Investigating Behavioral Responses to Positive Inducements for Filing Tax Returns

A significant amount of non-compliance associated with the personal income tax is due to the taxpayers who are not “in the system,” not having filed a tax return in the recent past or perhaps ever. We use experimental laboratory methods to examine two types of positive incentives for filing tax returns: tax credits and social safety net benefits, both of which are conditional on tax filing. Our experimental design captures the essential features of the voluntary income reporting and tax assessment system used in many countries. Human participants in a controlled laboratory environment earn income through their performance in a task. The participants must then decide whether to file a tax return and, conditional upon filing, how much income to report. Taxes are paid on reported income only. Unreported income of filers may be discovered via a random audit, and the participant must then pay the owed taxes plus a fine based on the unpaid taxes; non-filers are not subject to an audit. Inducements for filing are introduced in several alternative treatments. In one treatment we introduce a social safety net (e.g., unemployment replacement income) that is conditional on past filing behavior. In a second treatment we introduce tax credits that are available either to low income participants or to all income levels, but again only to those who file a tax return. Our results suggest that a tax credit increases filing but only if the credit is targeted to low income earners. The provision of a social safety net via unemployment benefits also has a positive, albeit indirect, impact on participation. * The research reported here was funded by the IRS (TIRNO – 07 – P – 00683). The views expressed are those of the authors and do not reflect the opinions of the IRS or of any researchers working within the IRS. Earlier versions of this paper were presented at the 2008 IRS Research Conference (under the title “Encouraging Filing via Tax Credits and Social Safety Nets”) and at the Workshop “Beyond the Economics of Crime” at the University of Heidelberg in March 2009 (under the title “Investigating the Impact of Positive Inducements on Voluntary Tax Compliance”). We are grateful to Kim Bloomquist, to participants at the 2008 IRS Research Conference, and to participants at “Beyond the Economics of Crime”, especially Jean-Robert Tyran, for many helpful discussions and comments.