Program Profile: Tax Compliance Experiment (Israel)

Study Title: Deterrence and Moral Persuasion Effects on Corporate Tax Compliance: Findings From a Randomized Controlled Trial (which is associated with Outcome 1)

Research Design/Sample

Ariel (2012) conducted a randomized controlled trial to examine the impact of tax letters on corporate tax compliance between January 2006 and March 2007. The sample was drawn from the list of all corporate taxpayers in Israel, which was provided by the Israeli Tax Authority. There were no major inclusion restrictions; however, there were three major exclusion criteria. First, taxpayers who were under investigation for tax evasion during the evaluation period were excluded from the sample. Second, new businesses (defined as 2 years old or younger) were excluded. Finally, 500 companies with the highest revenues in the market, and companies whose stocks were traded in the stock exchange were also excluded. Overall, 4,395 corporations were eligible to participate.

 

Corporations were randomly allocated using a computer-generated randomization syntax in a 3:1 ratio into the three arms of the trial: 1) deterrent letter, 2) moral persuasion letter, and 3) no-letter. Seven hundred and thirty-one corporations received the deterrent letter (the deterrent letter group), 732 corporations received the moral persuasion letter (the moral persuasion letter group) and 2,932 corporations received no letter (the control group). 

The mean gross income of the deterrence group was $772,820, the mean gross income of the moral persuasion group was $943,613, and the mean gross income of the control group was $843,974. Most of the corporations had their main offices in large metropolitan cities in Israel. Real estate was the most prevalent market sector, followed by construction workforce, consultancy firms, engineering services, and restaurants. There were no statistically significant differences between the treatment and control groups on these characteristics at baseline.

Data Collection/Outcome Measures

Three measures were used to evaluate tax compliance: 1) gross sales reporting, 2) tax payments, and 3) tax deductions, as these items are needed for tax reports. Gross sales are defined as the total value of services produced or goods sold by a company during the tax period. Tax payments are required from all taxpayers on every transaction the company is involved in during the tax period. Tax deductions are expenses or items that can be deducted from the revenue that is subject to tax. Tax compliance for all three groups was investigated using tax reports (which were accessed through the Israeli Tax Authority) following the treatment (January – April 2007) compared with tax reports prior to the treatment (January–April 2006). 

Statistical Analysis

Changes in tax-reporting among the deterrent letter group, the moral persuasion letter group, and the control group were analyzed using difference-in-differences. Hedges’s g effect sizes were computed for each of the three outcome variables to measure the magnitude of the treatment effect. No subgroup analysis was conducted.

Citation:

Ariel, Barak. 2012. “Deterrence and Moral Persuasion Effects on Corporate Tax Compliance: Findings from a Randomized Controlled Trial.” Criminology 50(1): 27–69.