The threat of harsh punishment does little to improve collection of billions evaded annually in federal taxes, University of Michigan research indicates.
Studies suggest, on the other hand, that such positive measures as streamlined Internal Revenue Service taxpayer contacts may be as effective as increasing the number of audits or imposing stiff fines. A person's peers may have the most influence of all on tax compliance.The government lost nearly $85 billion to income-tax cheaters in 1987, according to the latest figures available from the IRS.
"Many people who regularly pay their taxes need few or no incentives to comply," said Joel B. Slemrod, University of Michigan professor of business economics and public policy. "These taxpayers act honestly even though it is not in their own self-interest.
"The habitual tax evaders will find ways to cheat, and deterrents may have little effect on them."
Although sums evaded total about 40 percent of the federal deficit, Slemrod said suggestions to quickly trim it through beefed-up enforcement might be in vain.
"Simply because the amount of taxes not paid because of cheating is a big number doesn't mean the government can make a big dent in it," he said. "It's like oil reserves. They are there, but whether they are economically recoverable is a different matter."
Slemrod organized a conference sponsored by the Office of Tax Policy Research of the U-M School of Business Administration Dec. 7-8. It included results of 12 research projects on various aspects of tax evasion and tax-law enforcement.
Individual cheaters have a negative attitude toward the tax system, and believe others are equally dishonest, Slemrod said.
"Objective changes - whether the amount of taxes you pay goes up or down - apparently have little effect on an individual's attitude toward compliance. The subjective element matters - whether you believe the change is good or bad," Slemrod said."
One research project analyzed feelings of taxpayers before and after the 1988 tax season, the first time the main effects of the 1986 Tax Reform Bill were felt by individual taxpayers.
"The attitudes of other individuals with whom taxpayers discussed their taxes had the biggest effect," Slemrod said. "What mattered most was who you talked with on a personal level. If you talked with people at a cocktail party and everybody said they were cheating, you were more likely to cheat."
Auditing suspected cheaters may increase, rather than lessen, cheating. "More audit coverage does deter evasion," Slemrod said. "But if audits are seen as unfair and create negative attitudes between taxpayers and the IRS, they may backfire because more people with negative attitudes means more evasion."