Monday, September 10, 2018

Found that taxpayers’ attitudes toward evasion are not predictive of behavior & that tax compliance is not related to trust in government or one’s fellow citizens; Danes are more likely to evade tax than Italians; at the same time, Danes are less tolerant of tax evasion by others

Willing to Evade: An Experimental Study of Italy and Denmark. Alice Guerra and Brooke Harrington. Copenhagen  Business  School, Department  of  Business  and  Politics. ttps://

Abstract: Tax evasion varies widely across countries and follows a geographical pattern: Southern European countries such as Italy, Spain and Greece, are plagued by higher evasion rates than Northern European countries. This suggests a testable  research question: Can national identity explain  North-South  discrepancies  in  European tax compliance? We address this issue by conducting identical laboratory experiments in Denmark and Italy, two countries that lie not only at the opposite  ends of the spectrum on tax compliance but also at the extremes of cultural differences and citizen trust in the government. We adopt a double-hurdle model to separate the decision of whether to evade or not (extensive margin), from the decision of how much to evade (intensive margin). This study innovates both theoretically and methodologically. Theoretically, it contributes in two ways to the literature on tax compliance: 1) by showing that taxpayers’ attitudes toward evasion are not predictive of behavior; and 2) by showing that tax compliance is not related to trust in government or one’s fellow citizens. Methodologically, the paper innovates by  being the first to examine tax compliance in Denmark,  and  by testing the  effects  of  an extended vector of covariates on both the intensive and extensive margins of tax  behavior. Empirically, we find that--contrary to expectations--Danes are more likely  to evade tax than Italians; at the same time, Danes are less tolerant of tax evasion by others. We find that individual evasion choices are strongly affected by risk aversion and individual perception about others' compliance behavior. We conclude by discussing the implications of our findings for tax policies and future research.

Another, related interpretation is that discrepancies in tax behavior s are driven by differences in circumstances. Italians face the same circumstances as Dane s in the lab, but the circumstances Italians and Danes face outside the lab are very different. Danes can be highly motivated to evade taxes (even more than Italians) in situations where they have the possibility to do so (as in our experiment), but in mos t cases they are unable to cheat (e.g., because of the third-party reporting system and high tax enforcement they generally face). There is a crucial difference between being willing to evade taxes and being able to do so, and this depends upon the level o f tax enforcement and the reporting system in place. This explanation is coherent with the findings from the field experiment conducted by Kleven et al. (2011) in Denmark. The authors found that the tax evasion rate is close to zero for income subject to t hird-party reporting but substantial for self-reported income. Since most income in Denmark is subject to third-party reporting, the overall evasion rate is modest. In this respect, it would be interesting to ru n a similar field experiments with taxpayers in Italy to evaluate to extent to which compliance choices change under alternative reporting systems.

Overall, our experiment together with the recent cross-national laboratory experiments on tax behavior seem to reveal a common finding: that national identity, alone, cannot explain the North-South divergences in tax compliance. This result, which deserves further replication analyses, is encouraging because it suggests that tax policies and institutions play a crucial role in tax compliance. Indeed, fa ctors such as the traditional tax enforcement measures, redistribution policies, the threat of public disclosure of tax evasion, perception about others' compliance behavior, affect individual intrinsic motivation to fulfill fiscal obligations and should be used to mitigate evasion issues.

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