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When You Know Your Neighbour Pays Taxes: Information, Peer Effects, and Tax Compliance

Listed author(s):
  • James Alm

    ()

    (Department of Economics, Tulane University)

  • Kim M. Bloomquist

    ()

    (Taxpayer Advocate Service, U.S. Internal Revenue Service)

  • Michael McKee

    ()

    (Department of Economics, Appalachian State University)

In this paper, we suggest that individuals' tax compliance behaviours are affected by the behaviour of their "neighbours", or those about whom they may have information, whom they may know, or with whom they may interact on a regular basis. Individuals are 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 behaviour. In one treatment setting, we inform individuals about the frequency that their neighbours submit a tax return. In a second treatment setting, we inform them about the number of their neighbours who are audited, together with the penalties that they pay. In both cases, we examine the impact of information on filing behaviour and also on subsequent reporting behaviour. We find that providing information on whether one's neighbours are filing returns and/or reporting income has a statistically significant and economically large impact on individual filing and reporting decisions. However, this "neighbour" information does not always improve compliance, depending on the exact content of the information.

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File URL: http://econ.tulane.edu/RePEc/pdf/tul1619.pdf
File Function: First Version, December 2016
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Paper provided by Tulane University, Department of Economics in its series Working Papers with number 1619.

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Date of creation: Dec 2016
Handle: RePEc:tul:wpaper:1619
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