Profile Updated:
Summary: This experiment conducted in Israel sought to test whether taxpayer compliance could be increased by mailing two different types of letters to incorporated taxpayers: a deterrent letter or a moral persuasion letter. The program is rated Ineffective for improving tax compliance by those that received either type of letter. (Review the full program description).
| Title | Rating | Details | Outcome Category | Study(ies) |
|---|---|---|---|---|
| Tax compliance |
Ineffective | One Study |
Overall, there were no statistically significant differences on tax compliance between corporations that received deterrent letters or moral persuasion letters and corporations that did not receive any letters based on multiple measures from the study. |
Crime and Delinquency; Other crime/offense types; N/A | Ariel, Barak. 2012. “Deterrence and Moral Persuasion Effects on Corporate Tax Compliance: Findings from a Randomized Controlled Trial.” Criminology 50(1): 27–69. See evaluation methods. |
Program Goals
Tax noncompliance is a concern for governments and various approaches have been implemented, including mailing different types of letters to incorporated taxpayers, to attempt to reduce this behavior (Ariel 2012). The goal of the experiment in Israel was to increase corporate tax compliance.
Target Population
Incorporated entities make up 35 percent of the Israeli business community. The intervention sought to target corporate taxpayers because incorporated taxpayers pay more than double the amount of tax dollars than unincorporated taxpayers pay. Thus, the ability to impact tax noncompliance for corporations could result in a large gain for governments (Ariel 2012).
Program Components
Seeking to deter tax noncompliance through the threat of punishment, the deterrent letter explained that not filing a tax report or filing one with “irregular transactions” would result in punishment, which ranged from fines to criminal prosecution. The deterrent letter also informed recipients that the tax authority had introduced new methods to audit taxpayers. It was believed that adding a message about new methods to audit taxpayers, in a personalized format, would increase the recipients’ perceived risk of detection and apprehension.
Alternatively, the other type of letter sent to taxpayers, a moral persuasion letter, sought to increase tax morale. The moral persuasion letter did not mention the punishments of tax noncompliance. Instead, it emphasized the consequences of not paying taxes in terms of overall public benefit. The letters informed recipients that tax dollars are used to finance public commodities, stressing how their taxes were essential in the process (Ariel 2012).
Program Theory
The experiment was based on the deterrence model and the moral persuasion model. The deterrence model is based on the belief that effective threats of detection and punishment for noncompliance will increase compliance. It is argued that taxpayers are rational beings who weigh the costs and benefits of their actions, focusing on “what will make [them] better off” (Ariel 2012, p.28; Akers 1998; Becker 1968). Therefore, through threatening apprehension and punishment, the cost of noncompliance increases, which makes taxpayers more likely to comply.
The moral persuasion model is based on the belief that compliance is gained through appealing to the individuals’ morale, arguing that normative support is sufficient to sustain compliance. It is believed that taxpayers are law-abiding citizens who are not seeking to increase their economic utility through noncompliance: these citizens understand their moral and social obligations and therefore choose to comply with tax regulations (Ariel 2012; Wenzel 2001).
Study Title: Deterrence and Moral Persuasion Effects on Corporate Tax Compliance: Findings From a Randomized Controlled Trial (which is associated with outcome Tax compliance)
Research Design/Sample
Ariel (2012) conducted a randomized controlled trial to examine the impact of tax letters on corporate tax compliance between January 2006 and March 2007. The sample was drawn from the list of all corporate taxpayers in Israel, which was provided by the Israeli Tax Authority. There were no major inclusion restrictions; however, there were three major exclusion criteria. First, taxpayers who were under investigation for tax evasion during the evaluation period were excluded from the sample. Second, new businesses (defined as 2 years old or younger) were excluded. Finally, 500 companies with the highest revenues in the market, and companies whose stocks were traded in the stock exchange were also excluded. Overall, 4,395 corporations were eligible to participate.
Corporations were randomly allocated using a computer-generated randomization syntax in a 3:1 ratio into the three arms of the trial: 1) deterrent letter, 2) moral persuasion letter, and 3) no-letter. Seven hundred and thirty-one corporations received the deterrent letter (the deterrent letter group), 732 corporations received the moral persuasion letter (the moral persuasion letter group) and 2,932 corporations received no letter (the control group).
The mean gross income of the deterrence group was $772,820, the mean gross income of the moral persuasion group was $943,613, and the mean gross income of the control group was $843,974. Most of the corporations had their main offices in large metropolitan cities in Israel. Real estate was the most prevalent market sector, followed by construction workforce, consultancy firms, engineering services, and restaurants. There were no statistically significant differences between the treatment and control groups on these characteristics at baseline.
Data Collection/Outcome Measures
Three measures were used to evaluate tax compliance: 1) gross sales reporting, 2) tax payments, and 3) tax deductions, as these items are needed for tax reports. Gross sales are defined as the total value of services produced or goods sold by a company during the tax period. Tax payments are required from all taxpayers on every transaction the company is involved in during the tax period. Tax deductions are expenses or items that can be deducted from the revenue that is subject to tax. Tax compliance for all three groups was investigated using tax reports (which were accessed through the Israeli Tax Authority) following the treatment (January – April 2007) compared with tax reports prior to the treatment (January–April 2006).
Statistical Analysis
Changes in tax-reporting among the deterrent letter group, the moral persuasion letter group, and the control group were analyzed using difference-in-differences. Hedges’s g effect sizes were computed for each of the three outcome variables to measure the magnitude of the treatment effect. No subgroup analysis was conducted.
Citation:
Ariel, Barak. 2012. “Deterrence and Moral Persuasion Effects on Corporate Tax Compliance: Findings from a Randomized Controlled Trial.” Criminology 50(1): 27–69.
These sources were used in the development of the program profile:
Akers, Ronald L. 1998. Social Learning and Social Structure: A General Theory of Crime and Deviance. Boston, Mass.: Northeastern University Press.
Becker, Gary. 1968. “Crime and Punishment: An Economic Approach.” The Journal of Political Economy 76(2): 169–217.
Wenzel, Michael. 2001. Misperceptions of Social Norms about Tax Compliance (2): A Field-Experiment. Centre for Tax System Research. Working Paper No. 8. The Australian National University.
Following are CrimeSolutions-rated programs that are related to this practice:
These deterrence strategies are formal legal and administrative prevention and control tactics designed to prevent the occurrence of corporate crime. Strategies could include laws, regulatory policies, or punitive sanctions. The practice is rated Ineffective for reducing individual- and company-level corporate crime.
Evidence Ratings for Outcomes
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Crime & Delinquency - Public Order Offenses (Law) |
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Crime & Delinquency - Public Order Offenses (Regulatory Policy) |
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Crime & Delinquency - Public Order Offenses (Punitive Sanctions) |
This program was originally rated Ineffective. It has been re-reviewed based on the change in the program rating instrument. Under the new instrument, CrimeSolutions now rates individual program outcomes and no longer assigns an overall rating.
Rating Process
Program Status
This program is Not Active.