One Weird Trick to Save $345 Billion

The April 15 deadline for filing personal income tax returns in the United States is quickly approaching. According to the 2012 Taxpayer Attitude Survey, 87 percent of Americans believe that cheating on taxes is wrong. Moreover, 95 percent of those surveyed reported that their personal integrity affects their honest reporting on tax forms.

And yet: According to a recent estimate, the gap between actual and claimed taxes due in the United States amounts to roughly $345 billion, more than half of which, the IRS estimates, is lost because people misrepresent their income and deductions. These people give in to the temptation to cheat even though they must sign a statement at the bottom of the tax form declaring that the information provided is "true, correct, and complete."

The survey data captures what people think — but not how they act. From research that I've done, the same tendency exists in other facets of our lives. When confronted with the opportunity to cheat, most people engage in behavior that violates their own ethical goals.

Fortunately, simple interventions can help. For instance, consider a study that my colleagues and I conducted a few years ago [PDF] in collaboration with a major U.S. car insurance company. As part of the study, we sent 13,488 of the company's customers a form that asked them to report the number of miles they had driven the prior year, as indicated on their cars' odometers. Cheating by under-reporting mileage would come with the financial benefit of lower insurance premiums.

On about half of the forms sent out, customers were supposed to sign to indicate their truthfulness at the bottom of the form. The other half of the forms asked the customers to sign at the top of the form. The average mileage reported by customers who signed the form at the top was more than 2,400 miles higher than that reported by customers who signed at the bottom of the form.

Our follow-up research [PDF] demonstrated that signing at the top of the form (before reporting information that could be inflated) increased the salience of ethical standards by highlighting people's self-identity and improving their ethicality.

This research hints at how simply nudging people toward more ethical behavior can have important implications for organizations, which commonly bear substantial costs from dishonesty. For instance, according to a recent estimate, U.S. companies lose approximately $600 billion per year to employee theft and fraud. Most of us understand that we slip up occasionally, despite our best intentions, and that others do as well. And so it's useful for organizations to consider some simple interventions that can help their customers and employees stick to their ethical principles.

Organizations often use codes of ethics that employees must read and sign to indicate their intended compliance. But codes are insufficient on their own. To be effective, they need to be integrated into the organization's culture, and their importance just be stressed and discussed. For instance, the CEO as well as senior management in an organization should make their commitment to the codes of ethics visible and clear to employees, and communicate the value they put on ethics in orientation programs, annual reports, newsletters, meetings, and training sessions.

Organizations can also benefit more from the type of ethical nudge that would likely improve our honesty on our tax forms. Think, for instance, about the contracts we sign that explicitly stipulate the terms and agreements that different parties are expected to adhere to during a transaction or negotiation. Though we might hope that people read these documents carefully before signing, having them sign at the bottom of the form might cause them to miss important information and sign to terms they may not be able to uphold. When organizational representatives provide inaccurate numbers and sign contracts without carefully considering all the details of a business agreement, the business relationship and the company's reputation are put in jeopardy.

Moving the signature line to the top of a contract, along with a statement declaring the numbers reported are accurate, might cause signees be more truthful about the information they are declaring. And it may also lead them to pay more attention to the details specified in the document they are signing. The application of such simple ethical nudges could span to other contexts, such as reminding financial advisers of their fiduciary duty to their clients and doctors of their Hippocratic oaths.

The estimated U.S. personal income tax gap of $345 billion is clearly formidable. But we may be able to narrow it over the years, one signature at a time.

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