In 2006, according to an estimate by the United States Treasury Department, Americans underpaid their taxes by about $450 billion. For that year, that’s roughly equal to Pentagon spending, and more than the gross domestic products of Sweden and Switzerland.
A good chunk of the missing tax revenues comes from underreporting income, or tax evasion. The rest, roughly 25 percent — about $110 billion — comes from failure to pay taxes, or tax delinquency.
Some people are hard up and can’t afford to pay their taxes. But others simply choose not to pay. When traditional enforcement strategies, like charging above-market interest rates on the debt, don’t work, the government uses a number of tools to collect these taxes. For instance, some states, like Kentucky, can order employers to take a bigger tax bite from the wages of tax delinquents, as allowed by federal and state law.
But traditional collection methods don’t always work. In a recent study, we used another strategy that got results: publicly shaming tax delinquents. It should be a key part of government efforts to increase the collection of tax debts, and thanks to the Internet and social media, the government has the means to make it even more effective.
Public shaming is already used throughout the world to collect taxes. The city of Bangalore, India, hires drummers as tax collectors to visit the homes of tax evaders and to literally bang the drum if they don’t pay.
They are also used to a limited extent in the United States. Nearly two dozen states — among them California, Massachusetts and New York— publish online lists on state websites revealing the identities of tax delinquents.
But many people worry that the publication of the lists could backfire by insulting individuals who are in temporary financial hardship, making them less likely to pay once they are back on their feet. Or the shaming could alienate delinquents from future sources of income that could have been used to pay up.
In our study, though, we found a specific shaming policy that worked. We sent letters to 34,344 individuals who were publicly listed as tax delinquents in Kansas, Kentucky and Wisconsin. The lists included detailed information about these individuals, including their full names and addresses. They owed from $250 to $150,000 per person, and altogether nearly half a billion dollars in taxes.
We divided recipients into two groups. In the first, only the recipient was chosen to get information about an online list of tax delinquents. In the second, the recipient and other people from the same community were given that information. Those in the second group should have felt that their delinquent status could be monitored by neighbors.
In the following months, people in the second group — the “shamed” delinquents — were more likely to pay off their debts than those who did not feel monitored. This intervention was effective mostly for people who owed tax amounts up to $2,500. For this group, the shaming treatment increased the probability of leaving the list by 20 percent.
Since tax agencies already send several letters to delinquents, our results suggest that including a shaming list of delinquent neighbors can result in a highly cost-effective way to raise revenues. In addition, although we shared the shaming information only with neighbors, exposing the delinquency status to friends, relatives, co-workers, clients and bosses as well could make the policy effective even for higher debt amounts.
If shaming works, other states may start publishing online lists of delinquents, while states that have already adopted the policy may increase its scope. For instance, in California, only the top 500 delinquents are listed.
Tax agencies could also make the delinquency records more conspicuous by advertising the existence of the lists on the Internet and television and even in tax forms.
Social media offers an even greater opportunity for shaming. Tax agencies could use targeted online advertisements on social networks to raise awareness among the social contacts of delinquents.
That said, shaming penalties come at a cost: the violation of privacy. Governments face a trade-off between privacy and increasing the effectiveness of tax collection. This preference for privacy may help explain why most agencies have not taken advantage of the full potential of shaming penalties. In his new book “So You’ve Been Publicly Shamed,” Jon Ronson looks at a real risk: In some cases, social media may amplify shaming penalties to the point of greatly outweighing the crime.
This could change as open disclosure becomes more common. Indeed, government agencies are increasingly filling the Internet with detailed lists of Americans’ activities, from their political campaign contributions to their criminal records.
We believe that shaming policies are an effective tool and should be part of the effort to make citizens pay their fair share. More effective and fair tax collection will fund the infrastructure, research and education that pave the way for economic growth and opportunity.