When You Know Your Neighbor Pays Taxes: Information, Peer Effects, and Tax Compliance
AbstractIn this paper, we argue that individuals are affected in their compliance behavior by the behavior of their “neighbors”, or those about whom they may have information, whom they may know, or with whom they may interact on a regular basis. Individuals seem more likely to file and to report their taxes when they believe that other individuals are also filing and reporting their taxes; conversely, when individuals believe that others are cheating on their taxes, they may well become cheaters themselves. We use experimental methods to test the role of such information about peer effects on compliance behavior. In one setting, we inform individuals about the frequency that their neighbors submit a tax return. In a second setting, we inform them about the number of their neighbors who are audited, together with the penalties that they pay. In both cases, we examine the impact of information on filing behavior and also on subsequent reporting behavior. We find that providing information on whether one’s neighbors are filing returns and/or reporting income has a statistically significant and economically large impact on individual filing and reporting decisions. However, this “neighbor” information does not always improve compliance, depending on the exact content of the information. Key Words: Tax evasion; Tax compliance; Behavioral economics; Experimental economics
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Bibliographic InfoPaper provided by Department of Economics, Appalachian State University in its series Working Papers with number 13-22.
Date of creation: 2013
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Find related papers by JEL classification:
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-18 (All new papers)
- NEP-CBE-2013-10-18 (Cognitive & Behavioural Economics)
- NEP-EXP-2013-10-18 (Experimental Economics)
- NEP-IUE-2013-10-18 (Informal & Underground Economics)
- NEP-NET-2013-10-18 (Network Economics)
- NEP-PBE-2013-10-18 (Public Economics)
- NEP-PUB-2013-10-18 (Public Finance)
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