Running Head: CHEATING ON TAXES

Cheating on Taxes: Everyone Does It

Annie Sheoran

University of California, Berkeley

College Writing R1A

Cheating on Taxes: Everyone Does It

CHEATING ON TAXES
1

Cheating, to majority of the people, is a norm that although they can do without, they often

do it. One of the most common type of cheating is teaching on taxes. Everyone is required by

law to file tax returns once a year. Tax returns are filed with the IRS with the 2018 deadline for

filing the previous year’s returns being set on April 18. Cheating, which is rampant in taxation

can take the form of filing late returns past the due date. The purpose of this essay is to employ

the knowledge in behavioral economics to understand cheating on taxes.

In classical economic theory, cheating is subject to a cost benefit analysis. It is all about the

benefits one will receive from cheating. An individual will assess benefits, and then the risks of

being caught, and the punishment to be meted out if so (Levitt & Dubner, 2006). When an

individual finds out that the chances of being caught cheating are low and the rewards are high,

he or she is pushed to cheat and reap the rewards – or at least the theory goes.

But more recent research suggests that cheating is irrational. It is something that many

people across the world do every day, all the time, without realizing that they have done

something wrong. The irrationality in cheating is also seen in how the majority of people cheat in

a small way and thereby remain convinced that they have done the right thing. Irrationality in

cheating is also seen when individuals trust their intuition too much or pay no attention to other

people’s concerns. And so, the key to understanding cheating, whether in the stock market, on

examinations, or on taxes, is to understand irrational behavior.

Dan Ariely, in his research, found that people cheat in two ways; big cheating and small

cheating. Ariely carried out a host of experiments to find out what propels people to cheat and

how much cheating they do. The purpose of the experiments was to establish whether cheating is

a rational or irrational behavior (Ariely, 2009). During one experiment, Ariely gave the

respondents a piece of paper each containing thirty math questions. The respondents were paid a
CHEATING ON TAXES
2

reward of one dollar per right answer. After a period of five minutes, Ariely requested the

respondents hand over their papers and compensated the respondents for every right answer. The

majority of the respondents had solved fewer than four problems. Ariely then offered another

group of respondents the same math problems to solve within five minutes, but this time, he

asked the respondents to shred their test papers and inform him the number of questions they had

answered correctly. On average, the respondents now averaged seven correct questions. This was

three questions more than the first group of respondents. Given that the two groups were issued

with the same set of questions and same amount of time, the only explanation on why the second

group performed better than the first one is that they assessed the benefits of cheating and opted

to cheat.

Ariely repeated this research with thirty thousand participants. Twelve of the participants

cheated in a serious way and together stole a hundred and fifty dollars from him. Among the

same participants, 18,000 little cheaters stole a total of thirty-six thousand dollars from him.

Ariely drew the conclusion that majority of people who cheat are “little cheaters” (Ariely, 2012).

However, due to their large numbers, they create more impact than the big cheaters. Ariely

points out that most people cheat in a small way because they can still think of themselves as

honest. In a demonstration of rationalization, Ariely states that people cheat but want to look

themselves in the mirror and feel great about themselves.

In another research study, Ariely gave his math test to students from Carnegie Mellon

University (CMU) in Pittsburgh, Pennsylvania. In the experiment, Ariely had a large group of

students from CMU whom he pre-paid before sitting for the paper with the instructions that they

would hand over the money for the questions they did not solve. Among the students, Ariely

hired an actor-student to simulate cheating. After 30 seconds, the actor student, wearing a CMU
CHEATING ON TAXES
3

sweatshirt stood up and said he had completed the paper and was allowed to leave the room.

Soon after, other students stood up and said they had also completed all the questions. When the

actor student wore a University of Pittsburgh sweatshirt, cheating went down. The students were

influenced to cheat when they saw one of their own cheat, hence cheating went up. When the

student with University of Pittsburgh stood up, the CMU students realized he was cheating and

did not want to be associated with him, so cheating went down (Ariely, 2009). This showed that

cheating goes down when people are under peer influence .

One of the most common form of cheating is tax evasion which is done by many people

without knowing that they are actually cheating. Taxes are a responsibility for all citizens. People

generally accept that they need to pay taxes in order to receive services from the government.

Many people are, however, not comfortable paying high taxes, and they are afraid of the

consequences of being caught not paying taxes. No one wants to be charged with tax evasion.

But the notion that everyone else is evading taxes, influences them to do so as well. According to

a study by Credit Karma, an estimated 6 per cent of Americans accepted to have knowingly

cheated on taxes (Mockensturm, 2018). Although this figure looks small, the real figure could be

higher considering that very few people would open up about cheating on tax for fear of

retribution. Seven percent cheated on taxes by applying for excessive tax credits.

Although nine in ten Americans say that personal integrity is behind tax compliance as

opposed to six in ten who fear audit, Stuart Green argues that not all Americans comply with

taxes (Linn, 2014). According to IRS, 83 per cent of Americans paid their taxes timely in 2006

while 17 per cent were accused of underreporting their income to cheat on taxes. Cheating on

taxes has become a thorny issue for IRS which estimates that it failed to collect an estimated 458

billion dollars in 2016. According to Don Fort, the deputy director of criminal investigation at
CHEATING ON TAXES
4

the IRS, offshore tax evasion has more than doubled in the last two years (Scannell, 2017). Out

of the estimated nine million Americans living abroad, only 1.1 million Americans disclosed

their offshore accounts. The issue of tax evasion through offshore accounts was exposed by the

Panama Papers. An estimated 11.5 million documents were leaked from Mossack Fonseca, the

Panamanian law firm that aided Americans evade taxes by registering shell companies (Scannell,

2017). Wealthy Americans were found to cheat on taxes more than the lower income Americans.

The Panama Papers exposed a trail of well-off who moved their money through Swiss and

Panamanian accounts to defraud the IRS.

The fact that everyone else is doing something - whether positive or negative - becomes an

incentive for one to engage in the same behavior. According to Comer and Vega (2015) the

majority of American tax cheaters do not initially want to cheat on taxes. However, they are

influenced to cheat by other people who have successfully evaded taxes (Comer & Vega, 2015).

This category of tax cheaters cheat just a little bit, by concealing some of their incomes, claiming

excessive tax credits, claiming to have many dependents, failing to report income from

gambling, gifts and presents. This category is a proof that cheating is irrational as they believe

that they have done no wrong. The effect of this category of cheaters is that they form the largest

number of tax cheaters in the United States hence denying the government an estimated $270

billion dollars annually. I personally experienced this negative influence first-hand when a friend

of mine who own a large auto-repair shop decided to evade tax to fit in the group of fellow

business owners who evaded tax. He began by failing to issue receipts on some repairs and sales.

At the end of the year, the receipts he had quoted a far less figure than the actual figure

transacted throughout the year. Based on the available figures, he paid a little tax for the year.
CHEATING ON TAXES
5

Cheating is therefore, an irrational behavior which can be understood through behavioral

economics. Many people cheat due to social influence or due to the incentives offered. Other

people cheat to reap the rewards as evidenced by the students who cheated about the number of

problems solved to get higher compensation. When people are reminded not to cheat, they are

okay working under the rational behavior by not cheating. This arises the question about the

rational solution to this irrational behavior in relation to taxes? Maybe the IRS can remind

taxpayers about how many Americans don’t cheat on taxes, and of the sum cost of all the little

cheating. The implementation of a solution will increase the economic pie and taxpayers will

realise that they as well as the economy as a whole is better off without cheating on taxes.

References

Ariely, D. (2009). Dan Ariely on our buggy moral code. TED ideas worth spreading:

Inspired talks by the world's leading thinkers and doers.

Ariely, D., & Jones, S. (2012). The (honest) truth about dishonesty: How we lie to

everyone--especially ourselves (Vol. 336). New York, NY: HarperCollins.

Comer, D. R., & Vega, G. (2015). Moral courage in organizations: Doing the right thing

at work. ME Sharpe.
CHEATING ON TAXES
6

Economist, T. (2012, March 31). Time to be honest. Retrieved from

https://www.economist.com/node/21551447

Levitt, S. D., & Dubner, S. J. (2006). Freakonomics: A rogue economist explores the

hidden side of everything. Penguin UK.

Linn, A. (2014, March 3). Cheat on taxes? Never! (Really). Retrieved from CNBC:

https://www.cnbc.com/2014/02/28/cheat-on-taxes-never-really.html

Mockensturm, M. (2018, April 16). Study shows that 6 percent of Americans cheat on their

taxes. Retrieved from MOCKENSTRUM LTD:

https://www.mockltd.com/blog/2018/03/study-shows-that-6-percent-of-americans-

cheat-on-their-taxes.shtml

Scannell, K. (2017, June 19). US intensifies fight against tax evasion by using data mining.

Retrieved from Financial Times: https://www.ft.com/content/719544f6-529b-11e7-

bfb8-997009366969
CHEATING ON TAXES
7
CHEATING ON TAXES
8