Are Some Countries More Honest than Others? Evidence from a Tax Compliance Experiment in Sweden and Italy

This study examines cultural differences in ordinary dishonesty between Italy and Sweden, two countries with different reputations for trustworthiness and probity. Exploiting a set of cross-cultural tax compliance experiments, we find that the average level of tax evasion (as a measure of ordinary dishonesty) does not differ significantly between Swedes and Italians. However, we also uncover differences in national “styles” of dishonesty. Specifically, while Swedes are more likely to be either completely honest or completely dishonest in their fiscal declarations, Italians are more prone to fudging (i.e., cheating by a small amount). We discuss the implications of these findings for the evolution and enforcement of honesty norms.


Appendix
1.72 Yes We tested for differences in population means using Schlag's Z-test (for dummy variables) and t-tests (for continuous variables).  Columns (1)-(3) of Table 1 display the proportion of participants who report no income in each round of the experiment. Here, we do not detect any differences between Italians and Swedes in terms of the share of participants who engage in complete evasion. In columns (4)-(6), we show the proportion of participants that report 100% of their earnings for each round. We see that in five out of eight rounds, a significantly higher percentage of Swedes reported their entire income. Finally, the last three columns of Table 1 display the probability of fudging. Here, we uncover the largest cross-national differences in reporting behavior: Italians are more likely to fudge in every single round of the experiment. On average, Italians fudged 2.41 decisions out of 8, compared to Swedes, who fudged 1.59 decisions (ranksum test p-value< 0.001). We also discover that both Italians and Swedes fudged the most in round 8 (with a progressive flat rate system) where participants have a strong incentive to underreport their earnings to "get under" the 100 ECU threshold. Tax revenues are collected into a common fund, the amount in the fund is doubled, and then proceeds donated to a real-world charity

WILLING TO PAY? BASELINE EXPERIMENT INSTRUCTIONS
Below are the instructions given to the subjects both orally and written on their computer screens. The coordinator reads the following aloud as the subjects read along on their computer screens.
Before we begin, please type your experiment ID code into the field on your computer screen. You can find your experiment ID code by opening the envelope we handed to you as you entered the room. If you have any questions about this, please raise your hand now.
Please take a moment to type in your experiment ID code now.
Please press "Continue." Welcome. Thank you for agreeing to participate in this experiment.
This experiment will not be particularly difficult or involve trick questions. You will simply need to follow the instructions as they gradually appear on your screen. The answers you will provide will be confidential. Those who process the data from the experiment will not be able to match your name to your choices.
During the experiment, you will be asked to make choices. It is therefore important for the success of the experiment that you do not talk to each other and that you read the instructions very carefully. If you have questions during the experiment, please raise your hand.
At the end of the experiment, you will receive your payment in cash. The actual amount will depend partly on your choices, partly on the choices of the other participants and partly on chance.
Please press "Continue." Today's experiment is divided into four stages. Every stage is, in all respects, separate from the others. This means that the choices you make in each stage will have no effect on your earnings in the other stages. Your final earnings will be the sum of the earnings obtained in all four stages. At the beginning of each stage, we will read the relevant instructions and give examples to ensure that the experiment is clear.
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.
Please press "Continue." 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 euros 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 on the non-reported income, plus a fine equal to that non-paid tax. In other words, you will have to pay twice the tax you should have paid on the nonreported income.
Please press "Continue." 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 euros.
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. 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 euros. 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. 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 you have under-reported your earnings, you will have to pay the tax you should have paid on the non-reported income, plus a fine equal to that non-paid tax. In other words, you will have to pay twice the tax you should have paid on the non-reported income.
Please press "Continue." 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.
Please press "Continue." 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 twice the tax she did not pay (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.
Please press "Continue." 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 you have under-reported your earnings, you will have to pay the tax you should have paid on the non-reported income, plus a fine equal to that non-paid tax. In other words, you will have to pay twice the tax you should have paid on the non-reported income. 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 fund and then redistributed in equal parts among all participants, regardless of how much each participant paid in taxes.
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."
Please press "Continue." Let's look at an example.
If the total amount of tax collected is 500 currency units, the amount in the 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 fund will be doubled to 4000 (since 20x100=2000x2=4000) and each participant will receive 200 currency units from it.
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."
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 fund, multiplied by 2, and redistributed in equal parts among all participants, regardless of how much each participant paid in taxes.
Please press "Continue." 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.
Please press "Continue. 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 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 you have under-reported your earnings, you will have to pay the tax you should have paid on the non-reported income, plus a fine equal to that non-paid tax. In other words, you will have to pay twice the tax you should have paid on the nonreported income.
Please press "Continue." 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%.
Please press "Continue." 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." 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." 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." 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 you have under-reported your earnings, you will have to pay the tax you should have paid on the non-reported income, plus a fine equal to that non-paid tax. In other words, you will have to pay twice the tax you should have paid on the nonreported income. Please press "Continue." 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.
Please press "Continue." 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 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 reporting the highest incomes pay more in taxes, while those reporting the 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 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 you have under-reported your earnings, you will have to pay the tax you should have paid on the non-reported income, plus a fine equal to that non-paid tax. In other words, you will have to pay twice the tax you should have paid on the nonreported income.
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. 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 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.
Please press "Continue. 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.
Please press "Continue." 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 you have under-reported your earnings, you will have to pay the tax you should have paid on the non-reported income, plus a fine equal to that non-paid tax. In other words, you will have to pay twice the tax you should have paid on the non-reported income. In this round, however, the money collected in the fund will be multiplied by 2 and the proceeds will be donated to Oxfam 1 (note: we really will do this). 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." 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 euros, 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. 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.