Stimulating Taxpayer Morality: Eliciting Preferences Increases Tax Compliance

Decisions about paying taxes represent one of the most common moral quandaries faced by citizens. In the present research, we argue that taxpayer compliance can be raised by increasing “voice”: allowing taxpayers to express non-binding preferences about the way their taxes are used. We first test for effects of preference expression on tax compliance with a tax in a laboratory setting. Here, we find that allowing participants to express non-binding preferences over tax spending priorities leads to a 16% increase in compliance. A follow-up online study tests this treatment with a simulation of paying US federal taxes. Allowing taxpayers to express their preferences on the distribution of government spending reduces the stated take-up rate of a questionable tax loophole by 15%. A third experiment shows that this effect only occurs when taxpayers have voice in spending on preferred tax categories; allocating tax dollars across disliked spending categories increased neither feelings of voice nor likelihood of payment. RUNNING HEAD: VOICE AND TAX COMPLIANCE Tax noncompliance is estimated to amount to some $385 billion in lost funding annually in the US (IRS 2013) and £36 billion in the UK (HMRC 2016). Given that tax payment is legally required, non-compliance represents a substantial and surprisingly common moral failing among consumers: while most of people would hesitate to steal from needy consumers or vandalize a public park, willingness to take tax loopholes or underreport income comes much more easily. While tax aversion has many causes, we suggest that noncompliance can be understood — and mitigated — by considering two psychological characteristics of the tax process. First, tax aversion is created by the decoupling 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. Data suggests that such underrecognition of benefits is widespread: in one survey, among Americans who claimed they had never used a government social service, 53% percent had in fact taken out student loans, and 40 percent had benefited from Medicare (Mettler 2011). Because perceptions of such benefits are low at the time of payment, consumers feel that tax payment is a poor investment, and thus they feel licensed to cheat (Soman and Gourville 2001; Thaler 1999). However, we propose that recoupling alone may not be enough to solve this problem. Rather, we argue that taxpayer noncompliance results in part from the sense that one has no voice in the taxation process. One means by which voice – “the voluntary expression of people’s views” (Banerjee and Somanathan 2001) – can be provided in this context is by allowing individuals to express their non-binding preferences about the manner in which their tax dollars are spent. Building on the previous literature, we propose that voice will reduce tendencies toward “exit” strategies (Hirschman 1970) – manifest in this domain as noncompliance with the tax system. RUNNING HEAD: VOICE AND TAX COMPLIANCE In demonstrating the potential of preference expression, the present research offers both practical and theoretical contributions. To recouple payment and benefit, policymakers now widely publicize information on the allocation of tax dollars across expenditure categories (White House 2011) and are introducing “Personal Tax Statements” (UK Treasury 2012). The success of such interventions is yet to be determined on a large scale. Thus, our test of the role of recoupling in a preference expression context provides initial insight into the conditions under which such efforts will prove successful. Specifically, we explore whether information alone will generate greater levels of tax compliance, or whether an opportunity for preference expression is critical. Further, if our effects hold, the present work suggests a low-cost, psychologically-grounded means of addressing the individual moral failures that, in the aggregate, undermine the support of public goods. While our results also suggest that this intervention has limits, we argue that its practical impact may be large enough to warrant broader testing and implementation. From a theoretical perspective, we build on prior research suggesting that information alone – such as information about penalties for undesirable behaviors – may not be the optimal way to change moral behavior (Alm and Torgler 2011). In addition, our work extends prior research that focused on satisfaction with tax payment (Lamberton 2013, Sussman and Olivola 2011). While increasing satisfaction with payment may have important downstream consequences for civil sentiment, this previous research leaves open the critical question of whether taxes will be paid at all. Thus, we are still in need of evidence that the interventions that change attitudes will change costly moral behavior. Further, we contribute to the literature on transparency in information provision and in voice, showing both the power and its contingent nature of both. Though in a much less tragic context, our findings about the limitations of the power of voice as an empowering mechanism are generally consistent with those of Botti, Orfali and Iyengar (2009), in that we find that not all preference expression has RUNNING HEAD: VOICE AND TAX COMPLIANCE positive consequences. Similarly, our findings suggest that the effect of information may be conditional on the context in which it is provided, consistent with recent work in governance (e.g., de Fine Licht et al. 2014). We propose that future research should continue to explore the psychology of enhanced voice in the civic domain, in order to test for the longevity of morally-relevant effects over time. Such studies would allow us to learn even more about voice in consequential consumption and spending decisions, and ideally, to identify other means of prompting moral behavior. THEORETICAL BACKGROUND Tax compliance and tax morale form the basis for a large literature. This research suggests that factors driving tax compliance can be broadly understood to be either extrinsic or intrinsic in nature, with the former mostly centered on tax audit probabilities and penalty rates (Allingham and Sandmo, 1972) and the latter including numerous cultural and normative factors (for recent reviews see Alm, 2012; Luttmer and Singhal, 2014; OECD, 2012; Torgler, 2007; Cummings et al., 2009). The more psychological aspects of the tax system have received increasing attention, as standard extrinsic drivers of compliance (such as enforcement rates) do not fully explain moral decision-making in this domain (McCaffery and Slemrod, 2006; Torgler, 2007; Konrad and Qari, 2012; Christian and Alm, 2014). More particularly, recent research has focused on understanding the “interaction climate” between tax authorities and taxpayers (Kirchler, 2007) and examines factors such as tax code complexity (Abeler and Jäger, 2013), enforcement information dissemination (Alm et al., 2009), tax code kink points (Saez, 2010), service provision by tax authorities (Chetty and Saez, 2013; Mckee et al., 2011), tax framing (McCaffery and Baron, 2004), norms and varied RUNNING HEAD: VOICE AND TAX COMPLIANCE means of communication (John et al., 2011; Hallsworth et al., 2014), and effects of tax form design such as the placement of the signature box (Shu et al., 2012). Research suggests that providing information about the purpose and benefits of taxation may increase satisfaction with tax payment. For example, Sussman and Olivola (2011) show that asking individuals to consider the positive uses of their tax payments improves their negative attitudes towards taxation. Such results align with work that shows that making the resulting outcome of a charitable donation more tangible (Cryder and Loewenstein, 2010; Cryder et al., 2013) or providing more information on the beneficiary (Bohnet and Frey, 1999) can increase generosity. In essence, such work addresses the well-known mental accounting problem of decoupling between payment and its economic outcomes (Soman and Gourville, 2001; Thaler, 1999). At the same time, however, there is also a possibility for such informational interventions to fail. Recent work demonstrates that transparency does not always engender trust in government, and indeed, that information about priorities and procedures can in some cases create disruption and decrease trust (de Fine Licht, 2011; Worthy, 2015). Rather, only when transparency provides individuals with a belief that outcomes are the results of a “deliberative democratic ideal,” does it appear to lead to a sense that a government is more legitimate (de Fine Licht et al., 2012, p. 111). Thus, we hypothesize that positive effects of information provision on the decision to pay taxes will be more likely to emerge when such information is accompanied by voice. Voice has been shown to have substantial effects on well-being and loyalty, particularly when individuals are in groups subject to aggregate, shared outcomes (Banerjee and Somanthan, 2001). Classic research on voice argues that when encountering suboptimal experiences (such as the need to pay taxes), individuals tend to react either via “exit,” that is, opting-out of the undesirable system, or through “voice” (Hirschman, 1970). In the present context, exit is RUNNING HEAD: VOICE AND TAX COMPLIANCE captured via non-compliance; taxpayers simply decide to violate both laws and social norms rather than participate fully in the system. Hirschman (1970) would suggest that this is rational, as taxpayers have no opportunity to communicate with decision-makers at the time of tax payment. Thus, offering voice should reduce individuals’ likelihood of exiting – and increase their probability of compliance. But how can voice be implemented both politically and practically? Most prior work on voice in the tax system has relied on voice that direct