To declare or not to declare: that is the experiment!
Tax fraud: between social myth and economic reality With the return of the warm weather, French citizens undergo the annual ritual of declaring their income.
Tax fraud: between social myth and economic reality
With the return of the warm weather, French citizens undergo the annual rite of declaring their income. The vast majority of them, whether individuals or businesses, do so conscientiously and honestly. Fraud is extremely rare. Most of the time, it concerns minor dishonesty, such as declaring that you don't have a television set to avoid paying the licence fee, or artificially inflating your actual expenses. And contrary to the ideas that are often spread and generally based on examples of multinationals with complex tax systems, the vast majority of companies that make up the local economic fabric contribute effectively to their country's public spending. Moreover, scientific studies regularly demonstrate that it is not the scale of fraud that is surprising, but rather its weakness: taxpayers rarely, if ever, commit fraud. In a society often decried for its selfishness, individualism and loss of values, this is quite remarkable. Why do the French, like most citizens of developed countries, commit so little fraud? For the least serious frauds, the risks are relatively low (the frequency of checks is fairly low, less than 2% in most departments, and the penalties are only proportional to the tax avoided). Economists have been questioning this weakness for some decades: if taxpayers were motivated solely by selfishness, they would commit fraud far more often and to a much greater degree.
There are a number of technical reasons for this: changes to the tax system make tax evasion pointless, given the legal scope for tax avoidance and optimisation; the tax authorities know the income of employed taxpayers even before they file their tax returns, which makes under-declaration very risky; and so on. While there is some truth in these institutional reasons, they cannot be the underlying motivations of most taxpayers. Numerous studies[1] indicate that the motivation for tax compliance (i.e. declaring tax correctly) is more psychological: the vast majority of taxpayers are honest, understand the collective meaning of tax, and would feel particularly uncomfortable with an image of tax evasion. Behavioural economics has shown that far from being calculating and selfish agents, interested only in the monetary rewards of their choices, individuals are driven by a whole range of rich motivations, and particularly so-called "pro-social" motivations, i.e. the consideration that most individuals have for others and for the collective more generally. In other words, most taxpayers experience paying tax as an act of civic, political and collective support, rather than as an individual economic decision in which they weigh up the pros (avoiding tax adjustments) and cons (paying less tax).
Experimentation as a means of raising awareness
In this context, teaching taxation to students, i.e. helping young citizens to understand the real issues surrounding taxation in today's world so that they can make informed choices tomorrow, is a challenge. There are two pitfalls in teaching tax. On the one hand, we can be content with a technical approach - which is often the one adopted - which is legal and economic, and which consists of presenting all the intricacies of French and international taxation, its subtleties and - more or less explicitly - the ways in which these rules can be optimised, circumvented and 'played' with. In this context, the teaching does not deliver any prescriptive message and is supposed to be ethically neutral, but the approach is nonetheless partly hypocritical. By limiting itself to the technical aspects, it is suggested that these are the only ones that count, and that the political, social and ethical issues of taxation are secondary or negligible. On the other hand, it is possible to emphasise these issues without abandoning the technical aspects, but there is a great risk of falling into a form of moralising paternalism, which is sometimes counterproductive and will probably remain fairly abstract for most students.
An alternative approach is to put students in the position of experiencing what it means to be a 'taxpayer' or 'public decision-maker'. Using the methods of experimental economics, they are placed in a situation where they have to make tax decisions, both individually and collectively: How much income should I declare? What tax rate should I apply? etc. As part of the applied taxation course on the Grande Ecole programme at EDHEC Business School and the EPHEMER programme[2], the students were given the opportunity to test themselves in a large-scale experimental situation[3]. Divided into groups of 15, representing a small-scale community, each with a role (one public decision-maker for 14 taxpayers), the students make the decisions they want, taking into account the motivations they think are important (ethical, financial). They can observe the effects directly. The public decision-maker chooses a tax rate (between 0 and 50%). Taxpayers receive a (random) income and decide how much to declare. They can then, with a low probability, be audited and, if they have under-declared, have to pay penalties proportional to the amount of their fraud. All the sums collected are then multiplied by a factor (set here at 1.3) and handed over to the public decision-maker, who is free to decide what percentage he or she wishes to allocate to his or her own remuneration, and what percentage to redistribute, unless the tax revenue received is so low that the community made up of these 15 students goes bankrupt, leaving them with the frustration of seeing that, for them, the game has come to an end.
Results, personal experiences and educational input
This little role-playing exercise takes a stylised and simplified look at the most salient issues at stake in the question of taxes and, above all, the public good situation: students are invited to experiment with the fact that "1" in their pocket becomes, in the experiment described here, "1.3", if they pool it. In very practical terms, while it is inconceivable for an individual taxpayer to finance a park, a media library or a road, together they can hope to access the corresponding services. But this central issue should not detract from the other determining parameters of the situation: voluntary declaration with the risk of control, the possibility of illegitimate use (monopolisation of a rent by the public decision-maker) or legitimate use (redistribution to taxpayers) and even the risk of state bankruptcy. This experimental context makes it possible to reproduce, in miniature, the most important issues surrounding taxation.
What are the results of this experiment? From the student's point of view, as the experiment was carried out at the very beginning of the semester, each student's contribution was totally personal, linked firstly to the role they had been given (public decision-maker or taxpayer) but also to their prior exposure to these themes, linked to their beliefs, values or personality. By putting themselves in this situation, the students were encouraged to think about and face up to the consequences of their choices. More than a vertical approach to tax ethics, the students had to forge their own opinions and ethical thinking on the issue. In terms of the experiment itself, the common pedagogical interest is to make all the students realise that the more legitimate the use of tax is collectively, the higher tax compliance is (phenomenon of legitimacy and reciprocity). On the contrary, the more taxpayers cheat, the more the public decision-maker increases the tax rate to compensate. Through rounds and data feedback, students are encouraged to understand the decisions of others, and the consequences of their choices (whether individual or collective). The collectively best situation, i.e. the one that would generate the most total wealth in a group, would correspond to a tax rate of 50%, a tax compliance rate of 100% and egalitarian redistribution. In other words, the collective interest of the group is to move towards these behaviours. But the narrow interest of each individual is to monopolise the rent (for the public decision-maker), and to declare no income (for the taxpayer), in the hope that others will behave better. In other words, the situation reiterates the classic tension between collective and individual interest that lies at the very heart of political life. In this age of globalisation, digitalisation and robotisation, it is vital that the teaching of taxation can help students to understand the issues at stake in this dilemma, and provide them with food for thought about the challenges of citizenship in tomorrow's world.
[1] Andreoni, J., Erard, B., & Feinstein, J. (1998). Tax compliance. Journal of economic literature, 36(2), 818-860.
[2] The EPHEMER programme, funded by the French National Research Agency, which aims to place experimentation at the heart of ethics teaching
[3] The experience offered to the 700 students was organised jointly by Anthropo-lab, an experimental anthropology laboratory, and EDHEC Business School as part of the ANR EPHEMER project.
