1

Kaisa Kotakorpi & Jani-Petri Laamanen

Complexity, Salience, and Income Tax Reporting Behaviour:

Evidence from a Natural Experiment

And

Christian Gillitzer and Peer Ebbesen Skov

Evidence on Unclaimed Charitable Contributions from the

Introduction of Third-Party Information Reporting in Denmark

Discussion by: Erzo F.P. Luttmer

Dartmouth

October 2014

2

Outline

1. Discuss Kotakorpi & Laamanen paper (Finland) Offer suggestions specific to this paper

2. Discuss Gillitzer & Skov paper (Denmark) Offer suggestions specific to this paper

3. What are the wider lessons from both papers? What do we learn about underlying mechanisms? How could we learn more?

3

1. Roll-out of partial prefilling in Finland

Natural experiment: Roll-out of partially pre-filled tax forms based on (i) observables of

tax payers and (i) timing of the adoption by municipalities

Experimental groups: Treatment group: Tax payers in “early adoption” municipalities

selected to receive prefilled return Control group: Tax payers in “laggard” municipalities, who did not

receive a prefilled return, but with observable characteristics that would have gotten them a prefilled return in an early adoption municipality.

Outcomes: Reporting behavior for:

(i) income items vs. deduction items and (ii) prefilled items vs. non-prefilled items

4

Great paper!

Important topic: evidence on drivers of reporting behavior Great quasi-experimental variation (between 1995 and 1997,

the fraction of partially prefilled returns increased from 7% to 57%)

Very good data (administrative tax data, long panel)

Anything left for a discussant on which to “offer constructive comments” ???

5

Feedback (first try)

Perhaps “early adopter” municipalities differ in unobserved characteristics from “laggard” municipalities (or treatment and control group don’t quite match)

Pre-empted by K&L: Inclusion of individual fixed effects (which absorb municipal F.E., except for a couple of movers)

6

Feedback (second try)

Perhaps individuals in “early adopter” areas have different trends in reporting than those in “laggard” areas Because treatment and control group don’t quite match on

observables and/or because of unobserved differences b/w areas

Test the “parallel trends” assumption E.g., do placebo specifications: are there no differences in changes

in reporting behavior between treatment and control in the two years prior to adoption (or after it had been adopted both for treatment and control group).

Improve the comparability of treatment and control group Use all observations predicted to receive a partially prefilled return

as the treatment group (rather than those actually receiving it). Optional: turn ITT estimates to ATT by using IV.

7

Findings

1. Main regression results:

Effect of receiving partially prefilled tax form on:

2. Further findings The changes in reporting appear to be driven by different reporting for small amounts

  Self-reported Income Deductions

Prefilled field Any reporting:Avg. amount:

~0~0

+~0

Non-prefilled field Any reporting:Avg. amount:

-~0

- - - -

8

2. Adoption of prefilled char. ded. in Denmark

Natural experiment: Starting in 2008, individuals received a tax form in which their

charitable deductions were prefilled (3rd-party reporting of these deductions also started in 2008).

Experimental groups: Pre/post 2008: … doesn’t sound great. But the effect on fraction claiming

charitable deductions is so large (doubling!) that it cannot be due to the pre-trend (effectively, it is like doing a visual RD).

Outcome: Reporting of charitable deductions on tax form

9

Great paper!

Important topic: evidence on drivers of reporting behavior No control group, but this not really needed when looking

at the fraction reporting charitable deductions Very good data (administrative tax data, long panel) Interesting and creative cuts of the data

Behavior by accountants vs. non-accountants Charitable deduction amounts that are strictly dominated Examination of distribution of deduction amounts Differences by primary deficit of individual

Anything left for a discussant on which to “offer constructive comments” ???

Actually, no not really (at least not by me; sorry)

10

Findings

1. Main results:

Effect of receiving prefilled tax charitable deductions on:

2. Further findings: The changes in reporting appear to be driven by different reporting for small amounts Effects are less pronounced for accountants, and only present for deductions under 500

DKK for them. Those who started claiming charitable deductions in 2008, two-thirds claimed deductions

in each of the following 3 years, so this concerns regular donors. 2-3% of all donors and about 25% of small donors made charitable contributions in a

strictly dominated region. Hint of an uptick in fraction claiming charitable deductions for those with a primary deficit

  Other line items

Charitable Deductions

Prefilled field Any reporting:Avg. amount (incl. zeros):

N/A ++~0 or +

Non-prefilled field N/A N/A

11

3. Lessons from the papers togetherEasy lessons to draw:

1. Prefilling matters for reporting behavior!

2. Taxpayers leave dollar bills on the sidewalk, ….. but primarily bills in small denominations

3. Room for intellectual arbitrage between the papers K&L could look at subgroups (e.g., accountants) with lower decision-

making costs. (Other such subgroups? Heterogeneity by demographics?)

K&L could look at discontinuities around the primary deficit

4. Rich data in K&L allows for further analysis: K&L could examine whether the effects occur for all line items within

each of their four cells (e.g., for all non-prefilled deduction line items) (?) Examine effects on difference between prefill and final value

12

What explains the totality of the results?To be explained:1. Effects on reporting:

2. Effects concentrated among small amounts (DK and FI)3. Much smaller, but non-zero, effects among accountants (DK)4. Reporting of deductions in dominated regions (DK)

(Rational) model of line-item by line-item decision-making cost can explain: 1a, 1b, and 2 (record keeping costs outweigh tax benefits for small amounts) 3 and 4 (not worth learning about the rules for small amounts)

But how to explain 1d (and 1c, if it is indeed negative)? Confusion? Do people take an empty (non-prefilled) field to mean it is

prefilled at zero? But then why concentrated only for small amounts? Evasion? Do people think that if the item is not prefilled the tax authorities

don’t know about it? May explain income, but wrong direction for deductions.

  Income DeductionsPrefilled field [a] 0 (in FI) [b] + (in FI and DK)

Non-prefilled field [c] 0 / - (in FI) [d] - - (in FI)

13

How to explain 1d ? (I.e., the negative effect on non-prefilled deductions)

Perhaps: A one-time fixed cost for filling out a tax form. When it was not partially prefilled, individuals incur this cost and report

most items in each category (perhaps missing just a few) When it is partially prefilled, it is not worth incurring this cost and

individuals report fewer items in each non-prefilled category (forgetting many items). For prefilled items, the reported amount goes up because the tax authorities forget nothing, but individuals used to forget a few items even when they incurred the fixed cost.

Is the existence of such an overall fixed cost plausible? Further testable implications?

No such effects for tax professionals or people using tax preparers In the prefilled category: the fraction of deductions exceeding the prefill

amount should decline. If you report a large amount in one non-prefilled category, you incurred

the fixed cost and you should then also report small amounts in other non-prefilled categories.

Is there a better alternative explanation?

14

(end)