Reward for Truth on a 1040 Could Pay, Study Finds
The government can generate more revenue at lower cost by rewarding people who tell the truth on tax forms and punishing those who lie, a Caltech research team has concluded.
Economists studying ways to make tax auditing more efficient created a game governed by mathematical principles to illustrate how the Internal Revenue Service might increase the amount of money it can collect.
“Our model is not one of the real system,” said Caltech economist Kim Border, who with economist Joel Sobel co-authored the yearlong research project.
“This is an extremely polar case in which we represent the tax system as a game and analyze the results mathematically.”
The object of the game was to define ways in which the IRS could collect as much tax money as possible under game conditions plotted to be as close to ideal as possible for the IRS.
By way of “game theory,” the economists developed a hypothetical tax system that operated somewhat like the real one--a tug of war pitting the IRS against individual taxpayers.
“Game theory is basically a hybrid of mathematics and social science showing how rational people should and do behave in a conflict situation,” Border said.
“There’s no such thing in the model as an honest taxpayer; they’re all gaming the system to their own advantage.”
Statistical Logic
Game theory--actually a group of several mathematical ideas--applies statistical logic to hypothetical, competitive situations and is often used by military strategists in the development of battle plans.
Gains and losses are analyzed in terms of the game’s strategy, which is aimed at maximizing winnings for one side and minimizing those for the other.
Caltech researchers chose taxpayers as the side with the least to gain in their plan by underscoring enhanced opportunities for penalty whenever a taxpayer violated the system with a lie.
The study explored a series of possible interactions between the IRS and taxpayers illustrating that the probability for lying increases with mathematical predictability the higher a taxpayer’s income.
“The more a taxpayer makes, the greater the desire to keep more and pay less in taxes,” Border explained.
He said the study attempted to define efficient auditing schemes to maximize IRS revenue while taking auditing costs and taxpayer dishonesty into account.
Because each side in the game tries to maximize its net income of tax revenue, the stage is set for any number of moves by taxpayers who always play against the odds of an audit.
In the game, the IRS takes the first step by setting tax rates, audit probabilities and a schedule of penalties, Border said.
But taxpayers can respond by lying when they feel the gamble pays off.
Rewards for Truth
The study found that an ideal tax system would feature a reward system to encourage people to tell the truth and fine those who lie.
“The rewards would be given to people who were audited and found to be telling the truth,” Border said. The payments would be made in addition to tax refunds.
“This system could encourage honesty among those weighing the chances of being audited and possibly fined,” he said.
The economist suggests that punishment for liars would be “fines for misrepresentation just like we have now,” including prison sentences for those who evade taxation.
Border acknowledged that Congress might not view his system as fair because audited truth-tellers would receive rewards while truth-tellers who were not audited would receive nothing.
