Voluntary disclosure of tax declarations

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Abstract: Tax authorities have access to the tax declarations of citizens, but they cannot monitor their real wealth without costly auditing. In contrast, individuals can observe the wealth of their peers, but they do not have access to their tax declarations. The mismatch can be lifted if tax declarations are made public so that peers can function as whistle-blowers, as is the case in some Nordic countries. In this study, we test the effectiveness of such a system in laboratories in France, Germany, Poland, and Spain. In a tax-framed public goods game where players’ tax declarations are public, players can denounce tax dodgers. The average contribution is above 90% in all countries, versus 50% on average in the baseline. Acknowledging real-life political constraints regarding the obligatory nature of tax disclosures, we test an alternative scheme where tax declaration disclosure is voluntary. Results indicate that participants prefer to sacrifice their privacy to gain the right to denounce tax evaders and increase cooperation. We find an overall positive effect of this voluntary disclosure mechanism on contributions ranging from 87% in Germany to 57% in France, which corresponds to a 33% and 18% increase compared to the respective baseline. We argue that real-life local networks can function as guards against evasive taxpayers.

Keywords: peer monitoring, privacy, Public Goods Game, tax declaration, voluntary public disclosure, whistleblowing