Behavioral effects of tax withholding on tax compliance: Implications for information initiatives

Abstract

Using a theory-driven experiment with working adult participants and deliberate tax framing, this paper reports on the effects of tax withholding choices on subsequent individual income tax reporting behavior. We find reporting increases with the level of taxes over-withheld, and decreases with taxes under-withheld, with the latter effect being much larger in magnitude. We explore two information programs designed to influence social norms: compliance information specific to one's income class, and information related to the fairness of the tax system. Increasing either the compliance norm or the fairness measure increases tax reporting but only information on fairness affects the withholding choice. A third information program – a service that resolves uncertainty over tax liability – offsets the undesirable effects of tax under-withholding on reported liability when acquired. Using information from an extensive questionnaire, we find several interesting associations between decision-making in the experiment and the prior tax filing experiences and behaviors of participants.