Good citizens, good taxpayers

When we do something good, like donating to a local food bank, does it give us a “mental pass” to be a little less virtuous elsewhere? In the world of psychology, this is known as “moral licensing,” the idea that performing a good deed provides a “license” to behave immorally later.

However, new research from Amy Hageman, KPMG Ralph Crouch Professor in Kansas State University's College of Business Administration, and her colleagues, Donna Bobek Schmitt, University of South Carolina, and Cass Hausserman, Portland State University, suggests that when it comes to our wallets and our taxes, the opposite might be true. Their study, recently published in the Journal of Business Ethics, found that charitable giving and tax compliance actually go hand-in-hand.

The “consistency” effect

The researchers conducted an experiment with over 300 taxpayers to examine how tax incentives and perceptions of fairness influenced taxpayers’ decisions to donate and to report income.

“We were initially surprised that we did not find any evidence of moral licensing with charitable contributions,” said Hageman. “Instead, we found that people who complied on reporting income for tax purposes exhibited a lot of consistency. They were more likely to also make charitable contributions.”

Why the overlap? It turns out that in the minds of many taxpayers, donating to charity and honestly reporting income are not two separate chores. They are two ways of achieving the same goal: being a good member of society.

Fairness and the tax code

The study also looked at how “fairness” affects our behavior. When people feel the tax system is unfair, like when a tax deduction is available to some but not others, they are generally less likely to comply with tax laws.

However, the “good citizen” effect was so strong that even taxpayers who felt the tax system was unfair were still more likely to be honest on their taxes if they were also charitable donors. For these individuals, their internal moral compass outweighed their frustration with the tax code.

Lessons for charities and policymakers

For everyday taxpayers and the organizations they support, the research offers a strategic shift in perspective. As tax laws change and some incentives for charitable giving are reduced or repealed, charities may worry about a drop in donations.

Hageman suggests a different approach. “Our results suggest that charitable organizations may want to emphasize the pro-social and altruistic reasons for giving, rather than any potential tax deductions.”

The findings also have significant implications for how the government manages tax enforcement. Since those who donate to charity tend to be more honest in their tax reporting, Hageman suggests that policymakers could allocate audit resources more efficiently by focusing on those who do not donate.

A passion for the “tax gap”

For Hageman, the study is part of a career-long interest in how the tax structure shapes human behavior. “Understanding how tax structure affects donations to charitable organizations is something that fascinates me both as a researcher and a citizen,” she says.

As it turns out, being a good member of society is not just about the check you write to a charity. It is about the consistency of character that follows you all the way to Tax Day.

Learn more about the Herbel School of Accountancy at Kansas State University.