The Effect of Tax Privacy on Tax Compliance - An Experimental Investigation

• Published in: The European accounting review Vol. 26; no. 3; pp. 561 - 580
• Main Authors: Blaufus, Kay, Bob, Jonathan, Otto, Philipp E., Wolf, Nadja
• Format: Journal Article
• Language: English
• Published: London Routledge 03.07.2017; Taylor & Francis Ltd
• Subjects: Compliance; Contagion; Crowding; Disclosure; Morale; Noncompliance; Privacy; Shame; Tax evasion; Tax increases; Taxation
• ISSN: 0963-8180; 1468-4497
• DOI: 10.1080/09638180.2016.1258319

In this paper, we use a tax compliance game with a public good to investigate the impact of public disclosure on tax evasion behavior experimentally. Three different types of tax privacy are tested, ranging from complete privacy to full disclosure. We expect two different effects: first, a contagion effect, arising when an individual observes non-compliance of other individuals and therefore reduces her own tax compliance; second, a shame effect of increased tax compliance due to the anticipated shame of being declared a tax evader. Both these effects are supported by the experimental results. However, the shame effect reduces tax evasion only in the short run. The influence of shame diminishes over the course of the experiment with subjects observing the non-compliance of other participants. Thus, our results indicate that when the contagion and the shame effect are present the latter is not strong enough to override the former in the long run. Furthermore, disclosing tax information anonymously increases tax evasion compared to providing no information on tax evasion behavior. These observations are of particular importance for tax policy because public disclosure may lead to more evasion instead of less when supporting a crowding-out of the tax morale.