In case you hadn’t realized, tax policy is a big deal.
“The impact of the tax system is absolutely pervasive,” says Joel Slemrod, a professor of economics at the University of Michigan. “It touches on just about everything. It affects decisions that people don’t think of as economic — whether to get married, how many kids to have. All of those decisions have tax aspects. They affect the rewards to certain activities and the costs of many activities.”
Activities including… death. Imagine you’re old and frail; you don’t have much time left; you have a sizable estate — and now imagine the estate tax is about to be lowered. Here’s what Slemrod and his co-author Wojciech Kopczuk found, in a study they called “Dying to Save Taxes”: “For individuals dying within two weeks of a tax reform, a $10,000 potential tax saving increases the probability of dying in the lower-tax regime by 1.6%.”
In other words, the dying person hangs on just long enough to die under the new estate-tax rate. (Or, if you’re a suspicious type, you might imagine the dying person’s family tries to prolong their life in order to pay less tax, or even fudges some paperwork after the fact.) In any case, that’s how much effort can go into avoiding taxes.
Some people, of course, don’t go to that much trouble. They just decide to not pay what they owe, or to not declare all their income. This is what results in the massive tax gap. For millennia, taxation has been perhaps the most powerful tool (some would say “weapon”) that a government or crown can wield. Countless rebellions and revolutions were driven by tax issues — our own revolution included, at least to some degree. In 1774, Alexander Hamilton warned his fellow colonists that if Britain’s appetite for taxation were left unchecked, all the Americans’ “tables and chairs… and knives and forks, and everything else would be taxed,” along with “every child” and “every kiss your daughter received from their sweethearts.”
And for as long as there has been onerous taxation, there has been tax avoidance and evasion. The earliest such records go back to the 7th century B.C., in Egypt, where aging patriarchs transferred property to family members to avoid inheritance taxes. Avoidance and evasion have continued pretty much unabated ever since. In 17th century England, for instance, in an effort to tax mansions, authorities instituted a tax based on the number of windows a house had. Today, you can still see bricked-over windows in older homes, an effort to avoid the tax.
So knowing what we now know about strategic dying and bricked-up windows, what’s a country to do if it wants to increase tax compliance? Here’s one clue: the IRS reports that 96% of respondents to an independent poll agreed with this statement: “It is every American’s civic duty to pay their fair share of taxes.” But when asked why they pay, 62% answered “fear of an audit.” So it’s evident that enforcement is a force to be reckoned with. But the IRS doesn’t have unlimited resources for enforcement: Its real budget, Joel Slemrod tells us, has fallen 20% since 2010, and tax audits have declined by a third. This despite the fact that an audit can return as much as $4,500 per hour of IRS labor.
Audits aside, wouldn’t it be nice if people actually felt good about paying their taxes? Catherine Eckel is an economist at Texas A&M University whose earlier research on altruism inspired a question: Would people donate to the government for the same reasons they give to charity? There are, of course, substantial differences. When you give to a charity, you have a pretty clear idea of what they’re going to do with the money (or at least what you hope they’ll do with it). And you presumably only give money to charities with a mission you like. When you pay your taxes, meanwhile, it’s not easy to know exactly how your money will be spent, and it may well go toward things you don’t like.
So Eckel designed an experiment to address that problem. She asked her research subjects if they wanted to donate money to the government, but for a specific purpose — which happened to be the same purpose as the donations she had studied in previous research on altruism: disaster relief.
“And what we found, to our shock and astonishment, was that people would give almost as much to a government organization as they would to a private organization,” Eckel says. “Allowing people to earmark is really successful at getting people to give more.”
But how much of this effect was because people could specify where their money was going — something that can’t presently be done with tax payments? In another experiment, Eckel and her co-authors compared what people were willing to give to the federal government without knowing how the money would be spent versus the amount they’d give if they could earmark their money for a specific purpose — cancer research, for instance, or affordable housing. They found that people were twice as willing to give money when they knew it was going to causes they supported, and they donated roughly two-and-a-half times the amount. So it would seem that being allowed to allocate your tax dollars might significantly increase compliance.
Cait Lamberton, a marketing professor at the University of Pennsylvania’s Wharton School of business has also been studying this idea. She says that forcing people to do something, like pay taxes, often makes the task feel unpleasant, even for people who might normally be predisposed to pay taxes without complaint. There’s also the fact that paying your taxes isn’t coupled with any sort of tangible benefit, the way it is when you buy something for yourself.
“The benefits are very diffuse,” Lamberton says. “It’s kind of like you’re seeing something from a more distant vantage point. The benefit looks smaller; the cost looks bigger.”
One way to inform taxpayers about how their money is being spent is to make the data accessible. The Obama administration, for example, created a website that allowed people to see what their tax dollars were spent on. Lamberton says this addressed the decoupling issue (you could see where the money was going) but not the question of agency (you still couldn’t controlwhere the money was going). So she and her colleagues designed an intervention that provided participants with the opportunity to express an opinion about how money should be allocated. They found that, in Lamberton’s words, “tax compliance changes when people have the opportunity to express their opinions about the way their taxes are spent.”
It’s important to note that the subjects in a lab experiment like this (who tend to be undergraduate college students) don’t necessarily respond the way people in the real world will respond. Nevertheless, the results from Lamberton’s study suggest that getting to allocate your own tax dollars, at least to some degree, could increase compliance by up to 15%.