The Economic and Psychological Determinants - and Deterrents - of Tax Compliance

Abstract

Despite considerable theoretical and policy interest, little is known about the causes of tax non-compliance (Blumenthal and Christian and Slemrod 2001). In the EITC alone, the IRS approximates that 27 to 32 percent of funds (over $8 billion) is distributed to non-qualified recipients (IRS 2002; TY 1999). This paper uses a field experiment, administered in collaboration with the IRS, to test the efficacy of information and psychology based strategies for deterring non-compliance amongst EITC paid-preparers and claimants. Specifically, I distribute experimental compliance notices to 3,000 error-prone paid-preparers and 5,000 EITC filers in order to test the sensitivity of future compliance and take-up to (1) information on eligibility and claiming rules, (2) information on penalties and audits for negligent claiming, (3) the invocation of social norms and, (4) appeals to moral and personal responsibility. Next I test whether non-compliance amongst paid tax preparers is influenced by the economic incentives for preparation using proprietary panel data on claiming volume and error rates for over 100,000 paid preparers, and data collected on preparer firm incentives. I comment on the implications of these findings for policy as well as for understanding the role of social and psychological factors in determining compliance.