Tax Compliance

The social norms approach has been used in two experiments testing various strategies to increase tax compliance. The first of these was conducted in the United States, the second in Australia.

The Minnesota Tax Compliance Experiment

In 1995, The Minnesota Department of Revenue conducted a tax compliance experiment to test alternate strategies to improve voluntary tax compliance (Coleman, 1996). Among the strategies tested was a comparison of two information messages in letters sent to randomly selected taxpayers.

Informational Letter #1, which was sent to 20,000 taxpayers, made a rational argument for tax compliance. Recipients of this letter were informed that "your income tax dollars are spent on services the we Minnesotans depend on. Over 30 percent of state taxes go to support education. Another 18 percent is spent on health care and support for the elderly and the needy. Local governments get about 12 percent of the state tax money, supporting services in your community such as law enforcement, parks, libraries and snow removal…So when taxpayers do not pay what they owe, the entire community suffers."

Informational Letter #2, which was sent to a second group of 20,000 randomly selected taxpayers, used a social norms approach. This letter stated: "According to a recent public opinion survey, many Minnesotans believe other people routinely cheat on their taxes. This is not true, however. Audits by the Internal Revenue Service show that people who file tax returns report correctly and pay voluntarily 93 percent of the income taxes they owe. Most taxpayers file their returns accurately and on time. Although some taxpayers owe money because of minor errors, a small number of taxpayers who deliberately cheat owe the bulk of unpaid taxes."

Both of these informational letters shared a control group of 20,000 randomly selected taxpayers.

The analysis of the effect was based on a comparison of the changes in income and taxes from 1993 to 1994 between the treatment groups and the control groups. That is, the 1993 tax or income was subtracted from the 1994 tax or income, respectively, to calculate the change. If the average change in the treatment group was different from the average change in a control group, it was inferred that the treatment had an effect, provided that the difference between groups was large enough to be statistically significant.

The analyses indicated that Informational Letter #1 did not have any effect on compliance. By contrast, Informational Letter #2 (which used a social norms approach) "had a moderately significant effect on the entire sample and a stronger effect within a large subgroup of taxpayers." The subgroup identified, representing 36 percent of all taxpayers, was composed of those who had claimed a refund less than $90 or had a balance due less than $1,066 the previous year.

"The most cost-effective strategy for increasing voluntary compliance," the report concluded, "lies in applying the results of the information message, Letter 2, experiment…[The] low cost of sending letters or, perhaps, using advertising methods, combined with the large number of potentially responsive taxpayers make this a viable option to increase compliance."

Misperceptions of Social Norms about Tax Compliance: A Pre-Study and a Field Experiment (Australian National University/Australian Taxation Office)

In a working paper issued in 2001, Michael Wenzel of the Australian National University suggested that taxpayers may justify non-compliant behavior because of the perceived high prevalence (descriptive norm) or high acceptability (injunctive norm) of tax-noncompliance in the population (Wenzel, 2001a). He also noted, however, that their perceptions may be distorted, i.e., that their taxpaying behavior may follow misperceived norms.

In an experimental questionnaire study focusing on the injunctive norm, psychology students were asked, in a first step, about their personal tax-related beliefs and behavior and the perceived beliefs and behaviors of others. The results confirmed the divergence between average personal beliefs and perceived beliefs of the average. In a second step of the pre-study, participants were given feedback about either this divergence or about a norm-irrelevant finding (i.e., a control). The intervention significantly improved the perceived tax beliefs of others (injunctive norm) and, mediated by this effect, increased hypothetical tax compliance.

A subsequent field study was conducted to evaluate a normative intervention to increase tax compliance. This intervention involved two steps. In step one, taxpayers were sent a survey about their own personal norms and behavior as well as others' norms and behavior concerning the payment of taxes. In step two, they were informed about the systematic self-other discrepancy in their perceptions, suggesting that taxpayers erroneously think that most taxpayers hold norms of honesty to a lesser degree (injunctive norm) and actually act less honestly (descriptive norm) than they themselves do. Normative feedback about the survey results, it was hypothesized, would encourage taxpayers to reduce their misperceptions of the social norm and result in increased compliance.

Deduction claims of four groups of taxpayers (injunctive norm feedback, descriptive norm feedback, survey only, control) were analyzed and revealed no treatment effects for work-related expenses, but a significant reduction of claims for other deductions in the injunctive norm feedback condition compared to the control conditions (Wenzel, 2001b)

References

Coleman, Stephen. "The Minnesota Income Tax Compliance Experiment: State Tax Results." Minnesota Department of Revenue, April 1996.

Wenzel, Michael. "Misperceptions of Social Norms about Tax Compliance: A Prestudy." Working Paper No. 7, June 2001a. The Australian National University/Australian Taxation Office, Centre for Tax System Integrity.

Wenzel, Michael. "Misperceptions of Social Norms about Tax Compliance: A Field Experiment." Working Paper No. 8, June 2001b. The Australian National University/Australian Taxation Office, Centre for Tax System Integrity.

**Portions of the information presented on this page were originally prepared by Michael Haines and Richard Rice and are printed here with their permission.