How Government Spending Impacts Tax Compliance

A new research paper hit the wires a little while back: How Government Spending Impacts Tax Compliance. Excerpts:

In an effort to further understand tax compliance behavior and find ways to mitigate noncompliance, we examine the impact of goal congruence in the context of how tax dollars are allocated to pay for government programs. Alm, McClelland, and Schulze (1992)* argue that theoretical and experimental work ignores much evidence that tax compliance depends in part upon the use of tax revenue. Thus, we focus on how tax dollars are spent and the incongruence created when the government’s allocation does not coincide with the taxpayer’s personal views about government policies.

* Alm, J., G. H. McClelland, and W. D. Shulze. 1992. Why Do People Pay Taxes? Journal of Public Economics 48(1): 21–48.

Accordingly, we propose that in certain instances goals may not be aligned between the government and the taxpayer, providing taxpayers with a potentially justifiable (based on taxpayers’ personal views) incentive to cheat on their taxpaying responsibilities. Recent examples of misaligned goals are illustrated with growing groups who are intensely opposed to how tax dollars are spent by the government (e.g., tax resisters and conscientious objectors). The U.S. National War Tax Resistance Coordinating Committee estimates that about 10,000 people “resist” paying taxes in protest against military spending (USA Today 2006). Tax resisters often pay a portion of their taxes, but “deduct” an amount related to the spending with which they do not agree. Accordingly in a tax setting, goal congruence may not be an “all-or-nothing” variable, but rather taxpayers may have varying levels of opposition with the tax system. Thus, we hypothesize that taxpayers with low goal congruence (those who oppose or disagree with how tax dollars are spent) will be less likely to comply than taxpayers with high goal congruence (i.e., those whose goals are more closely aligned with the government).

* USA Today. 2006. National Tax War Resistance. Available at, April 14.

From here things go a little sideways for a while. Although the authors have noted conscientious tax resisters as examples of people who do not pay their taxes because of a lack of “goal congruence” with the government, the paper sidetracks into a discussion of taxpayers with a high “Machiavellianism” score (“which measures the tendency of an individual to detach from ethical considerations and perform actions that profit the self”) and suggests that Machiavellian taxpayers are more likely to put their own goals ahead of the government’s while “low Machiavellian taxpayers will make decisions that are more conditioned by their emotions and internalized ethical principles, and goal congruence should have less impact on their compliance decisions.”

In summary, we posit that goal congruence will have less impact on low Machiavellian taxpayers, who are motivated by ethics than high Machiavellian taxpayers, who are motivated by self-interest.

This seems like a non-sequitur to me unless you somehow categorize the war tax resisters as high-Machiavellian people acting from self-interested, non-ethical motives, which doesn’t match any reality I’m familiar with.

The academic tax literature in general seems to be biased toward equating ethical behavior with compliant behavior when it comes to taxation and is reluctant to consider alternatives to this viewpoint even when, as in this case, the alternatives are staring them in the face.

(And as it turns out, their hypothesis about the interaction between Machiavellianism and goal congruence was not ultimately shown by their data.)

Be that as it may, here is a description of one of the experiments they devised:

Participants read a scenario about a hypothetical taxpayer who earned cash from self-employment and were told to assume either a low or high probability of audit. They were asked to put themselves in the position of the hypothetical taxpayer and to think about their views concerning tax dollars being used to fund national defense programs. Participants then recorded the amount of income that they would report on their tax return.

Goal congruence can be represented by the degree to which a taxpayer agrees with the government’s allocation of tax revenue to particular programs. Participants were informed that approximately 20 percent of the total federal budget is used to fund national defense programs, and they were reminded that when a taxpayer pays more tax, more of their tax dollars go to defense programs. In this experiment, goal congruence is measured by summing participants’ agreement (on seven-point Likert scales) with the following three statements (1) the way the government spends tax dollars on defense programs is effective, (2) defense programs are important, and (3) I support a percentage of my tax dollars going to support the current defense program.

Participants were asked how much of the $45,000 income earned by the hypothetical taxpayer they would report if they were in a similar situation to the hypothetical taxpayer. Participants recorded their responses on a sliding scale from $0 to $45,000, where the scale was marked in $5,000 increments.

The results: “participants reported less income when they felt low support for a tax program (mean=$34,080.32, s.d.=1058.64) than when they felt high support (mean=$38,183.44, s.d.= 1063.73). Specifically, taxpayers who agree with the government’s use of their tax dollars report more income than those who do not.”


Results indicate that when the taxpayer supports a program, a higher audit rate increases income reporting (low audit rate mean $37,034.34 vs. high audit rate mean $39,332.51). However, when the taxpayer has low support for a program, a higher audit rate does not improve compliance. In fact, it has the opposite effect (low audit rate mean $35,146.04 vs. high audit rate mean $33,014.59).* Importantly, this indicates that policy efforts aimed at increasing the audit rate may not be beneficial if the taxpayer does not find value in a program

* Consistent with this finding, research has found that deterrence-based compliance measures sometimes can be counterproductive (Murphy, K. 2005. Regulating More Effectively: The relationship between procedural justice, legitimacy, and tax non-compliance. Journal of Law and Society, 32 (4): 562–589).

The explicit goals of this research project were “to further understand tax compliance behavior and find ways to mitigate noncompliance,” and with this in mind, the authors make the following suggestion:

When taxpayers do not support government programs, their compliance is lower regardless of the audit probability. This highlights the importance of gaining taxpayer support for government programs and that attempts to align the goals of taxpayers and the government may be fruitful. Thus, programs such as The Conscientious Objection Act [a Canadian “peace tax” bill] and the [U.S. Religious Freedom] Peace Tax Fund Bill, may increase voluntary compliance among taxpayers.

This will warm the hearts of peace tax legislation supporters, who now have some academic support for their proposals that may resonate with money-hungry legislators. For those of us who think that to increase “voluntary” compliance with taxpaying is not such a hot idea, this will give us more reason to oppose such legislation.