This week’s selection from the world of social science research.
Collidoscope is The Wire’s weekly newsletter on social science research, bringing together different views and ways of understanding and analysing society from across the world. You can subscribe to the Collidoscope newsletter here. If you missed the previous editions and would like to catch up, you can find them here.
This week’s issue looks at how people think about taxes, and specifically how and why they decide not to pay them.
Evading taxes in Norway
Can moral appeals drive tax compliance?
To try and answer at least a part of that in the Norwegian context, Kristina M. Bott, Alexander W. Cappelen, Erik Ø. Sørensen and Bertil Tungodden conducted an experiment on 15,000 taxpayers who were likely to have misreported their foreign income in the previous tax year, but did not know that Norwegian tax administration knew about this misreporting.
In their article ‘You’ve got mail: A randomised field experiment on tax evasion‘, published as a Norwegian School of Economics working paper, the authors find that there is one thing that can make a generic appeal from the tax administration almost twice as useful – inserting a simple line that contains a moral appeal.
The researchers sent out three kinds of letters, specifically about reporting foreign income, and also sent one group no letter at all. The base letter was an ordinary official letter, which also included details on how to report foreign income. The second kind of letter included a moral appeal and the third suggested that there was a probable audit in the taxpayer’s future.
Taxation on foreign income in Norway is based on self reporting. The authors say that while historically it has been difficult for authorities to cross-check the self reported amount, “Over the last few years, however, tax administrations in a number of countries have increasingly provided information about the income and wealth that tax residents of other countries earn or hold in their countries”. They used this information received by the tax authority (on a later date) to determine whether those who were sent various letters were correctly reporting their foreign income, and whether the number of people misreporting their foreign income changed when compared to the previous year.
The base letter was three paragraphs long, with information on why reporting foreign income was being given special importance (the economy becoming more international). The taxpayer was told that the authority wanted to give out information on how this kind of income is to be reported and how it is taxed. The ‘moral’ letters were of two kinds – one that focused on fairness by reminding the taxpayer that most Norwegians report domestic income correctly (“The great majority report information about their income and assets in Norway correctly and completely. In order to treat all taxpayers fairly, it is therefore important that foreign income and foreign assets are reported in the same manner”), and one that talked about the social benefits of taxation (“Your tax payment contributes to the funding of publicly financed services in education, health and other important sectors of society”). The ‘detection’ letter made it sound like there was a probability of authorities finding out if evasion did take place (“The tax administration has received information that you have had income and/or assets abroad in previous years”).
Their results? In a result that may surprise the more cynical among us, the moral letter had the largest impact. However, even the base letter resulted in more reporting than sending no letter at all (of course assuming there weren’t other factors influencing these decision, which there easily could be). While there was no great difference in the foreign income reported by the ‘base’ and ‘detection’ letter groups, the ‘moral’ letter group saw a 50% higher reporting rate. However, they say that while the moral letter possibly has a more short-term affect, the detection letter could change how an individual thinks about the system and how easy (or hard) it is to get away with tax evasion, thereby resulting in more long-term foreign income reporting for those the letter had an impact on.
Taxpayers’ resentment in Ethiopia
How do business people view the tax administration?
In an International Centre for Tax and Development working paper, Wollela Abehodie Yesegat and Odd-Helge Fjeldstad look at business people’s perceptions of the taxation system in Ethiopia and whether this affects their tax compliance.
Previous literature the authors refer to says that if the public provision of services and government expenditure is seen as adequate and efficient, people are more likely to pay their taxes, because they trust how the money will be spent. Whether the tax administration is seen as fair – and not favouring certain groups – also matters, they say. But how does that play out in Ethiopia?
To find an answer, the authors interviewed 500 business taxpayers in Addis Ababa. Both satisfaction with the tax administration and the perception of corruption in the system were closely related to how frequently evasion occurred. The probability of detection was also an important factor, as was the perception of whether or not others in a similar situation were paying their taxes.
One of the things the authors note is interesting and for me was counter-intuitive – the tax compliance attitude was lower for those who were more educated. According to the authors, this could be because “high educational achievement (general education) may have given individuals the capacity to judge the fairness and other dimensions of the tax system, the governance system at large, and to make their compliance decisions”.
The authors seem to suggest that if a state wants to increase tax collection, it also needs to get better at its own job by providing essential services and winning people’s trust.
Finding ‘tax-free’ cigarettes in New York
Do students in New York find ways to avoid paying taxes on cigarettes?
Simple answer – yes. According to an article by Kimberly Consroe, Marin Kurti, David Merriman and Klaus von Lampe in Nicotine & Tobacco Research, New York City has a high rate of tax avoidance when it comes to cigarettes; and students, given their usually low budgets and ability to source cigarettes from outside the state (such as when they travel home), are a large part of the group doing this.
One thing jumped out at me immediately from the paper – the methodology. According to the authors, they used “garbology”, which involves the collection of discarded material. While my immediate vision was someone ruffling through trash cans for cigarette stubs, it’s the packs and not the stubs that give the answers they’re looking for. “We collected cigarette packs found in outdoor trash receptacles on campus, and analyzed these data to identify patterns and trends,” the authors write. They chose campuses that aren’t completely smoking free, but allow students to smoke in outdoor spaces.
After the (literally) dirty work, which was done by student volunteers, the authors found that of the 174 cigarette packets they found on campus, 72.4% were bought in areas where the joint New York City and New York State cigarette tax does not apply. When they compared packets depending on when they were found, they discovered that tax non-compliance was highest just after a break or vacation, when students presumably travelled elsewhere. The non-compliant cigarette packets they found were mostly from Virginia, New Jersey and Pennsylvania, all lower tax states. Their findings also suggested that some students used the black market in the city to avoid paying cigarette taxes.
The conclusion from all this? While high taxes are a deterrent, the authors argue, they’re far from enough if colleges (or the government) actually want young people to stop smoking. They think spreading awareness on nicotine replacement therapy and counselling could be a way to complement the high tax policy.
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If you have any comments or suggestions on what could be carried in this column, write to me at firstname.lastname@example.org