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
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.
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
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
Experiment to explain regime choice
Experimental
Treatment
Number of Varying
rounds
experimental
parameters
Results used to
estimate
1: Observe
compliance
behavior
12
Tax rate, audit
rate, penalty rate
Determinants of underreporting, propensity to
under-report (PTC)
2: Observe
demand for
burden reduction
5
Burden reduction
fee
Willingness to pay for
burden reduction (WTP)
3: Observe regime 9
choice
Audit rate in selfreporting regime,
form type in
automatic regime
Determinants of regime
choice, determinants of
under-reporting
conditional on choosing
self-reporting
Treatment 1: Compliance behavior
• Propensity to cheat index
– PTC1 = share of rounds (out of 12) subject underreports income
– PTC2 = share of income (over 12 rounds) subject
failed to report
• Tobit model to explain amount of underreported income:
– decreases with audit and penalty rates
– increases with actual income
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
Treatment 3: Regime choice
Automatic reporting
regime
Self-reporting regime
1. Learn parameters
Level of burden (none,
short form, long form)
Audit rate (0, .10, .50)
2. Choose regime
Automatic
Self
3. Complete burden
requirements
Complete form, if any
Complete long form
4. Report income
Choose amount to
report
5. Face enforcement
Random audits, underreports are penalized
6. Pay tax
Tax levied on actual
earnings
Tax levied on actual
earnings
Treatment 3: Regime choice
Probit model to explain regime choice
• Higher audit rateless likely to choose selfreporting
• 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 selfreporting
• Level of burden in automatic regime not
significant
Treatment 3: Under-reporting in selfreporting 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 underreported income
• Higher willingness to paymore underreported income
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