Governments face the perennial challenge of collecting taxes effectively, as calculating the necessary taxation to fund various public services is one thing, but ensuring compliance is another. Despite the evolution from heavy-handed tax collectors to audits and fines, a significant number of individuals still resort to cheating. This poses a dilemma for treasuries, as increasing the burden on honest taxpayers is not a viable solution. Addressing this issue is the focus of a recent study conducted by the University of Delaware.
According to IRS research, approximately 85% of people willingly and fully pay their taxes, demonstrating honesty. However, the remaining 15% of tax cheats contribute to substantial revenue losses for the government. The IRS estimates an annual loss of around $428 billion based on data from 2014-2016, and similar tax gaps in the hundreds of billions are reported by other nations.
Preventing tax evasion
In response to this challenge, the IRS has taken steps to tackle tax evasion, including the announcement of an $80 billion cash injection into the agency over a decade. More than half of this funding is allocated to enforcement measures, with the agency projecting that the recovered revenue will more than offset the investment.
Yet, the question remains: Is enforcement the most effective use of these funds? The researchers delved into existing literature on the efficacy of audits but identified a gap when it came to understanding taxpayers’ motivations for complying with tax obligations.
They argue that previous studies focusing on penalties and economic incentives fail to capture the complete picture. Specifically, an analysis of how taxpayers’ perceptions of government programs influence their willingness to fulfill their tax responsibilities is lacking. By exploring this aspect, a more comprehensive understanding of tax compliance can be achieved.
Tax compliance
The researchers delved into the various determinants influencing individuals’ compliance with tax regulations, focusing on key factors such as their inclination towards supporting government programs and their ethical stance, particularly their proclivity towards self-interest and a “ends justify the means” mindset.
To investigate these factors, the study involved subjecting participants to a series of assessments and probing inquiries regarding their endorsement of defense programs and social welfare initiatives. Subsequently, participants were instructed to empathize with a hypothetical taxpayer earning $45,000 through self-employment, paid in cash. The researchers then requested participants to indicate the portion of this income they would be willing to report to the Internal Revenue Service (IRS). Notably, certain participants were informed of a heightened likelihood of being subjected to an audit, while others were informed of a low probability.
The researchers gathered data from slightly over 300 taxpayers hailing from diverse backgrounds, encompassing various age groups, income brackets, and educational levels, and representing different regions across the country.
Support for programs
“In a nutshell, we find that taxpayers with more support for a program report higher amounts of income,” the researchers explain.
The correlation between individuals’ support for different government programs and their compliance with tax regulations under the specter of an audit has been unveiled by recent research. The findings indicate that individuals who express favor towards expenditure on national defense are more inclined to honestly report their income when confronted with the possibility of an audit. Conversely, those who exhibit support for social programs do not require the same coercive stimulus.
The study concludes that individuals’ compliance levels are significantly influenced by their alignment with government programs, irrespective of the likelihood of an audit. Essentially, individuals who endorse governmental policies demonstrate a heightened propensity to fulfill their tax obligations.
However, individuals with unethical tendencies present a more challenging scenario. For this group, the study reveals that the combination of supporting a government program and confronting a higher probability of an IRS audit is necessary to engender compliance.
Conversely, individuals with a strong ethical compass appear to be less swayed by their stance on government spending, as they exhibit a predisposition to dutifully pay their taxes regardless of their views on such matters.
It is important to note that the researchers do not assert that audits and penalties are ineffective in motivating compliance. Rather, they emphasize that individuals’ attitudes towards government spending and programs exert a significant influence on their taxpaying behavior, alongside these enforcement mechanisms.
Broad implications
While the implications of this study primarily pertain to government officials, it is worth noting that taxpayers may benefit from gaining a deeper understanding of the rationale behind various programs.
“We feel that our findings highlight the importance of gaining taxpayer support for government programs through aligning citizens’ interests with those of the government,” the authors explain.
That is to say, the government needs to persuade people their money is being well spent.
“One way to do this would be for the government to provide taxpayers with a better understanding of why they are being taxed and how they benefit from government spending of their tax dollars.”
