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Investigating Behavioral Responses to Positive Inducements for Filing Tax Returns

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  • James Alm
  • Todd Cherry
  • Michael McKee
  • Michael L. Jones

Abstract

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. Key Words:

Suggested Citation

  • James Alm & Todd Cherry & Michael McKee & Michael L. Jones, 2010. "Investigating Behavioral Responses to Positive Inducements for Filing Tax Returns," Working Papers 10-11, Department of Economics, Appalachian State University.
  • Handle: RePEc:apl:wpaper:10-11
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    File URL: http://econ.appstate.edu/RePEc/pdf/wp1011.pdf
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    References listed on IDEAS

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    1. Fortin, Bernard & Lacroix, Guy & Villeval, Marie-Claire, 2007. "Tax evasion and social interactions," Journal of Public Economics, Elsevier, vol. 91(11-12), pages 2089-2112, December.
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    4. James Alm & John Deskins & Michael McKee, 2009. "Do Individuals Comply on Income Not Reported by Their Employer?," Public Finance Review, , vol. 37(2), pages 120-141, March.
    5. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier.
    6. Alm, James & Jackson, Betty R. & McKee, Michael, 2009. "Getting the word out: Enforcement information dissemination and compliance behavior," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 392-402, April.
    7. Alm, James & McKee, Michael J. & Beck, William, 1990. "Amazing Grace: Tax Amnesties and Compliance," National Tax Journal, National Tax Association, vol. 43(1), pages 23-37, March.
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    10. Steven D. Levitt & John A. List, 2007. "What Do Laboratory Experiments Measuring Social Preferences Reveal About the Real World?," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 153-174, Spring.
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    14. Cherry, Todd L. & Shogren, Jason F., 2008. "Self-interest, sympathy and the origin of endowments," Economics Letters, Elsevier, vol. 101(1), pages 69-72, October.
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    16. Cummings, Ronald G. & Martinez-Vazquez, Jorge & McKee, Michael & Torgler, Benno, 2009. "Tax morale affects tax compliance: Evidence from surveys and an artefactual field experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 70(3), pages 447-457, June.
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