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Social esteem versus social stigma: The role of anonymity in an income reporting game
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Social esteem versus social stigma: The role of anonymity in an income reporting game Sandro Casal a,1 , Luigi Mittone b,∗ a b
Doctoral School of Social Sciences, University of Trento, Italy Department of Economics and Management, University of Trento, via Inama 5, 38122 Trento, Italy
a r t i c l e
i n f o
Article history: Received 6 June 2014 Received in revised form 18 February 2015 Accepted 21 September 2015 Available online xxx Keywords: Tax evasion Non-monetary (dis)incentives Anonymity Experimental economics
a b s t r a c t This paper aims at experimentally testing the role of different non-monetary (dis)incentives on tax compliance. Participants were subjected to different experimental conditions where the role played by anonymity differed. As expected, anonymity does play an important role in the decision to pay taxes. In addition, we found that a negative non-monetary incentive increases tax compliance more effectively than a positive non-monetary incentive. We also found that the effect of these non-monetary incentives is mitigated when too much information is made available. Results show that, when evasion is made public, tax fraudsters are willing to pay in order to keep their dishonest behaviour undisclosed and to avoid public shame. Interestingly we found a misalignment on the impact of stigmatization, namely that the judgement of an individual’s evasion is perceived, by the individual, more harshly than a judgement made by the said individual regarding evasion carried out by other parties. © 2015 Elsevier B.V. All rights reserved.
1. Introduction The Allingham and Sandmo (1972) model is the starting point of almost all the studies on tax evasion: both empirical and experimental research have analyzed the model’s variables in order to better understand the role of income, tax rate, audit probability and fine rate.2 Findings, in some cases, are contradictory. Even if there is no general consensus on the role played by tax rate and income (e.g., the contradictory conclusions of Yitzhaki, 1974; Pommerehne and Weck-Hannemann, 1996; Park and Hyun, 2003; Baldry, 1987; Alm et al., 1995; Anderhub et al., 2001), the literature does provide agreement on the deterrent impact of the “audit scheme” which comprises audit probabilities, sequences of audits, endogenous or exogenous audits, and fine rates (Alm et al., 1993; Slemrod et al., 2001; Kastlunger et al., 2009). Regardless of the consensus or the disagreement on the effect of some of these variables, it is important to notice that researchers do agree that it is necessary to consider and include other variables when studying tax compliance. If based only on economic disincentives, not only does the model fail in describing the taxpayer behaviour, it also, paradoxically, poses the question of why people pay taxes rather than evade them (Alm et al., 1992). It is our opinion that not enough emphasis has been placed on the role played by social pressure (not necessarily used in a negative sense) on tax compliance. Only recently, and years after the pioneer work on blame carried out by Bosco and Mittone (1997), some studies have started to fill this gap (Coricelli et al., 2010, 2014; Maciejovsky et al., 2012).
∗ Corresponding author. Tel.: +39 0461 28 22 13. E-mail addresses: [email protected] (S. Casal), [email protected] (L. Mittone). 1 Present address: Department of Economics, Management, and Quantitative Methods (DEMM) of the University of Milan, Italy. 2 Comprehensive reviews of this topic are Andreoni et al. (1998) and Kirchler (2007). http://dx.doi.org/10.1016/j.jebo.2015.09.014 0167-2681/© 2015 Elsevier B.V. All rights reserved.
Please cite this article in press as: Casal, S., Mittone, L., Social esteem versus social stigma: The role of anonymity in an income reporting game. J. Econ. Behav. Organ. (2015), http://dx.doi.org/10.1016/j.jebo.2015.09.014
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However, this is not the case in public good games literature, where social pressure was studied first by Masclet et al. (2003) and only thereafter was a large corpus of literature produced.2 In public good literature, Rege and Telle (2004) is an example of a study centred on sustaining cooperation without monetary punishments and making use of both social approval and disapproval. It is important to state that essentially all studies on tax compliance have the following in common, namely an emphasis on tax evasion and the idea that taxpayers are, by definition, potential criminals. Generally, the focus point is to prevent a potential crime instead of pursuing tax compliance through promoting and facilitating the correct behaviour of taxpayers. Contrary to Rege and Telle (2004), in tax compliance literature cooperation (compliance) is rarely supported by the idea that taxpayers can also be honest and social approval has seldom been used to rise compliance. In a recent paper, Alm and Torgler (2011) propose, among other alternatives, to “publicize tax evasion convictions in the media as an alternative, nonmonetary type of penalty” (Alm and Torgler, 2011, p. 646). This disincentive perfectly fits what has been implemented in the UK where since 2012 Her Majesty’s Revenue and Customs (HMRC) has posted the pictures of the most-wanted tax evaders on its official webpages and asked citizens for help with their identification and localization. Coricelli et al. (2010, 2014) claim that social stigmatization can sustain compliance because taxpayers anticipate negative emotions like shame and blame. On the other hand, it is also plausible to expect that they also anticipate positive emotions, like respect and esteem, which can be induced with positive non-monetary incentives. Following the same line of reasoning, the mass-media could also be used to publicize full contributors and full compliance3 which could induce a possible twofold result: sustaining compliance via the anticipation of positive emotions and triggering the idea that tax compliance is a widespread phenomenon in the society (Alm and Torgler, 2011). Our paper contributes to research on social pressure and tax compliance in the following innovative ways: first, we compare the impact of negative and positive non-monetary incentives on tax behaviour linked to the loss of anonymity and related to different kinds of social pressure; and second, we measure the (monetary) value that taxpayers associate with the loss of anonymity when asked to pay taxes. More precisely, we measure: (i) the tax evaders’ willingness to pay a fee to avoid publicity of their evasion (value attributed to individual anonymity, VIA); and (ii) the taxpayers’ willingness to pay a fee to identify tax evaders (value attributed to the others anonymity, VOA). Several questions obviously arise: (i) Are positive non-monetary incentives or negative non-monetary disincentives more effective in sustaining tax compliance? (ii) Do people care about the loss of anonymity through a public announcement of their tax behaviour, and do they care about the judgements of other members of the community? (iii) Is there a gap between VIA and VOA or, more precisely, is there a misalignment in evaluating the same phenomenon (evasion) when its consequences (social blame) affect either the individual or others? In Section 2, we present the experimental protocol used to answer these questions. Section 3 contains experimental data, analysis and tests. Finally, Section 4 concludes with a discussion of the results.
2. Method 2.1. Design We investigate behaviour in an income reporting game and test the effect of non-monetary (dis)incentives on tax compliance. Non-monetary (dis)incentives consist in the public announcements of audited taxpayers’ behaviour via the publication of their photographs. The experiment consists of seven treatments: baseline (B), control (C), esteem (E), public (P), stigma (S), anonymous stigma (AS) and curiosity (CU). We used a between-subjects design: each session had 16 participants and consisted of 20 rounds. Participants were informed that the experimental session had several rounds but the exact number was not specified. At the beginning of each round, participants were randomly assigned to groups of four and each received an initial endowment (IE) of 1500 experimental currency units (ECU). They were required to declare the endowment: a tax rate ( = 55%4 ) was applied to the declared income (DI), and taxes were collected. Participants were informed about the probability to be audited (p = 20%) and the amount of fine for evasion ( = 125% of evaded taxes). Collected taxes were then redistributed among the members of the group, after being multiplied by the factor 1.4 (˛).
2
Chaudhuri (2011) examines the latest developments in public good experiments in detail. In March 2012, the Italian tax authority began to consider the possibility of introducing a type of “certificate of fiscal conformity”. Businesses which resulted in having complied with their fiscal duties would receive the certificate. These businesses could then use the certificate to publicize their status to the public. 4 The tax rate was set according to a study released in 2012 by Confcommercio (Italian General Confederation of Commerce, Tourism and Services) in which it was pointed out that, taking into account the size of the Italian shadow economy, the actual average tax burden for a compliant Italian taxpayer was around 55%. 3
Please cite this article in press as: Casal, S., Mittone, L., Social esteem versus social stigma: The role of anonymity in an income reporting game. J. Econ. Behav. Organ. (2015), http://dx.doi.org/10.1016/j.jebo.2015.09.014
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Table 1 Experimental design. Treatment
# of subjects
# of matching groups
Pic. for enrolment
Anonymity of audited evaders
Anonymity of audited full contributors
Baseline (B) Control (C) Esteem (E) Public (P) Stigma (S) Anonymous stigma (AS) Curiosity (CU)
48 32 32 32 32 32 32
6 4 4 4 4 4 4
No Yes Yes Yes Yes Yes Yes
Yes Yes Yes No No P NG
Yes Yes No No Yes Yes Yes
Note: P stands for possible, NG for not guaranteed.
The payoff for the participant, at the end of the round, was equal to:
⎧ 4 ˛ i=1 DI i ⎪ ⎪ ⎨ IE − DI + if (s)he was not audited 4 = 4 ⎪ ⎪ ⎩ IE − DI + ˛ i=1 DI i − ((IE − DI)) if (s)he was audited. 4
The round ended with the communication of the amount the participant received as payoff. After this stage and before starting a new round, participants were randomly reallocated to new groups.5 In treatments B and C, non-monetary (dis)incentives were not used. As explained in Section 2.3, treatment B differs from treatment C in the enrolment process: pictures of participants in treatment C were taken, even though these were not used. In treatments E, P and S, non-monetary (dis)incentives were implemented: after the communication of the participant’s payoff, and only among the members of the groups, the identities of audited taxpayers were announced. More precisely: • in treatment E we publicized the identities of audited full contributors (positive non-monetary incentive) • in treatment S we publicized the identities of audited tax evaders (negative non-monetary incentive) • in treatment P we publicized the identities of all audited taxpayers (positive and negative non-monetary incentives). In treatment AS, the same non-monetary disincentive as in treatment S was implemented but evaders had the possibility of keeping their identities secret by acquiring the “right of anonymity”. Before running the auditing process, we elicited the evaders’ willingness to pay for the anonymity using the BDM procedure (Becker et al., 1964). In other words, contrary to S, in AS evaders had the possibility of escaping social stigma. In treatment CU social stigma and social blame were only possible if participants actively decided to discover the identity of the tax offenders. In this treatment, participants had to pay a fee in order to know the identity of tax evaders: as in treatment AS, we elicited their willingness to pay, via a BDM procedure. Table 1 summarizes the experimental design. As expected in experiments on tax compliance, non-neutral terms were used both in the instructions and in the software. 2.2. Behavioural predictions The introduction of a public good financed by tax revenues is necessary for our experimental setting: if there is no interaction among participants, an exercise on social pressure (of both kinds, i.e., social approval and/or social disapproval) loses a substantial part of its appeal.6 In common with papers that include the redistribution of collected taxes, our marginal per capital return (MPCR) is (1/group size)
5
As in Coricelli et al. (2014), the rematching procedure is used to restore participants’ “reputation” in the treatments with non-monetary (dis)incentives. In addition, public good provision ensures the presence of both monetary and non-monetary (dis)incentives. Full contributions have the monetary incentive in the multiplication factor of the public good structure and the non-monetary incentive in the publication of honest behaviour while acts of evasion have the monetary disincentive in fines and the non-monetary disincentive in the publication of evasive behaviour. 6
Please cite this article in press as: Casal, S., Mittone, L., Social esteem versus social stigma: The role of anonymity in an income reporting game. J. Econ. Behav. Organ. (2015), http://dx.doi.org/10.1016/j.jebo.2015.09.014
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on emotions related with public disapproval (Coricelli et al., 2010, 2014), we expect that the introduction of negative nonmonetary incentives increases compliance. The value attributed to individual anonymity (VIA) can be seen as an indirect pecuniary measure of the psychological costs introduced by Gordon (1989) where the “right of anonymity” represents a sort of insurance against stigmatization. The possibility of avoiding social blame should decrease tax compliance since, in case of evasion, the reduction (in terms of utility) given by the monetary loss (the fee for the “right of anonymity”) is smaller than the reduction given by the psychological cost.7 We thus predict that when tax fraudsters can avoid social stigma, tax evasion increases. Our design allows to test for the impact of positive non-monetary incentive on tax compliance: given previous results on cooperation in public good experiments (e.g., Rege and Telle, 2004), we can expect that the anticipation of social approval, in case of the publication of full contribution, increases contributions (compliance). Unfortunately, we do not have an indirect measure of the psychological satisfaction of being publicly recognized as a full contributor, a factor that may have a positive impact on a taxpayer’s utility and may modify, as Gordon (1989) did for psychological costs, the Allingham and Sandmo (1972) model. This could be a starting point for further research. More recently, Bénabou and Tirole (2006) discussed the motivations for individuals’ prosocial behaviour and they found three main drivers: altruistic motivation, material self-interest, and social or self-image concerns (Bénabou and Tirole, 2006, p. 1674). Exposing tax evaders or full contributors to publicity changes the last of the three drivers and can influence an individual’s behaviour. The authors claim that the effect of a specific stimulus depends on the distribution of social preferences, i.e., in a context like ours, the negative non-monetary incentive should work better in a community where tax compliance is widespread and the positive non-monetary incentive should work better when the population includes a large number of tax evaders. Finally, the willingness to pay a fee to identify tax evaders (value attributed to the others anonymity, VOA) can be considered as a monetary proxy of the value attributed to the psychological pleasure of identifying the tax fraudsters in the group.8 There is an interesting feature of these different psychological carriers in VIA and VOA: regardless of the fact that both involve the issue of identifiability, VIA is linked to a loss, the loss of personal good reputation, while VOA is related to a gain, the gain of information about the identity of the tax evaders. Under the standard definition of loss aversion (Kahneman et al., 1991), we predict a statistically significant difference between VIA and VOA and, indeed, VIA should be higher than VOA.
2.3. Participants and procedures The experiment was run in Trento (Italy), in the Cognitive and Experimental Economics Laboratory (CEEL) at the University of Trento. The participants were mainly University of Trento students and most of them attended courses in the Department of Economics (55%).9 The computerized experiment was programmed and conducted using z-Tree software (Fischbacher, 2007). A total of 240 participants (119 males and 121 females with an average age of 23 with sd of 3.3) took part in the experiment which was divided into 15 sessions involving 16 participants. Each treatment had two sessions, except treatment B which had three. Treatment B was the only one with a “traditional” enrolment procedure: participants were recruited via an announcement using the laboratory mailing list. In treatments C, E, P, S, AS and CU, participants were required to come to the laboratory for the enrolment (one week before the experiment). Once in the laboratory, they were informed that they should authorize the experimenter to take their photograph and that this could be used during the experiment. Participants were not informed about the purpose of the picture but only about the possibility of using the picture during the experiment. Participants were also ensured that, at the end of the experiment, all pictures would be destroyed.10 On the day of the experiment, instructions were distributed and each participant was given time to read them. To establish and ensure common knowledge, instructions were also read aloud and a questionnaire was distributed before starting the experiment to check the understanding of the rules. The experiment lasted about 60 min. Regardless of the result achieved in the experiment, subjects received a show-up fee of D 2.50. Only one of the session rounds was randomly selected for payment: the result of the selected round was converted into Euro (150 ECU = 1 Euro) and privately paid to the subject. On average, participants earned D 11.50.
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The BDM procedure ensures that the amount paid for the anonymity is no larger than the VIA amount. In the CU case, some participants may make high offers not because they have a high VOA but because they are applying a sort of social norms reinforcing mechanism. The pursuing of this goal is, in our setting, illusory given that we use a random matching procedure when creating the groups at the beginning of each round. Therefore, the reinforcement mechanism cannot produce any foreseen advantage for the punishers. 9 In addition to the economic students, 14% took courses in other social sciences (Sociology, Political Science, Psychology and Cognitive Science), 16% in Law, 7% in Engineering, 5% in Humanities, 1% in Hard Sciences. Seven participants (2%) had graduated shortly before the experiment and declared they were not longer students. 10 None of the participants refused to enrol. 8
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Table 2 Proportion of evaders. Treatment
All rounds
First round
B C E P S AS CU
55.63 (1.60) 41.88 (1.95) 49.22 (1.98) 45.00 (1.97) 30.31 (1.82) 43.91 (1.96) 57.34 (1.96)
54.17 (1.61) 40.63 (1.94) 40.63 (1.94) 34.37 (1.88) 31.25 (1.83) 31.25 (1.83) 50.00 (1.98)
Table 3 Average declared income at individual level. Treatment
Min
1st Qu.
Median
Mean
3rd Qu.
Max
B C E P S AS CU
0 0 0 0 75 0 0
634 838 525 626 1069 597.8 461.5
988 1292 1015 1111 1348 1195 1003
934 1121 950 1010 1210 1015 879
1365 1473 1478 1475 1490 1500 1361
1500 1500 1500 1500 1500 1500 1500
3. Results Compliance levels were considerably high in all treatments. Possible reasons for this could be found in the nested public good game structure11 or in the unusual enrolment procedure which may had altered the social distance not only among participants but also between participant and experimenter (Bohnet and Frey, 1999; Levitt and List, 2007). In addition, in our setting participants had to take decisions on windfall gains (Arkes et al., 1994), i.e., they did not exert effort to get their initial endowment. When the endowment is not earned, pro-sociality is usually triggered in participants (see the results of dictator game-like experiments such as Cherry et al., 2002 or Oxoby and Spraggon, 2008) even though conclusions on cooperation, for example in public good settings, are conflicting (Clark, 2002; Harrison, 2007). Kirchler et al. (2009), in line with Boylan and Sprinkle (2001), claim that tax evasion tends to be lower when participants exert considerable effort to obtain their endowments. Our compliance rates and our level of tax honesty12 , which are slightly higher than the cited studies, seem to endorse the idea that windfall gains trigger pro-sociality and cooperation more than evasion. 3.1. Descriptive statistics Table 2 shows the proportions of evaders (defined when DI < 1500, standard deviations in parentheses) in all 20 rounds and in the first round: the first round was the only when declarations could not be influenced by any previous experience of audits or peer behaviour. When considering the first round of the experiment, the proportion of evaders is higher in B than in treatment S and AS (Pearson’s Chi-squared test, for both comparisons p-value = 0.04355), and marginally higher than treatment C (Pearson’s Chi-squared test, p-value = 0.08197). A statistically significant difference is also found when comparing the frequency of full cooperation in the first period in treatment B with a pooled sample of the other treatments in which a photograph was required during the enrolment process (Pearson’s Chi-squared test, p-value = 0.04211). Overall, in all treatments except CU, the proportion of evaders is lower than in B (Pearson’s Chi-squared test, p-value ≤ 0.01189 for all comparisons). This suggests the presence of an “enrolment” effect: taking a photograph during the enrolment process drives participants to be more compliant. Under all treatment conditions subjects declare a considerably high amount of their initial endowment. This is more noticeable by considering the average declared income at the individual level: the maximum value is, for each treatment, ECU 1500 which means that in all treatments there is the presence of perfect full contributors (players who declared ECU 1500 in all 20 rounds). On the other hand, the only treatment without the presence of perfect full evaders (players who declared ECU 0 in all 20 rounds) is treatment S. As depicted in Table 3, treatment S shows a tendency of higher values for mean, median and other quartiles.
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In public goods experiments, it is not unusual to incur into the phenomenon of over-contribution (Ledyard, 1995). Intended as in Kirchler et al. (2009, p.498), as “the overall level of participants reporting their full income”.
Please cite this article in press as: Casal, S., Mittone, L., Social esteem versus social stigma: The role of anonymity in an income reporting game. J. Econ. Behav. Organ. (2015), http://dx.doi.org/10.1016/j.jebo.2015.09.014
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Evaded taxes (standard errors in parentheses)
Model
Probability to evade (standard errors in parentheses) 1
2
3
(Intercept) Control Esteem Stigma Public Anonymous Stigma CUriosity Age Female Econ Period Just checked Count checks
1.911 (2.058) −1.359 (0.833) −1.656 (0.835)* −2.443 (0.832)** −0.776 (0.820) −1.566 (0.830)* −0.812 (0.890) −0.034 (0.078) −1.425 (0.477)** −0.734 (0.505)• 0.090 (0.014)*** 1.522 (0.125)*** −0.290 (0.058)***
308.039 (43.466)*** −99.417 (68.726) −5.344 (68.726) −148.444 (68.726)* −38.618 (68.726) −41.085 (68.726) 33.605 (68.726)
242.380 (145.652)• −86.764 (67.879) −46.605 (68.005) −154.919 (67.848)* −3.366 (67.359) −37.331 (67.463) 3.168 (71.443) 4.237 (5.498) −144.166 (33.784)*** −61.910 (36.126) 8.363 (1.043)*** 127.472 (8.820)*** −21.722 (4.262)***
Log likelihood Prob > F R squared Num. obs. Num. groups: ID Num. groups: matching group
−1946.004 0.000 – 4800 240 30
– 0.007 0.027 4800 240 30
– 0.000 0.098 4800 240 30
• * ** ***
p < 0.1. p < 0.05. p < 0.01. p < 0.001.
To confirm this, we tested whether the publication of the photographs of tax evaders rises honesty and, as a consequence, compliance. We checked whether the average declaration at the individual level of treatment S statistically differs from the average declarations of the other treatments. We found that the average declaration in treatment S is significantly different when compared to treatment B and treatment CU (Wilcoxon rank sum test, p-value = 0.02187 and p-value = 0.01828 respectively) and differs marginally when compared to treatments E and P (Wilcoxon rank sum test, p-value = 0.0864 and p-value = 0.0892 respectively). 3.2. Determinants of evasion Table 4 presents regression analyses regarding the determinants of tax behaviour in players. Model 1 refers to the decision of engaging in tax evasion. Model 1 is a generalized linear mixed model with a dichotomous dependent variable given by the decision of the participant to evade (DI < 1500) or not (DI = 1500). Given the nature of the dependent variable, we used a logit link function. In Model 1, potential dependence for the repeated decisions made by participants (20 rounds) is controlled by including random effects at the individual level. Random effects at matching group level are introduced to account for the possible lack of independence of taxpayers within a matching group. Model 1 presents the explanatory variables given by the experimental treatments (treatment B represents our benchmark) as regressors, plus other control variables (Age measures the age of the participant in years, Female controls for gender and Econ is a dummy variable which takes into account whether the participant is a student of economics or not) and the variables Period, Just Checked and Count Checked. Period registers the round of the experiment (from 1 to 20), Just Checked captures whether the subject has been caught evading in the previous round and Count Checked records the number of audits experienced by the participant. Compared to treatment B, where no (dis)incentives are applied, both kinds of non-monetary incentives, positive (treatment E) and negative (treatment S and AS), reduce the likelihood of evasion. Treatment S is the most effective (in terms of both impact and significance level). This suggests that when a taxpayer has to decide whether to engage in tax evasion, stigmatization suppresses this temptation better than good publicity as an honest taxpayer. The determinant role of social stigma in reducing the likelihood of evasion is also supported (as fully discussed in Section 3.3) by the reduction in the effectiveness of stigmatization when social stigma is made avoidable (treatment AS). We found that the effects of the non-monetary (dis)incentives, which worked quite effectively in isolation, disappear when positive and negative non-monetary incentives are applied at the same time: treatment P, in which the photographs of both honest and dishonest taxpayers were displayed, fails to reduce the likelihood of evasion. This phenomenon can be justified by salience (Taylor and Thompson, 1982): information given by the publication of both kinds of taxpayers (evaders and full-contributors) may have received insufficient attention since treatment P—unlike treatments E, S and AS—did not only focus on one single characteristic of tax behaviour. The regression also shows that the possibility of becoming aware of the identities of tax fraudsters (treatment CU) does not reduce the likelihood of evasion possibly because participants generally lack the urge to pay for this opportunity. As Please cite this article in press as: Casal, S., Mittone, L., Social esteem versus social stigma: The role of anonymity in an income reporting game. J. Econ. Behav. Organ. (2015), http://dx.doi.org/10.1016/j.jebo.2015.09.014
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a consequence, the threat represented by treatment CU is not considered credible and the probability of being exposed to social stigma is perceived to be very low. In other words, treatment CU fails in reducing the likelihood of tax evasion because public disapproval is believed to be very unlikely. This point is taken up again and discussed in Section 3.3. Model 1 confirms established findings in tax evasion research (e.g., Mittone, 2006) namely that females are less likely than males to engage in evasion, the likelihood of compliance decreases immediately after an audit and the more a subject is monitored throughout an experiment, the less the likelihood of dishonest behaviour. Result 1. Regarding the probability of evasion, non-monetary (dis)incentives work in both directions: nevertheless, negative non-monetary incentives are more effective in reducing the likelihood of evasion. Result 1 is in line with the prediction of the Bénabou and Tirole (2006) model: stigma works better than esteem since, as we already know, tax honesty was generally high among our participants. Model 2 and Model 3 are linear mixed models with the amount of evaded taxes as the dependent variable. Also in these models, potential dependence is controlled by including random effects at the individual and group level. Model 2 presents only the explanatory variables given by the experimental treatments as regressors while Model 3 has all the other control variables. The positive coefficients (marginally significant in Model 3) of the intercept show that participants tend to evade taxes in the baseline B. Furthermore, the certain application of social stigma (treatment S) does significantly reduce the amount of evaded taxes. However, when considering the other (dis)incentives, significant reductions are not observed. Result 2. Regarding the intensity of evasion, publicizing tax fraudsters has an impact on participants’ honesty by driving them to evade less taxes. It is not surprising that E does not significantly affect evaded taxes (publicity of full contributors does not impinge on evasion intensity when a taxpayer has already decided to engage in evasion), and the non-significant impact of AS suggests that the intensity of cheating is not affected by stigma if tax offenders can escape it. This issue is largely discussed in the next section. 3.3. Value of anonymity Treatments AS and CU endorse in depth investigation of the roles played by anonymity and negative social pressure on tax compliance because these treatments provide either the opportunity for tax evaders to avoid public blame (treatment AS) or the chance for taxpayers to blame fraudsters (treatment CU). Contrary to treatment S, in treatment AS players had the opportunity to buy the certainty of not being publicized as fraudsters by acquiring the “right of anonymity”. Each offender was informed, before the random auditing process, that in the case of inspection their identity would be publicized. They had the possibility of making an offer to acquire the “right of anonymity” via the BDM procedure (Becker et al., 1964). The offer ranged from zero to Xmax : the maximum amount allowed depended on the evaded amount and the associated fine, and it corresponded to the available income before the auditing process subtracted from the potential fine. The amount was calculated as follows: Xmax = IE − DI − ((IE − DI)). After the offer, the software generated a random number between 0 and Xmax ; if the offer made resulted equal to or higher than the random number, the player acquired the “right of anonymity”. In this case, the software substituted the photograph of the offender with an anonymous picture and the random number had to be paid by the subject as the fee for the anonymity. On the other hand, if the offer resulted smaller than the random number, the evaders identity was made public and no fee was subtracted from the income of the player. In treatment CU players had the opportunity to know with absolute certainty the identities of the caught (if any) tax evaders in the group. Using the same BDM procedure described above, participants had to state their maximum willingness to pay for being informed of the audited tax offenders’ identities. For a perfect comparison with treatment S, in treatment AS and in treatment CU the number of the audited tax evaders was also displayed, regardless of the result of the BDM procedures. Fig. 1 is an example of how identities were publicized in treatments S (top-left), AS (top-right) and CU (bottom left and right). The numbers of acts of evasion (Rd < 1500) are, in treatment AS, systematically higher than the numbers those in treatment S. The average proportion of tax evaders is 30.31% in treatment S, and 43.91% in treatment AS. Evasion increases even more in treatment CU, where the average proportion of tax evaders is around 60% (statistically significant differences in all comparisons: Wilcoxon rank sum test, p-value < 0.001 for all comparisons). Fig. 2 compares acts of evasion in treatment S, AS and CU: the dashed lines are a representation of the average proportion of tax evaders. In treatment AS, acts of evasion are accompanied by a high interest in acquiring the “right of anonymity” (high VIA). Fig. 3 summarizes the overall interest in anonymity. The left-hand side of Fig. 3 shows the proportion of positive offers throughout the sessions. On average, around 76% of evaders showed interest in avoiding social blame by offering an amount bigger than zero for the photograph. Not only the majority of offenders were interested in acquiring the “right of anonymity” but, as depicted by the right-hand side of Fig. 3, offers were effective in acquiring the anonymity on average once every two trials (overall average success probability = 48.39%). Please cite this article in press as: Casal, S., Mittone, L., Social esteem versus social stigma: The role of anonymity in an income reporting game. J. Econ. Behav. Organ. (2015), http://dx.doi.org/10.1016/j.jebo.2015.09.014
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Fig. 1. Examples of taxdogers’ publicity.
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Fig. 2. Acts of evasion: treatments S, AS and CU compared.
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81.5
60 40
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% avaiilable income
68.4
Type 1
Type 2
Type 3
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Taxpayer
Fig. 4. Percentage of available income offered for acquiring the right of anonymity.
To better understand the value of anonymity for tax evaders, we have defined four different types according to the number of acts of evasion carried out during the twenty experimental periods.13 Taxpayer Type 1 is a taxpayer who evaded no more than 5 times; taxpayer Type 2 evaded more than 5 times but less than 11; a taxpayer who evaded from 11 to 15 times (both included) is classified as taxpayersType 3. Finally, taxpayer Type 4 evaded more than 15 times. Fig. 4 shows the distribution of the average offers as a percentage of the player’s available
13
Identifying a complete taxpayers’ taxonomy is often not easy: examples of categorization are Torgler (2003) and Mittone (2002).
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Probability of acquiring Curiosity
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Fig. 5. Treatment CU: positive offers for anonymity and average probability of acquisition.
income at the moment of the offer (Xmax ). In addition, the value of the average offer for each type of taxpayer is reported in the corresponding column. Average offers decrease as evasion becomes more systematic. The average offer of Type 1 taxpayers is not significantly different compared to the average offer of Type 2 (Wilcoxon rank sum test, p-value = 0.559), but it is significantly higher than offers made by Type 3 and Type 4 taxpayers (Wilcoxon rank sum test, p-value = 0.056 and p-value < 0.001). Statistically, differences are detected when comparing offers made by Type 2 and Type 3 taxpayers (Wilcoxon rank sum test, p-value = 0.027), Type 2 and Type 4 (Wilcoxon rank sum test, p-value < 0.001) and Type 3 and Type 4 (Wilcoxon rank sum test, p-value = 0.007). Result 3. The possibility of avoiding social blame leads to an increase in the number of acts of evasion and to a corresponding number of positive offers for anonymity. Occasional tax offenders offer more than those who engage in frequent evasion in order not to have their identities publicized when they are caught. The number of positive offers in treatment CU drops with respect to treatment AS but remains of note. It is important to notice that the positive offered amounts are, in this case, generally very low: on average only around 8% of offers could have been effective in buying the identity of the tax evaders. Fig. 5 summarizes offers in treatment CU. If anonymity is the status quo, participants do not show a high interest in knowing the identities of tax evaders (low VOA) and the belief that this is the common consensus would appear to be widespread. At the end of the experiment, we asked participants to guess the average offer made during the full experiment: the average guess was 14.58% (sd, 16.08), and half of the subjects guessed a value smaller than 10% of the available income (actual mean offer equal to 8.29%).14 The combination of the audit probability and the low (perceived) VOA reduces the threat of social stigma and its effect on compliance. Result 4. Taxpayers are willing to protect themselves against the stigma of social blame even if they show very little interest in the opportunity of blaming others. In other words, there is a misalignment between VIA and VOA. Even though there is little general interest in knowing who a tax evader is, a large majority of taxpayers do not want to be publicly recognized as an offender. We thus conclude that, despite the low values of VOA, the threat of social stigma has a real impact in sustaining tax compliance and reducing tax evasion, and it produces the best results with unsystematic evaders. 4. Discussion and conclusion The aim of this work was to contribute to the experimental research being carried out on social pressure in tax compliance. Our experimental setting involved, differently from recent investigations, non-monetary (dis)incentives aimed at increasing both negative and positive pressure (social approval and/or social disapproval) on tax evaders. As in Coricelli et al. (2010)
14
This task was incentivized with an additional payment of 1 euro if the guess was in the range ±5% of the actual offer.
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and Coricelli et al. (2014), social stigma raises tax compliance but social approval also decreases the likelihood of dishonest behaviour. Nevertheless, once tax evasion has been engaged in, non-monetary disincentives have an effective impact in reducing the intensity of that evasion (amount of evaded taxes) only if stigmatization is exogenously guaranteed (S): when it depends on the active behaviour of either the evader (AS) or the other taxpayers (CU), the amount of evaded taxes does not statistically decrease. With regard to the probability of evasion, if it is true that both positive and negative non-monetary incentives work when applied separately, changes in tax behaviour are not statistically detected when these incentives are applied at the same time. Surprisingly, when both social approval and social disapproval are at work (treatment P) no significant differences are detected when compared with the control group. We interpret this phenomenon as a lack of attention to the information provided (Taylor and Thompson, 1982). If stigmatization and/or social approval lose their appeal, the related non-monetary incentives fail in sustaining compliance: investigation of whether this is the case could be a starting point for further research. In addition, tax authorities must be aware that non-monetary incentives may backfire. Our results confirm what was pointed out by (Bénabou and Tirole, 2006, p. 1667): “stigma considerations will be dominant when the population includes only a few bad apples” or “honor will dominate when there are only few heroic types”. This means that a negative (positive) incentive may not deliver satisfactory results if applied in a context with low (high) intrinsic values in the population under investigation. Our experimental design has allowed us not only to test the impact of negative and positive non-monetary incentives but to understand what, if any, value taxpayers give to social disapproval (VIA and VOA). Avoiding stigmatization and social blame is particularly important for occasional tax offenders: to acquire the “right of anonymity”, taxpayers with less than five acts of evasion offered more than double the amount (in terms of percentage of available income) than the taxpayers with sixteen or more acts of evasion. There are two possible explanations for this phenomenon: (i) the unsystematic tax fraudsters evade less because they are more risk adverse or (ii) they are more compliant because their ethics drive their behaviour towards the “right thing to do” or, in other words, towards compliance. If more honest behaviour were only a result of the difference in attitudes towards risk, differences in offers for the anonymity would not be observed. This is not the case in our experiment: unsystematic tax offenders evade less not because they are more risk adverse but because they recognize evasion as unethical behaviour and, for this reason, they are more than willing to buy the anonymity when there is the risk of being publicly recognized as a dishonest person. When unsystematic tax offenders engage in evasion, they want to be sure that their acts will remain private (highest VIA). It is important to highlight the fact that avoiding individual stigmatization works even if individuals are not really interested in blaming others and believe that others are not interested in blaming tax evaders (low VOA). Tax authorities can, for this reason, exploit this misalignment between the value attributed to individual anonymity and the value attributed to the others anonymity to ensure and uphold tax compliance via the public stigmatization of tax fraudsters. Acknowledgements The authors gratefully acknowledge the constructive advice of the reviewers. Appendix A. Supplementary data Supplementary data associated with this article can be found, in the online version, at http://dx.doi. org/10.1016/j.jebo.2015.09.014. References Allingham, M.G., Sandmo, A., 1972. Income tax evasion: a theoretical analysis. J. Public Econ. 1, 323–338. Alm, J., Cronshaw, M.B., McKee, M., 1993. Tax compliance with endogenous audit selection rules. Kyklos 46, 27–45. Alm, J., McClelland, G.H., Schulze, W.D., 1992. Why do people pay taxes? J. Public Econ. 48, 21–38. Alm, J., Sanchez, I., de Juan, A., 1995. Economic and noneconomic factors in tax compliance. Kyklos 48, 3–18. Alm, J., Torgler, B., 2011. Do ethics matter? Tax compliance and morality. J. Bus. Ethics 101, 635–651. Anderhub, V., Giese, S., Güth, W., Hoffmann, A., Otto, T., 2001. Tax evasion with earned income – an experimental study. FinanzArchiv/Public Finance Anal. 58, 188–206. 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Social esteem versus social stigma: The role of anonymity in an income reporting game Sandro Casal a,1 , Luigi Mittone b,∗ a b
Doctoral School of Social Sciences, University of Trento, Italy Department of Economics and Management, University of Trento, via Inama 5, 38122 Trento, Italy
a r t i c l e
i n f o
Article history: Received 6 June 2014 Received in revised form 18 February 2015 Accepted 21 September 2015 Available online xxx Keywords: Tax evasion Non-monetary (dis)incentives Anonymity Experimental economics
a b s t r a c t This paper aims at experimentally testing the role of different non-monetary (dis)incentives on tax compliance. Participants were subjected to different experimental conditions where the role played by anonymity differed. As expected, anonymity does play an important role in the decision to pay taxes. In addition, we found that a negative non-monetary incentive increases tax compliance more effectively than a positive non-monetary incentive. We also found that the effect of these non-monetary incentives is mitigated when too much information is made available. Results show that, when evasion is made public, tax fraudsters are willing to pay in order to keep their dishonest behaviour undisclosed and to avoid public shame. Interestingly we found a misalignment on the impact of stigmatization, namely that the judgement of an individual’s evasion is perceived, by the individual, more harshly than a judgement made by the said individual regarding evasion carried out by other parties. © 2015 Elsevier B.V. All rights reserved.
1. Introduction The Allingham and Sandmo (1972) model is the starting point of almost all the studies on tax evasion: both empirical and experimental research have analyzed the model’s variables in order to better understand the role of income, tax rate, audit probability and fine rate.2 Findings, in some cases, are contradictory. Even if there is no general consensus on the role played by tax rate and income (e.g., the contradictory conclusions of Yitzhaki, 1974; Pommerehne and Weck-Hannemann, 1996; Park and Hyun, 2003; Baldry, 1987; Alm et al., 1995; Anderhub et al., 2001), the literature does provide agreement on the deterrent impact of the “audit scheme” which comprises audit probabilities, sequences of audits, endogenous or exogenous audits, and fine rates (Alm et al., 1993; Slemrod et al., 2001; Kastlunger et al., 2009). Regardless of the consensus or the disagreement on the effect of some of these variables, it is important to notice that researchers do agree that it is necessary to consider and include other variables when studying tax compliance. If based only on economic disincentives, not only does the model fail in describing the taxpayer behaviour, it also, paradoxically, poses the question of why people pay taxes rather than evade them (Alm et al., 1992). It is our opinion that not enough emphasis has been placed on the role played by social pressure (not necessarily used in a negative sense) on tax compliance. Only recently, and years after the pioneer work on blame carried out by Bosco and Mittone (1997), some studies have started to fill this gap (Coricelli et al., 2010, 2014; Maciejovsky et al., 2012).
∗ Corresponding author. Tel.: +39 0461 28 22 13. E-mail addresses: [email protected] (S. Casal), [email protected] (L. Mittone). 1 Present address: Department of Economics, Management, and Quantitative Methods (DEMM) of the University of Milan, Italy. 2 Comprehensive reviews of this topic are Andreoni et al. (1998) and Kirchler (2007). http://dx.doi.org/10.1016/j.jebo.2015.09.014 0167-2681/© 2015 Elsevier B.V. All rights reserved.
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However, this is not the case in public good games literature, where social pressure was studied first by Masclet et al. (2003) and only thereafter was a large corpus of literature produced.2 In public good literature, Rege and Telle (2004) is an example of a study centred on sustaining cooperation without monetary punishments and making use of both social approval and disapproval. It is important to state that essentially all studies on tax compliance have the following in common, namely an emphasis on tax evasion and the idea that taxpayers are, by definition, potential criminals. Generally, the focus point is to prevent a potential crime instead of pursuing tax compliance through promoting and facilitating the correct behaviour of taxpayers. Contrary to Rege and Telle (2004), in tax compliance literature cooperation (compliance) is rarely supported by the idea that taxpayers can also be honest and social approval has seldom been used to rise compliance. In a recent paper, Alm and Torgler (2011) propose, among other alternatives, to “publicize tax evasion convictions in the media as an alternative, nonmonetary type of penalty” (Alm and Torgler, 2011, p. 646). This disincentive perfectly fits what has been implemented in the UK where since 2012 Her Majesty’s Revenue and Customs (HMRC) has posted the pictures of the most-wanted tax evaders on its official webpages and asked citizens for help with their identification and localization. Coricelli et al. (2010, 2014) claim that social stigmatization can sustain compliance because taxpayers anticipate negative emotions like shame and blame. On the other hand, it is also plausible to expect that they also anticipate positive emotions, like respect and esteem, which can be induced with positive non-monetary incentives. Following the same line of reasoning, the mass-media could also be used to publicize full contributors and full compliance3 which could induce a possible twofold result: sustaining compliance via the anticipation of positive emotions and triggering the idea that tax compliance is a widespread phenomenon in the society (Alm and Torgler, 2011). Our paper contributes to research on social pressure and tax compliance in the following innovative ways: first, we compare the impact of negative and positive non-monetary incentives on tax behaviour linked to the loss of anonymity and related to different kinds of social pressure; and second, we measure the (monetary) value that taxpayers associate with the loss of anonymity when asked to pay taxes. More precisely, we measure: (i) the tax evaders’ willingness to pay a fee to avoid publicity of their evasion (value attributed to individual anonymity, VIA); and (ii) the taxpayers’ willingness to pay a fee to identify tax evaders (value attributed to the others anonymity, VOA). Several questions obviously arise: (i) Are positive non-monetary incentives or negative non-monetary disincentives more effective in sustaining tax compliance? (ii) Do people care about the loss of anonymity through a public announcement of their tax behaviour, and do they care about the judgements of other members of the community? (iii) Is there a gap between VIA and VOA or, more precisely, is there a misalignment in evaluating the same phenomenon (evasion) when its consequences (social blame) affect either the individual or others? In Section 2, we present the experimental protocol used to answer these questions. Section 3 contains experimental data, analysis and tests. Finally, Section 4 concludes with a discussion of the results.
2. Method 2.1. Design We investigate behaviour in an income reporting game and test the effect of non-monetary (dis)incentives on tax compliance. Non-monetary (dis)incentives consist in the public announcements of audited taxpayers’ behaviour via the publication of their photographs. The experiment consists of seven treatments: baseline (B), control (C), esteem (E), public (P), stigma (S), anonymous stigma (AS) and curiosity (CU). We used a between-subjects design: each session had 16 participants and consisted of 20 rounds. Participants were informed that the experimental session had several rounds but the exact number was not specified. At the beginning of each round, participants were randomly assigned to groups of four and each received an initial endowment (IE) of 1500 experimental currency units (ECU). They were required to declare the endowment: a tax rate ( = 55%4 ) was applied to the declared income (DI), and taxes were collected. Participants were informed about the probability to be audited (p = 20%) and the amount of fine for evasion ( = 125% of evaded taxes). Collected taxes were then redistributed among the members of the group, after being multiplied by the factor 1.4 (˛).
2
Chaudhuri (2011) examines the latest developments in public good experiments in detail. In March 2012, the Italian tax authority began to consider the possibility of introducing a type of “certificate of fiscal conformity”. Businesses which resulted in having complied with their fiscal duties would receive the certificate. These businesses could then use the certificate to publicize their status to the public. 4 The tax rate was set according to a study released in 2012 by Confcommercio (Italian General Confederation of Commerce, Tourism and Services) in which it was pointed out that, taking into account the size of the Italian shadow economy, the actual average tax burden for a compliant Italian taxpayer was around 55%. 3
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Table 1 Experimental design. Treatment
# of subjects
# of matching groups
Pic. for enrolment
Anonymity of audited evaders
Anonymity of audited full contributors
Baseline (B) Control (C) Esteem (E) Public (P) Stigma (S) Anonymous stigma (AS) Curiosity (CU)
48 32 32 32 32 32 32
6 4 4 4 4 4 4
No Yes Yes Yes Yes Yes Yes
Yes Yes Yes No No P NG
Yes Yes No No Yes Yes Yes
Note: P stands for possible, NG for not guaranteed.
The payoff for the participant, at the end of the round, was equal to:
⎧ 4 ˛ i=1 DI i ⎪ ⎪ ⎨ IE − DI + if (s)he was not audited 4 = 4 ⎪ ⎪ ⎩ IE − DI + ˛ i=1 DI i − ((IE − DI)) if (s)he was audited. 4
The round ended with the communication of the amount the participant received as payoff. After this stage and before starting a new round, participants were randomly reallocated to new groups.5 In treatments B and C, non-monetary (dis)incentives were not used. As explained in Section 2.3, treatment B differs from treatment C in the enrolment process: pictures of participants in treatment C were taken, even though these were not used. In treatments E, P and S, non-monetary (dis)incentives were implemented: after the communication of the participant’s payoff, and only among the members of the groups, the identities of audited taxpayers were announced. More precisely: • in treatment E we publicized the identities of audited full contributors (positive non-monetary incentive) • in treatment S we publicized the identities of audited tax evaders (negative non-monetary incentive) • in treatment P we publicized the identities of all audited taxpayers (positive and negative non-monetary incentives). In treatment AS, the same non-monetary disincentive as in treatment S was implemented but evaders had the possibility of keeping their identities secret by acquiring the “right of anonymity”. Before running the auditing process, we elicited the evaders’ willingness to pay for the anonymity using the BDM procedure (Becker et al., 1964). In other words, contrary to S, in AS evaders had the possibility of escaping social stigma. In treatment CU social stigma and social blame were only possible if participants actively decided to discover the identity of the tax offenders. In this treatment, participants had to pay a fee in order to know the identity of tax evaders: as in treatment AS, we elicited their willingness to pay, via a BDM procedure. Table 1 summarizes the experimental design. As expected in experiments on tax compliance, non-neutral terms were used both in the instructions and in the software. 2.2. Behavioural predictions The introduction of a public good financed by tax revenues is necessary for our experimental setting: if there is no interaction among participants, an exercise on social pressure (of both kinds, i.e., social approval and/or social disapproval) loses a substantial part of its appeal.6 In common with papers that include the redistribution of collected taxes, our marginal per capital return (MPCR) is (1/group size)
5
As in Coricelli et al. (2014), the rematching procedure is used to restore participants’ “reputation” in the treatments with non-monetary (dis)incentives. In addition, public good provision ensures the presence of both monetary and non-monetary (dis)incentives. Full contributions have the monetary incentive in the multiplication factor of the public good structure and the non-monetary incentive in the publication of honest behaviour while acts of evasion have the monetary disincentive in fines and the non-monetary disincentive in the publication of evasive behaviour. 6
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on emotions related with public disapproval (Coricelli et al., 2010, 2014), we expect that the introduction of negative nonmonetary incentives increases compliance. The value attributed to individual anonymity (VIA) can be seen as an indirect pecuniary measure of the psychological costs introduced by Gordon (1989) where the “right of anonymity” represents a sort of insurance against stigmatization. The possibility of avoiding social blame should decrease tax compliance since, in case of evasion, the reduction (in terms of utility) given by the monetary loss (the fee for the “right of anonymity”) is smaller than the reduction given by the psychological cost.7 We thus predict that when tax fraudsters can avoid social stigma, tax evasion increases. Our design allows to test for the impact of positive non-monetary incentive on tax compliance: given previous results on cooperation in public good experiments (e.g., Rege and Telle, 2004), we can expect that the anticipation of social approval, in case of the publication of full contribution, increases contributions (compliance). Unfortunately, we do not have an indirect measure of the psychological satisfaction of being publicly recognized as a full contributor, a factor that may have a positive impact on a taxpayer’s utility and may modify, as Gordon (1989) did for psychological costs, the Allingham and Sandmo (1972) model. This could be a starting point for further research. More recently, Bénabou and Tirole (2006) discussed the motivations for individuals’ prosocial behaviour and they found three main drivers: altruistic motivation, material self-interest, and social or self-image concerns (Bénabou and Tirole, 2006, p. 1674). Exposing tax evaders or full contributors to publicity changes the last of the three drivers and can influence an individual’s behaviour. The authors claim that the effect of a specific stimulus depends on the distribution of social preferences, i.e., in a context like ours, the negative non-monetary incentive should work better in a community where tax compliance is widespread and the positive non-monetary incentive should work better when the population includes a large number of tax evaders. Finally, the willingness to pay a fee to identify tax evaders (value attributed to the others anonymity, VOA) can be considered as a monetary proxy of the value attributed to the psychological pleasure of identifying the tax fraudsters in the group.8 There is an interesting feature of these different psychological carriers in VIA and VOA: regardless of the fact that both involve the issue of identifiability, VIA is linked to a loss, the loss of personal good reputation, while VOA is related to a gain, the gain of information about the identity of the tax evaders. Under the standard definition of loss aversion (Kahneman et al., 1991), we predict a statistically significant difference between VIA and VOA and, indeed, VIA should be higher than VOA.
2.3. Participants and procedures The experiment was run in Trento (Italy), in the Cognitive and Experimental Economics Laboratory (CEEL) at the University of Trento. The participants were mainly University of Trento students and most of them attended courses in the Department of Economics (55%).9 The computerized experiment was programmed and conducted using z-Tree software (Fischbacher, 2007). A total of 240 participants (119 males and 121 females with an average age of 23 with sd of 3.3) took part in the experiment which was divided into 15 sessions involving 16 participants. Each treatment had two sessions, except treatment B which had three. Treatment B was the only one with a “traditional” enrolment procedure: participants were recruited via an announcement using the laboratory mailing list. In treatments C, E, P, S, AS and CU, participants were required to come to the laboratory for the enrolment (one week before the experiment). Once in the laboratory, they were informed that they should authorize the experimenter to take their photograph and that this could be used during the experiment. Participants were not informed about the purpose of the picture but only about the possibility of using the picture during the experiment. Participants were also ensured that, at the end of the experiment, all pictures would be destroyed.10 On the day of the experiment, instructions were distributed and each participant was given time to read them. To establish and ensure common knowledge, instructions were also read aloud and a questionnaire was distributed before starting the experiment to check the understanding of the rules. The experiment lasted about 60 min. Regardless of the result achieved in the experiment, subjects received a show-up fee of D 2.50. Only one of the session rounds was randomly selected for payment: the result of the selected round was converted into Euro (150 ECU = 1 Euro) and privately paid to the subject. On average, participants earned D 11.50.
7
The BDM procedure ensures that the amount paid for the anonymity is no larger than the VIA amount. In the CU case, some participants may make high offers not because they have a high VOA but because they are applying a sort of social norms reinforcing mechanism. The pursuing of this goal is, in our setting, illusory given that we use a random matching procedure when creating the groups at the beginning of each round. Therefore, the reinforcement mechanism cannot produce any foreseen advantage for the punishers. 9 In addition to the economic students, 14% took courses in other social sciences (Sociology, Political Science, Psychology and Cognitive Science), 16% in Law, 7% in Engineering, 5% in Humanities, 1% in Hard Sciences. Seven participants (2%) had graduated shortly before the experiment and declared they were not longer students. 10 None of the participants refused to enrol. 8
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Table 2 Proportion of evaders. Treatment
All rounds
First round
B C E P S AS CU
55.63 (1.60) 41.88 (1.95) 49.22 (1.98) 45.00 (1.97) 30.31 (1.82) 43.91 (1.96) 57.34 (1.96)
54.17 (1.61) 40.63 (1.94) 40.63 (1.94) 34.37 (1.88) 31.25 (1.83) 31.25 (1.83) 50.00 (1.98)
Table 3 Average declared income at individual level. Treatment
Min
1st Qu.
Median
Mean
3rd Qu.
Max
B C E P S AS CU
0 0 0 0 75 0 0
634 838 525 626 1069 597.8 461.5
988 1292 1015 1111 1348 1195 1003
934 1121 950 1010 1210 1015 879
1365 1473 1478 1475 1490 1500 1361
1500 1500 1500 1500 1500 1500 1500
3. Results Compliance levels were considerably high in all treatments. Possible reasons for this could be found in the nested public good game structure11 or in the unusual enrolment procedure which may had altered the social distance not only among participants but also between participant and experimenter (Bohnet and Frey, 1999; Levitt and List, 2007). In addition, in our setting participants had to take decisions on windfall gains (Arkes et al., 1994), i.e., they did not exert effort to get their initial endowment. When the endowment is not earned, pro-sociality is usually triggered in participants (see the results of dictator game-like experiments such as Cherry et al., 2002 or Oxoby and Spraggon, 2008) even though conclusions on cooperation, for example in public good settings, are conflicting (Clark, 2002; Harrison, 2007). Kirchler et al. (2009), in line with Boylan and Sprinkle (2001), claim that tax evasion tends to be lower when participants exert considerable effort to obtain their endowments. Our compliance rates and our level of tax honesty12 , which are slightly higher than the cited studies, seem to endorse the idea that windfall gains trigger pro-sociality and cooperation more than evasion. 3.1. Descriptive statistics Table 2 shows the proportions of evaders (defined when DI < 1500, standard deviations in parentheses) in all 20 rounds and in the first round: the first round was the only when declarations could not be influenced by any previous experience of audits or peer behaviour. When considering the first round of the experiment, the proportion of evaders is higher in B than in treatment S and AS (Pearson’s Chi-squared test, for both comparisons p-value = 0.04355), and marginally higher than treatment C (Pearson’s Chi-squared test, p-value = 0.08197). A statistically significant difference is also found when comparing the frequency of full cooperation in the first period in treatment B with a pooled sample of the other treatments in which a photograph was required during the enrolment process (Pearson’s Chi-squared test, p-value = 0.04211). Overall, in all treatments except CU, the proportion of evaders is lower than in B (Pearson’s Chi-squared test, p-value ≤ 0.01189 for all comparisons). This suggests the presence of an “enrolment” effect: taking a photograph during the enrolment process drives participants to be more compliant. Under all treatment conditions subjects declare a considerably high amount of their initial endowment. This is more noticeable by considering the average declared income at the individual level: the maximum value is, for each treatment, ECU 1500 which means that in all treatments there is the presence of perfect full contributors (players who declared ECU 1500 in all 20 rounds). On the other hand, the only treatment without the presence of perfect full evaders (players who declared ECU 0 in all 20 rounds) is treatment S. As depicted in Table 3, treatment S shows a tendency of higher values for mean, median and other quartiles.
11 12
In public goods experiments, it is not unusual to incur into the phenomenon of over-contribution (Ledyard, 1995). Intended as in Kirchler et al. (2009, p.498), as “the overall level of participants reporting their full income”.
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Evaded taxes (standard errors in parentheses)
Model
Probability to evade (standard errors in parentheses) 1
2
3
(Intercept) Control Esteem Stigma Public Anonymous Stigma CUriosity Age Female Econ Period Just checked Count checks
1.911 (2.058) −1.359 (0.833) −1.656 (0.835)* −2.443 (0.832)** −0.776 (0.820) −1.566 (0.830)* −0.812 (0.890) −0.034 (0.078) −1.425 (0.477)** −0.734 (0.505)• 0.090 (0.014)*** 1.522 (0.125)*** −0.290 (0.058)***
308.039 (43.466)*** −99.417 (68.726) −5.344 (68.726) −148.444 (68.726)* −38.618 (68.726) −41.085 (68.726) 33.605 (68.726)
242.380 (145.652)• −86.764 (67.879) −46.605 (68.005) −154.919 (67.848)* −3.366 (67.359) −37.331 (67.463) 3.168 (71.443) 4.237 (5.498) −144.166 (33.784)*** −61.910 (36.126) 8.363 (1.043)*** 127.472 (8.820)*** −21.722 (4.262)***
Log likelihood Prob > F R squared Num. obs. Num. groups: ID Num. groups: matching group
−1946.004 0.000 – 4800 240 30
– 0.007 0.027 4800 240 30
– 0.000 0.098 4800 240 30
• * ** ***
p < 0.1. p < 0.05. p < 0.01. p < 0.001.
To confirm this, we tested whether the publication of the photographs of tax evaders rises honesty and, as a consequence, compliance. We checked whether the average declaration at the individual level of treatment S statistically differs from the average declarations of the other treatments. We found that the average declaration in treatment S is significantly different when compared to treatment B and treatment CU (Wilcoxon rank sum test, p-value = 0.02187 and p-value = 0.01828 respectively) and differs marginally when compared to treatments E and P (Wilcoxon rank sum test, p-value = 0.0864 and p-value = 0.0892 respectively). 3.2. Determinants of evasion Table 4 presents regression analyses regarding the determinants of tax behaviour in players. Model 1 refers to the decision of engaging in tax evasion. Model 1 is a generalized linear mixed model with a dichotomous dependent variable given by the decision of the participant to evade (DI < 1500) or not (DI = 1500). Given the nature of the dependent variable, we used a logit link function. In Model 1, potential dependence for the repeated decisions made by participants (20 rounds) is controlled by including random effects at the individual level. Random effects at matching group level are introduced to account for the possible lack of independence of taxpayers within a matching group. Model 1 presents the explanatory variables given by the experimental treatments (treatment B represents our benchmark) as regressors, plus other control variables (Age measures the age of the participant in years, Female controls for gender and Econ is a dummy variable which takes into account whether the participant is a student of economics or not) and the variables Period, Just Checked and Count Checked. Period registers the round of the experiment (from 1 to 20), Just Checked captures whether the subject has been caught evading in the previous round and Count Checked records the number of audits experienced by the participant. Compared to treatment B, where no (dis)incentives are applied, both kinds of non-monetary incentives, positive (treatment E) and negative (treatment S and AS), reduce the likelihood of evasion. Treatment S is the most effective (in terms of both impact and significance level). This suggests that when a taxpayer has to decide whether to engage in tax evasion, stigmatization suppresses this temptation better than good publicity as an honest taxpayer. The determinant role of social stigma in reducing the likelihood of evasion is also supported (as fully discussed in Section 3.3) by the reduction in the effectiveness of stigmatization when social stigma is made avoidable (treatment AS). We found that the effects of the non-monetary (dis)incentives, which worked quite effectively in isolation, disappear when positive and negative non-monetary incentives are applied at the same time: treatment P, in which the photographs of both honest and dishonest taxpayers were displayed, fails to reduce the likelihood of evasion. This phenomenon can be justified by salience (Taylor and Thompson, 1982): information given by the publication of both kinds of taxpayers (evaders and full-contributors) may have received insufficient attention since treatment P—unlike treatments E, S and AS—did not only focus on one single characteristic of tax behaviour. The regression also shows that the possibility of becoming aware of the identities of tax fraudsters (treatment CU) does not reduce the likelihood of evasion possibly because participants generally lack the urge to pay for this opportunity. As Please cite this article in press as: Casal, S., Mittone, L., Social esteem versus social stigma: The role of anonymity in an income reporting game. J. Econ. Behav. Organ. (2015), http://dx.doi.org/10.1016/j.jebo.2015.09.014
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a consequence, the threat represented by treatment CU is not considered credible and the probability of being exposed to social stigma is perceived to be very low. In other words, treatment CU fails in reducing the likelihood of tax evasion because public disapproval is believed to be very unlikely. This point is taken up again and discussed in Section 3.3. Model 1 confirms established findings in tax evasion research (e.g., Mittone, 2006) namely that females are less likely than males to engage in evasion, the likelihood of compliance decreases immediately after an audit and the more a subject is monitored throughout an experiment, the less the likelihood of dishonest behaviour. Result 1. Regarding the probability of evasion, non-monetary (dis)incentives work in both directions: nevertheless, negative non-monetary incentives are more effective in reducing the likelihood of evasion. Result 1 is in line with the prediction of the Bénabou and Tirole (2006) model: stigma works better than esteem since, as we already know, tax honesty was generally high among our participants. Model 2 and Model 3 are linear mixed models with the amount of evaded taxes as the dependent variable. Also in these models, potential dependence is controlled by including random effects at the individual and group level. Model 2 presents only the explanatory variables given by the experimental treatments as regressors while Model 3 has all the other control variables. The positive coefficients (marginally significant in Model 3) of the intercept show that participants tend to evade taxes in the baseline B. Furthermore, the certain application of social stigma (treatment S) does significantly reduce the amount of evaded taxes. However, when considering the other (dis)incentives, significant reductions are not observed. Result 2. Regarding the intensity of evasion, publicizing tax fraudsters has an impact on participants’ honesty by driving them to evade less taxes. It is not surprising that E does not significantly affect evaded taxes (publicity of full contributors does not impinge on evasion intensity when a taxpayer has already decided to engage in evasion), and the non-significant impact of AS suggests that the intensity of cheating is not affected by stigma if tax offenders can escape it. This issue is largely discussed in the next section. 3.3. Value of anonymity Treatments AS and CU endorse in depth investigation of the roles played by anonymity and negative social pressure on tax compliance because these treatments provide either the opportunity for tax evaders to avoid public blame (treatment AS) or the chance for taxpayers to blame fraudsters (treatment CU). Contrary to treatment S, in treatment AS players had the opportunity to buy the certainty of not being publicized as fraudsters by acquiring the “right of anonymity”. Each offender was informed, before the random auditing process, that in the case of inspection their identity would be publicized. They had the possibility of making an offer to acquire the “right of anonymity” via the BDM procedure (Becker et al., 1964). The offer ranged from zero to Xmax : the maximum amount allowed depended on the evaded amount and the associated fine, and it corresponded to the available income before the auditing process subtracted from the potential fine. The amount was calculated as follows: Xmax = IE − DI − ((IE − DI)). After the offer, the software generated a random number between 0 and Xmax ; if the offer made resulted equal to or higher than the random number, the player acquired the “right of anonymity”. In this case, the software substituted the photograph of the offender with an anonymous picture and the random number had to be paid by the subject as the fee for the anonymity. On the other hand, if the offer resulted smaller than the random number, the evaders identity was made public and no fee was subtracted from the income of the player. In treatment CU players had the opportunity to know with absolute certainty the identities of the caught (if any) tax evaders in the group. Using the same BDM procedure described above, participants had to state their maximum willingness to pay for being informed of the audited tax offenders’ identities. For a perfect comparison with treatment S, in treatment AS and in treatment CU the number of the audited tax evaders was also displayed, regardless of the result of the BDM procedures. Fig. 1 is an example of how identities were publicized in treatments S (top-left), AS (top-right) and CU (bottom left and right). The numbers of acts of evasion (Rd < 1500) are, in treatment AS, systematically higher than the numbers those in treatment S. The average proportion of tax evaders is 30.31% in treatment S, and 43.91% in treatment AS. Evasion increases even more in treatment CU, where the average proportion of tax evaders is around 60% (statistically significant differences in all comparisons: Wilcoxon rank sum test, p-value < 0.001 for all comparisons). Fig. 2 compares acts of evasion in treatment S, AS and CU: the dashed lines are a representation of the average proportion of tax evaders. In treatment AS, acts of evasion are accompanied by a high interest in acquiring the “right of anonymity” (high VIA). Fig. 3 summarizes the overall interest in anonymity. The left-hand side of Fig. 3 shows the proportion of positive offers throughout the sessions. On average, around 76% of evaders showed interest in avoiding social blame by offering an amount bigger than zero for the photograph. Not only the majority of offenders were interested in acquiring the “right of anonymity” but, as depicted by the right-hand side of Fig. 3, offers were effective in acquiring the anonymity on average once every two trials (overall average success probability = 48.39%). Please cite this article in press as: Casal, S., Mittone, L., Social esteem versus social stigma: The role of anonymity in an income reporting game. J. Econ. Behav. Organ. (2015), http://dx.doi.org/10.1016/j.jebo.2015.09.014
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Fig. 1. Examples of taxdogers’ publicity.
Treatment AS
12
Period
15
18
80
57.344
0
0
0 1 3 5 7 9
40 20
% Evaders
43.906
40 20
% Evaders
30.312
60
60
80 60 40 20
% Evaders
Treatment CU
80
Treatment S
1 3 5 7 9
12
15
18
Period
1 3 5 7 9
12
15
18
Period
Fig. 2. Acts of evasion: treatments S, AS and CU compared.
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Probability of acquiring anonimity
80
48.391
60 0
20
40
Probability (Mean)
75.968
60 40 0
20
% of positive Offers
80
100
100
Positive Offers for Anonymity
9
1
3
5
7
9
11
13
15
17
19
1
3
5
Period
7
9
11
13
15
17
19
Period
Fig. 3. Treatment AS: positive offers for anonymity and average probability of acquisition.
80
100
Offer for anonymity
81.5
60 40
55.2
39.3
0
20
% avaiilable income
68.4
Type 1
Type 2
Type 3
Type 4
Taxpayer
Fig. 4. Percentage of available income offered for acquiring the right of anonymity.
To better understand the value of anonymity for tax evaders, we have defined four different types according to the number of acts of evasion carried out during the twenty experimental periods.13 Taxpayer Type 1 is a taxpayer who evaded no more than 5 times; taxpayer Type 2 evaded more than 5 times but less than 11; a taxpayer who evaded from 11 to 15 times (both included) is classified as taxpayersType 3. Finally, taxpayer Type 4 evaded more than 15 times. Fig. 4 shows the distribution of the average offers as a percentage of the player’s available
13
Identifying a complete taxpayers’ taxonomy is often not easy: examples of categorization are Torgler (2003) and Mittone (2002).
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Probability of acquiring Curiosity
80 60 40 0
0
8.29
20
Probability (mean)
49.06
60 40 20
% of positive offers
80
100
100
Positive offers for Curiosity
1
3
5
7
9
11 Period
13
15
17
19
1
3
5
7
9
11
13
15
17
19
Period
Fig. 5. Treatment CU: positive offers for anonymity and average probability of acquisition.
income at the moment of the offer (Xmax ). In addition, the value of the average offer for each type of taxpayer is reported in the corresponding column. Average offers decrease as evasion becomes more systematic. The average offer of Type 1 taxpayers is not significantly different compared to the average offer of Type 2 (Wilcoxon rank sum test, p-value = 0.559), but it is significantly higher than offers made by Type 3 and Type 4 taxpayers (Wilcoxon rank sum test, p-value = 0.056 and p-value < 0.001). Statistically, differences are detected when comparing offers made by Type 2 and Type 3 taxpayers (Wilcoxon rank sum test, p-value = 0.027), Type 2 and Type 4 (Wilcoxon rank sum test, p-value < 0.001) and Type 3 and Type 4 (Wilcoxon rank sum test, p-value = 0.007). Result 3. The possibility of avoiding social blame leads to an increase in the number of acts of evasion and to a corresponding number of positive offers for anonymity. Occasional tax offenders offer more than those who engage in frequent evasion in order not to have their identities publicized when they are caught. The number of positive offers in treatment CU drops with respect to treatment AS but remains of note. It is important to notice that the positive offered amounts are, in this case, generally very low: on average only around 8% of offers could have been effective in buying the identity of the tax evaders. Fig. 5 summarizes offers in treatment CU. If anonymity is the status quo, participants do not show a high interest in knowing the identities of tax evaders (low VOA) and the belief that this is the common consensus would appear to be widespread. At the end of the experiment, we asked participants to guess the average offer made during the full experiment: the average guess was 14.58% (sd, 16.08), and half of the subjects guessed a value smaller than 10% of the available income (actual mean offer equal to 8.29%).14 The combination of the audit probability and the low (perceived) VOA reduces the threat of social stigma and its effect on compliance. Result 4. Taxpayers are willing to protect themselves against the stigma of social blame even if they show very little interest in the opportunity of blaming others. In other words, there is a misalignment between VIA and VOA. Even though there is little general interest in knowing who a tax evader is, a large majority of taxpayers do not want to be publicly recognized as an offender. We thus conclude that, despite the low values of VOA, the threat of social stigma has a real impact in sustaining tax compliance and reducing tax evasion, and it produces the best results with unsystematic evaders. 4. Discussion and conclusion The aim of this work was to contribute to the experimental research being carried out on social pressure in tax compliance. Our experimental setting involved, differently from recent investigations, non-monetary (dis)incentives aimed at increasing both negative and positive pressure (social approval and/or social disapproval) on tax evaders. As in Coricelli et al. (2010)
14
This task was incentivized with an additional payment of 1 euro if the guess was in the range ±5% of the actual offer.
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and Coricelli et al. (2014), social stigma raises tax compliance but social approval also decreases the likelihood of dishonest behaviour. Nevertheless, once tax evasion has been engaged in, non-monetary disincentives have an effective impact in reducing the intensity of that evasion (amount of evaded taxes) only if stigmatization is exogenously guaranteed (S): when it depends on the active behaviour of either the evader (AS) or the other taxpayers (CU), the amount of evaded taxes does not statistically decrease. With regard to the probability of evasion, if it is true that both positive and negative non-monetary incentives work when applied separately, changes in tax behaviour are not statistically detected when these incentives are applied at the same time. Surprisingly, when both social approval and social disapproval are at work (treatment P) no significant differences are detected when compared with the control group. We interpret this phenomenon as a lack of attention to the information provided (Taylor and Thompson, 1982). If stigmatization and/or social approval lose their appeal, the related non-monetary incentives fail in sustaining compliance: investigation of whether this is the case could be a starting point for further research. In addition, tax authorities must be aware that non-monetary incentives may backfire. Our results confirm what was pointed out by (Bénabou and Tirole, 2006, p. 1667): “stigma considerations will be dominant when the population includes only a few bad apples” or “honor will dominate when there are only few heroic types”. This means that a negative (positive) incentive may not deliver satisfactory results if applied in a context with low (high) intrinsic values in the population under investigation. Our experimental design has allowed us not only to test the impact of negative and positive non-monetary incentives but to understand what, if any, value taxpayers give to social disapproval (VIA and VOA). Avoiding stigmatization and social blame is particularly important for occasional tax offenders: to acquire the “right of anonymity”, taxpayers with less than five acts of evasion offered more than double the amount (in terms of percentage of available income) than the taxpayers with sixteen or more acts of evasion. There are two possible explanations for this phenomenon: (i) the unsystematic tax fraudsters evade less because they are more risk adverse or (ii) they are more compliant because their ethics drive their behaviour towards the “right thing to do” or, in other words, towards compliance. If more honest behaviour were only a result of the difference in attitudes towards risk, differences in offers for the anonymity would not be observed. This is not the case in our experiment: unsystematic tax offenders evade less not because they are more risk adverse but because they recognize evasion as unethical behaviour and, for this reason, they are more than willing to buy the anonymity when there is the risk of being publicly recognized as a dishonest person. When unsystematic tax offenders engage in evasion, they want to be sure that their acts will remain private (highest VIA). It is important to highlight the fact that avoiding individual stigmatization works even if individuals are not really interested in blaming others and believe that others are not interested in blaming tax evaders (low VOA). Tax authorities can, for this reason, exploit this misalignment between the value attributed to individual anonymity and the value attributed to the others anonymity to ensure and uphold tax compliance via the public stigmatization of tax fraudsters. 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Please cite this article in press as: Casal, S., Mittone, L., Social esteem versus social stigma: The role of anonymity in an income reporting game. J. Econ. Behav. Organ. (2015), http://dx.doi.org/10.1016/j.jebo.2015.09.014