Two experiments show that eliciting taxpayer preferences on government spending?providing taxpayer agency--increases tax compliance. We first create an income and taxation environment in a laboratory setting to test for compliance with a lab tax. Allowing a treatment group to express nonbinding preferences over tax spending priorities, leads to a 16% increase in tax compliance. A followup online study tests this treatment with a simulation of paying US federal taxes. Allowing taxpayers to signal their preferences on the distribution of government spending, results in a 15% reduction in the stated take-up rate of a questionable tax loophole. Providing taxpayer agency recouples tax payments with the public services obtained in return, reduces general anti-tax sentiment, and holds satisfaction with tax payment stable despite increased compliance with tax dues. With tax noncompliance costing the US government $385billion annually, providing taxpayer agency could have meaningful economic impact. At the same time, giving taxpayers a voice may act as a two-way 'nudge,' transforming tax payment from a passive experience to a channel of communication between taxpayers and government.

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29 May 2014     Paper Number CEPDP1270

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This CEP discussion paper is published under the centre's Community Wellbeing programme.

This publication comes under the following theme: Causes and effects of wellbeing