the quality of democracy. Empirical demonstration of the argument is surprisingly rare, however, and limited to affluent democracies. In this article, we use original survey data for two large cities in Third Wave democracies—São Paulo and Mexico City—to explore this argument in a novel way. We focus on the extent to which participation in associations (or associationalism) increases “active citizenship”—the effort to negotiate directly with state agents access to goods and services legally mandated for public provision, such as healthcare, sanitation, and security—rather than civic engagement, which encompasses any voluntary and public spirited activity. We examine separately associationalism’s impact on the quality of citizenship, a dimension that varies independently from the level of active citizenship, by assessing differences in the types of citizenship practices individuals use to obtain access to vital goods and services. To interpret the findings, and identify possible causal pathways, the paper moves back-and-forth between two major research traditions that are rarely brought into dialogue: civic engagement and comparative historical studies of democratization.     

Inequality and education decisions in developing countries

In this paper we analyze the effect of inequality on school enrollment, preferred tax rate and expenditure per student in developing countries; when parents can choose between child labor, public schooling or private schooling. We present a model in which parents make schooling decisions for their children, weighing the utility benefit of having a child with formal public or private education versus the forgone income from child labor or household work. Parents vote over the preferred tax rate to finance freely provided public education. The utility benefit of an educated child is proportional to expenditure per student, so that there is congestion in public school. We find that when parents can send their children to work or to private school, high inequality leads to exit from public education at both ends of the income distribution. Thus high inequality reduces the support for public education, leading to a low tax rate and expenditure per student. Exit from public education results in both high child labor and a large fraction of students attending private school. In fact there is a threshold level of inequality above which there is no longer support for public education. In addition we explore the implications for the design of foreign aid. The results suggest that foreign aid policies should focus on promoting school attendance rather than increasing school resources, as the later policy might be offset by a reduction in the recipient country’s fiscal effort, with little impact on outcomes.      

Commitment to tax compliance: Timing effect on willingness to evade

Experimental and empirical literature on individual decision-making has shown a remarkable difference between planning and ongoing decisions: when asked to plan their actions, people overweight events with low probability; on the contrary, in ongoing decisions, they tend to ignore them. We report on a laboratory experiment designed to explore the presence of this decisional inconsistency in taxpayers’ behavior, by means of a commitment system for compliance. In line with the overweighting of events with small probabilities (i.e. fiscal audits), we find that planning induces the majority of people not only to adopt a mechanism of commitment to tax compliance, but also to actually comply.     

‘Say no to the ATO’: the cultural politics of protest against the Australian Tax Office

Researching a broad array of protest forms offers valuable insights into social change. One such unusual form includes protests against tax law rulings made by the Australian Tax Office (ATO). Across Australia thousands of taxpayers invested in ‘tax effective schemes’ in the late 1990s. However, by 2000 each owed on average AUS$75,000 as a result of these schemes being ruled illegal. Rather than pay the money owed many have refused, publicly protesting through formal administrative and political mechanisms, and through public debate. At first glance, this appears an issue of individual economic self‐interest. However, qualitative research methods provide a more detailed and contextual picture of why protestors feel justified in their actions. Focusing on the hard‐hit Goldfields region of Western Australia, protests are argued as being about real and imagined identities; concerns over roles and status in Australian society; and the failings of institutional and political frameworks that should support, not penalize, citizens. The offence and ‘moral shock’ of being publicly labelled as ‘tax cheats’ facilitated protestors' view of themselves as workers trying to do the ‘right thing’ by their families and country. And as such, the normally private issue of individual tax affairs became a public debate and a site of cultural politics wherein the ATO's official discourse of rationality and regulation compliance is received by protestors as symbolic of their beleaguered position in Australian society. Here, citizenship struggles have not been eclipsed by post‐material or ‘new social movement’ concerns. Rather, sites of cultural politics, such as struggles over tax and identity, are constantly redrawn in light of new social practices and relations.     

Academic Civic Mindedness and Model Citizenship in the International Baccalaureate Diploma Programme

This study uses interview and survey methods to describe the International Baccalaureate (IB) Diploma Programme's (DP) development of students' “academic civic mindedness” and “model citizenship” at four public schools in California. Results indicate that the DP pedagogy enables students to develop many of the skills that are necessary for civic advocacy and that the DP places a strong emphasis on students' knowledge of issues related to public policy. The DP develops students' citizenship through promoting their awareness of political and social issues and required active engagement with a local or global issue. Most IB students and teachers feel that the DP develops students' academic civic mindedness and model citizenship to a considerably greater extent than other curricular alternatives. Finally, teachers feel that the strongest limitation to their prioritization of students' citizenship development is their lack of clarity on how to frame the civic implications of what they teach.     

Socio-historical foundations of citizenship practice: after social revolution in Portugal

This article shows how macro-historical processes of change can activate robust and enduring forms of citizenship practice, providing both survey-based evidence for this claim and a theorization of the causal mechanisms involved. Focusing on the case of Portugal, where democratization followed the historically unusual path of social revolution, we examine survey data on civic practice covering twenty countries and find Portugal to be a world leader in public participation in the electronic public sphere. When we examine the subsection of the population socialized politically in the country’s post-revolutionary democracy, we find another important indicator of lively citizenship practice. The article takes the examination of this specific national case as the basis for developing an argument of broad theoretical relevance on the social underpinnings of lively and participatory citizenship practice. With an empirical foundation for our claims in survey data and other sources, our analysis of Portugal offers an interpretation of the case, leading to substantial revision of assumptions in the extant literature. More importantly, through our examination of this case, we show how large-scale macro-historical processes of change can encourage lively civic practice manifested at the individual level. Our argument highlights the importance of hierarchy-challenging collective experiences that reconfigure cultural frameworks and reorient the character of institutional practice. We take up the implications of this argument for cases lacking a history of revolution and find certain parallels with national cases shaped by movements of social reform as in the social democracies of Scandinavia.     

ON THE EXTERNAL VALIDITY OF LABORATORY TAX COMPLIANCE EXPERIMENTS

An essential issue for laboratory experiments to inform policy debates is the “external validity” of the experimental results; that is, does behavior in the laboratory apply to behavior that occurs in the naturally occurring world? We examine this issue of external validity in the specific context of laboratory experiments on tax compliance, using two different types of evidence. We find that the behavioral patterns of subjects in the laboratory conform to those of individuals making a similar decision in naturally occurring settings. We also find that the behavioral responses of students are largely the same as those of nonstudents in identical experiments (JEL C9, H0, H3)     

Tax avoidance and the endogenous formation of social norms

We analyse a model of income tax avoidance with heterogenous agents who face monetary as well as psychic costs in order to successfully hide their income from the fisc. We argue that, in general, the stigmatisation of tax dodging is motivated by the desire to make redistribution more effective. In this context, we demonstrate two results. First, we study the policy preferences of the agents, identify a median-agent political equilibrium, and show that the psychic cost of tax dodging leads to a highly progressive income tax. Second, we model the endogenous formation of stigma as a “conformism game”, and argue that, since high levels of stigma are favoured by the low-income agents, a society-wide condemnation of tax dodging will be established only in robust democracies where these agents possess enough social influence.