Extrinsic and Intrinsic Motivations for Tax Compliance:
Evidence from a Field Experiment in Germany
Nadja Dwenger (MPI)
Henrik Kleven (LSE)
Imran Rasul (UCL)
Johannes Rincke (Erlangen-Nuremberg)
October 2014
A Tax Compliance Puzzle?
Gap between theory and evidence:
• Theory predicts low compliance under low audit probabilities or
penalties (Becker-Allingham-Sandmo)
• Evidence shows high compliance in modern tax systems despite low
audit probabilities and penalties
Closing the gap:
• Third-party information creates large detection probabilities
• Misperception of enforcement parameters
• Intrinsic or social motivations
Extrinsic and Intrinsic Motivations
Extrinsic motivation (pecuniary):
• Deterrence and tax policy
Intrinsic motivation (non-pecuniary):
• Duty, guilt, shame, social norms, reciprocity, etc.
Studying intrinsic motives is difficult: measurement, variation
• We consider a setting in which we can identify extrinsically and intrinsically motivated individuals
• We vary deterrence and rewards/recognition in a field experiment
Local Church Tax in Germany: Key features
Feature 1: tax and charity
• Legal obligation to pay for church members
• Overpayments are encouraged and represent donations
Feature 2: true tax base is observable
• True tax base for church = reported taxable income to government
• Distinguish evaders, compliers & donors
Feature 3: zero deterrence in the baseline
• Church never cross-checks reports against income tax returns
• Baseline compliance = intrinsic motivation
Local Church Tax in Germany: Identifying Motivation
Baseline behavior (p = 0) reveals motivation:
• Baseline compliers & donors: intrinsically motivated
• Baseline evaders: extrinsically motivated
Compliance type is very persistent prior to experiment:
• We define types based simply on one pre-treatment year
Each type could be subject to misperception (p  0):
• Estimate misperception via (randomized) communication of  = 0
• Separate misperception from motivation
Outline
1. Conceptual framework: warm-glow model of tax compliance
2. Context, design and data
3. Empirical findings
(a) Baseline compliance under zero deterrence:
Amount of intrinsic motivation; duty to comply
(b) Randomized field experiment:
Simplification; misperception; deterrence; rewards
4. Conclusion
Outline
1. Conceptual framework: warm-glow model of tax compliance
2. Context, design and data
3. Empirical findings
(a) Baseline compliance under zero deterrence:
Amount of intrinsic motivation; duty to comply
(b) Randomized field experiment:
Simplification; misperception; deterrence; rewards
4. Conclusion
Local Church Tax in Germany
Legal tax obligation for church members above 18 years of age
• Membership by baptism; possible to quit church
• 60% of the population are members
Two tiers of church taxes: federal state, church district
Our focus:
• Local church tax for Protestant church in a large metro area of Bavaria
• Legal tax obligation determined by a progressive schedule
• Payments above legal tax obligation defined as donations
• Concern with external validity: stakes are small
Local Church Tax in Germany: Tax Schedule
Experimental Design
Manipulations of the official tax notification from the church tax
authority
Randomly assignment to treatment letters:
— Tax simplification
— Zero deterrence (misperception)
— Positive Deterrence (audit probabilities)
— Compliance rewards (social and monetary rewards)
Randomization successful across all letter groups
All treatments were truthfully implemented
Data
Linked administrative panel data 2008-2012:
• Church District tax records
• State personal income tax records
About 40,000 individuals per year with information on actual church taxes
paid, true church taxes owed, and personal characteristics
Individual records of tax compliance for up to 4 years pre-treatment
Outline
1. Conceptual framework: warm-glow model of tax compliance
2. Context, design and data
3. Empirical findings
(a) Baseline compliance under zero deterrence:
Amount of intrinsic motivation; duty to comply
(b) Randomized field experiment:
Simplification; misperception; deterrence; rewards
4. Conclusion
Compliance Under Zero Deterrence
[Distributions of Payment Made and Payment Owed]
(Control Group)
Finding 1: Intrinsic Motivation is Substantial (or Not)
Under zero deterrence, predicted compliance is zero absent intrinsic motivation
But a significant fraction of individuals comply:
• 20% of individuals make payment ≥ true taxes owed
• 80% of individuals make payment  true taxes owed
(and most of them pay zero)
Implications for the compliance puzzle debate:
• The Becker-Allingham-Sandmo model is 20% wrong, 80% right
Bunching at Exact Compliance under Zero Deterrence
[Distribution of payment made — payment owed]
(Control Group)
Finding 2: Bunching at Exact Compliance
Sharp bunching at exact compliance under zero deterrence:
No pecuniary discontinuity at exact compliance under zero deterrence
⇒ Discontinuity in intrinsic motivation at exact compliance
Two possible explanations (labels):
1. Duty to comply with the letter of the law
2. Attention/focal point effects
(We provide a test suggesting against the latter)
Outline
1. Conceptual framework: warm-glow model of tax compliance
2. Context, design and data
3. Empirical findings
(a) Baseline compliance under zero deterrence:
Amount of intrinsic motivation; duty to comply
(b) Randomized field experiment:
Simplification; misperception; deterrence; rewards
4. Conclusion
Tax Simplification
[Heterogeneity Across Compliance Types]
(Simplification vs Control)
Full Sample
Tax Simplification
Outcome in comparison
group (control group)
Number of Observations
Baseline Evaders
(Extrinsically Motivated)
Baseline Donors
(Intrinsically Motivated)
Probability of
Evading
Evasion Rate
Probability of
Evading
Evasion Rate
Probability of
Donating
Increased
Donation Rate
-2.45**
-3.17***
-2.66***
-3.36***
-4.04
-30.37
(0.971)
(0.910)
(0.747)
(0.732)
(6.97)
(27.88)
79.29%
5076
76.35%
5076
94.98%
4007
92.35%
4007
62.34%
476
9.09%
476
Tax Simplification
[Distributional Effects on Baseline Evaders]
(Simplification vs Control)
Correcting Misperception
[Heterogeneity Across Compliance Types]
(Zero Audit Probability vs Simplification)
Full Sample
Correcting Misperception
Outcome in comparison
group (simplification group)
Number of Observations
Baseline Evaders
(Extrinsically Motivated)
Baseline Donors
(Intrinsically Motivated)
Probability of
Evading
Evasion Rate
Probability of
Evading
Evasion Rate
Probability of
Donating
Increased
Donation Rate
0.942
0.957
1.53**
1.41*
1.52
50.61
(0.889)
(0.857)
(0.715)
(0.720)
(5.78)
(37.38)
77.30%
73.37%
92.35%
88.69%
61.63%
5.71%
7641
7641
6049
6049
723
723
Correcting Misperception
[Distributional Effects on Baseline Evaders]
(Zero Audit Probability vs Simplification)
Finding 3: Simplification Matters, Misperception Less So
Tax simplification:
• Baseline evaders: strong positive effect on compliance
• Baseline donors: no significant effect
Correcting misperception of audit probability:
• Baseline evaders: weak negative effect on compliance
• Baseline donors: no significant effect
Outline
1. Conceptual framework: warm-glow model of tax compliance
2. Context, design and data
3. Empirical findings
(a) Baseline compliance under zero deterrence:
Amount of intrinsic motivation; duty to comply
(b) Randomized field experiment:
Simplification; misperception; deterrence; rewards
4. Conclusion
Positive Audit Probability
[Heterogeneity Across Compliance Types]
(Positive Audit Probability vs Zero Audit Probability)
Full Sample
Deterrence
Outcome in comparison
group (zero audit prob group)
Number of Observations
Baseline Evaders
(Extrinsically Motivated)
Baseline Donors
(Intrinsically Motivated)
Probability of
Evading
Evasion Rate
Probability of
Evading
Evasion Rate
Probability of
Donating
Increased
Donation Rate
-3.13***
-2.80***
-3.12***
-2.81***
7.07*
25.59
(0.660)
(0.627)
(0.536)
(0.534)
(4.22)
(22.20)
78.04%
74.52%
93.80%
90.43%
61.72%
8.16%
12692
12692
9979
9979
1261
1261
Positive Audit Probability
[Distributional Effects on Baseline Evaders]
(Positive Audit Probability vs Zero Audit Probability)
Perceived Penalty?
Audit results suggest a perceived penalty of being caught evading
But we can provide direct evidence using a bunching approach:
• Asymmetric treatment of evaders (expected penalty = ×) and
donors (zero penalty)
• Penalty kink under   0 iff perceived penalty is positive
There is already bunching under  = 0 (‘duty-to-comply’), so we consider
• Change in bunching when moving from  = 0 to   0
Perceived Penalty
[Change in Bunching at Exact Compliance]
(Positive Audit Probability vs Simplification)
Finding 4: Deterrence Works on the Extrinsically Motivated,
Not on the Intrinsically Motivated
Baseline evaders: compliance increases with deterrence
• Significant increases for uniform audit probabilities of 10%, 20%, 50%
• Stronger effects for notched audit probability
• Significant responses to perceived penalty
Baseline donors: weak effect of deterrence
• No effect on donation amount, weak effect on probability of donating
• Hence there is no extrinsic-intrinsic crowd-out
Outline
1. Conceptual framework: warm-glow model of tax compliance
2. Context, design and data
3. Empirical findings
(a) Baseline compliance under zero deterrence:
Amount of intrinsic motivation; duty to comply
(b) Randomized field experiment:
Simplification; misperception; deterrence; rewards
4. Conclusion
Compliance Rewards
[Heterogeneity Across Compliance Types]
(Social/Monetary Rewards vs Simplification)
Full Sample
Compliance Rewards
Outcome in comparison
group (simplification group)
Number of Observations
Baseline Evaders
(Extrinsically Motivated)
Baseline Donors
(Intrinsically Motivated)
Probability of
Evading
Evasion Rate
Probability of
Evading
Evasion Rate
Probability of
Donating
Increased
Donation Rate
0.259
0.447
1.27*
1.20*
2.02
83.24**
(0.821)
(0.789)
(0.664)
(0.666)
(4.95)
(32.80)
77.30%
73.37%
92.35%
88.69%
61.63%
5.71%
12632
12632
9909
9909
1247
1247
Compliance Rewards
[Distributional Effects on Baseline Evaders]
(Social/Monetary Rewards vs Simplification)
Finding 5: Recognition Works on the Intrinsically Motivated,
Not on the Extrinsically Motivated
Compliance rewards create opposite effects on the two types:
• Baseline donors increase donations
• Baseline evaders further reduce compliance
• Average effect is strongly attenuated
Interpretation:
Rewarding compliers (rather than punishing evaders) highlights voluntary
contribution aspect and downplays mandatory tax aspect
Conclusions
• Some of the first evidence on intrinsically motivated tax compliance
• Direct evidence on intrinsic motivation from a zero deterrence baseline:
— Becker-Allingham-Sandmo model is 20% wrong, 80% right
— Study interaction between individual motivation and policy
• First integrated treatment of tax compliance and charitable giving
— Imperfectly enforced tax systems have an element of voluntary giving
• External validity issues are addressed in the paper:
— Smallness of tax; zero enforcement signal; donation substitution