complexity of the tax code, and uncertainty about existing and future tax laws.3 The role of government expenditures in compliance behavior has received only ...
J,burnal of Economic Behavior and Organization
ichael
22 (1993) 285-303. North-Holland
ee* w. N
eceiv
. USA
n received Calgary 1992
It is commonly believed that voluntary tax compliance is affected by the nature of the expenditures and by t anner these expen ture decisions are made. This paper reports on the results of a series of 1 ratory experiments igned to examine the role of f&al exchange, the uses of tax revenues and the decision process by which these uses are selected, In individual compliance behavior. Individuals respond positively when tax proceeds are directed toward programs they approve of and when they feel they are active in the decision process.
It is commonly believed that voluntary tax compliance is affected by the nature of the expenditures and by the manner in which these expenditure decisions are made. Tax protestors assert that they will not pay their taxes if the revenues are to be spent in Ways that they do not approve, and compliance has sometimes declined during periods in which government expenditures are particularly controversial and unpopu1ar.l There is also some anecdotal evi ence that individuals are less inclined to pay their taxes when they feel that they have little say in government decisions and when government is perceived as unresponsive to their wishes.2 Correspondence to: Professor Michael McKee, Department of Economics, University of New Mexico, 1915 Roma NE/Economics Bldg.. Albuquerque, NM 87131-1101, USA. *We are grateful to the Peat Marwick Main Foundation for linancial support. Dorla Evans al:3 an anonymous referee prcvided comments that have improved the analysis and the exposition. 1For example, compliance su red in the United States during the Vietnam war, and is generally lower in countries in which government is unpopular and distrusted. See Tanzi (1982) for estimates of the underground economy in various countries. ‘For example, tax and bond referenda are often more likely to receive voter approval when the uses of the revenues are tied to a specitic purpose; conversely. indivi uals react negatively to the perception that they have no control over the use of their taxes. h ah Internal Revenue Service funded survey of taxpayers, Westat (1980a) finds the following kinds of taxpayer attitudes: 0 f 67-268 1;PS ‘$06.00 c
1993~Elsevier
Science Publishers B.V. All rights reserved
286
J. Aim et al., Fiscal exchange,
collectbe
decision institutions, and tax compliance
Most work on compliance has, however, focused upon the effects of such factors as the threat of detection and punishment, the level of tax rates, the complexity of the tax code, and uncertainty about existing and future tax laws.3 The role of government expenditures in compliance behavior has received only limited attention, and the research evidence is largely inconclusive4 Pt is the purpose of this paper to examine the impact on compliance of the uses of tax revenues and the decision process by which these uses are chosen.’
‘I wouldn’t mind it so much if I could designate where my tax dollars went to. I resent having to find out why frogs in South America croak and things like that. That goes against my grain.’ ‘When we pay taxes, we like to know what it’s going for.’ Similarly, taxpaj *er fogs group suggestions for increasing comp!iance as reported to Yankelovich, Skelly and White, Inc. (1984) include the ioiiowing kinds of ideas: ‘Parochialize expenditures. Publicize local benefits of tax monies.’ ‘Publicize national social programs which benefit from tax money.’ ‘Allow people to earmark a portion of their tax payments. Give them choices.* ‘Illustrate benefits to all of us if taxes are paid.’ In addition, low levels of tax compliance are often perceived to be more prevalent in countries i which government is seen as unresponsive to the wishes of the electorate; developing countries in particular are often cited for having such governments. Again, see Tanzi (1982) for a discussion of the underground economy in various countries. 3See Cowell (1990) for a discussion of the theoretical and empirical literature. In the standard economics-of-crime model of taxpayer compliance, an individual faces a portfolio choice problem, with evasion as the risky, high return asset and disclosure as the riskless asset. Typically. the individual receives income and must decide how much to report to the government. Declared income is taxed at some rate. Unreported income is not taxed, but the individual faces some probability that unreported income will be detected, at which point a fine is imposed on all unpaid taxes. The individual then chooses declared income to maximize the expected utility of the evasion gamble. Nearly all models of compliance follow this basic approach. 4This evidence is discussed in detail in section 2. Note that there is an enormous literature on the voluntary Grovision of publig goods. See, for example, Kim and Walker (1984). Isaac, McCue and Plott (1985) Rapaport (1985) Bagnoli and McKee (1991), and Bagnoli, Ben-David and McKee (1992) for experimental evidence on the extent to which individuals make voluntary contributions to public goods. However, this work is largely distinct from the compliance literature. Becker, Buchner and Sleeking (1987) Cowell and Gordon (1988), and Alm, McClelland and Schulze ~forthcoming) anal the effects of government expenditures on tax compliance, but they do not examine the cts of collective decision institutions on such behavior. ‘There are, of course, other policies that affect tax compliance, such as the standard prescription of increased enforce ent efforts. For example, Alm, Jackson and McKee (1992a) use experimental methods to investigate the impact of more frequent audits and more stringent varied. Alm, Jackson
9. Alm et al., Fiscal exchange, collective decision institutions, and tax compliance
287
The way in which a given level of government expenditures affects tax compliance hat4 several dimensions. One dimension is the process by which a community decides how lo use its tax revenues to provide goods and services. If taxpayers feel th;tt they have a voice in the way their taxes will spent, then they are likely to feel more inclined to pay their taxes; further, announcing the outcome of the vote reveals information to the taxpaytm
information on overall compliance.
her dimension is the level of popular
in favor of specific govemmen citizens share their feelings - then they are likely to comply more wiflingly, regardless of the process by which the decision is made by the community. Conversely, individuals seem less likely to pay their taxes voluntarily if they do not approve or value the use o heir tax dollars, and if they do not know the level of support of the others. cts of these dimensions of fiscal exchange on tax compliance remain unresolved.” This paper uses experimental methods to examine the roles that these cts of fiscal exchange play in individual compliance behavior. experimental design captures the essential features of the voluntary tax compliance system used in many countries: individuals receive income, they pay taxes on income voluntarily reported, they face some chance that unreported taxes will be detected and penalized, and the total taxes paid by all individuals are used to provide a public good. Several treatments are examined. In some treatments subjects must choose among two alternative type& of public goods, with the type of public good that will be provided decided by majority vote; in other treatments, the subjects are not allowed to orate on public good provision, and the public good is instead imposed on the group. The level of support for the public good alternatives also varies. n some treatments group members strongly prefer one of the alternative public go& types, l~;tp .I IlX.Vthe level of support for the two alternatives is more evenly divided in other treatments. Information on the level of popular support is also varied across the sessions. The results indicate that both the manner in which group decisions are made and the level of popular support for the public goods over which these
60ther dimensions of public good provision may also be relevant. For example, the amount of public goods received from the taxes that are paid and the distribution of the public good may affect tax compliance. Becker, Buchner and Sleeking ( 1987), Bagnoli and McKee (1991), and Alm, McClelland and Schulze (1992) discuss these aspects of public gcod provision.
288
J. Aim et al., Fiscal exchange, collective decision institutions, and tax compliance
decisions are made can have a significant impact on compliance behavior. Compliance is significantly higher when individuals vote on the use of their taxes than when the identical result is imposed upon them. Compliance is also higher when the vote is decisive than when the vote is close; that is, compliance is increased when the vote reveals widespread support for the public good from the group members, even when both alternatives are highly valued by the individuals, a!though the information must be revealed to the group members for it to have a positive impact. Finally, compliance is significantly lowered by the imposition of an unpopular expenditure program. Indeed, compliance is lower with an imposed and unpopular public good than in the complete absence of any public good. Section 2 discusses the propositions that are tested. The experimental design is presented in section 3, and the results are examined in section 4. Section 5 sumnjarizes the main conclusions. 2, Fiscal exchange ad tax compbice Behavioral sti~ce evidence suggests that greater individual participation in the allocation and decision process will foster an increased level of compliance. Further, this research suggests that taxpayers will be more willing to pay taxes if they value the expenditures financed from tax revenues. This section discusses several propositions about the effects on compliance of the method by which a community decides to spend its tax collections and of the level of popular support for the particular public good that is provided. Participation in the processes that affect individuals appears to lend support or legitimacy to a system and to foster compliance with the system. As noted by Lempert (1939\ I LJ and McEwen and Maiman (1986), rules attained through consensus are more likely to be observed because compliance with such rules then becomes consistent with norms about honesty. In their analysis of compliance with consensual agreements versus authoritatively imposed resolutions of legal disputes, Kidder and McEwen (1989) conclude that ‘. . . the more involved people are in making rules and consenting to them, the stronger the sense of obligation they will feel to abide by those rules’. In contrast, the absence of control under imposed choices may generate feelings of alienation and powerlessness, feelings that are likely to lead to dissatisfaction with the system and uGimately to iower tax compliance. It has also been observed that people generally tend to behave rn ways that are consistent with their words and actior: ~ %ldini, 2 j!;:. This commitment/consistency notion suggests that people t.. ,: more likely :.G comply when they have committed themselves to some position, as occurs when they play a role in the decision process. Pommerehne and Weckanneman (1989) present empirical evidence for cantons in Switzerland that
J. Aim et al., Fiscal exchange, collec ‘medecision institutions, and tax compliance
289
supports the notion that the institutions for collective decisionmaking affect the amount of tax evasion. This evidence suggests that taxpayers who have input in the decision to allocate government expenditures will be more likely to comply than individuals who are not involved in the allocation prv that is, cornpliance will be higher when individuals vote on what will be provided with their tax payments than when the decision is imposed upon them, even if the outcome is identical. This suggests: Proposition 1. Compliance will be higher when the use of tax revenues is decided by majority rule than when the use of taxes is imposed upon the group. Public expenditure decisions that are decided by vote provide individ&s with the feeling of control over the decisions. Note also that provision via voting may reveal information to each individual about thz level of group support for the public good. The inf’oFmationaspect is dkussed in more detail below. Individual perceptions of the desirability of tax allocations also seem likely to affect compliance. Homans (1961) and Adams (1965) suggest that, if groups of workers feel unfairly treated in an exchange relationship, then they will seek to equalize the exchange in some way by taking action to their benefit. Spicer and Lundstedt (1976) apply these theories to tax compliance, and find that both tax attitude and reported tax evasion behavior are related to the benefits received for taxes paid. In addition, Yankelovich, Skelly and White, Inc. (1984) find a significant relationship between an index measuring objections to government spending and self-reported compliance, and Thurman, St. John and Riggs (1984) find that attitudes about the exchange relationship with government affect compliance. However, although many studies have observed a high degree of dissatisfaction with government, evidence on the link between attitudes toward government expenditures and actions toward tax compliance is mixed. in a large survey of taxpayers funded by the Internal Revenue Service, Westat (1980a) concludes that, even though taxpayers surveyed were negative about the level of perceived waste and inefficiency, this belief only motivated them to minimize their taxes, not to evade. Similarly, Mason, Calvin and Faulkenberry (1974), Westat (1980b), Dean, Keenan and Kenney (1980) Mason and Lowry (1981), Scott and Grasmiek (l981), and Mason and Calvin (1984) find no relationship between compliance and attitudes about fiscal exchange. One explanation for the weak results may be due to the way in which ‘attitude’ is measured. Ajzen and Fishbein (1980) demonstrate that any links are strongest for attitudes most closely related to the behavior in question. This finding suggests that general attitudes toward government may not be
290
J. Aim et al., Fiscal exchange, collective decision institutions, and tax compliance
as closely related to compliance as specific attitudes toward tax !a~, tax administration, and use of tax revenues. Moreover, the absence of a link between taxpayer attitudes and an initial reduction in complialnce does not mean that such perceptions will not lead ultimately to a reduction in compliance. Sociologists have noted that the evolution of deviant behavior includes a stage at which honest taxpayers accept excuses in a process of neutralizing norms of behavior [Sykes and Matza (1957), Minor (1981) and Thurman, St. John and Riggs (1983)]. Consequently, the effects of a breakdown in compliance norms may be time-delayed. It therefore appears likely that compliance is affected by the degree of popularity of the public good that is provided with tax pa ents. When the public good is chosen by majority rule. the level of support for the public good that is chosen will affect vo’nuntary compliance; that is, is approval for the public good that is chosen widespread or narrow? It seems likely that compliance will be greater when approval for the public good is una&Tous (or nearly so) than when approval is more narrow: Proposirion 2. Complkance will be higkr under majority rule when the outcome ~t~euis widespread support for the public good t!m den the vote over alternutive public goods is dose. Widespread support tends to legitimize the public sector, and so imposes some social obligation to pay taxes. In addition, revealing the results of the vote provides individuals with information about the extent of support for the public good. Such information about group preferences helps each individual form conjectures about the support of other group members and therefore about the compliance behavior of the group. When it is known that approval is widespread, each taxpayer believes that other individuals are likely to pay their taxes. The informational value of voting can, however, be dissipated by the failure to reveal the actual vote count. Proposition 2 is therefore suggested by the ‘focal equilibrium’ of Schelling (1960), in which the players in a game are able to focus upon one particular outcome because this outcome has the property that each player expects the others to behave in a specific manner - or pay their taxes - and all players have this indentical expectation.’ An implication of Proposition 2 is that revealing information about the vote outcome will influence the compliance behavior of individuals by indicating the level of general support for the public good. Thus, a corollary to Proposition 2 is: ‘The notion of a foca! point equilibrium underlies the behavior reported in some voluntary public good provision settings, such as that investigated by Rapoport (1985) and Bagnoli and McKee (1991).
J. Aim et al., Fiscal exchange, cel!e&re decision institutions, and tax compliance
291
Corollary 1. Revealing the level of popular support increases the level of compliance under majority rule voting.
In the absence of information, individuals may impute a low level of public support for the public good and so reduce their compliance. When approval is both widespread and known to be widespread, the amount of the public good will therefore be large, the return from payzng one’s taxes will also be large, and there will be little chance that one’s taxes will be squandered in financing a program that is too small to generate meaningful benefits. In contrast, it is more difiicult for each individual to determine the level of group support when-the (same] expenditure decision is imposed upon the group or when individuals are not the vote outcome, and compliance is likely to be lower in such a setting. The level of support for the public good also seems likely to affect compliance even when the choice of the public good is imposed on the members of the group. There will be more support for the public good - and so more tax compliance - when the public good imposed upon members of the group is popular, even if individuals are unable to articulate their level of support via voting: Proposition 3. Compliance will be higher under an imposed choice when the imposed public good is popular than when the imposed public good is unpopular.
Because each individual has no o portunity to express his or her preferences for the public good except through the compliance decision, compliance will suffer when the public good is not desired by individuals.
3. Experimental design In the experimental design, student subjects receive Income, they pay taxes on reported income, they face a probability of audit, and they pay a penalty on taxes not reported. The tax rate, the audit rate, and the penalty rate are chosen t.; approximate their actual values in the United States voluntary compliance sys tern. The effects of fiscal institutions on compliance are examined by varying the process by which tax collections become a public good and by varying the level of support for the public good. The design is summarized in table l.* *The experimental instructions are provided in the appendix. The instructions use ‘neutral’ terminology; that is, all references ^OO taxes, audits, declared income, and so on are replaced with neutral words like checks, disclosures, and so on, in order to avoid context or framing effects that may unpredictably bias subject choices. The discussion in the text uses the tax terminology for ease of exposition. See Plott (1985) for a di,cussion of the necessity of using neutral instructions in experimental economics.
292
J. Alm et al., Fiscal exchange, collective decision institutions, and tax cozrpliance
Table 1 Experimental design. Treatment MRDCFI
Collective decision institution ---_ - ~-.Majority rule (vote count ar3nou~Xed)
Public good alternativesa -Diverse choice: (Student Financial Aid Office VGGlS University President’s Office)
MRSCFI
Majority rule (vote count announced)
Similar choice: (Student Financial Aid OlIke versus Student Health Center)
MRSCNI
Majority rule (winner only announced)
Similar choice: (Student Financial Aid Office versus Student Health Center)
IFC
Imposed outcow
Favored choice: (Student Financial Aid OfIice versus University President’s OIIice)
INC
Imposed outcome
Nonfavored choice: (Student Financial Aid OIlice versus U niversitv President’s O&e)
“The underlined alternative is the actual outcorn:: jr, the session. In all treatments, the tax rate on declared income is 0.30 the (effective) fine rate on detected eva:,ion is 2, and the probability of audit is 0.04.
In each session fifteen subjects are organized into three groups of five, and are told that they wirl remain in their assigned group for the duration of the session. The subjects are informed that the session will last for an unkno-wn s, called rounds; in practice the actual number of rounds is 25. The currency used in the experiment is called tokens. ven an initial endowment of 10 tokens, and is told that all tokens accumulated during the experiment will be redeemed for dollars at the end of the sessi ounced exchange rate. At the beginning of every round, each subject receives a random income, drawn from the interval 2 is distribution is common knowledge, alt or her actual income. The individual is then asked to declare some or all of this income, and he or she pays taxes at a tax rate of 8.30 on the decla income. An individual does not pay taxes on income not declared. wever, each ability of 0.04 that evasion will be detected and come and paid their iduals have reporte m for an audit. If a
3. Aim et al., Fiscal exchange, collective decision institutions, and tax complillltce
293
and the previous rounds are compared; if the subject did not fully comply, then any back taxes are collected and a fine equal to the unpaid taxes is also imposed. The audit selection is performed using a bingo cage that contains one numbered ball for each of the fifteen subjects plus ten additional balls that fix the probability of an au8 t at 0.04. Balls are pia& in and d from the bingo cage in full view of the subjects. At the completion of round the subjects are shown their new balances. All tax payments of the five subjects in each into a ‘group fund’, which then becomes t takes the form of a donation given to a camp size of the group fund; that is, the public good is n the subjects but instead is a check that is sent to a speciEed campus organization.9 Prior to the start of the experiments, a survey of sixty renresentative undergraduate students was undertaken to determine their preferences over fourteen campus organizations. The s y told respondents to imagine that they were in a position to allocate $1 of the university’s money to these organizations. Respondents were asked to rank the organizations from 1 (or most favored) to 6 (or least favored); if they did not wish to allocate any money to an organization, then they were told to leave the organization blank, and this ranking was scored as a 7. On the basis of this survey the fourteen campus organizations were ranked from most favored (the Student Financial Aid Office, followed closely by the Student Health Center) to least favored (the University President’s Office). This ranking was then used to select the types of public goods presented to the subjects in the experiments. Different types of public goods and alternative ways of deciding upon public good provision are examined in separate treatments. Before the start of each session, subjects are presented with the question of ‘Note that this experimental design resembles in some ways that used in the voluntary public good provision literature. Both are suggested by the fiscal exchauge theory of the public sector [e.g., Wicksell (!967)], which argues that individuais pay taxes in order to receive some public sector output. In much of the research on voluntary provision, subjects receive an income that may be kept or contributed to a public good under various provision rules [see Isaac, McCue and Plott (1985) and Bagnoli and McKee (1991) for examples of different rules]. The task of subjects in these experiments is to choose a level of contribution. In the tax compliance setting here, subjects also receive an income and must choose how much to declare to the tax authority, knowing that less than full disclosure may lead to panalties; declared income is then taxed at some rate, and a public good is provided from the tax collections. In both settings, subjects must therefore select the amount of income. However, on a behavioral level the tasks that they encounter are somewhat different. In the voluntary provision literature, the explicit setting is that a contribution game, in which individuals forego private gain in anticipation of public good provision; in the compliance experiments, the explicit setting is that of an audit lottery, in which failure to disclose all income may iead to ‘official’ punishment. Moreover, subjects in compliance experiments face the same decision setting as individuals reporting income to the Internal Revenue Service, and face levels of the tax, audit, and penalty rates similar to those in the naturally occuring world. Put differently, most of the voluntary provision literature does not have an enforcement program, while most of the compliance literature does not have an eqenditure program. The experimental design here unites these separate literatures.
294
J. Aim et al., Fiscal exchange, c;:Vective de&on
institutions, and tax compliance
where the group fund from all three groups will be sent at the completion of the experiment; the decision is always presented as the choice between onl!. two organizations. Subjects are told that immediately after the experiment :J check in the amount of the group fund will be written in their presence, placed in a stamped and addressed envelope, and mailed by a randomly selected subject to the designated organization. Two treatments are conducted in which the fifteen subjects vote via sealed ballot before the start of the session on which organization will receive the group fund. The actual outcome of the vote is based upon simple majority rule with all the money in the group fund given to the winner, and the actual vote is announced prior to the start of the session. In one treatment the subjects vote on whether to donate the group fund to alternatives that the survey indicated differ widely in popular support: the Student Financial Aid Office versus the University President’s Office. The results of the vote are announced and this treatme& is designated Majority Rule over Diverse Choices with Full Information (MRDCFI). In another treatment the alternatives are known by the survey to be much closer in support (the Student Financial Aid Office versus the Student Health Center); this treatment is designated Majority Rule over Similar Choices (MRSCFI). To address the role of the information content of voting, one treatment is conducted in which the subjects vote over the Student Financial Aid Office and the Student Health Center but in which only the winner is announced, not the vote itself. This treatment is designated Majority Rule over Similar Choices with No Information on the vote count (MRSCNI). Two treatments are also conducted in which there is no vote over alternatives, and the choice is instead imposed on the group. The subjects are told prior to the start of the session that the decision on which of two organizations will receive the end-of-experiment group fund was determined by a recent survey of undergraduate students at the university; they are also told that the alternative organizations were the Student Fir>ncial Aid Office and the University President’s Office. In one treatment (Imposed Favored Choice, or IFC) the subjects are told that the money from the group fund will b paid to the Student Financial Aid Office. In the other treatment the subjects are told that the money will be paid to the President’s Office (Imposed Nonfavoured Choice, or INC). All sessions consist of ftiteen subjects organized into three groups of five, in order to ensure group anonymity and to generate independence of the data. All subjects are recruited from principles of economics and principles of accounting classes. Individual earnings are generally between $10 and $20 for a one hour session. Subjects are not allowed to communicate with one another during the experiment. All instructions are provided in writing, and the subjects are permitted to keep the instructions during the experiment for reference. In all sessions five practice rounds are conducted prior to the start
J. Aim et al., Fiscal exchange, collective decision institutions, and :LIXcompliance
295
of the real rounds. All subject entries are made on computer terminals, acd all calculations are performed by the computer.10 4.
hslllts
Recall the three propositions and the corollary discussed earlier: that compliance will be higher when individuals vote on the use of their taxes, when the vote reveals widespread support for the chosen public good, when the vote count is revealed, and when an imposed choice is also one that is desired by the public. The results on these propositions are presented in terms of difference of means tests on the ‘average compliance rate’ for each treatment. The average compliance rate is computed as the ratio of repor%zd income to total income averaged by round over all five subjects in all ihze groups in each treatment.” Table 2 presents the average compliance rates for all sessions by round. The amount provided to the relevant campus or,;anization is also indicated in the table. 5onsider Proposition 1, which states that compliance will be higher when individuals vote on the use of their taxes than when the use is imposed; that is, tkrp Trocess of the expenditure decision is important in the compliance decision. In the experimental sessions, compliance is significantly higher in the majority rule treatments than in all imposed treatments. Compare in particular MRDCFI versus IFC and MRSCFI versus IF@, since in all these cases the group fund is given to the Student Financial Aid Office. Average compliance is 0.452 in MRDCFI, and is only 0.337 in fFC; this diEerence is significant at the 0.001 level (t-statistic = 5.227). (See fig. 1.) Average compliance in MRSCFI is 0.4119 which is also significantly higher than in IFC (t-statistic = 2.697). Proposition 2 suggests that compliance will be greater under majority rule “‘Throughout the experimental design, substantial care has been taken to ensure control over the experimental setting so that the subjects make decisions only on the basis of the institution in the laboratory. For exampIe, the payments to the subjects are substantial (thus, salient), the rewards are dependent upon subject performance, and neutral instructions are used. Since campus organizations are the object of the payoff, additionai care has also been taken to ensure that the subject pooi is c;lnsistent acrass experimental treatments. ?%e entire subject poet is drawn from the cohort that respGadeu tr the survey question ranking on-campus organizations. Since the results of this survey indicated consistency 3f preferences across students, we are confident that differences in the compliance rates across experimental treatments are due to the conditions of treatment, not to differences 31 the personal characteristics of the subjects. ’ *More precisely, the average compliance rate for a given session and round is calculated in two steps: first, by averaging for each round the compliance rates across all five subjects in a group; and, second, by taking the average of the three group averages. This procedure generates 25 observations for each session, or one for each round of the scGsn, and these data are reported in table 2. These observations are independent because they are averages across three unrelated groups of subjects. Normality of these observations is tested using the Bera-Jarque (1981) statistic. Means and standard deviations are computed from these 25 observations, and it is these values that are used in the hypothesis tests.
296
J. Ah
et al., Fiscal exchange, coktive
decision institutions, and tax compliance
Table 2 Average compliance rates by round and treatment. Treatment Round
MRDCFI
MRSCF:
MRSCNI
IFC
INC
0.406
0.437 0.564 0.460 0.367 0.492 0.628 0.482 0.507 0.495 0.426 0.461 0.386 0.426 0.512 0.439 0.480 0.479 0.429 0.490
(Li91 0.47 i 0.410 0.528 0.422 0.47 1 0.548 0.537 0.460 0.541 0.497 0.43 1 0.518 0.379 0.401 0.505 0.374 0.262 0.253 0.37 1 0.305 0.306 0.215 0.246 0.287
0.377 0.295 0.265 0.361 0.262 0.304 0.369 0.404 0.396 0.274 0.377 0.292 0.460 0.43 1 0.256 0.324 0.352 0.285 0.265 0.414 0.338 0.226 0.306 0.250
0.402 0.371 0.470 0.440 0.320 0.375 0.543 0.25 1 0.438 0.25 1 0.303 0.157 0.295 0.300 0.360 0.296 0.359 0.439 0.294 0.215 0.379 0.171 0.326 0.387 0.391
0.107 0.115 0.092 0.110 0.109 0.075 0.073 0.069 0.07 1 0.077 0.096 0.063 0. 0.070 0.078 0.079 0.065 0.068 0.091 0.061 0.126
Average compliance rate
0.452
0.411
0.332
0.337
0.08 1
Standard deviation
0.068
0.106
0.065
0.085
0.019
$15.00 a0 Student Financial Aid OfIice
$15.50 to Student Financial Aid Ofice
S5.75 to University President’s OfIke
1
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Total group fund
0.423 0.401 0.418 0.433 0.35 1 0.415
$26.50 to Student Financial Ai Of&x!
wherl ?he expenditure
each individual
chosen
$19.50
to Student Finaxial Aid Office
is known to
will believe that all others
0.087 0.069
have widespread support, smce * .
will comply
more fully. Put
J. Alm et al., Fiscal exchange, collective decision instittitiorrs, ~nri tax compliance
297
Voting VSI Imposition Average Compliance Rates COmpliance Rate 0.7 I=-----6.6 0.6 0.4 0.3 0.2
Fig. I
the group fund is paid to the Student Financial Aid Office. However, the vote count is different in the treatments. Financial Aid is the clearly preferred choice when the subjects vote on this and the University President’s Office (the vote is 14 to 1 in RDCFI). While Financial Aid is also preferred to the Student Health Center in MRSCFI, this preference (9 to 6) is not as marked. The average compliance rate in MRDCFI is 0.452 and in MRSCFI is only 0.411, a difference that is significant at the 0.055 level (lstatistic= 1.625). When individuals know that the group is strongly in favor of a particular expenditure, compliance is enhanced.” Lower compliance in MRSCFI may arise because those who prefer the alternative expenditure express their displeasure over losing the vote by reducing their compliance. However, the prior survey of attitudes toward campus organizations suggests that it is unlikely that those .favoring the Student Health Center feel a significant sense of loss when the outcome is the Student Financiai Aid OIEce, since these two aiternatives were cioseiy ranked in the survey. Further, such a ‘displeasure effect’ would seem likely to decline over time, so that compliance should then increase in MRSCFI as the “The ballots used in the experiment were not marked to allow identification of the subjects. Consequently, the compliance behavior of those who voted for the winning option cannot be compared to the compliance behavior of those w&o ,fot.ed against the winning option. However, of central interest is whether a change in the fiscal institution leads to a change in overall group compliance behavior, not whether this impact can be attributed to a particular individual.
298
J. Alm et al., Fiscal exchange, collective decision institutions, and tax compliance
session continued; however, as shown in table 2 and fig. 1, the compliance rate is actually higher in the early rounds of the MRSCFI session and declines over time. ’ 3 Instead, as discussed earlier, the decline in corn SCFI is consistent with the notion latter rounds of the primary reason for lower compliance in the information on group attitudes conveyed by the vote; have difficulty sustaining high compliance when the vote that there is not (nea are used to test The results of the examines directly the role of the informational content of the vote. In this treatment the actual vote is 11 to in favor of the Student Financial Aid Office; however, the subjects do ot learn this and are told only the winner. l4 If compliance is not affected by the public info ation concerning the level of suppor the average compliance in this session same as i SCFI session, where the vote is over alternatives and the winner (Financial Aid) is the same. In fact, c in MRSCNI is only 0.332, or significantly lower than compliance MRSCFI (t-statistic= 3.201) and comparable to compliance in IFC. tudent Financia is somewhat weaker g the subjects in I actually knrr~ that t ce enjoys at least a moderate majority . The impact of this information is show told the vote count, they must infer t support, and the lack of explicit information results in a lower level of compliance. l 5 Consider finally Proposition 3, which argues t imposed choice will be greater when the choi proposition is tested with the IFC and the I average compliance rate in IFC is 0. 7, and falls en usly to only 0.081 unpopular in when the choice is both imposed a ; this difference is 0.001 level (t-statistic = 14.630). iance is lower when the choice is imposed and unpopuiar than when the treatment was
‘%e
average compliance rate in MRSCFl is higher than in MRDCF in 9 of the first 13 r in MRDCFI in 11 of the last 12 rounds. this session and its analysis. session to be greater than in ancial Aid Offke (or 11
J. Aim et al., Fiscal exchange, collective decision institutions, and tax conyfimce
The
Effect of Information
Averap
Compliance
Outcome Effect Average Compliance Compliance Rate
-
Fig.
INC
Rates
2W
300
J. Alm et al., Fiscal exchange, collective decision institutions, and tax compliance
Note also that there is co compliance of 0.081 in INC (t-statistic --72.730). statistical digerence between compliance when the choice, even if popular. is imposed (or IFC) and when the subjects receive noth’ng. The large number of observations ai?ows estimation of the i individual compliance of the various collective iccision pro institutions. The empirical specification is based upon the experimental &sign and the limited empirical compliance literat re? The amount of income declared by each individual in each round ~DE~~ARED) is prein the round be a positive function of the level of income ly to depend E). An individual’s compliance decision is positively on the level of compliance expected of others; the signal recording group compliance is the magnitude of the group fund at the end of the previous round (a cROI.3PFUND). since the subjects see that size of the group fund when making their compliance decisions for the cui-rent round. Compliance is predicted to be higher when the individual has a direct say in the outcome (VOTE) and fels there is widespread support for the public US); however, compliance is likely to fall if the sector program (CONS vote count is not revea (INFORMATION). Even when the individual feels his or her preferences are not consi ered, an imposed but favorable outcome rate greater compliance. INCO are measured in tokens. VOTE, RMATION ar variables. CON§ENSIJS, FAVORED, and where the VOTE takes a value of 1 for MR MRSCFI, and ublic good is decided by majority rule, and equals 0 othervdise. CONSENSUS equals 1 for M where the vote reveals widespread agreement on the public good, s a value of 0 otherwise. FAVORED equals 1 folr IFC where e outcome is * osed but enjoys widespread oval, and equals 0 o rwise. INFOR TION has a value of 1 for CNI and 0 otherwise. Propositions 1 through 3 suggest that the coeacients on VOTE, C Corollary 1 suggests a n the variable equals 1 in nformation). Tobit maximum likelihood estimation result The results strongly s ith the exception of are highly significant and have the is positive but is not significantly different from zero.’ ’ In particular, th.e results for the dummy variables indicate that individual Lompliance is increased significantly when individua’ 5 vote on the use of their tax payments, when the vote reveals strong support “6This literature is discussed in Roth, ScMz and Witte (1989) and Cowell (1990). cient on INCQh Z is likely due to the extremely low compliance rate ion, since there is no correlation between compliance and income for the INC session.
J. Aim et al., Fiscal exchange, collective decisron institutions, and tax compliance
301
Table 3 Tobit maximum likelihood estimation result. Independent variable CONSTANT INCOME VOTE CONSENSUS
Coefficient estimate -ml4
0.122 0.053 302 .226
t-statistic
Significance level
3.845 1.179 3.396
- 0.329
public good, w e count is revealed, and when an imposed choice enjoys approval. hese results provide furt r support for the propositions. A variety of debri g questionnaires was also administered to the subjects. Some of these were given orally, tile others were written. The responses to the debriefing questionnaires sh some light on the motivations of the subjects in making their compliance decisions. ost notably, the subjects took into account the nature of responses clearly indicate that CFI and and MRDCFI sessions many :.>f the public expenditure. In the he subjects noted that ‘ y payments would be lower if II disclosed less but then the check to the Financial Aid Ofice would be smaller’.
5.
The experimental results provide strong evidence that individuals are more likely to respond positively - and so to increase their tax compliance - when faced with a public sector expenditure program that they select themselves and that they know enjoys widespread approval. In contrast, compliance suffers when individuals have no control over the use of their tax payments, when their taxes pay for public goods that are unpopular, and when they do no;t know the level of support for the government program. It therefore appears that the nature of the institutions that govern fiscal exchange can affect individual compliance behavior. Put differently, the process of decisionmaking is important in several dimensions: in the way the choice is made, in the programs that are the subject of the choice, and in the revelation of the support for the choice. Specifically, government can generate greater compliance by ensuring that individuals feel that they have a say in the manner in which their taxes ar? spent, that citizens are well-
302
J. Alm et d., Fiscal exchange, collective decision institutions, and tax compliance
informed of the outcome of the vote, and that taxes are spent in ways consistent with the preferences of the citizens. Such policies have seldom been thought to be a part of a general strategy for tax compliance. Instead, traditional methods have usually focused mainly on enforcement efforts.18 However, the results in this paper suggest that an emphasis on the institutions of fiscal exchange can have a significant impact on the way in which individuals decide to pay their taxes. ‘*See, for example, the experimental work of Alm, Jackson and McKee ( 1992a).
References Adams. J.S., 1965, Equity and social change, in: L. Berkowitz, ed., Advances in experimental social psychology (Academic Press, New York, NY) 267-299. Ajzen, I. and M. Fishbein, 1980, Understanding attitudes and predicting social behavior (Prentice-Hall, Inc., Englewood Ziffs, NJ). Aim, James, Betty R. Jackson and Michael McKee, 11992a,Deteren= and beyond: Toward a kinder, gentler IRS, in: Joel Siemrod, ed., Why people pay taxes (Unriversity of Michigan Press, Ann Arbor, MI) 31 l-329. Alm, James, Betty R. Jackson and Michael McKee, 19ZS, Institutional uncertainty and taxpayer compliance, American Economic Review 82, no. 4, 1018-1026. Aim, James, Gary H. McClelland and William D. Schulze, t992, Why do people pay taxes?, Journal of Public Economics 48, no. 1,21-38. Bagnoii, Mark and Michael McKee, 1991, Voluntary contribution games: Efficient private provision of public goods, Economic Inquiry 29, no. 2, 351-366. Bagnoli, Mark, Shaul Ben-David and Michael McKee, 1992, Voluntary provision of public goods: The multiple unit case, journal of Public Economics 47, no. 1, 85-106. Becker, Winfried, Heinz-Jurgen Buchner and Simon Sleeking, 1987, The impact of public transfer expenditures on tax evasion: An experimental approach, Journal of Public Economics 34, no. 2243-252. Bera, A.K. and C.M. Barque, 1981, An eficient large-sample test for normality of observations and regression residuds, Working Papers in Economics and Econometrics 40 (Australian National University). Cialdini, Robert I)., 1989, Social motivations to comply: Norms, values and principles, in: Jeffrey A. Roth and John T. Shoiz, ede., Taxpayer compliance, Volume 2: Social science perspectives (University of Pennsylvania Press, Philadelphia, PA) 200-227. Cowell, Frank A., 1990, Cheating the government (The MIT Press, Cambridge, MA). Cowelt, Frank A. and James P.F. Gordon, 1988, Unwillingness to pay: Tax evasion and public good provision, Journal of Public Economics 36, no. 3, 305-32 1. Dean, P., T. Keenan and F. KGnney, 1980, Taxpayers’ attitudes to income tax evasion: An empirical study, British Tax Review !, 28-44. Homans, G., 1961, Social behavior: Its elementary forms (Harcourt, Brace and World, New York, N-I’). Isaac, R. Mark, Kenneth F. McCue and Zharles R. Plott, 1985, Public goods provision in an experimental environment, Journal of Public Economics 26, no. 1, lQ7-116. Kidder, Robert and Craig McEwen, 1999, Taxpaying behavior in social context: A tentative typoiogy of tax compliance and noncompliance, in: Jeffrey A. Roth and John T. Sholz, eds., Taxpayer compliance, Volume 2: Social science perspectives (University of Pennsylvania Press, Philadelphia, PA) 46-75. Kim, Oliver and Mark Walker, 1984, The free rider problem: Experimental evidence, Public Choice 43, no. 1, 3-24. hmpert, R.O., 1972, Norm-making in social exchange: A contract law model, Law and Society Review 1, l-32.
J. Aim et al., Fiscal exchange, collective decision institutions, and tax compliance
303
Mason, Robert and L.D. Calvin, 1984. Public confidence and admitted tax evasion, National Tax Journal 37, no. 4,489496. Mason, Rob:rt, L.D. Calvin and G.D. Faulkenberry, 1974, Knowledge evasion and p&tic support for Oregon’s tax system (Survey Research Cpnter, Oregon State University, Corvallis, OR). Mason, Robert and H. Lowry, 1981, An estimatt of income tax evasion in Oregon (Survey Research Center, Oregon State University, Corvallis, OR). McEwen, Craig A. and R.J. M&an, 1986, In search of legitimacy: Toward an empirical response analysis, Law & Policy 8. 257-273. Minor, W. William, 1981, Techniques of neutralization: A reconceptu tion and empiricaI examination, Journal of Research in Crime and Delinquency 18,296319. Newbold, Paul, 1988, Statistics for business and economics (Prentice-Ha& Inc., Englewood Cliffs, NJ). Pommerehne, Werner and H. Week-Hannemann, 1989, Tax rates, tax administration and income tax evasion in Switzerland, Discussion paper no. B8904 (Department of Economi,> University of Saarland, Saarbrucken). Rapoport, Annon. 1985, Provision of public goods and the MCS experimental paradigm, American Political Science Review 79, 148-l 55. Roth, Jeffrey A.. John T. Scholz and Ann Dryden Witte, eds., 1989. Taxpayer compliance, Volume 1: An agenda for research (University of Pennsylvania Press. PhiIadelphia PA). Schelling. Thomas C., 1960, The strategy of conflict (Oxford University Press, New York, NY). Scott, W.J. and H.G. Grasmick, 1981, Deterrence and income tax cheating Testing interaction hypotheses in utilitarian theories, Journal of Applied Behavioral Science 17,395-408. Simon, Carl P. and Ann D. Witte, 1982, Beating the system (Auburn House Publishing Boston, MA). ael W. and S.B. Lundstedt, 1976, Understanding tax evasion, Public Finance/ Finances Publiques 3 1, no. 2, 295-305. Sykes, Gresham M. and David Matza, 1957, Techniques of neutralization: A theory of delinquency, American Sociological Review 22664-670. Tanzi, Vito, ed.. 1982, The underground economy in the United States and abroad (DC. Heath and Company, Lexington, MA). Thurman, Quint C., Craig St. John and Lisa Riggs, 1984, Neutralization and tax evasion: How effective would a moral appeal be in improving compliance to tax law?, Law & Policy 6, 309-327. Westat, Inc., 198Oa, Individual income tax compliance factors study qualitative research results, Prepared for the Internal Review Service, February 4, 1980, by Westate, Inc. (Rockville, MD). Westat, Inc., 1980b. Self-reported tax compliance: A pilot survey report, Prepared for the Internal Revenue Service, March 21, 1980, by Westat Inc. (Rockville, MD). Wicksell, Knut, 1967, A new principle of just taxation, Reprinted in: Richard A. Musgrave and Alan Peacock, eds., Classics in the theory of public finance (St. Martins Press, New York, NY) 72-l 18. Yankelovich, Skelly and White, Inc., 1984, Taxpayer attitudes survey: Final report. Public opinion survey prepared for the Public Affairs Division, Internal Revenue Service, December 1984, by Yankelovich, Skelly and White, Inc. (New York. NY).
