Research reveals effective ways to ensure payment of taxes from individuals

Government officials can do the math and figure out how much taxes they need to cover everything from military defense to bridges, education, and Medicare. The snag comes, as it has for thousands of years, when they try to get people to actually pay those taxes.

While the days of the hard-line tax collector extracting prompt and honest payment have evolved into audits and threats of hefty fines, quite a few people still cheat.

Besides raising taxes on honest people, what does the treasury do?

This is a question explored by University of Delaware researcher George Tzakoumis in a paper published in Journal of Business Ethics in March. Tsakomis, an associate professor of accounting in the Alfred Lerner College of Business and Economics, teamed up with friends from his doctoral days, Diana Falsetta of the University of Miami and Jennifer Schaeffer of Kennesaw State University.

They all worked as tax consultants for major accounting firms before entering academia, so studying was a natural angle.

About 85% of people are already honest about their taxes, according to IRS research, paying voluntarily and in full. But the tax cheats who make up the other 15% are costing the government a heap of money. Based on data from 2014 to 2016, the IRS estimates it loses about $428 billion annually, and other global governments report tax gaps in the hundreds of billions as well, the researchers note.

The IRS appears ready to do something about this, with the announcement last year of an $80 billion cash injection into the agency over a decade. More than half of that amount is ripe for enforcement, which the agency estimates will more than pay itself out in refunds.

Is enforcement the most effective use of that money, though? Tsakomis and his colleagues reviewed a lot of research on how well audits work, but they note a gap in the literature when it comes to understanding people’s motivations for making the decision to pay taxes.

They argue that traditional studies focusing on sanctions and economic motives are missing part of the picture – an analysis of how taxpayers’ feelings about government programs affect their willingness to pay.

Quite a bit, they found out in their studies. The conclusions published in the paper How Government Spending Affects Tax Compliance have implications for ways in which policymakers can encourage taxpayers to actually pay.

To decipher all this, the researchers looked at several factors that can influence people’s willingness to obey tax rules, including whether they support government programs, and how ethical they are — whether they are likely to act selfishly and take “ends that justify the means” approaches.

Study participants were tested on these factors, and asked field questions about their support for advocacy and welfare programs. They were then told to put themselves in the shoes of a taxpayer who earned $45,000 in self-employment income, paid in cash. The researchers asked the participants to determine how much of this income they would give to the IRS. Some participants were told that they were likely to be audited, others that the probability was low.

The researchers quizzed just over 300 taxpayers from across the country, of a variety of ages and different income and education levels.

“In summary, we found that taxpayers who receive more support for a program report higher incomes,” Tsakomis wrote in an email. They also found that people who support spending on programs such as national defense were more likely to truthfully report income under threat of scrutiny, but those who support social programs do not need this alert.

The study concluded that “when taxpayers do not support government programmes, their compliance is lower regardless of the likelihood of scrutiny”.

In other words, regardless of the threat of scrutiny, people who support government policies are likely to pay their share.

However, unethical people took more hackers. To be persuaded to pay, Tsakomis said, “taxpayers with low moral standards (both) need government (program) support and face a higher probability of an IRS audit.”

On the flip side, they find that highly moral people aren’t affected by their feelings about government spending, because they’re going to pay their taxes anyway.

The researchers do not argue that audits and penalties do not work. They are just saying that people are also motivated more by their attitude towards government spending and programs than by these enforcement methods.

The takeaway is more for government officials than the average taxpayer, though Tsakomys noted that taxpayers might consider learning more about the rationale behind the programs.

“We feel that our findings highlight the importance of winning taxpayer support for government programmes,” he wrote, “by aligning the interests of citizens with those of government.”

This means that the government needs to convince people to spend their money well.

“One way to do this is for the government to provide taxpayers with a better understanding of why they are taxed and how they benefit from government spending for their tax dollars,” Tsakomys said.