Social programs as positive inducements for tax participation

A significant amount of non-compliance with the personal income tax is due to individuals who have not filed a tax return and so who are not “in the system”. We use experimental laboratory methods to examine the effect of positive inducements for filing a tax return. Our design captures the essential features of a voluntary income reporting and tax assessment system: human participants earn income, they must decide whether to file a tax return, and, conditional upon filing, they must choose how much income to report. Taxes are paid on reported income only. Unreported income of filers may be discovered via a random audit, and the participant then pays owed taxes plus a fine. Inducements for filing are introduced as treatments: a social safety net (e.g., unemployment replacement income) that is conditional upon past filing behavior, and a tax credit that is available only to those who file. Our results suggest that an untargeted tax credit can encourage participation, but that targeting the credit to low income earners offers a stronger inducement to file. Also, the provision of a social safety net via unemployment benefits has a positive, albeit an indirect, impact on participation.

► A significant amount of non-compliance is due to individuals who have not filed a tax return.
► This paper uses experimental methods to examine the behavior of non-filers, looking at two types of positive incentives for filing returns.
► Our experimental design captures the essential features of the voluntary income reporting system used in many countries.
► Inducements for filing are introduced in different treatments, both conditional upon filing: unemployment insurance benefits and tax credits.
► Our results suggest that these social programs can have a significant positive impact on filing.