The Effects of Official and Unofficial Information on Tax Compliance

CAEPR Working Paper Series 2018-004

50 Pages Posted: 8 May 2018

See all articles by Filomena Garcia

Filomena Garcia

Indiana University; ISEG - Technical University of Lisbon; UECE - Research Unit in Economics and Complexity

Luca David Opromolla

Bank of Portugal; CEPR; UECE - Research Unit on Complexity in Economics

Andrea Vezzulli

UECE - Research Unit on Complexity in Economics

Rafael Marques

Environmental Financial Products, LLC

Date Written: March 1, 2018

Abstract

The administration of tax policy has shifted its focus from enforcement to complementary instruments aimed at creating a social norm of tax compliance. In this paper we provide an analysis of the effects of the dissemination of information regarding the past degree of tax evasion at the social level on the current individual tax compliance behavior. We build an experiment where, for given levels of audit probabilities, fines and tax rates, subjects have to declare their income after receiving either a communication of the official average tax evasion rate or a private message from a group of randomly matched peers about their tax behavior. We use the experimental data to estimate a dynamic econometric model of tax evasion. The econometric model extends the Allingham–Sandmo–Yitzhaki tax evasion model to include self-consistency and endogenous social interactions among taxpayers. We find four main results. First, tax compliance is very persistent. Second, the higher the official past tax evasion rate the higher the degree of persistence: evaders are more likely to evade again, and compliant individuals are more likely to comply again. Third, when all peers communicate to have evaded (complied) in the past, both evaders and compliant individuals are more likely to evade (comply). Fourth, while both treatments, and especially the unofficial information treatment, are associated, in the context of our experiment, with a significantly larger growth in evasion intensity, the aggregate effect depends on the characteristics of the population. In countries with inherently low levels of tax evasion, official information can have beneficial effects by consolidating the behavior of compliant individuals. However, in countries with inherently high levels of tax evasion, official information can have detrimental effects by intensifying the behavior of evaders. In both cases, the impact of official information is magnified in the presence of strong peer effects.

Keywords: Tax morale, Information, Tax evasion, Experiment, Peer Effects

JEL Classification: H26; D63; C24; C92; Z13

Suggested Citation

Garcia, Filomena and Opromolla, Luca David and Vezzulli, Andrea and Marques, Rafael, The Effects of Official and Unofficial Information on Tax Compliance (March 1, 2018). CAEPR Working Paper Series 2018-004 , Available at SSRN: https://ssrn.com/abstract=3166305 or http://dx.doi.org/10.2139/ssrn.3166305

Filomena Garcia (Contact Author)

Indiana University ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

ISEG - Technical University of Lisbon ( email )

R. Miguel Lupi, 20
Lisbon, 1200
Portugal

UECE - Research Unit in Economics and Complexity ( email )

Rua Miguel Lupi, 20
Lisboa, 1200-781
Portugal

Luca David Opromolla

Bank of Portugal ( email )

Rua Francisco Ribeiro 2
Lisbon, 1150-165
Portugal

CEPR ( email )

London
United Kingdom

UECE - Research Unit on Complexity in Economics ( email )

ISEG/UTL Rua Miguel Lupi 20
Lisboa, 1249-078
Portugal

Andrea Vezzulli

UECE - Research Unit on Complexity in Economics ( email )

ISEG/UTL, Rua Miguel Lupi 20
Lisboa, 1249-078
Portugal

HOME PAGE: http://pascal.iseg.utl.pt/~uece/peoplefellows.shtml

Rafael Marques

Environmental Financial Products, LLC ( email )

The Wrigley Building
400 N. Michigan, Suite 1100
Chicago, IL 60611
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
54
Abstract Views
554
rank
419,409
PlumX Metrics