1. The Effect of Written Notices on Taxpayers' Reporting Behavior – A Block Randomized Controlled Trial Barak Ariel Jerry Lee Centre of Experimental Criminology, Cambridge U., UK ba285@cam.ac.uk Presented at the Randomized Controlled Trials in the Social Sciences: Methods and Synthesis Third Annual Conference University of York, UK (2008)

2. 2 Research Questions Tax Authorities use written notices to generate compliance from non- compliers. The literature points to the possibility that written notices have a positive affect on taxpayers’ reporting behavior (Schwartz & Orleans, 1967; Slemrod et al., 2001; Wenzel, 2006): Receiving a written notice increases compliance and decreases noncompliance for income taxes. 1.Is this correct for VAT? 2.Does the content / language of the written notice matter? A threatening content v. nonthreatening content 3.Is the effect similar for businesses with different yearly revenues?

3. 3 Research Design: Block randomized field experiment 16,870 Israeli VAT taxpayers randomly selected and allocated to study group and control group. A blocking method based on subjects’ yearly revenues was used to decrease heterogeneity. Manipulation: Subjects approached by the tax authority through formal written notices. Subjects in study group received a formal written notice, and had their monthly tax reports analyzed, 4 months after manipulation and one month after the manipulation (controlling for external biases during manipulation). Two types of letters sent: one threatening with punishment if true tax liability is not reported (deterrence); one without a threat of punishment if true tax liability is not reported (procedural justice approach).

4. 4 Dependent Variable: Monthly Tax Payments (variable is calculated as the mean dollar value of four consecutive months following manipulation, minus dollar value of one month prior to manipulation). However, due to skewness of data, log transformation of dollar values of DV are analyzed instead in statistical analyses.

5. 5 Manipulation: formal written notices

6. 6SamplingMethod 2 Experimental groups (one for each type of written notice) Control group (no letter) In Each block

7. 7 Step 1: Testing for Overall Written Notices' Effect on Tax Reporting Behavior

8. 8 Step 2: Testing for Effect for Subjects with Different Yearly Revenues – comparing threatening v. nonthreatening letters (In order to test for this hypothesis, block randomized design is used. This method decreases heterogeneity of sample, by sampling subjects and allocating them into study groups according to a criterion (in our case, 2006 yearly revenues)

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11. 11 1.As a tool, written notices have a limited effect on VAT taxpayers’ reporting behavior. Overall, when compared to control group, those receiving a written notice did not perform better. ES very small. 2.When taking into account the content of the written notice, we still do not find effects statistically significant at the.05 level, compared to the control group. ES very small. 3.When Blocking method used, we see effect is concentrated in low-revenue block, such that receiving non-threatening letter has caused subjects to report more VAT liability compared to a threatening letter. These findings imply that mid-high level businesses are unaffected by written notices! This begs the question: why is the effect non-continuous and what makes the poor(er) businesses unique? OR: WAS STAT. SIG. FINDING SIMPLY A STAT. ANOMALY? THIS MEANS THERE IS SIMPLY NOTHING “GOING ON”? …ES TENDS TO TELL THIS STORY… Summary of Findings:

12. 12 Policy Implications Experiment suggests compliance can be generated without necessarily threatening taxpayers. Not without caution, it can be said that Written Notices work better for low income businesses: this population is known to be a difficult target for the tax authority (more tax cheating, less tax planning). Given the low cost of sending out written notices, it proves to be an efficient tax collection mechanism for this subgroup. (i.e., audit hours can be directed to bigger businesses, where audit findings are more substantial).