Unwilling or Unable to Cheat? Evidence From a Tax Audit Experiment in Denmark

Abstract

This paper analyzes a tax enforcement field experiment in Denmark. In the base year, a stratified and representative sample of over 40,000 individual income tax filers was selected for the experiment. Half of the tax filers were randomly selected to be thoroughly audited, while the rest were deliberately not audited. The following year, threat‐of‐audit letters were randomly assigned and sent to tax filers in both groups. We present three main empirical findings. First, using baseline audit data, we find that the tax evasion rate is close to zero for income subject to third‐party reporting, but substantial for self‐reported income. Since most income is subject to third‐party reporting, the overall evasion rate is modest. Second, using quasi‐experimental variation created by large kinks in the income tax schedule, we find that marginal tax rates have a positive impact on tax evasion for self‐reported income, but that this effect is small in comparison to legal avoidance and behavioral responses. Third, using the randomization of enforcement, we find that prior audits and threat‐of‐audit letters have significant effects on self‐reported income, but no effect on third‐party reported income. All these empirical results can be explained by extending the standard model of (rational) tax evasion to allow for the key distinction between self‐reported and third‐party reported income.

Determinants of the Shadow Economy in the Czech Regions: A Region-Level Study

“…Moreover, the results suggest that selfemployment decreases the shadow economy. This is at variance with the findings by Kleven et al (2011). Importantly, out of the two indicators (excluding the electricity consumption that is fixed to 1) it is only the economic growth that is statistically significant with the negative sign.…”

“…Thus, the positive correlation between the unemployment rate and the size of the shadow econo-my is expected. The choice of using the self-employment rate as a determinant is inspired by a study by Kleven et al (2011) that deals with a higher level of tax evasion for people with a large share of self-reported income. These individuals typically are selfemployed, whereas tax evasion of people with third-party information reporting is virtually nil.…”

1. At the Intersection: A Review of Institutions in Economic Development

“…One of them is who reports income. Kleven et al (2011) conducted a large tax enforcement field experiment in Denmark, and showed that tax evasion is near zero for third-party reported income but considerable for self-reported income. This suggests that governments with weak enforcement capabilities may want to 'max out' their use of mechanisms that involve as much self-enforcement as possible.…”

“…Of course, given institutions and tax instruments, tax levels are also relevant for compliance. Kleven et al (2011) showed that higher marginal tax rates lead to more evasion but even more (legal) avoidance. However, in addition to tax levels, the salience of tax penalties and the likelihood of audits may also be relevant.…”

“…We reviewed several of these when commenting on the role of norms and the potential use of exhortative messages; the literature tends to find support for using messages that increased the salience of audits and penalties (McGraw and Scholz, 1991;Blumenthal et al, 2001;Fellner et al, 2013;Castro and Scartascini, 2015). Kleven et al (2011) demonstrated in the context of their experiment in Denmark that audits and letters threatening audits affect self-reported income but not third-party reported income.…”