Third-Party Income Reporting and Income Tax Compliance

Abstract

Individuals whose income is not reported to the tax authority by a third party (e.g., the self-employed and those earning casual wages such as tips) may be less likely to be detected evading taxes relative to the case in which they are subject to third-party reporting. However, the compliance response is not known, in part because of the difficulty in obtaining information on individual choices in these situations. We use experimental methods to examine individual income tax compliance in settings where a portion of an individual's income is relatively difficult to detect upon audit by the tax authority, due to the absence of third-party information. Our results indicate that tax compliance rates decline as individuals earn larger shares of income that is not perfectly detectable. Our results also indicate that tax compliance rates decline with higher income, lower audit rates, and higher tax rates.