Behavioral experiments of alternative reporting regimes: transparency vs. burden

1. Behavioral experiments of alternative reporting regimes: transparency vs. burden By Laura Kalambokidis, Alex Turk, and Marsha Blumenthal Presented at the 2012 IRS Research Conference Washington, DC June 21, 2012

2. Summary • Taxpayers may trade the opportunity to cheat for reduced compliance burden. • Trading depends on strength of desire to cheat relative to distaste for burden. • If taxpayers who would have cheated make the trade, compliance could improve. • Tax authority can tailor enforcement to regimes. • An experiment can show how the propensity to cheat on taxes and the distaste for reporting burden influence regime choice.

3. Alternative regimes for reporting of income • Automatic reporting • Transparency of income to authority • High or perfect compliance • Lower compliance burden • Self-reporting • Income not transparent to authority • Opportunity to under-report income • Higher compliance burden

4. Laboratory experiment • 330 subjects • 52 % female, 24% 30+ years of age, 38% minority, 28% not students, 64% employed • 16 sessions, one hour each • Subjects perform tasks to earn income, choose how much to report to authority, pay tax • Random auditing, mis-reports corrected and under-reports charged penalty = penalty rate x tax due on under-reported income • Within subject variation in experiment parameters

5. Experiment to explain regime choice

6. Treatment 1: Compliance behavior • Propensity to cheat index • PTC1 = share of rounds (out of 12) subject under-reports income • PTC2 = share of income (over 12 rounds) subject failed to report • Tobit model to explain amount of under-reported income: • decreases with audit and penalty rates • increases with actual income

7. Treatment 2: Demand for burden reduction • Willingness to pay index (WTP) • Sum of fees over 5 rounds = $7.75 • WTP = sum of fees subject paid (over 5 rounds) / $7.75. • Mean = .16, WTP= 0 for 48% of subjects, WTP = 1 for 6% of subjects • Aggregate demand for burden reduction… • …decreases with price • …more price-sensitive at higher prices

8. Treatment 3: Regime choice

9. Treatment 3: Regime choice Probit model to explain regime choice • Higher audit rateless likely to choose self-reporting • Higher propensity to cheatmore likely to choose self-reporting • Higher willingness to payless likely to choose self-reporting • Higher incomemore likely to choose self-reporting • Level of burden in automatic regime not significant

10. Treatment 3: Under-reporting in self-reporting regime Linear regression and Tobit model to explain amount of under-reporting, conditional on choosing self-reporting regime. • Higher audit rateless under-reported income • Higher propensity to cheatmore under-reported income • Higher willingness to paymore under-reported income

11. Further work • Strengthen our responses to current research questions • Alternative measures of propensity to cheat, “gamerness” • Alternative measures of reporting burden • Tax authority’s problem: can regime choice improve compliance and/or reduce enforcement costs? • Answer additional research questions • Responsiveness of work effort to tax rate • Correlate of cost of learning with understanding instructions and willingness to pay • Correlate personality type with compliance