Who Cheats on Their Taxes?

Copyright, The New York Times Company

The United States Treasury has taxpayer integrity to thank for many of its tax collections. But some Americans are not honest with the Internal Revenue Service.

Last week I explained how many taxpayers accurately report their income to the I.R.S., despite apparently low penalties for underreporting. Many economists say that people are willing to sacrifice some disposable income in order to be honest taxpayers; others say that fear of penalties is the overwhelming motivation for tax payments.

Three years ago, in his Ph.D. dissertation at the University of Chicago on “Tax Compliance and Social Values,” Oscar Vela suggested both that taxpayers are honest and that they are largely so because honesty keeps them from losing income.

In other words, some people pay taxes not because of fines that the I.R.S. might levy, but because a tax conviction would harm their professional reputation and that, in turn, would lower their income.

Dr. Vela looked at the importance of integrity in job performance in the Occupational Information Network and found that the occupations where integrity was especially valued coincided with the occupations where the I.R.S. found tax compliance rates to be the highest.

The chart below shows some of Dr. Vela’s results, with tax compliance measured as the fraction of business income that was found by the I.R.S.’s special compliance study to be underreported.

Integrity and Tax Compliance by Occupational Groups

Vela Trevino, Oscar Ernesto, “Essays on the Economics of Individual Tax Compliance,” Ph.D. Dissertation, 2008.

Business income reporting has a large scope for potential underreporting, because the I.R.S. cannot as easily match third-party transaction reports to business tax returns the way it can with, say, employee W-2s.

For example, the construction trades do not appear to value integrity as much as other occupations do – Dr. Vela found the occupation to be ranked third from the bottom, based on the Occupational Information Network. Construction is also one of the top occupations in terms of underreporting business income.

Another finding is that the much-disparaged legal occupation is near the top in terms of valuing integrity, and that lawyers underreport a relatively small fraction of their business income.

Dr. Vela also examined other times of tax cheating and other demographic factors that were correlated with it, such as education (education and tax compliance were positively correlated).

He concluded that taxpayer integrity cannot be taken for granted, and that it evolves over time according to changes in a nation’s education and occupational structure.