Wednesday, April 2, 2014
Kathleen Delaney Thomas (North Carolina) presents The Psychic Cost of Tax Evasion at Duke today as part of its Tax Policy Seminar hosted by Lawrence Zelenak:
Tax evasion presents the government with a formidable task. We are losing hundreds of billions of dollars in tax revenue each year due to underreporting by individual taxpayers. According to deterrence theory, policymakers should be able to reduce evasion by making it more costly for taxpayers. This could be accomplished by raising the audit rate, increasing tax penalties, or some combination of both. However, budgetary limitations and political hurdles have made these strategies difficult for the government to employ.
But there is another cost to tax evasion incurred by taxpayers, which may provide a more promising means by which the government can improve tax compliance. Apart from the potential monetary costs, individuals may also experience some form of psychological discomfort when they are dishonest, which may deter them from cheating. And while past tax scholarship has portrayed honesty as a fixed personal characteristic (i.e., people are either honest or dishonest), recent empirical studies have demonstrated that individual honesty is actually a malleable trait, influenced heavily by environmental factors. For example, studies show that subjects cheat less if they sign an honor code before they perform a task.
In light of this research on what kinds of external factors influence honesty, this Article argues that policymakers should use this knowledge to reduce tax evasion. Because individuals experience discomfort when they are dishonest in certain contexts, tax evasion imposes an additional utility cost not accounted for by the standard deterrence model, which I refer to as the “psychic cost” of tax evasion. By understanding the psychic cost of tax evasion as malleable, rather than a fixed trait of a particular taxpayer, this cost becomes another policy tool – along with audits and penalties – that can be utilized by the government in an effort to increase tax compliance. Adopting measures to increase the psychic cost of tax evasion, such as making small adjustments to the way that taxpayers fill out their tax forms, could generate much needed tax revenue at virtually no administrative cost to the government.