Allowing taxpayers to earmark their tax dollars for specific purposes can increase tax compliance.
Providing taxpayers with a choice in how their tax dollars are used can incentivize compliance and encourage voluntary contributions.
Deep dives
The Power of Voluntary Giving
People are willing to give money to the government voluntarily if they support what the government is doing. This was observed in an experiment where participants gave money to a charitable organization. When the organization was a specialized charity like the American Red Cross, people gave more compared to giving to an anonymous person. This suggests that people are more inclined to give when they know their money will be used for a cause they support.
Increasing Tax Compliance Through Altruism
Allowing taxpayers to earmark their tax dollars for specific purposes can increase tax compliance. In an experiment, participants were asked if they wanted to donate money to the government for disaster relief, similar to donating to a private organization. The results showed that people gave almost as much to the government organization as they did to the private one. This indicates that providing taxpayers with a choice in how their tax dollars are used can incentivize compliance and encourage voluntary contributions.
The Tax Gap and Behavioral Economics
The tax gap, which is the difference between owed taxes and paid taxes, is a significant issue in many countries. Several factors contribute to the tax gap, including underreporting of income and non-filing. Behavioral economics research suggests that correspondence from the tax authority and increased transparency can improve tax compliance. Additionally, motivational crowding-out should be considered, as introducing incentives may undermine the intrinsic motivation to pay taxes.
The Hometown Tax System in Japan
Japan's hometown tax system, introduced in 2008, allows taxpayers to direct their donations to any region, not just their hometowns. In return for their donations, taxpayers receive local products or services. This system encourages entrepreneurs to market their products and creates competition among regions. While there are criticisms regarding its distribution and potential crowding-out effects, some economists believe that a hybrid model could benefit other countries by encouraging local entrepreneurship, increasing tax compliance, and fostering citizens' engagement with government spending.
Every year, Americans short the I.R.S. nearly half a trillion dollars. Most ideas to increase compliance are more stick than carrot — scary letters, audits, and penalties. But what if we gave taxpayers a chance to allocate how their money is spent, or even bribed them with a thank-you gift?
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