The role of enforcement action uncertainty on tax compliance: Evidence from three experiments

Abstract

In this study, we first present a large field experiment to investigate the nature of costs resulting from tax collector oversight that are salient to taxpayers. Messages pertaining to specific time and cognitive incentives do not significantly increase payment rates, whereas stating non-specific costs of inaction does. Further analysis suggests the increase in compliance is likely due to rational taxpayers 'filling in the blank’ – an effect in which taxpayers likely assume the consequence is an average-sized fine when subject to uncertain enforcement actions. Specifically stating maximum fine or jailtime consequences have the largest effect in a laboratory setting but only if the consequences are interpreted as realistic. Overall, our study reinforces that tax authorities can use short messages to increase tax compliance. Moreover, our results may be useful to regulators that cannot commit to punishments ex-ante as our study shows tax messages need not necessarily be detailed and specific.

Keywords: taxation, compliance, accounting, behavioral economics, natural field experiment

JEL Classification: C93, D03, H26