Stanford tax expert Joseph Bankman suggests that a redesign of tax forms and the online filing experience based on social psychology insights would encourage more people to file truthful returns. Revamping the language of tax forms and the online filing process to make them more direct could reduce tax evasion in the United States, he says.
For example, a suggested question on a tax form could read: “Did you receive cash or other compensation from providing services directly to customers and/or as an independent contractor? You must answer ‘yes’ or ‘no.'”
Most current tax forms do not include such direct wording, wrote Stanford law Professor Joseph Bankman in a new research paper. Even a few changes based on social psychology insights could generate more tax revenue and taxpayer compliance, he wrote.
“The explosion of research in social psychology over the past few decades, along with industry experience with data-driven interactive systems, suggests a different approach to the problem: Redesign the tax forms and online filing process to elicit more truthful responses from taxpayers,” said Bankman, the Ralph M. Parsons Professor of Law and Business. His co-authors included the late Clifford Nass, a professor of communication at Stanford, and Joel Slemrod, a professor of economics at the University of Michigan.
Tax evasion costs federal, state and local governments more than $400 billion a year or about 17 percent of all taxes owed, according to the researchers. Typical tools to discourage evasion include audits, penalties and third-party reporting. But these efforts, the authors suggest, have proven too expensive or politically unpopular.
To encourage greater compliance, Bankman and the others propose changes to tax forms.
Change the wording to make it more direct, clear
Tax forms – paper, electronic and preparer-completed formats – could be changed to increase the “psychological cost of lying and the perceived risk of detection,” wrote Bankman. Asking more direct questions would put the burden on taxpayers to give explicit answers. Today, the tax forms contain too many general questions that allow for deceptive answers, he said.
“The difference between these two alternatives can be thought of roughly as the difference between lying through commission and omission,” the researchers wrote.
Social scientists, noted Bankman, have found that lying is cognitively more difficult than truth telling. It requires activation of additional parts of the brain, as well as the sympathetic nervous system.
Research also shows that people are generally “cognitive misers,” preferring to minimize cognitive activity like lying that requires great effort. Lying also produces “cognitive dissonance” – a negative state of mind caused by inconsistency in behavior.
The researchers suggest that taxpayers should swear under penalty of perjury to answer the questions honestly before filling out their forms, and they should be asked more detailed questions about income sources.
Build appeals to morality in tax forms by using ‘self-referential’ nouns
Bankman said that research by Stanford psychologist Benoît Monin and others in social psychology suggests a different approach to moral suasion, one that asks people to change their behavior to fit within a particular identity connected to a key decision to be made.
In other words, research shows that when one is told “please do not be a cheater” rather than “please do not cheat,” people are less likely to cheat.
Bankman suggested including a similar phrase in the tax form’s perjury section or at the top of each page.
Use online questioning to ask taxpayers for information that the IRS already has
This approach is called “adaptive questioning,” wrote Bankman, and is often used in e-commerce due to its efficiency. Similar to a chat session found on many web sites, the data approach would involve an IRS questioner already having information at their disposal about the filer.
“In the tax context, it would allow the IRS to ask more focused questions, which should reduce evasion and audit costs. It could also benefit taxpayers by reducing filing time and eliminating the risk of subsequent audit,” he said.
Bankman explained that an interaction that feels like a conversation is intrinsically more pleasant than a standardized tax form with less personal language.
“For example, if the interaction is framed as a set of questions, the taxpayer should have the ability to ask a question back, for example, ‘Why are you asking this?'” he said.
Bankman said he is not calling for more government intrusion or heavy regulation of tax filing, but more direct communication and the use of information available through a data-driven approach.
“The proposals described would make the government a smarter user of information and require that the taxpayer verify some forms of information. Potential benefits include reduced evasion, reduced compliance costs and (more speculatively) a better filing experience,” Bankman and the others wrote.
Tax evasion is harmful, they contend, because taxes that go uncollected have to be found in other sources – as in higher tax rates for compliant taxpayers and sectors of the economy less associated with tax dodging.
According to the authors, the highest compliance rates are associated with people who report job wages and investments, while the lowest are found among those who run individual businesses, such as moonlighting professionals, the self-employed and independent contractors.
Clifton Parker is a staff reporter for Stanford News Service.