Social Norms and Tax Compliance

Abstract

This collection of essays investigates the role of social norms on tax compliance and analyzes optimal tax enforcement when social norms influence taxpayers' decisions.

The first two chapters focus on a field experiment performed with the property tax in Peru. While Chapter 2 studies the impact of the information treatments on compliance, Chapter 3 pins down the mechanisms of the interventions.

Randomly chosen subsets of residents in two municipalities in the Lima province were informed, through an official letter from the municipality, about the average rate of compliance, the average level of municipal enforcement, or both. A last group was only reminded of the payment deadline. Disclosing information on the average rate of compliance had a large positive impact on the decision to comply (20%). However, the payment reminder also raised compliance by 10%, while the enforcement treatment did not have a significant effect on compliance net of the reminder effect.

To focus on mechanisms, the study design also included surveys, conducted both before and after the treatments, in which a subsample of taxpayers was asked about their beliefs concerning the levels of compliance and enforcement. Both the norms and the enforcement treatments raised beliefs about compliance as well as about enforcement. Interestingly, the reminder letter also raised beliefs about compliance. Using the experimental and survey data I also assess quantitatively the role of norms through different channels by fitting a model in which residents take into account expected monetary penalties from noncompliance, the disutility of tax evasion rises with the fraction of residents who comply, and individuals hold subjective beliefs about the probabilities of both detection and compliance.

Finally, Chapter 4 pursues the question from a mechanism design perspective and studies the tax authority's revenue maximizing problem when social norms impact the decision to comply. Budgetary resources have a larger marginal benefit on those sectors (or neighborhoods) where more people are complying, thus changing the optimal budget allocation. In particular, a discontinuity happens where the tax authority is no longer able to deter evasion, and thus no social norms emerge.