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Why people cheat on their taxes

Marketplace Staff Apr 14, 2009

Why people cheat on their taxes

Marketplace Staff Apr 14, 2009


Kai Ryssdal: When the 16th Amendment to the Constitution of the Unites States was enacted — the one that allows for personal income tax — Tax Day was March 1st. So if you look at it that way, you’ve been able to hang onto the money you’ll have to hand over to the IRS tomorrow an extra six weeks. The other way to look at it, of course, is that taxes are due tomorrow. We’ve got behavioral economist Dan Ariely on the line once again to talk about our deeply conflicted relationship with the Internal Revenue Code. Dan, good to talk to you again.

DAN ARIELY: Same here.

Ryssdal: If ever there was topic that rolled behavioral and economics all into one, it is taxes. Because really you don’t want to pay them. What is the temptation here, to maybe not pay taxes and cheat a little bit.

ARIELY: Taxes, especially with the American system, is a kinda good test case for cheating. Where we have to pay taxes, and we realize it. We also realize it’s good to pay taxes on some level because the government does all kinds of things for us. At the same time, we have our selfish desires to pay as least as possible. And the tax code lets us play tricks with ourselves. So imagine you went out for dinner with your aunt, and she asked you how work was going, and you said, “Oh, it was going well,” and she gave you some suggestions about work. Can you not charge it as a business expense?

Ryssdal: That’s right, that’s right.

ARIELY: How about if you went golfing with somebody who might appear on the show at some point? Me, for example. Can you charge this?

Ryssdal: One can only hope.

ARIELY: So it’s actually very, very tricky. And all this ability to change things makes it very fuzzy. In fact, Will Rogers said the income taxes made liars of more Americans than even golf.

Ryssdal: What about the current economic climate. Will that make it more likely for people to wanna just save a little bit and maybe not give it to the government?

ARIELY: That’s a very crucial topic for the IRS this year. Every year the IRS kinda thinks that they’re getting a slightly lower level of compliance. And every year there’s a sliding scale in which this number increases a little bit. And this year in particular, it’s a question of how much will it increase. And here’s the story, if we can justify it. If you can say, “Oh the government is just terrible, they’re giving all these bonuses away, they’re spending my tax money.” That might actually create a situation in which we’re more willing to bend the rules. There is one more crucial interesting part here, which is what is the role of accountants. Imagine that you did it yourself, and you had to write the numbers in and you had to declare all the amounts and so on…

Ryssdal: I can’t because my wife won’t let me. But anyway, go ahead.

ARIELY: Oh, imagine your wife is doing it, and she’s writing all the numbers, versus you putting all the receipts in the shoe box, and you sending it to your accountant.

Ryssdal: Right.

ARIELY: Under which of those things would you feel more comfortable slipping a few extra receipts?

Ryssdal: Doing it myself, of course, right? Because nobody else knows.

ARIELY: So, it turns out that’s not the answer. It turns out that if you do it yourself, you kinda feel morally responsible. But if somebody else is eventually going to sign, and you leave it to somebody else’s discretion, now you feel, ah, let me try this thing, and the accountant will tell me if it’s right or wrong. And it’s basically what we call diffusion of responsibility.

Ryssdal: Yeah, see, I’d be afraid of getting caught, though. Which is why I’m going to pay my taxes anyway. But would we get better participation from the American public if we cut out the annoyance and just made it some flat 22.5 percent tax and be done with it?

ARIELY: I think so. I think people would be happier. And the other interesting thing about it is that I like the American tax system in principle. Once a year, you sit, you look at your income, you look at your taxes, you think you’re participating in some civic engagement in which you are part of society, and you’re contributing your share. But the way we’re doing it, it’s not helpful at all. You don’t feel more part of American society, you just feel annoyed. It would be a good, interesting exercise to try to say, how would we create a civil-engagement exercise out of this. Imagine, I would say, you know what, 10 percent of your taxes you can decide how it goes. You can decide if you want to spend it on education, roads, military, transportation, whatever you decide, alternative energy. And the question is would that actually create more civil engagement, people would care more, think more, and actually maybe contribute more.

Ryssdal:Something to think about on Tax Day tomorrow from Dan Ariely. He teaches behavioral economics at Duke University. His book is called “Predictably Irrational.”

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