"Willing to Pay?" Tax Compliance in Britain and Italy: An Experimental Analysis

As shown by the recent crisis, tax evasion poses a significant problem for countries such as Greece, Spain and Italy. While these societies certainly possess weaker fiscal institutions as compared to other EU members, might broader cultural differences between northern and southern Europe also help to explain citizens’ (un)willingness to pay their taxes? To address this question, we conduct laboratory experiments in the UK and Italy, two countries which straddle this North-South divide. Our design allows us to examine citizens’ willingness to contribute to public goods via taxes while holding institutions constant. We report a surprising result: when faced with identical tax institutions, redistribution rules and audit probabilities, Italian participants are significantly more likely to comply than Britons. Overall, our findings cast doubt upon “culturalist” arguments that would attribute cross-country differences in tax compliance to the lack of morality amongst southern European taxpayers.

At the end of the experiment, you will turn in your envelope with your experiment ID number inside. Your earnings will be issued based on this number, not based on your name, so it is important that you retain your ID number. The payments will be issued in cash in the next room, where only one participant at a time may enter. This way none of the other participants will know how much you earned.

SCREEN 4 -THE FIRST THREE STAGES
The first three stages of the experiment are similar to each other in many ways. In each of the first three stages, you will be asked to perform a clerical task for 5 minutes. Based on your performance, you will earn currency units; these will be converted into dollars at the end of the experiment. You will participate in several rounds, during which you will be asked to report your income for tax purposes. You are free to report any amount, from 0% to 100% of your earnings. You will only be taxed on the income you report.
There is, however, a 5% probability of being audited. At the end of the experiment, the computer will choose a number between 1 and 100 for each of you in each round. If the result is a number between 1 and 5, you will be audited for that round. If you are audited and you have under-reported your earnings, you will have to pay the tax you should have paid, plus a fine equal to that tax. In other words, you will have to pay twice the tax you should have paid.

SCREEN 5 -CLERICAL TASK
The work that you will complete involves copying data about fictional students from a sheet of paper onto your computer screen, starting from the first line on the list and following the correct order. This piece of paper is in front of you, entitled "Practice Clerical Task." Once you have completed the first line, click the NEXT button. If the computer detects a mistake, you will see an error message, and you will have to correct the mistake before proceeding. If there is no mistake, clicking NEXT will take you to a new screen on which you can start the next line.
For each row copied correctly, you will be paid 10 currency units. Each currency unit in this task is worth 0.01 dollars.
We now ask you to try a practice round of this clerical task for 2 minutes. Your performance in this practice round will not count towards your earnings.
Afterward, we will begin the real clerical task, for which you will be paid, and which will last 5 minutes.

[verbal instructions only; read between practice and clerical task #1]
Your screen should now show the number of rows you copied correctly. When you have finished viewing your results, please press "Done." Now that everyone has completed the practice clerical task, we will begin the real clerical task, for which you will earn real currency units that you can later exchange for dollars. Please turn to the next page in your packet, entitled "Clerical Task #1." You will start with the first line on this page, which is row number 101.

[verbal instructions only; read after clerical task #1]
Your screen should now show the number of rows you copied correctly. When you have finished viewing your results, please press "Done."

SCREEN 6 -TRANSITION SCREEN
Now that everyone has completed the clerical task, you will have to report your income for tax purposes. You will be asked to do this multiple times during the next three rounds.
Please press "Continue." In the first round, we ask you to report your income for tax purposes. The tax rate is 30%.
Please remember that you are free to report any amount of your earnings from 0% to 100% for tax purposes. You will only be taxed on the income you report. There is, however, a 5% probability of being audited.
At the end of the experiment, if you are audited and are caught under-reporting your income, you will pay the tax you should have paid, plus a fine equal to that tax. In other words, you will pay twice the tax you should have paid.
Please press "Continue." Before we begin, let's look at some examples.
Let's assume that we have three participants: X, Y, and Z. All three participants copy 10 names correctly during the clerical task, and each participant therefore earns 100 currency units.
If Participant X accurately reports his total real earnings of 100 currency units and the tax rate is 30% he will pay 30 in taxes. His final income will therefore be 70 currency units.
If Participant Y reports only 50 currency units, she will pay 15 currency units (since you are only taxed on the income you report). In this case, her final income will be 85 currency units, if she is not audited and fined at the end of the experiment.
If Participant Z reports 0 currency units, he will pay 0 currency units in taxes and his final income will be 100 currency units, unless he is audited and fined at the end of the experiment.

SCREEN 9 -EXAMPLE 2
What happens if all three participants (X, Y, and Z) are audited and fined at the end of the experiment?
If Participant X is audited, nothing happens: since he reported his total real earnings, he will not incur any penalty, and his final income will be 70 currency units.
If Participant Y is audited, then since she underreported her earnings, she will have to pay twice the tax she did not pay. Since she reported 50 currency units, she owes 15 currency units in taxes. She will therefore have to pay double that (30 currency units) and her final income will be 55 (since 85-30=55).
If Participant Z is audited, then since he reported 0 currency units, he owes 30 currency units in taxes. He will therefore have to pay 60 currency units and his final income will be 40 (since 100-60=40).
During the experiment, do not worry about making these calculations. The computer will do them for you.

SCREEN 10 -REPORTING STAGE
We now ask you to report your income for tax purposes. The tax rate is 30%.
Your earnings from the clerical task are on your screen.
Please report your earnings for tax purposes now.
When you have finished reporting your earnings, please press "Continue. The second round is very similar to the first one. As in the first round, we ask you to report your income for tax purposes, at the tax rate of 30%. Again, you are free to report any amount of your earnings (from 0% to 100%) for tax purposes. You will only be taxed on the income you report. There is, however, a 5% probability of being audited. At the end of the experiment, if you are audited and it is discovered that you have under-reported your earnings, you will have to pay a penalty equal to twice the tax you should have paid on the income you did not report.
The only difference between the first and the second round is that in the second round, the money that is collected in taxes from all participants will be put into a general fund and then redistributed in equal parts among all participants, regardless of how much each participant paid in taxes.

SCREEN 12 -EXAMPLE
Let's look at an example. Let's assume that 3 people participate in the experiment, and that each one of them earns 100 currency units during the clerical task. One participant reports 100 currency units, one reports 50 currency units, and the other reports 0 currency units. The amount collected in taxes and put into the general fund is therefore 45 currency units (since 30+15+0=45). Each participant receives 15 currency units from the "general fund." Please press "Continue."

SCREEN 13 -REPORTING STAGE
We now ask you to report your income for tax purposes. The tax rate is 30%. Please remember that the amount you report in this round is in no way connected to the amount you reported and the tax you paid in the previous round. In other words, your income is exactly the same amount as in the beginning of the first round.
Your earnings from the clerical task are on your screen.
Please report your earnings for tax purposes now.
When you have finished reporting your earnings, please press "Continue." The third round is similar to the second one. The only difference is that the amount of money that is collected and put into the general fund is now multiplied by 2 before being redistributed in equal parts among all participants. Again, everyone receives an equal amount from the "general fund," regardless of the amount that each participant paid in taxes.

SCREEN 15 -EXAMPLE
Let's look at an example.
If the total amount of tax collected is 500 currency units, the amount in the general fund will be doubled and the amount redistributed in equal parts among all participants will be 1000 currency units.
Let's look at another example. Let's assume that 20 people participate in the experiment and that each of them pays 100 currency units in taxes. In this case, the amount in the general fund will be doubled to 4000 (since 20x100=2000x2=4000) and each participant will receive 200 currency units from it.

SCREEN 16 -REPORTING STAGE
We now ask you to report your income for tax purposes. The tax rate is 30%. Please remember that the amount you report in this round is in no way connected to the amount you reported and the tax you paid in the previous round. In other words, your income is exactly the same amount as in the beginning of the first round.
Your earnings from the clerical task are on your screen.
Please report your earnings for tax purposes now.
When you have finished reporting your earnings, please press "Continue." Now let's begin the second stage of the experiment. The second stage is very much like the first stage. We will again ask you to perform a clerical task for 5 minutes. Based on your performance, you will earn currency units, which will constitute your income in this stage, and which you will be able to turn in for real money at the end of the experiment.
As in the last stage, you will participate in three different rounds, during which we will ask you to report your income for tax purposes. You are free to report any amount (from 0% to 100%) of your earnings. You will only be taxed on the income you report. There is, however, a 5% probability of being audited.
At the end of the experiment, if you are audited and it is discovered that you have under-reported your earnings, you will have to pay a penalty equal to twice the tax you should have paid on the income you did not report.
In each round, the money that is collected in taxes from all participants will be put in a "general fund," multiplied by 2, and redistributed in equal parts among all participants, regardless of how much each participant paid in taxes.

SCREEN 18 -CLERICAL TASK
We now ask you to perform the clerical task for 5 minutes. Afterwards, you will be told how many currency units you earned. The currency units you earn will constitute your income for the next three rounds.
Please turn to the next page in your packet, entitled "Clerical Task #2." You will start with the first line on this page, which is row number 201. Once again, we ask you to focus on the clerical task, so that you can earn as much as possible by correctly completing it.

SCREEN 19 -TRANSITION SCREEN
Now that everyone has completed the clerical task, we will present you with the different scenarios in which you will have to report your income for tax purposes.
Please press "Continue." In the first round, we ask you to report your income for tax purposes. The tax rate is 10%. The money collected in taxes from all participants will be put into a "general fund," multiplied by 2, and redistributed in equal parts among all participants, regardless of how much each participant paid in taxes Please remember that you are free to report any amount of your earnings (from 0% to 100%) for tax purposes. You will only be taxed on the income you report. There is, however, a 5% probability of being audited. At the end of the experiment, if you are audited and are caught under-reporting your income, you will pay the tax you should have paid, plus a fine equal to that tax. In other words, you will pay twice the tax you should have paid.

SCREEN 21 -REPORTING STAGE
We now ask you to report your income for tax purposes. The tax rate is 10%. Please remember that the amount you report in this round is in no way connected to the amount you reported and the tax you paid in the previous rounds.
Your earnings from the clerical task are on your screen.
Please report your earnings for tax purposes now.
When you have finished reporting your earnings, please press "Continue." The second round is similar to the first one. The only difference is that the tax rate is now 30%.

SCREEN 23 -REPORTING STAGE
We now ask you to report your income for tax purposes. The tax rate is 30%. Please remember that the amount you report in this round is in no way connected to the amount you reported and the tax you paid in the previous rounds. In other words, your income is exactly the same amount as in the beginning of the first round.
Your earnings from the clerical task are on your screen.
Please report your earnings for tax purposes now.
When you have finished reporting your earnings, please press "Continue."

SCREEN 24 -INSTRUCTIONS 2.3
The third round is very similar to the first and second rounds. The only difference is that the tax rate is now 50%. Please press "Continue."

SCREEN 25 -REPORTING STAGE
We now ask you to report your income for tax purposes. The tax rate is 50%. Please remember that the amount you report in this round is in no way connected to the amount you reported and the tax you paid in the previous rounds. In other words, your income is exactly the same amount as in the beginning of the first round.
Your earnings from the clerical task are on your screen.
Please report your earnings for tax purposes now.
When you have finished reporting your earnings, please press "Continue."

SCREEN 26 -INSTRUCTIONS 3.0
Now let's move on to the third stage of the experiment. The third stage is very similar to the previous ones. We will ask you once again to perform a clerical task for 5 minutes. Based on your performance, you will earn currency units, which will constitute your income in this stage, and which you will be able to turn in for real money at the end of the experiment.
As in the last stage, you will participate in different rounds, during which we will ask you to report your income for tax purposes. You are free to report any amount (from 0% to 100%) of your income. You will only be taxed on the income you report. There is, however, a 5% probability of being audited. At the end of the experiment, if you are audited and it is discovered that you have under-reported your earnings, you will have to pay a penalty equal to twice the tax you should have paid on the income you did not report.

SCREEN 27 -CLERICAL TASK
We now ask you to perform the clerical task for 5 minutes. Afterwards, you will be told how many currency units you earned. The currency units you earned will constitute your earnings in the three rounds of this stage, in which we will present you with different scenarios and ask you to report your income for tax purposes.
Please turn to the next page in your packet, entitled "Clerical Task #3." You will start with the first line on this page, which is row number 301. Once again, we ask you to focus on the clerical task, so that you can earn as much as possible by correctly completing it.

[verbal instructions only; read at the end of the clerical task]
Your screen should now show the number of rows you copied correctly. When you have finished viewing your results, please press "Done."

SCREEN 28 -TRANSITION SCREEN
Now that everyone has completed the clerical task, we will present you with the different scenarios in which you will have to report your income for tax purposes.

SCREEN 29 -INSTRUCTIONS 3.1
In this round, participants will be divided into three groups based on reported income. Those with the highest reported income (the top 10%) will pay a 50% tax rate; those with the lowest reported income (the bottom 10%) will pay a 10% tax rate; and everyone else will pay a 30% tax rate.
In other words, those with the highest incomes pay more in taxes, while those with lower incomes pay less. Note, however, that you will not know for sure whether you are a high income, low income, or middle income earner.
As in the previous stage, the money collected in taxes from all participants will be put into a "general fund," multiplied by 2, and redistributed in equal parts among all participants, regardless of how much each participant paid in taxes.
As in the last stage, you are free to report any amount (from 0% to 100%) of your income for tax purposes. You will only be taxed on the income you report. There is, however, a 5% probability of being audited. At the end of the experiment, if you are audited and are caught under-reporting your income, you will pay the tax you should have paid, plus a fine equal to that tax. In other words, you will pay twice the tax you should have paid.
Please press "Continue." Let's look at an example. Let's assume that ten subjects participate in the experiment. Of these ten participants, one copies 20 names correctly, one copies 5 names correctly, and the other eight copy 10 names correctly. Every correct name is awarded with 10 currency units. Let's assume, too, that all participants then report their total real earnings for tax purposes.
The participant who copies 20 names correctly has an income equal to 200 currency units and pays 50% of it (=100 currency units) in taxes. These 100 currency units are collected in the "general fund." The participant who copies 5 names correctly has an income of 50 currency units and pays 10% of that income (=5 currency units) in taxes. These 5 currency units are collected into the "general fund." Each of the participants who copies 10 names correctly has an income equal to 100 currency units and pays 30% of that income (=30 currency units each) in taxes. A total of 240 currency units (8x30) is collected in the "general fund." Please press "Continue."

SCREEN 31 -EXAMPLE 2
There are now 345 currency units in the general fund (100+240+5=345). The amount collected in the general fund is then doubled (345x2=690) and redistributed in equal parts among all participants (690/10=69). Every participant therefore receives 69 currency units from the "general fund." In this example, the participant reporting the highest income (200 currency units) pays 100 in taxes, receives 69 from the "general fund," and therefore has a final income of 169 currency units.
The participant reporting the lowest income (50 currency units) pays 5 in taxes, receives 69 from the "general fund," and therefore has a final income of 114 currency units.
Each of the other participants (reporting 100 currency units each) pays 30 in taxes, receives 69 from the "general fund," and therefore has a final income of 139 currency units.

SCREEN 32 -REPORTING STAGE
We now ask you to report your income for tax purposes. You will pay a tax rate of 50% if your reported income puts you in the top 10% of income earners; a tax rate of 10% if your reported income puts you in the bottom 10% of income earners; and a tax rate of 30% if you are in the middle 80% of reported income earners. Please remember that the amount you report in this round is in no way connected to the amount you reported and the tax you paid in the previous round. In other words, your income is exactly the same amount as in the beginning of the first round of this stage.
Your earnings from the clerical task are on your screen.
Please report your earnings for tax purposes now.
When you have finished reporting your earnings, please press "Continue." - The second round is very similar to the first one. As in the first round, we ask you to report your income for tax purposes. Again, you are free to report any amount of your earnings (from 0% to 100%) for tax purposes. The probability of being audited at the end of the experiment is, again, 5%. Once again, the money collected in taxes from all participants will be put into a "general fund," doubled and redistributed in equal parts among all participants, regardless of how much each participant paid in taxes.
The new thing about this round is that you pay 10% for the first 50 currency units of reported income, 30% for any reported income between 51 and 100 currency units, and 50% for any reported income above 100 currency units.
In other words, all participants pay the same tax on the same amount of income, but you pay a different tax rate on different levels of reported income.

SCREEN 34 -EXAMPLE
Let's look at an example.
Let's assume that Participant X reports 80 currency units for tax purposes. The amount paid in taxes will be equal to 10% on the first 50 currency units, plus 30% on the next 30 currency units, so 14 (=5+9) currency units.

SCREEN 35 -REPORTING STAGE
We now ask you to report your income for tax purposes. You will pay a tax equal to 10% for the first 50 currency units of reported income, 30% on reported income between 51 and 100 currency units, and 50% on reported income above 100 currency units. Please remember that the amount you report in this round is in no way connected to the amount you reported and the tax you paid in the previous round. In other words, your income is exactly the same amount as in the first round.
Your earnings from the clerical task are on your screen.
Please report your earnings for tax purposes now.
When you have finished reporting your earnings, please press "Continue." We now begin the final round. In this round, we ask you to report your income for tax purposes. The tax rate is 30%. As in all the other rounds, you are free to report any amount of your earnings (from 0% to 100%) for tax purposes. You will only be taxed on the income you report. There is, however, a 5% probability of being audited. At the end of the experiment, if you are audited and are caught underreporting your income, you will pay the tax you should have paid, plus a fine equal to that tax. In other words, you will pay twice the tax you should have paid.
In this round, however, the money collected in the general fund will be multiplied by 2 and the proceeds will be donated to Red Cross (note: we really will do this).

SCREEN 37 -REPORTING STAGE
We now ask you to report your income for tax purposes. The tax rate is 30%. Please remember that the amount you report in this round is in no way connected to the amount you reported and the tax you paid in the previous rounds. In other words, your income is exactly the same amount as in the beginning of the first round.
Your earnings from the clerical task are on your screen.
Please report your earnings for tax purposes now.
When you have finished reporting your earnings, please press "Continue."

SCREEN 38 -TRANSITION SCREEN
You have finished the first three stages of the experiment. Now let's begin the fourth stage.
Please press "Continue." We now begin the fourth and final stage of the experiment.
This stage is different from the first three. In this stage, you have been randomly paired with another person, whom we will refer to as "the other." This other person is someone you do not know and will remain mutually anonymous. All of your choices are completely confidential. You will be making a series of decisions about allocating resources between yourself and this other person.
Please press "Continue. For each of the questions that will follow, you will be asked to indicate the distribution of resources you prefer by marking the respective position along the midline, as in the example below. You can only make one mark for each question. There are no right or wrong answers; this is all about personal preferences.
In the example below, a person has chosen to distribute money so that she receives 50 tokens, while the anonymous other person receives 40 tokens. Note that 10 tokens are worth 0.03 dollars.
Please press "Continue." Note that at the end of this stage, only one person in each pair will have their decisions applied. In other words, if you are selected to have your decisions applied, then your choices will determine the ultimate payout that both you and the other person receives at the end of this stage. If you are not selected, then the choices made by "the other" will be implemented, and your earnings will depend on the choices they have made about the distribution of resources. The selection will be at random, and neither of you will know beforehand whose decisions will be applied.
The earnings from this stage will be added to your earnings from the previous three stages of the experiment to determine your final income.
You may move through the following screens at your own pace; you do not need to wait for permission to move to the next screen.
Please press "Continue" to start the final stage.

SCREEN 42 -SVO RESULTS
We have now completed the four stages of the experiment. Next, we will show you your results.
Please press "Continue." The next few screens will reveal your earnings for each stage and each round of the experiment, including whether you were audited and fined for a particular round. You may move through these screens at your own pace; you do not need to wait for permission to move to the next screen.
The final screen will convert your earnings from currency units into dollars, so that you can see how much you will be paid for your participation in this experiment.
Please press "Continue" to begin viewing your earnings. -

SCREEN 44 -QUESTIONNAIRE INSTRUCTIONS
Finally, we will ask you to complete a short questionnaire, which we will hand out shortly.
Please remain seated and refrain from talking to other participants. Once everyone has completed the questionnaire, we will give you instructions about how to receive your payment.