Over the past thirty years, a significant amount of research from a variety of social science disciplines has considered tax compliance. Economists, psychologists, and sociologists have contributed to the discussion, offering research and, at times, conflicting explanations regarding whether a person is likely to comply with his obligation to file an accurate tax return. The unifying theme among this research is a search for explanatory reasons which are the factors that lead to non-compliance. In broad terms, the economic models of tax compliance assume rational behavior, and that people will coldly consider compliance from the perspective as to whether the expected utility of non-compliance exceeds the utility of complying. To that end, researchers relying on the economic model have looked to a variety of independent variables likely to affect the calculus, including penalty rates, the likelihood of an audit, and complexity. There are numerous studies testing the variables that economists believe contribute to taxpayers’ decisions to comply with the tax laws. Psychologists and sociologists have rightly pointed out that the economic model is insufficient as an explanatory tool. Sociologists and psychologists alike argue that some economic models fail to capture the complexities of human behavior and relationships, and fail to explain why compliance rates exceed what would otherwise be expected if people were solely evaluating compliance in terms of dollars and cents. The challenge among policymakers mining the social science research is that the research is at times inconsistent and incomplete.
This article considers how the current earned income tax credit (EITC} creates opportunities for individuals to affirmatively misstate eligibility. It examines insights from the popular book Freakonomics and argues that despite the confusing and sometimes inconsistent state of research relating to tax compliance, policymakers concerned with reducing the tax gap should consider structural incentives and visibility as key factors relating to the decision to intentionally comply with the tax laws. While more empirical research must be done that examines and considers the relationship between various independent variables that may affect the decision to comply with the tax laws, policymakers can limit opportunities for noncompliance by considering (i) how taxpayers and return preparers perceive the visibility of their conduct, and (ii) how structural incentives of particular provisions might contribute to the willingness to cheat. The article examines how structural incentives and visibility operate in the context of the EITC, and create the conditions that allow individuals to intentionally misstate eligibility on tax returns.
Date of this Version
Leslie Book, "Freakonomics and the Tax Gap: An Applied Perspective" (July 2007). Villanova University School of Law Working Paper Series. Working Paper 74.