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Are Some Countries More Honest than Others? Evidence from a Tax Compliance Experiment in Sweden and Italy

Are Some Countries More Honest than Others? Evidence from a Tax Compliance Experiment in Sweden... ORIGINAL RESEARCH published: 07 April 2016 doi: 10.3389/fpsyg.2016.00472 Are Some Countries More Honest than Others? Evidence from a Tax Compliance Experiment in Sweden and Italy 1, 2 3 4 5 Giulia Andrighetto *, Nan Zhang , Stefania Ottone , Ferruccio Ponzano , 1 1, 6 John D’Attoma and Sven Steinmo Robert Schumann Center for Advanced Studies, European University Institute, San Domenico di Fiesole, Fiesole, Italy, 2 3 National Council for Research, Institute of Cognitive Science and Technologies, Rome, Italy, Department of Social and Political Sciences, European University Institute, San Domenico di Fiesole, Fiesole, Italy, Department of Economics, Management and Statistics, University of Milano-Bicocca, Milano, Italy, Department of Law, Politics, Economics and Social Sciences, University of Eastern Piedmont, Alessandria, Italy, Department of Political Science, University of Colorado, Boulder, CO, USA This study examines cultural differences in ordinary dishonesty between Italy and Sweden, two countries with different reputations for trustworthiness and probity. Exploiting a set of cross-cultural tax compliance experiments, we find that the average level of tax evasion (as a measure of ordinary dishonesty) does not differ significantly between Swedes and Italians. However, we also uncover differences in national “styles” of dishonesty. Specifically, while Swedes are more likely to be either completely honest or completely dishonest in their fiscal declarations, Italians are more prone to fudging Edited by: (i.e., cheating by a small amount). We discuss the implications of these findings for the Dan Ariely, evolution and enforcement of honesty norms. Duke University, USA Reviewed by: Keywords: tax compliance, ordinary dishonest behavior, fudging, cross-country comparison, social norms Ting Jiang, University of Pennysalvania, USA Stefania Bortolotti, INTRODUCTION University of Cologne, Germany *Correspondence: Ordinary dishonest behavior rarely attracts much attention. Seemingly innocuous practices such as Giulia Andrighetto avoiding VAT, double parking, cheating on an exam, and dodging fares on public transport tend giulia.andrighetto@gmail.com to spread, often even in the wake of high-profile, sensationalized scandals. But while such everyday misdeeds may appear benign, taken together, they can result in vast societal damage (DePaulo et al., Specialty section: 1996; Ariely, 2008; Feldman, 2009; Ayal and Gino, 2011). In this study, we examine cross-national This article was submitted to variation in individuals’ willingness to engage in ordinary dishonest behavior, as measured by their Cognitive Science, a section of the journal tendency to underreport income for tax purposes. Frontiers in Psychology The extent to which citizens engage in tax evasion and tax avoidance varies enormously across countries (Schneider and Enste, 2013). This is true even within European nations that share Received: 17 July 2015 Accepted: 17 March 2016 important features such as stable democratic institutions, developed economies, EU membership Published: 07 April 2016 and broadly similar tax systems. Part of the reason underlying this cross-national variation relates to Citation: the efficiency of public institutions. Put simply, countries with efficient institutions (with stringent Andrighetto G, Zhang N, Ottone S, auditing and financial reporting standards) may be more effective at deterring tax evasion. At the Ponzano F, D’Attoma J and Steinmo S same time, efficient institutions may encourage higher compliance because citizens feel that they (2016) Are Some Countries More are receiving something (i.e., high-quality public services) in return for their money (Levi, 1989; Honest than Others? Evidence from a Smith and Stalans, 1991; Smith, 1992; Pommerehne et al., 1994; Edlund, 1999; Frey and Feld, 2002; Tax Compliance Experiment in Frey and Torgler, 2007; Torgler and Schneider, 2007; Cummings et al., 2009; Levi et al., 2009). Sweden and Italy. However, there is also reason to believe that variation in norms and culture plays an important Front. Psychol. 7:472. doi: 10.3389/fpsyg.2016.00472 role in explaining tax evasion. Consider two European countries that arguably lie at opposite ends Frontiers in Psychology | www.frontiersin.org 1 April 2016 | Volume 7 | Article 472 Andrighetto et al. Ordinary Dishonesty in Tax Compliance of the spectrum on tax compliance: Sweden and Italy . measured in more real life domains (e.g., tax evasion and Even setting aside differences in the institutional environment, bribery scenarios) and framed language is used, systematic and substantial evidence suggests that norms of honesty may predictable differences are observed across countries (Alm et al., differ between these two countries. Specifically, Swedes think 1995; Torgler, 2004; Bobek et al., 2007; Cummings et al., 2009; that honesty is a typical national trait (Daun, 1989), an Barr and Serra, 2010). assessment shared by other Europeans (Zetterberg, 1995) . By Our study contributes to this literature in two ways. First, we contrast, Italy is ranked very low in terms of honesty amongst suggest that national or cultural context can influence behavior European countries, and even Italians themselves consider their in the lab under some conditions, but not necessarily others. This compatriots to be less than trustworthy (Mackie, 2001). In is because although honesty norms may differ across societies, fact, the Italian journalist and writer Giuseppe Prezzolini once normative considerations may have little effect on behavior if not described Italy as the “country of cunningness” (paese dei furbi), first activated by situational cues in the decision context (Cialdini where people “worship cunningness so much that they even go so et al., 1990; Aarts and Dijksterhuis, 2003; Joly et al., 2008). For far as to admire those who use it against them” (Prezzolini, 1921). example, although the general norm in my society may be that To what extent can differences in norms and cultures of “people should not lie,” I could feel perfectly justified in lying (dis)honesty explain cross-national variation in fiscal avoidance to increase my payoffs in a lab experiment, if I believe that the and evasion? To address this question, we report data from a operative norm in that specific context is to make as much money tax compliance laboratory experiment conducted in Sweden and as possible. Given this, it is unsurprising that experiments using Italy in 2013/14 . Our experimental framework allows us to hold neutral language and context free tasks find little variation in fiscal institutions constant, and thereby isolate the influence of dishonest behavior across countries (since the relevant country- national cultures on individuals’ willingness to pay taxes. Given specific norms remain dormant), whereas one finds variation prevailing national stereotypes about norms of dishonesty, we when the specific context is made explicit and the corresponding expected that Italians would engage in greater fiscal evasion in norms are activated. For this reason, as we describe below, the experiment, compared to Swedes. we designed our experiment to explicitly incorporate framed To preview our basic findings, our experiment reveals, instructions in order to increase the salience of norms against tax somewhat surprisingly, that average levels of tax evasion in evasion . Sweden and Italy do not differ significantly. Yet, we uncover Secondly, we argue that a consideration of “average” country country-specific styles of dishonesty. More specifically, we find effects may obscure important variation in patterns of dishonesty. that Italians engage more frequently in moderately dishonest For example, suppose that researchers administer a matrix test to behavior, or what Ariely (2012) refers to as “fudging.” By contrast, 20 participants, divided evenly between country A and country Swedes are more likely to be perfectly honest in their behavior, B. Suppose further that all 10 participants in country A cheat on but among those Swedes who do cheat, they are much more 50% of the test questions, while in country B, 5 participants are likely to cheat to the maximum extent possible. In the concluding completely honest, while 5 participants are completely dishonest. section, we discuss some possible implications of Italians’ greater In this example, “average cheating” is identical across the two tendency to fudge for the evolution and enforcement of honesty countries, but this average also masks important variation in the norms, with a particular eye toward explaining Italy’s reputation distribution (i.e., the extent and intensity) of dishonest behavior. as a “country of cunningness.” In relation to this last point, several studies have documented heterogeneity in degrees of dishonesty in experimental tasks (Gneezy et al., 2013). More specifically, one general finding RELATED WORK emerging from the psychology literature is that, when given opportunities to be dishonest in everyday life, most people are Several previous studies have attempted to evaluate cross- willing to fudge—that is, to cheat “just a little bit” (Mazar et al., national variation in cheating and dishonesty using laboratory 2008; Gino et al., 2009; Ayal and Gino, 2011; Ariely, 2012). experiments. The results have been mixed. On the one hand, a The attractiveness of fudging lies in its ability to reduce “ethical number of studies have found that the propensity to engage in dissonance” by allowing people to recast their transgressions in dishonest behavior does not diverge significantly across countries (Gneezy, 2005; Amir et al., 2008; Ariely, 2012; Pascual-Ezama However, as noted by an anonymous reviewer, the use of framed instructions et al., 2015; but see Dieckmann et al., 2015 for contradictory could introduce an experimenter demand effect: in particular, participants who wish to “look good” in front of the experimenters may behave more honestly. results). On the other hand, when honesty and dishonesty are As we are interested in cross-national differences in behavior, this demand effect One of the most obvious differences between these two countries is revealed in would be problematic for our analysis only if it also differs across countries. what is known as the “Tax Gap.” The Tax Gap is a measure of the difference For example, Italians might care more about “looking good” than Swedes, and between revenues actually collected and taxes that would have been collected if thus moderate the amount by which they cheat on their tax declarations in the all taxpayers had honestly reported their incomes. While it is difficult to precisely experiment. However, we do not believe that this possibility poses a serious threat measure these gaps for obvious reasons, it is widely recognized that the Tax Gap to the validity of our study. In particular, we were careful to ensure from the in Sweden is approximately 8–9% of GDP (Slemrod, 2007), whereas in Italy it can very beginning that participants had no knowledge that they were taking part in reach as high as 25% to 30% (Santoro, 2010). a cross-national comparative study. In other words, there is little reason for Italian In a recent YouGov poll, Northern Europeans perceived Sweden as the most (Swedish) participants to feel scrutinized just because they are Italian (Swedish). In honest nation in the EU (YouGov’s Eurotrack Series, 2013). addition, we use only native speakers (indeed, in Italy, only native dialect speakers) These experiments are part of a larger study on tax compliance behavior in five in each laboratory. This should lessen concerns that one needs to “look good” in countries funded by the European Research Council. front of foreign researchers. Frontiers in Psychology | www.frontiersin.org 2 April 2016 | Volume 7 | Article 472 Andrighetto et al. Ordinary Dishonesty in Tax Compliance a more benign light, and thereby reconcile dishonesty with the in their tendency to fudge their taxes, an issue that has not been desire to maintain a positive moral self-image (Barkan et al., carefully investigated in previous work. 2012). In the context of the foregoing discussion, we are interested in examining how cross-national variation in social norms relating EXPERIMENTAL PROTOCOL to tax evasion shapes both aggregate tax compliance as well as the tendency to engage in “fiscal fudging.” Accordingly, both of The experiment consisted of four stages, plus a post-experimental these considerations—norm specificity and average vs. degrees of survey, and lasted 90 minutes on average. In this article, we honesty—inform the design and analysis of the present study. report the findings of the first three stages of this experiment . In all, we took great care to ensure that the participant pools were similar in each experimental location , and that the protocol EXPERIMENTAL OVERVIEW was implemented in exactly the same manner in each country (Appendix Table 1 in the Supplementary Material displays We report results from a tax experiment involving a total of 638 descriptive statistics for each country sample, as well as the degree participants in Italy and Sweden (311 in Italy; 327 in Sweden), of similarity between Italian and Swedish participants) . recruited in five different locations (Rome, Bologna, Milan, Each stage began with participants performing a 5 minute Stockholm and Gothenburg) during the academic year 2013– clerical task in which they copied random strings of letters 2014 . The basic design of our experiment is similar to that used and numbers from a sheet of paper onto an electronic form. by Alm (1991), and aims to capture some essential features of Participants were paid 10 Experimental Currency Units (ECUs) the tax system used in many countries: (1) individuals earn real for each line of text they correctly copied . After the clerical income, (2) they pay taxes on income voluntarily reported, (3) task, participants were shown their earned income and asked they face some chance that unreported taxes will be detected and to “report your income for tax purposes” under a variety of penalized, and (4) the total taxes paid are used to provide a public institutional scenarios (described below). Participants were not good. informed of how many scenarios would follow or what the We describe our experimental protocols in detail below, but specific content of each scenario might be. two features of our methodology are worth highlighting up front. In addition, participants were told that they would face First, our design explicitly provides a “context rich” setting in a 5% probability of being audited in each scenario; if they which tax language is used throughout. This feature is intended underreported their income and were audited, they would to ensure that participants’ decisions in the lab reflect their pay a fine equal to twice the tax that they had avoided. experiences and social norms pertaining to the specific subject Importantly, we revealed the results of any audits only at under study: taxation (Cummings et al., 2009). By contrast, the the end of the experiment, to avoid the possibility that being standard approach of using neutral language may encourage audited in one round would affect behavior in subsequent participants to perceive the decision problem at hand as a risky rounds. Moreover, throughout the experiment, participants gamble (i.e., the extra income one earns from unreported taxes had no knowledge of other participants’ performance in the weighed against the probability of being caught and fined), as typing tasks or their tax reporting decisions. This ensured that opposed to a tax compliance decision. An additional benefit of individual choices did not reflect reciprocity or conditional framing is that there is no ambiguity for participants about what cooperation. constitutes honest behavior in the experiment. In other words, In each of the three stages of the experiment, we manipulated unlike in standard public good games in which participants may fiscal rules relevant to different features of modern taxation have different expectations about the appropriate amount of systems, in order to elicit behavior under a range of institutional money to contribute, it is clear in the tax frame that the honest behavior is to declare the total amount earned. These three stages of the experiment encompass nine rounds of tax reporting (see Secondly, in our task, participants are not restricted to being Appendix Table 7 in the Supplementary Material for a summary). However, we either completely honest or completely dishonest, but instead, are th report data from the first 8 rounds only. The 9 round involves donations to a allowed to report any amount (from 0 to 100%) of earned income. real-world charity, and is not central to our research question. In addition, since th the 9 round was the final round (and therefore, did not affect behavior in previous Thus, our task allows us to test whether Italians and Swedes differ rounds), we have decided to exclude it from the analysis presented in this paper. 5 8 Replicating the experiment in multiple locations within each country provides us Participants were all recruited using ORSEE (Greiner, 2004). In early versions with greater confidence that we are not simply picking up “site-specific” effects, of the experiment, the experimental tasks were programmed and conducted but rather cross-country differences in patterns of behavior. We chose these five with zTree (Fischbacher, 2007), and the demographic information was collected locations specifically because they were the only active laboratories with suitable through Qualtrics. Later in our project, we were able to integrate the experimental characteristics—i.e. with active participant pools drawn from different fields of and survey portions of the study using our own web-based experimental software. study — that we could find in Sweden and Italy. A summary of the reporting rounds and a text version of the instructions Our experiments have been approved by the IRB Committee at the University (translated into English) are included in Appendix Table 7 in the Supplementary of Colorado, Boulder, where the principal investigator holds a professorship. Our Material and Appendix Supplementary Information 8. project has also been approved by the Ethics Council of the European Research We also had the protocol translated (double-blind) to ensure that the meanings Council, and the European University Institute Ethics committee. Finally, our of the words and phrases used were consistent across the countries. work has also been authorized by all of the Italian and Swedish laboratories we ECUs are converted into real currency at the end of the experiment. One ECU have used, but we did not undergo a separate university-based IRB review in each is worth e0.01 in Italy, and 0.60 SEK in Sweden. These exchange rates are chosen case as these were not required by the universities in question. All participants based on the average hourly pay rates in each country. The average earnings were signed a written consent form prior to taking part in the study. 14.09 Euros in Italy and 187.60 SEK in Sweden. Frontiers in Psychology | www.frontiersin.org 3 April 2016 | Volume 7 | Article 472 Andrighetto et al. Ordinary Dishonesty in Tax Compliance contexts . In stage 1, we altered the amount that participants Finally, in stage 3, we presented scenarios with two different received in return for the taxes that they collectively paid. In types of progressive taxation schemes. In round 7, the top 10% the first scenario (round 1) of stage 1, participants were simply of income earners (as defined by self reported income) faced a told that the tax rate is 30%. There was no redistribution of tax 50% tax rate; participants in the bottom 10% of reported incomes revenues. In the second scenario (round 2), the tax rate remained faced a 10% rate; finally, the middle 80% of reported income 30%, but all tax revenues were placed in a “general fund” earners faced a 30% rate. By contrast, in round 8, we introduced a which was subsequently divided equally among all participants marginal tax rate system (similar to the real tax systems operating irrespective of how much each individual paid into the fund. in Italy and Sweden). In this case, all subjects paid a 10% tax In the third scenario (round 3), we again held the tax rate at on the first 50 ECUs of reported income, a 30% tax on reported 30%, but all tax revenues in the general fund were doubled and income between 51 and 100 ECUs, and a 50% tax on all reported then redistributed equally to all participants, regardless of how income above 100 ECUs. In both progressive taxation rounds, all much each participant had individually paid into the fund. In tax revenues were doubled and then redistributed, and we held each round (before they were asked to report their incomes), the audit rate constant at 5%. Once again, subjects were given subjects were given multiple specific examples demonstrating the explicit examples to ensure their understanding of the rules. rules in each scenario under a series of hypothetical decisions (see Appendix Supplementary Information 8 in the Supplementary Material); they were also reminded of the 5% probability of being RESULTS audited, as well as of the fine they would have to pay should the Average Compliance Rate audit detect any under-reporting. Despite the intrinsic social dilemma structure of the tax scenario In stage 2, we held redistribution constant and varied the that makes evasion the optimal strategy, we find that the level of tax rates. In the first scenario of stage 2 (round 4), we asked compliance far exceeded the level predicted by expected utility participants to report their income under a tax rate of 10%. In theory (Allingham and Sandmo, 1972; Yitzhaki, 1974) in both the second scenario (round 5), the tax rate was increased to countries and in all rounds. This result is consistent with previous 30%, and in the third scenario (round 6), the tax rate was again research on tax compliance and public goods (Ledyard, 1995; increased to 50%. In all three rounds of stage 2, we held the Bosco and Mittone, 1997; Cummings et al., 2009; Alm, 2012). audit rate (5%), fines (2x underreported income) and the rules Pooling both countries, we observe that individuals were mostly for redistribution (tax revenues doubled and then redistributed) honest, reporting on average 64.9% of total income. constant. Additionally, we observe that the reporting rate varied according to the specific scenarios presented in each round. We also considered randomly ordering the scenarios to control for order effects. Figure 1 shows the average percentage of earned income that However, we decided that this option was unnecessary because our central concern was reported in each of the eight rounds, broken down between is not to evaluate the effects of institutional changes, but rather to examine how people in different countries would respond to the same institutional scenarios. Swedish and Italian participants. The vertical axis displays FIGURE 1 | Average compliance rate divided by round and by country. Frontiers in Psychology | www.frontiersin.org 4 April 2016 | Volume 7 | Article 472 Andrighetto et al. Ordinary Dishonesty in Tax Compliance the average tax compliance rate, defined as the percentage of lower average compliance (Marwell and Ames, 1981; Carter and total earned income that is truthfully declared in each round. Irons, 1991; Cullis et al., 2006; Lewis et al., 2009). Finally, we Comparing rounds 1 through 3, we see that compliance responds control for participants’ beliefs about the behavior of others in positively to the efficiency of redistribution: individuals were the experiment . Individuals who believed that others reported willing to declare more when they knew that tax revenues less also reported less themselves (Fischbacher et al., 2001). produced more public goods. Secondly, individuals responded to Importantly, the inclusion of these covariates does not change higher tax rates by evading their fiscal obligations: compliance our overall conclusions regarding cross-country differences in falls moving from rounds 4 through 6. These results are in line the average compliance rate. As shown in Models 3 and 4, the with previous experimental studies on tax compliance (Alm et al., coefficient on the Italy dummy is never statistically significant. 1992; Bosco and Mittone, 1997; Torgler, 2002; Blackwell, 2007; These additional results confirm our initial findings reported Alm, 2012), providing us with some assurance about the validity above: regardless of the controls and model specification we of our experimental design. employ, we do not find any significant differences in average Turning to the cross-country variation in average compliance compliance rates between the two countries . rates, although we predicted that Swedes would comply more on average than Italians, we do not document significant differences Patterns of Compliance and Dishonesty across countries. Pooling across all 8 rounds of the experiment, Although an analysis of the average compliance rate does not Italians reported 63.1% of their earned income (s.e. = 1.8%), support prevailing national stereotypes that Swedes are more as compared to Swedes who reported 66.6% (s.e. = 1.9%), honest than Italians, a closer analysis of the distribution of and the cross-country difference is only 3.5% (t-test s.e. = compliance decisions yields some interesting cross-national 2.6%, p = 0.182). We run several additional tests to assess differences. In particular, a statistic like the average compliance the robustness of this result. First, we check whether different rate does not allow us to distinguish between three different locations within each country can indeed be pooled to estimate a decisions: complete compliance (i.e., the decision to declare 100% larger “country” effect. To do so, in Models 1 and 2 of Appendix of earned income), complete evasion (i.e., the decision to declare Table 2 in the Supplementary Material, we estimate individual- 0% of earned income), and partial compliance or “fudging” (i.e., level tobit models for the average compliance rate (pooled across the decision to declare more than 0, but less than the total; see all 8 rounds) with site-specific dummy variables, separately also Mazar et al., 2008 for a similar analysis). for Italy and Sweden . We also cluster standard errors by These distinctions are shown in Figure 2, which displays the experimental session. We find no statistically significant within- distribution of participants’ reported incomes (pooled across country variability, suggesting that the results from different all 8 rounds). The x-axis breaks down the distribution of locations can indeed be pooled. reported incomes into the following bins: [0%, (1–10%), (11– Next, we put data from both countries together, and estimate 20%). . . (91–99%), 100%], and the y-axis displays the percentage the effect of a dummy variable for Italian participants on the of participants in each country falling into each bin. We observe average compliance rate, controlling for a host of individual- that Swedes tended to concentrate in the extreme bins (0% and level characteristics including gender, age, previous participation 100%), while the distribution is more uniform amongst Italians. in experiments, economics training, earnings in the clerical To more precisely operationalize these patterns, we define the task, and beliefs about the honesty of other participants. In following three “types” of participants: an alternative specification, we also add fixed effects for the • Honest Type: declares 100% of earned income across all 8 individual treatment round. The inclusion of covariates in rounds. Models 3 and 4 of Appendix Table 2 in the Supplementary • Dishonest Type: declares 0% of earned income across all 8 Material allows us to examine individual-level correlates of tax rounds. evasion and dishonesty. We observe that the average compliance • Fudging Type: everyone else. rate is lower amongst men, and amongst younger participants (although this latter result is less robust), which is consistent with Next, we compare the distribution of types across Italy and previous research (Hasseldine, 1999; Lewis et al., 2009; Torgler Sweden. We find more Honest Types in Sweden compared to and Valev, 2010). Risk aversion is also correlated with higher Italy (25.7% in Sweden vs. 14.8% in Italy; Schlag z-test p < 0.001), average compliance . In addition, in line with previous work, but also more Dishonest Types (8.9% in Sweden vs. 5.1% in Italy; we find a positive correlation between economics training and Schlag z-test p = 0.066). By contrast, significantly more Italians are classified as Fudging Types (80% in Italy vs. 65% in Sweden; The number of observations changes once we include demographic covariates in our regression models. This is because in early versions of the experiment, and 10 signifying someone who is “completely willing to take risks.” Answers have the experimental tasks were implemented in zTree, while the demographic been standardized to have mean = 0 and s.d. = 1. information was collected separately using Qualtrics. This necessitated participants We measured participants’ perceptions a survey item which asks subjects entering their anonymous participant-IDs twice: once into zTree, and once whether they thought other participants in the experiment reported (a) their entire again into Qualtrics. Because some participants accidentally entered different earned incomes, (b) less than their entire earned incomes, or (c) much less than participant-IDs into the two systems, we were unable to match their experimental their entire earned incomes. In our regressions, we use (b) as our baseline category. decisions with their demographic data. This problem was fixed in later versions of As a further robustness check, we compared country-level differences in average the experiment, once we switched to our own web-based experimental software. compliance rates separately for each individual round of the experiment. In 6 out of We measured risk using a survey item that asks subjects to rank themselves on a the 8 rounds, we found no statistically significant differences (see Appendix Table 10-point scale, with 1 signifying a person who “normally tries to avoid taking risks” 3 in the Supplementary Material). Frontiers in Psychology | www.frontiersin.org 5 April 2016 | Volume 7 | Article 472 Andrighetto et al. Ordinary Dishonesty in Tax Compliance FIGURE 2 | Distribution of individual compliance rates. Schlag z-test p < 0.001). In other words, Swedish participants others behaved honestly in the experiment were significantly less 17,18 displayed more clear-cut behaviors: Swedes cheat less frequently, likely to fudge . but when they cheat, they are likely to do so completely. By In summary, although the average level of dishonesty does contrast, Italians cheat more habitually, but the intensity of their not differ across the two countries, a closer examination of the cheating is more restrained: they hold back from “cheating all data reveals a cross-national difference in patterns of dishonesty. they way.” Simply put: Italians are more prone to “fudging” than Swedes. Interestingly, we also find that, compared to Dishonest Types, Fudging Types are also more likely to deceive (themselves) about DISCUSSION AND CONCLUDING their behavior during the experiment. In particular, in our post- REMARKS experimental survey, participants were asked to indicate how much of their total earnings they themselves reported during Our results indicate that when Italians and Swedes face a tax the experiment: 18% of Fudging Types indicating that they compliance scenario consisting of a transparent tax system, reported their total income, while no Dishonest Types lied. This efficient redistributive regime, and clear audit rules and penalties, last finding nicely fits with evidence from social psychological the average level of honesty is relatively high in both countries. research showing that individuals choose fudging strategies to This result does not bear out our initial expectations based maintain a positive moral reputation and self-image (Ayal and on national stereotypes, where we predicted a greater level of Gino, 2011; Ariely, 2012). honesty in Sweden compared to Italy. However, we also identify To check the robustness of these results, we conduct an an interesting cross-country difference that may shed light on our additional battery of tests. First, as before, we verify that results understanding of why these stereotypes emerge. In particular, we from separate locations within countries can indeed be pooled find country-specific styles of dishonesty, with Italians engaging (Models 1 and 2 of Appendix Table 4 in the Supplementary more frequently in fudging, while Swedes were more likely to be Material) . Next, we estimate probit models of the probability both perfectly honest and perfectly dishonest. In this concluding of being a Fudging Type, conditional upon individual-level section, we offer some conjectures linking this result to the covariates and round fixed effects (Models 3 and 4 of Appendix Table 4 in the Supplementary Material). In all specifications, We also check whether our results are sensitive to the definition of fudging Italians were approximately 10% more likely to fudge, compared we employ. Specifically, we alternatively redefine Fudging Types as those who rds rd rds to Swedes. Here, we also find that individuals who believed that reported (a) more than 2/3 of their income, (b) between 1/3 and 2/3 of total rd income, and (c) less than 1/3 of total income. Overall, as shown in Appendix Table 5 in the Supplementary Material, we find that regardless of the definition of The percentage of Fudging Types in all Italian locations is higher than in all Fudging Type, Italians were more likely fudge. Swedish locations (83% in Milan, 74% in Bologna and 84% in Rome vs. 67% in We also checked for cross-country differences in the distribution of types Stockholm and 62% in Gothenburg). Running an “empty” random-effects model, separately for each individual round. We find that in all 8 rounds of the experiment, we find that the variance within countries is about half the size of the variance Italians were significantly more likely to fudge than Swedes (See Appendix Table 6 across countries. in the Supplementary Material). Frontiers in Psychology | www.frontiersin.org 6 April 2016 | Volume 7 | Article 472 Andrighetto et al. Ordinary Dishonesty in Tax Compliance development and perpetuation of national stereotypes about both self-regulation (as it is more difficult to self-justify gross honesty and dishonesty in Sweden and Italy. dishonesty) and social control. In particular, we argue that when ordinary dishonesty takes Efforts to raise the moral standard of society in the presence on the form of fudging, this behavior may be particularly of fudging may thus require actions that (a) increase awareness difficult to control and eradicate. Part of the reason stems of the negative effects of apparently benign behaviors, and from the fact that fudging introduces a degree of moral (b) support norms enforcers who insist on absolute honesty. ambiguity in judging the wrongfulness of a particular action. As In future work, we propose to use agent-based modeling and discussed in Ayal and Gino (2011), when the categorization of additional experiments to explore the dynamics of fudging, its a behavior is malleable rather than clear-cut, people are more social effects, and the effectiveness of policy interventions to likely to conceptualize their own actions in acceptable terms. foster greater public integrity. This benevolent interpretation of dishonest behavior helps to reduce any dissonance that may result from the tension between AUTHOR CONTRIBUTIONS unethical conduct and the desire to maintain a moral self-image (Baumeister, 1998; Schweitzer and Hsee, 2002). Fudging thus Conceived and designed the experiments: GA, SO, FP, and SS. provides individuals with greater moral license to indulge in Performed the experiments: GA, SO, FP, SS, and NZ. Analyzed (moderate) wrongdoing. the data: NZ, SO, and JD. Wrote the paper: GA. In addition, in the presence of widespread fudging, it may be difficult for third parties to enforce honesty norms. In FUNDING particular, when there is uncertainty about what is right or wrong, punishment becomes more risky, since enforcement may The research leading to these results has received funding from generate counter-punishment (also from third-party observers) the European Research Council under the European Union’s who do not recognize the legitimacy of the punisher (Herrmann Seventh Framework Programme (FP7/2007-2013)/ERC Grant et al., 2008; Strimling and Eriksson, 2014). As such, tolerance for Agreement n. (295675). The funders had no role in study design, (moderate) wrongdoing rises. data collection and analysis, decision to publish, or preparation Given the difficulties that fudging poses for both self- of the manuscript. regulation and peer-regulation of dishonest behavior, ordinary dishonesty tends to spread. This may explain why Italians have SUPPLEMENTARY MATERIAL such a widespread reputation for cunningness, as they are observed both to engage in ubiquitous small acts of dishonesty, The Supplementary Material for this article can be found and to tolerate and even justify dishonesty on the part of others. online at: http://journal.frontiersin.org/article/10.3389/fpsyg. By contrast, Swedes’ relatively clear-cut behaviors may facilitate 2016.00472 REFERENCES Barkan, R., Ayal, S., Gino, F., and Ariely, D. (2012). The pot calling the kettle black: distancing response to ethical dissonance. J. Exp. Psychol. Gen. 141, 757–773. Aarts, H., and Dijksterhuis, A. (2003). The silence of the library: environment, doi: 10.1037/a0027588 situational norm, and social behavior. J. Pers. Soc. Psychol. 84, 18–28. doi: Barr, A., and Serra, D. (2010). Corruption and culture: an experimental analysis. 10.1037/0022-3514.84.1.18 J. 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The use, distribution or reproduction in other forums Econ. 15, 295–310. doi: 10.1016/0047-2727(81)90013-X is permitted, provided the original author(s) or licensor are credited and that the Mazar, N., Amir, O., and Ariely, D. (2008). The dishonesty of honest people: original publication in this journal is cited, in accordance with accepted academic a theory of self-concept maintenance. J. Market. Res. 45, 633–644. doi: practice. No use, distribution or reproduction is permitted which does not comply 10.1509/jmkr.45.6.633 with these terms. Frontiers in Psychology | www.frontiersin.org 8 April 2016 | Volume 7 | Article 472 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Frontiers in Psychology Pubmed Central

Are Some Countries More Honest than Others? Evidence from a Tax Compliance Experiment in Sweden and Italy

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ORIGINAL RESEARCH published: 07 April 2016 doi: 10.3389/fpsyg.2016.00472 Are Some Countries More Honest than Others? Evidence from a Tax Compliance Experiment in Sweden and Italy 1, 2 3 4 5 Giulia Andrighetto *, Nan Zhang , Stefania Ottone , Ferruccio Ponzano , 1 1, 6 John D’Attoma and Sven Steinmo Robert Schumann Center for Advanced Studies, European University Institute, San Domenico di Fiesole, Fiesole, Italy, 2 3 National Council for Research, Institute of Cognitive Science and Technologies, Rome, Italy, Department of Social and Political Sciences, European University Institute, San Domenico di Fiesole, Fiesole, Italy, Department of Economics, Management and Statistics, University of Milano-Bicocca, Milano, Italy, Department of Law, Politics, Economics and Social Sciences, University of Eastern Piedmont, Alessandria, Italy, Department of Political Science, University of Colorado, Boulder, CO, USA This study examines cultural differences in ordinary dishonesty between Italy and Sweden, two countries with different reputations for trustworthiness and probity. Exploiting a set of cross-cultural tax compliance experiments, we find that the average level of tax evasion (as a measure of ordinary dishonesty) does not differ significantly between Swedes and Italians. However, we also uncover differences in national “styles” of dishonesty. Specifically, while Swedes are more likely to be either completely honest or completely dishonest in their fiscal declarations, Italians are more prone to fudging Edited by: (i.e., cheating by a small amount). We discuss the implications of these findings for the Dan Ariely, evolution and enforcement of honesty norms. Duke University, USA Reviewed by: Keywords: tax compliance, ordinary dishonest behavior, fudging, cross-country comparison, social norms Ting Jiang, University of Pennysalvania, USA Stefania Bortolotti, INTRODUCTION University of Cologne, Germany *Correspondence: Ordinary dishonest behavior rarely attracts much attention. Seemingly innocuous practices such as Giulia Andrighetto avoiding VAT, double parking, cheating on an exam, and dodging fares on public transport tend giulia.andrighetto@gmail.com to spread, often even in the wake of high-profile, sensationalized scandals. But while such everyday misdeeds may appear benign, taken together, they can result in vast societal damage (DePaulo et al., Specialty section: 1996; Ariely, 2008; Feldman, 2009; Ayal and Gino, 2011). In this study, we examine cross-national This article was submitted to variation in individuals’ willingness to engage in ordinary dishonest behavior, as measured by their Cognitive Science, a section of the journal tendency to underreport income for tax purposes. Frontiers in Psychology The extent to which citizens engage in tax evasion and tax avoidance varies enormously across countries (Schneider and Enste, 2013). This is true even within European nations that share Received: 17 July 2015 Accepted: 17 March 2016 important features such as stable democratic institutions, developed economies, EU membership Published: 07 April 2016 and broadly similar tax systems. Part of the reason underlying this cross-national variation relates to Citation: the efficiency of public institutions. Put simply, countries with efficient institutions (with stringent Andrighetto G, Zhang N, Ottone S, auditing and financial reporting standards) may be more effective at deterring tax evasion. At the Ponzano F, D’Attoma J and Steinmo S same time, efficient institutions may encourage higher compliance because citizens feel that they (2016) Are Some Countries More are receiving something (i.e., high-quality public services) in return for their money (Levi, 1989; Honest than Others? Evidence from a Smith and Stalans, 1991; Smith, 1992; Pommerehne et al., 1994; Edlund, 1999; Frey and Feld, 2002; Tax Compliance Experiment in Frey and Torgler, 2007; Torgler and Schneider, 2007; Cummings et al., 2009; Levi et al., 2009). Sweden and Italy. However, there is also reason to believe that variation in norms and culture plays an important Front. Psychol. 7:472. doi: 10.3389/fpsyg.2016.00472 role in explaining tax evasion. Consider two European countries that arguably lie at opposite ends Frontiers in Psychology | www.frontiersin.org 1 April 2016 | Volume 7 | Article 472 Andrighetto et al. Ordinary Dishonesty in Tax Compliance of the spectrum on tax compliance: Sweden and Italy . measured in more real life domains (e.g., tax evasion and Even setting aside differences in the institutional environment, bribery scenarios) and framed language is used, systematic and substantial evidence suggests that norms of honesty may predictable differences are observed across countries (Alm et al., differ between these two countries. Specifically, Swedes think 1995; Torgler, 2004; Bobek et al., 2007; Cummings et al., 2009; that honesty is a typical national trait (Daun, 1989), an Barr and Serra, 2010). assessment shared by other Europeans (Zetterberg, 1995) . By Our study contributes to this literature in two ways. First, we contrast, Italy is ranked very low in terms of honesty amongst suggest that national or cultural context can influence behavior European countries, and even Italians themselves consider their in the lab under some conditions, but not necessarily others. This compatriots to be less than trustworthy (Mackie, 2001). In is because although honesty norms may differ across societies, fact, the Italian journalist and writer Giuseppe Prezzolini once normative considerations may have little effect on behavior if not described Italy as the “country of cunningness” (paese dei furbi), first activated by situational cues in the decision context (Cialdini where people “worship cunningness so much that they even go so et al., 1990; Aarts and Dijksterhuis, 2003; Joly et al., 2008). For far as to admire those who use it against them” (Prezzolini, 1921). example, although the general norm in my society may be that To what extent can differences in norms and cultures of “people should not lie,” I could feel perfectly justified in lying (dis)honesty explain cross-national variation in fiscal avoidance to increase my payoffs in a lab experiment, if I believe that the and evasion? To address this question, we report data from a operative norm in that specific context is to make as much money tax compliance laboratory experiment conducted in Sweden and as possible. Given this, it is unsurprising that experiments using Italy in 2013/14 . Our experimental framework allows us to hold neutral language and context free tasks find little variation in fiscal institutions constant, and thereby isolate the influence of dishonest behavior across countries (since the relevant country- national cultures on individuals’ willingness to pay taxes. Given specific norms remain dormant), whereas one finds variation prevailing national stereotypes about norms of dishonesty, we when the specific context is made explicit and the corresponding expected that Italians would engage in greater fiscal evasion in norms are activated. For this reason, as we describe below, the experiment, compared to Swedes. we designed our experiment to explicitly incorporate framed To preview our basic findings, our experiment reveals, instructions in order to increase the salience of norms against tax somewhat surprisingly, that average levels of tax evasion in evasion . Sweden and Italy do not differ significantly. Yet, we uncover Secondly, we argue that a consideration of “average” country country-specific styles of dishonesty. More specifically, we find effects may obscure important variation in patterns of dishonesty. that Italians engage more frequently in moderately dishonest For example, suppose that researchers administer a matrix test to behavior, or what Ariely (2012) refers to as “fudging.” By contrast, 20 participants, divided evenly between country A and country Swedes are more likely to be perfectly honest in their behavior, B. Suppose further that all 10 participants in country A cheat on but among those Swedes who do cheat, they are much more 50% of the test questions, while in country B, 5 participants are likely to cheat to the maximum extent possible. In the concluding completely honest, while 5 participants are completely dishonest. section, we discuss some possible implications of Italians’ greater In this example, “average cheating” is identical across the two tendency to fudge for the evolution and enforcement of honesty countries, but this average also masks important variation in the norms, with a particular eye toward explaining Italy’s reputation distribution (i.e., the extent and intensity) of dishonest behavior. as a “country of cunningness.” In relation to this last point, several studies have documented heterogeneity in degrees of dishonesty in experimental tasks (Gneezy et al., 2013). More specifically, one general finding RELATED WORK emerging from the psychology literature is that, when given opportunities to be dishonest in everyday life, most people are Several previous studies have attempted to evaluate cross- willing to fudge—that is, to cheat “just a little bit” (Mazar et al., national variation in cheating and dishonesty using laboratory 2008; Gino et al., 2009; Ayal and Gino, 2011; Ariely, 2012). experiments. The results have been mixed. On the one hand, a The attractiveness of fudging lies in its ability to reduce “ethical number of studies have found that the propensity to engage in dissonance” by allowing people to recast their transgressions in dishonest behavior does not diverge significantly across countries (Gneezy, 2005; Amir et al., 2008; Ariely, 2012; Pascual-Ezama However, as noted by an anonymous reviewer, the use of framed instructions et al., 2015; but see Dieckmann et al., 2015 for contradictory could introduce an experimenter demand effect: in particular, participants who wish to “look good” in front of the experimenters may behave more honestly. results). On the other hand, when honesty and dishonesty are As we are interested in cross-national differences in behavior, this demand effect One of the most obvious differences between these two countries is revealed in would be problematic for our analysis only if it also differs across countries. what is known as the “Tax Gap.” The Tax Gap is a measure of the difference For example, Italians might care more about “looking good” than Swedes, and between revenues actually collected and taxes that would have been collected if thus moderate the amount by which they cheat on their tax declarations in the all taxpayers had honestly reported their incomes. While it is difficult to precisely experiment. However, we do not believe that this possibility poses a serious threat measure these gaps for obvious reasons, it is widely recognized that the Tax Gap to the validity of our study. In particular, we were careful to ensure from the in Sweden is approximately 8–9% of GDP (Slemrod, 2007), whereas in Italy it can very beginning that participants had no knowledge that they were taking part in reach as high as 25% to 30% (Santoro, 2010). a cross-national comparative study. In other words, there is little reason for Italian In a recent YouGov poll, Northern Europeans perceived Sweden as the most (Swedish) participants to feel scrutinized just because they are Italian (Swedish). In honest nation in the EU (YouGov’s Eurotrack Series, 2013). addition, we use only native speakers (indeed, in Italy, only native dialect speakers) These experiments are part of a larger study on tax compliance behavior in five in each laboratory. This should lessen concerns that one needs to “look good” in countries funded by the European Research Council. front of foreign researchers. Frontiers in Psychology | www.frontiersin.org 2 April 2016 | Volume 7 | Article 472 Andrighetto et al. Ordinary Dishonesty in Tax Compliance a more benign light, and thereby reconcile dishonesty with the in their tendency to fudge their taxes, an issue that has not been desire to maintain a positive moral self-image (Barkan et al., carefully investigated in previous work. 2012). In the context of the foregoing discussion, we are interested in examining how cross-national variation in social norms relating EXPERIMENTAL PROTOCOL to tax evasion shapes both aggregate tax compliance as well as the tendency to engage in “fiscal fudging.” Accordingly, both of The experiment consisted of four stages, plus a post-experimental these considerations—norm specificity and average vs. degrees of survey, and lasted 90 minutes on average. In this article, we honesty—inform the design and analysis of the present study. report the findings of the first three stages of this experiment . In all, we took great care to ensure that the participant pools were similar in each experimental location , and that the protocol EXPERIMENTAL OVERVIEW was implemented in exactly the same manner in each country (Appendix Table 1 in the Supplementary Material displays We report results from a tax experiment involving a total of 638 descriptive statistics for each country sample, as well as the degree participants in Italy and Sweden (311 in Italy; 327 in Sweden), of similarity between Italian and Swedish participants) . recruited in five different locations (Rome, Bologna, Milan, Each stage began with participants performing a 5 minute Stockholm and Gothenburg) during the academic year 2013– clerical task in which they copied random strings of letters 2014 . The basic design of our experiment is similar to that used and numbers from a sheet of paper onto an electronic form. by Alm (1991), and aims to capture some essential features of Participants were paid 10 Experimental Currency Units (ECUs) the tax system used in many countries: (1) individuals earn real for each line of text they correctly copied . After the clerical income, (2) they pay taxes on income voluntarily reported, (3) task, participants were shown their earned income and asked they face some chance that unreported taxes will be detected and to “report your income for tax purposes” under a variety of penalized, and (4) the total taxes paid are used to provide a public institutional scenarios (described below). Participants were not good. informed of how many scenarios would follow or what the We describe our experimental protocols in detail below, but specific content of each scenario might be. two features of our methodology are worth highlighting up front. In addition, participants were told that they would face First, our design explicitly provides a “context rich” setting in a 5% probability of being audited in each scenario; if they which tax language is used throughout. This feature is intended underreported their income and were audited, they would to ensure that participants’ decisions in the lab reflect their pay a fine equal to twice the tax that they had avoided. experiences and social norms pertaining to the specific subject Importantly, we revealed the results of any audits only at under study: taxation (Cummings et al., 2009). By contrast, the the end of the experiment, to avoid the possibility that being standard approach of using neutral language may encourage audited in one round would affect behavior in subsequent participants to perceive the decision problem at hand as a risky rounds. Moreover, throughout the experiment, participants gamble (i.e., the extra income one earns from unreported taxes had no knowledge of other participants’ performance in the weighed against the probability of being caught and fined), as typing tasks or their tax reporting decisions. This ensured that opposed to a tax compliance decision. An additional benefit of individual choices did not reflect reciprocity or conditional framing is that there is no ambiguity for participants about what cooperation. constitutes honest behavior in the experiment. In other words, In each of the three stages of the experiment, we manipulated unlike in standard public good games in which participants may fiscal rules relevant to different features of modern taxation have different expectations about the appropriate amount of systems, in order to elicit behavior under a range of institutional money to contribute, it is clear in the tax frame that the honest behavior is to declare the total amount earned. These three stages of the experiment encompass nine rounds of tax reporting (see Secondly, in our task, participants are not restricted to being Appendix Table 7 in the Supplementary Material for a summary). However, we either completely honest or completely dishonest, but instead, are th report data from the first 8 rounds only. The 9 round involves donations to a allowed to report any amount (from 0 to 100%) of earned income. real-world charity, and is not central to our research question. In addition, since th the 9 round was the final round (and therefore, did not affect behavior in previous Thus, our task allows us to test whether Italians and Swedes differ rounds), we have decided to exclude it from the analysis presented in this paper. 5 8 Replicating the experiment in multiple locations within each country provides us Participants were all recruited using ORSEE (Greiner, 2004). In early versions with greater confidence that we are not simply picking up “site-specific” effects, of the experiment, the experimental tasks were programmed and conducted but rather cross-country differences in patterns of behavior. We chose these five with zTree (Fischbacher, 2007), and the demographic information was collected locations specifically because they were the only active laboratories with suitable through Qualtrics. Later in our project, we were able to integrate the experimental characteristics—i.e. with active participant pools drawn from different fields of and survey portions of the study using our own web-based experimental software. study — that we could find in Sweden and Italy. A summary of the reporting rounds and a text version of the instructions Our experiments have been approved by the IRB Committee at the University (translated into English) are included in Appendix Table 7 in the Supplementary of Colorado, Boulder, where the principal investigator holds a professorship. Our Material and Appendix Supplementary Information 8. project has also been approved by the Ethics Council of the European Research We also had the protocol translated (double-blind) to ensure that the meanings Council, and the European University Institute Ethics committee. Finally, our of the words and phrases used were consistent across the countries. work has also been authorized by all of the Italian and Swedish laboratories we ECUs are converted into real currency at the end of the experiment. One ECU have used, but we did not undergo a separate university-based IRB review in each is worth e0.01 in Italy, and 0.60 SEK in Sweden. These exchange rates are chosen case as these were not required by the universities in question. All participants based on the average hourly pay rates in each country. The average earnings were signed a written consent form prior to taking part in the study. 14.09 Euros in Italy and 187.60 SEK in Sweden. Frontiers in Psychology | www.frontiersin.org 3 April 2016 | Volume 7 | Article 472 Andrighetto et al. Ordinary Dishonesty in Tax Compliance contexts . In stage 1, we altered the amount that participants Finally, in stage 3, we presented scenarios with two different received in return for the taxes that they collectively paid. In types of progressive taxation schemes. In round 7, the top 10% the first scenario (round 1) of stage 1, participants were simply of income earners (as defined by self reported income) faced a told that the tax rate is 30%. There was no redistribution of tax 50% tax rate; participants in the bottom 10% of reported incomes revenues. In the second scenario (round 2), the tax rate remained faced a 10% rate; finally, the middle 80% of reported income 30%, but all tax revenues were placed in a “general fund” earners faced a 30% rate. By contrast, in round 8, we introduced a which was subsequently divided equally among all participants marginal tax rate system (similar to the real tax systems operating irrespective of how much each individual paid into the fund. in Italy and Sweden). In this case, all subjects paid a 10% tax In the third scenario (round 3), we again held the tax rate at on the first 50 ECUs of reported income, a 30% tax on reported 30%, but all tax revenues in the general fund were doubled and income between 51 and 100 ECUs, and a 50% tax on all reported then redistributed equally to all participants, regardless of how income above 100 ECUs. In both progressive taxation rounds, all much each participant had individually paid into the fund. In tax revenues were doubled and then redistributed, and we held each round (before they were asked to report their incomes), the audit rate constant at 5%. Once again, subjects were given subjects were given multiple specific examples demonstrating the explicit examples to ensure their understanding of the rules. rules in each scenario under a series of hypothetical decisions (see Appendix Supplementary Information 8 in the Supplementary Material); they were also reminded of the 5% probability of being RESULTS audited, as well as of the fine they would have to pay should the Average Compliance Rate audit detect any under-reporting. Despite the intrinsic social dilemma structure of the tax scenario In stage 2, we held redistribution constant and varied the that makes evasion the optimal strategy, we find that the level of tax rates. In the first scenario of stage 2 (round 4), we asked compliance far exceeded the level predicted by expected utility participants to report their income under a tax rate of 10%. In theory (Allingham and Sandmo, 1972; Yitzhaki, 1974) in both the second scenario (round 5), the tax rate was increased to countries and in all rounds. This result is consistent with previous 30%, and in the third scenario (round 6), the tax rate was again research on tax compliance and public goods (Ledyard, 1995; increased to 50%. In all three rounds of stage 2, we held the Bosco and Mittone, 1997; Cummings et al., 2009; Alm, 2012). audit rate (5%), fines (2x underreported income) and the rules Pooling both countries, we observe that individuals were mostly for redistribution (tax revenues doubled and then redistributed) honest, reporting on average 64.9% of total income. constant. Additionally, we observe that the reporting rate varied according to the specific scenarios presented in each round. We also considered randomly ordering the scenarios to control for order effects. Figure 1 shows the average percentage of earned income that However, we decided that this option was unnecessary because our central concern was reported in each of the eight rounds, broken down between is not to evaluate the effects of institutional changes, but rather to examine how people in different countries would respond to the same institutional scenarios. Swedish and Italian participants. The vertical axis displays FIGURE 1 | Average compliance rate divided by round and by country. Frontiers in Psychology | www.frontiersin.org 4 April 2016 | Volume 7 | Article 472 Andrighetto et al. Ordinary Dishonesty in Tax Compliance the average tax compliance rate, defined as the percentage of lower average compliance (Marwell and Ames, 1981; Carter and total earned income that is truthfully declared in each round. Irons, 1991; Cullis et al., 2006; Lewis et al., 2009). Finally, we Comparing rounds 1 through 3, we see that compliance responds control for participants’ beliefs about the behavior of others in positively to the efficiency of redistribution: individuals were the experiment . Individuals who believed that others reported willing to declare more when they knew that tax revenues less also reported less themselves (Fischbacher et al., 2001). produced more public goods. Secondly, individuals responded to Importantly, the inclusion of these covariates does not change higher tax rates by evading their fiscal obligations: compliance our overall conclusions regarding cross-country differences in falls moving from rounds 4 through 6. These results are in line the average compliance rate. As shown in Models 3 and 4, the with previous experimental studies on tax compliance (Alm et al., coefficient on the Italy dummy is never statistically significant. 1992; Bosco and Mittone, 1997; Torgler, 2002; Blackwell, 2007; These additional results confirm our initial findings reported Alm, 2012), providing us with some assurance about the validity above: regardless of the controls and model specification we of our experimental design. employ, we do not find any significant differences in average Turning to the cross-country variation in average compliance compliance rates between the two countries . rates, although we predicted that Swedes would comply more on average than Italians, we do not document significant differences Patterns of Compliance and Dishonesty across countries. Pooling across all 8 rounds of the experiment, Although an analysis of the average compliance rate does not Italians reported 63.1% of their earned income (s.e. = 1.8%), support prevailing national stereotypes that Swedes are more as compared to Swedes who reported 66.6% (s.e. = 1.9%), honest than Italians, a closer analysis of the distribution of and the cross-country difference is only 3.5% (t-test s.e. = compliance decisions yields some interesting cross-national 2.6%, p = 0.182). We run several additional tests to assess differences. In particular, a statistic like the average compliance the robustness of this result. First, we check whether different rate does not allow us to distinguish between three different locations within each country can indeed be pooled to estimate a decisions: complete compliance (i.e., the decision to declare 100% larger “country” effect. To do so, in Models 1 and 2 of Appendix of earned income), complete evasion (i.e., the decision to declare Table 2 in the Supplementary Material, we estimate individual- 0% of earned income), and partial compliance or “fudging” (i.e., level tobit models for the average compliance rate (pooled across the decision to declare more than 0, but less than the total; see all 8 rounds) with site-specific dummy variables, separately also Mazar et al., 2008 for a similar analysis). for Italy and Sweden . We also cluster standard errors by These distinctions are shown in Figure 2, which displays the experimental session. We find no statistically significant within- distribution of participants’ reported incomes (pooled across country variability, suggesting that the results from different all 8 rounds). The x-axis breaks down the distribution of locations can indeed be pooled. reported incomes into the following bins: [0%, (1–10%), (11– Next, we put data from both countries together, and estimate 20%). . . (91–99%), 100%], and the y-axis displays the percentage the effect of a dummy variable for Italian participants on the of participants in each country falling into each bin. We observe average compliance rate, controlling for a host of individual- that Swedes tended to concentrate in the extreme bins (0% and level characteristics including gender, age, previous participation 100%), while the distribution is more uniform amongst Italians. in experiments, economics training, earnings in the clerical To more precisely operationalize these patterns, we define the task, and beliefs about the honesty of other participants. In following three “types” of participants: an alternative specification, we also add fixed effects for the • Honest Type: declares 100% of earned income across all 8 individual treatment round. The inclusion of covariates in rounds. Models 3 and 4 of Appendix Table 2 in the Supplementary • Dishonest Type: declares 0% of earned income across all 8 Material allows us to examine individual-level correlates of tax rounds. evasion and dishonesty. We observe that the average compliance • Fudging Type: everyone else. rate is lower amongst men, and amongst younger participants (although this latter result is less robust), which is consistent with Next, we compare the distribution of types across Italy and previous research (Hasseldine, 1999; Lewis et al., 2009; Torgler Sweden. We find more Honest Types in Sweden compared to and Valev, 2010). Risk aversion is also correlated with higher Italy (25.7% in Sweden vs. 14.8% in Italy; Schlag z-test p < 0.001), average compliance . In addition, in line with previous work, but also more Dishonest Types (8.9% in Sweden vs. 5.1% in Italy; we find a positive correlation between economics training and Schlag z-test p = 0.066). By contrast, significantly more Italians are classified as Fudging Types (80% in Italy vs. 65% in Sweden; The number of observations changes once we include demographic covariates in our regression models. This is because in early versions of the experiment, and 10 signifying someone who is “completely willing to take risks.” Answers have the experimental tasks were implemented in zTree, while the demographic been standardized to have mean = 0 and s.d. = 1. information was collected separately using Qualtrics. This necessitated participants We measured participants’ perceptions a survey item which asks subjects entering their anonymous participant-IDs twice: once into zTree, and once whether they thought other participants in the experiment reported (a) their entire again into Qualtrics. Because some participants accidentally entered different earned incomes, (b) less than their entire earned incomes, or (c) much less than participant-IDs into the two systems, we were unable to match their experimental their entire earned incomes. In our regressions, we use (b) as our baseline category. decisions with their demographic data. This problem was fixed in later versions of As a further robustness check, we compared country-level differences in average the experiment, once we switched to our own web-based experimental software. compliance rates separately for each individual round of the experiment. In 6 out of We measured risk using a survey item that asks subjects to rank themselves on a the 8 rounds, we found no statistically significant differences (see Appendix Table 10-point scale, with 1 signifying a person who “normally tries to avoid taking risks” 3 in the Supplementary Material). Frontiers in Psychology | www.frontiersin.org 5 April 2016 | Volume 7 | Article 472 Andrighetto et al. Ordinary Dishonesty in Tax Compliance FIGURE 2 | Distribution of individual compliance rates. Schlag z-test p < 0.001). In other words, Swedish participants others behaved honestly in the experiment were significantly less 17,18 displayed more clear-cut behaviors: Swedes cheat less frequently, likely to fudge . but when they cheat, they are likely to do so completely. By In summary, although the average level of dishonesty does contrast, Italians cheat more habitually, but the intensity of their not differ across the two countries, a closer examination of the cheating is more restrained: they hold back from “cheating all data reveals a cross-national difference in patterns of dishonesty. they way.” Simply put: Italians are more prone to “fudging” than Swedes. Interestingly, we also find that, compared to Dishonest Types, Fudging Types are also more likely to deceive (themselves) about DISCUSSION AND CONCLUDING their behavior during the experiment. In particular, in our post- REMARKS experimental survey, participants were asked to indicate how much of their total earnings they themselves reported during Our results indicate that when Italians and Swedes face a tax the experiment: 18% of Fudging Types indicating that they compliance scenario consisting of a transparent tax system, reported their total income, while no Dishonest Types lied. This efficient redistributive regime, and clear audit rules and penalties, last finding nicely fits with evidence from social psychological the average level of honesty is relatively high in both countries. research showing that individuals choose fudging strategies to This result does not bear out our initial expectations based maintain a positive moral reputation and self-image (Ayal and on national stereotypes, where we predicted a greater level of Gino, 2011; Ariely, 2012). honesty in Sweden compared to Italy. However, we also identify To check the robustness of these results, we conduct an an interesting cross-country difference that may shed light on our additional battery of tests. First, as before, we verify that results understanding of why these stereotypes emerge. In particular, we from separate locations within countries can indeed be pooled find country-specific styles of dishonesty, with Italians engaging (Models 1 and 2 of Appendix Table 4 in the Supplementary more frequently in fudging, while Swedes were more likely to be Material) . Next, we estimate probit models of the probability both perfectly honest and perfectly dishonest. In this concluding of being a Fudging Type, conditional upon individual-level section, we offer some conjectures linking this result to the covariates and round fixed effects (Models 3 and 4 of Appendix Table 4 in the Supplementary Material). In all specifications, We also check whether our results are sensitive to the definition of fudging Italians were approximately 10% more likely to fudge, compared we employ. Specifically, we alternatively redefine Fudging Types as those who rds rd rds to Swedes. Here, we also find that individuals who believed that reported (a) more than 2/3 of their income, (b) between 1/3 and 2/3 of total rd income, and (c) less than 1/3 of total income. Overall, as shown in Appendix Table 5 in the Supplementary Material, we find that regardless of the definition of The percentage of Fudging Types in all Italian locations is higher than in all Fudging Type, Italians were more likely fudge. Swedish locations (83% in Milan, 74% in Bologna and 84% in Rome vs. 67% in We also checked for cross-country differences in the distribution of types Stockholm and 62% in Gothenburg). Running an “empty” random-effects model, separately for each individual round. We find that in all 8 rounds of the experiment, we find that the variance within countries is about half the size of the variance Italians were significantly more likely to fudge than Swedes (See Appendix Table 6 across countries. in the Supplementary Material). Frontiers in Psychology | www.frontiersin.org 6 April 2016 | Volume 7 | Article 472 Andrighetto et al. Ordinary Dishonesty in Tax Compliance development and perpetuation of national stereotypes about both self-regulation (as it is more difficult to self-justify gross honesty and dishonesty in Sweden and Italy. dishonesty) and social control. In particular, we argue that when ordinary dishonesty takes Efforts to raise the moral standard of society in the presence on the form of fudging, this behavior may be particularly of fudging may thus require actions that (a) increase awareness difficult to control and eradicate. Part of the reason stems of the negative effects of apparently benign behaviors, and from the fact that fudging introduces a degree of moral (b) support norms enforcers who insist on absolute honesty. ambiguity in judging the wrongfulness of a particular action. As In future work, we propose to use agent-based modeling and discussed in Ayal and Gino (2011), when the categorization of additional experiments to explore the dynamics of fudging, its a behavior is malleable rather than clear-cut, people are more social effects, and the effectiveness of policy interventions to likely to conceptualize their own actions in acceptable terms. foster greater public integrity. This benevolent interpretation of dishonest behavior helps to reduce any dissonance that may result from the tension between AUTHOR CONTRIBUTIONS unethical conduct and the desire to maintain a moral self-image (Baumeister, 1998; Schweitzer and Hsee, 2002). Fudging thus Conceived and designed the experiments: GA, SO, FP, and SS. provides individuals with greater moral license to indulge in Performed the experiments: GA, SO, FP, SS, and NZ. Analyzed (moderate) wrongdoing. the data: NZ, SO, and JD. Wrote the paper: GA. In addition, in the presence of widespread fudging, it may be difficult for third parties to enforce honesty norms. In FUNDING particular, when there is uncertainty about what is right or wrong, punishment becomes more risky, since enforcement may The research leading to these results has received funding from generate counter-punishment (also from third-party observers) the European Research Council under the European Union’s who do not recognize the legitimacy of the punisher (Herrmann Seventh Framework Programme (FP7/2007-2013)/ERC Grant et al., 2008; Strimling and Eriksson, 2014). As such, tolerance for Agreement n. (295675). The funders had no role in study design, (moderate) wrongdoing rises. data collection and analysis, decision to publish, or preparation Given the difficulties that fudging poses for both self- of the manuscript. regulation and peer-regulation of dishonest behavior, ordinary dishonesty tends to spread. This may explain why Italians have SUPPLEMENTARY MATERIAL such a widespread reputation for cunningness, as they are observed both to engage in ubiquitous small acts of dishonesty, The Supplementary Material for this article can be found and to tolerate and even justify dishonesty on the part of others. online at: http://journal.frontiersin.org/article/10.3389/fpsyg. By contrast, Swedes’ relatively clear-cut behaviors may facilitate 2016.00472 REFERENCES Barkan, R., Ayal, S., Gino, F., and Ariely, D. (2012). The pot calling the kettle black: distancing response to ethical dissonance. J. Exp. Psychol. Gen. 141, 757–773. Aarts, H., and Dijksterhuis, A. (2003). The silence of the library: environment, doi: 10.1037/a0027588 situational norm, and social behavior. J. Pers. Soc. Psychol. 84, 18–28. doi: Barr, A., and Serra, D. (2010). Corruption and culture: an experimental analysis. 10.1037/0022-3514.84.1.18 J. 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The use, distribution or reproduction in other forums Econ. 15, 295–310. doi: 10.1016/0047-2727(81)90013-X is permitted, provided the original author(s) or licensor are credited and that the Mazar, N., Amir, O., and Ariely, D. (2008). The dishonesty of honest people: original publication in this journal is cited, in accordance with accepted academic a theory of self-concept maintenance. J. Market. Res. 45, 633–644. doi: practice. No use, distribution or reproduction is permitted which does not comply 10.1509/jmkr.45.6.633 with these terms. Frontiers in Psychology | www.frontiersin.org 8 April 2016 | Volume 7 | Article 472

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