34,334 letters were sent to test how sensitive those owing back taxes are to neighbors’ knowledge of the debts
Americans, the U.S. Treasury reports, shirk their taxes to the tune of $458 billion a year, a sum equal to more than half the most recent fiscal year’s federal budget deficit. Most of the non-payment total comes from those not filing tax returns at all, or from underreporting income — tax avoidance or tax evasion — and about a quarter of the tax gap is simply failure to pay taxes that people already have fessed up to owing.
This “tax delinquency” is at the heart of a study by UCLA Anderson’s Ricardo Perez-Truglia and Ugo Troiano of the University of Michigan at Ann Arbor. Their paper, published in the Journal of Public Economics, examines a common though not entirely understood tactic: public shaming of tax delinquents.
Almost half the states, including California, Florida and New York, publish online lists naming and shaming tax delinquents. And public tax shaming is prevalent around the world — notably, in Bangalore, India, where the government sends drummers out to homes and offices to embarrass people who refuse to pay their tax bills.
But does shaming actually work?
To get at that answer, the authors conducted an experiment. They sent letters to 34,334 tax delinquents from three states (Kansas, Kentucky and Wisconsin). The researchers estimate that their sample was 35 percent female and 71 percent white, and most likely of middle-class income levels. The letter recipients, who owed from $250 to $150,000 apiece, had long been delinquent and had already been told by tax agencies that their names, addresses and debt amounts were listed online. The idea was to see whether they could be shamed into settling up if they thought others knew that information was public.
The letter included information on how to access the website shaming delinquents, and even listed their tax debt along with that of nine others from the same area. Half of the recipients were told “explicitly and conspicuously” that neighbors received the same letter. The other half were told they were the only ones in their area to get it. Sure enough, people who believed their debts would be seen by others were 20 percent more likely to pay those taxes or start a payment plan, either of which would remove them from their state’s tax-delinquency list.
A key caveat to the shaming strategy is that it worked for people who owed amounts below $2,500, but did not work for people who owed amounts above that level. The researchers theorize this could be because social incentives are difficult to scale up; i.e., there’s a limit to how much someone will pay to protect his reputation. This interpretation is consistent with interviews with a Vermont tax official: “When you are talking about large debts, you do tend to get some people who just don’t care. It’s just not worth paying off their $450,000 or $1.2 million debt. Down on the lower levels, you get more of the Average Joe who is concerned.”
The Internal Revenue Service estimates that over the past 30 years, the tax gap has ranged from 16 percent to 20 percent of total tax liability, so compliance has been fairly consistent. But it takes years for the IRS to estimate the tax gap — the latest numbers, released in 2016, cover the 2008-2010 tax years — so it’s yet unknown how enforcement has been or will be affected by ongoing cuts to IRS budget and staffing.
Closing the tax gap is viewed by many as a major revenue source, and tax delinquencies in particular are seen as most collectible, since they’re already known and documented. That’s why Perez-Truglia and Troiano believe that tax shaming is such a widespread tool. Indeed, the authors believe that, in the future, governments may even use social media to advertise the lists and call out particular delinquents. But they caution that other tactics can be effective, too, without the potential to alienate people. They found, for instance, that reminders about tax-debt interest rates and penalties do eventually lead to payment, and not only for the smaller tax bills.