Analysis of 20,000 taxpayers led to new tax rules and made it harder to cheat the tax system


Unwilling or Unable to Cheat? Evidence from a Tax Audit Experiment in Denmark.

Claus Thustrup KreinerIn 2007, professor Claus Thustrup Kreiner initiated a large-scale survey into how honest Danish taxpayers were in declaring income and deductions onther tax returns; the study was called 'Unwilling or Unable to Cheat? Evidence from a Tax Audit Experiment in Denmark' and was conducted between 2006 and 2011.

The study was conducted in collaboration with research colleagues from UC Berkeley and London School of Economics and two employees from the Danish tax department (SKAT).

The objective of the study was to find out how far people comply with the rules set out in tax legislation and to gain a better understanding of how the tax authorities can best enforce tax legislation.


Together with SKAT, data from a selected representative total of 20,000 Danish taxpayers were analysed with the aim of establishing the level of tax compliance - i.e. finding out the extent to which the figures that taxpayers declare to the tax authorities are correct.


Analyses revealed that there are striking differences in how accurately tax returns were reported: figures reported by a third party, for example an employer or a bank, are close to 100% correct, while income figures declared by taxpayers themselves are significantly below what they should be. In fact, taxpayers only declare aournd 60% of the income that they are supposed to on their tax returns. Tax returns from independent traders in particular as well as information about capital gains and losses from share trading were shown to be full of errors when taxpayers themselves filled in the figures. All in all, the research group estimated that taxpayers failed to declare some DKK 8 billion annually to SKAT.

The main results of the analysis were in place in 2008-09 and were included in the work carried out by the Tax Commission at the time, which Thustrup Kreiner was also a member of. In its final report, the Commission proposed that banks should have a duty to report their customers’ share purchases and sales to ensure that authorities were fully informed about monetary gains made and losses incurred as a result of share dealing.

The Tax Commission’s proposal concerning third party reporting into share trading was in fact adopted in the tax reform known as the ‘Spring Package (Forårspakken) 2.0' in March 2009.

As a result of the new rules, information about a person’s share purchases and sales is now reported by banks etc., so that the tax authorities (SKAT) can automatically calculate any taxable gains or tax-deductible losses. This means that it is now significantly more difficult to under-report income from shareholdings.

Another advantage is that taxpayers no longer have to spend time on filling in this part of their tax return form.

In its report, the Tax Commission estimated that introducing the rule about third party reporting on share trading would increase the amount of reported taxable income by between one and one and a half billion Danish kroner.

There is less under-reporting of income in Denmark than in many other countries. However, our study shows that this is apparently not because Danes are particularly morally responsible when it comes to paying tax, but rather because the tax authorities automatically receive information about 95 per cent of Danes’ income from employers, banks and other sources and thus know what people earn. The survey also shows that there is a surprisingly high level of under-reporting of income that taxpayers have to report themselves. Some kind of monitoring system is necessary because not everything can be automated; however, when automatic third party reporting is possible, this solution should certainly be considered.

Claus Thustrup Kreiner

The researchers behind the study

The study was conducted in collaboration with research colleagues from California and London as well as with two employees from the Danish tax authority. These researchers were: Claus Thustrup Kreiner, professor, Department of Economics, Henrik Jacobsen Kleven, London School of Economics, Emmanuel Saez, UC Berkeley; and Martin Knudsen og Søren Pedersen (the Danish tax department).

Period: 2006-2011

Changes to tax legislation

Thustrup Kreiner's research project was so successful that it led to amendments in the tax legislation, which was implemented in March 2009 with the tax reform Forårspakken 2.0 (Spring Tax Package 2.0):

"Simple and effective checking procedures and less tax planning. If the taxpayers are to perceive a tax system as fair, it is essential that there is a simple and effective system of checks and balances to ensure that taxes paid are all above board. The parties therefore agreed on a number of initiatives: 

Reporting of capital gains on shares:

"The duty to declare investment fund trading activities and listed shares currently covers dividends, end of year holdings and sales. However, an agreement is now in place to implement a duty to declare purchases as well. In addition, minor ajustments have been made to the tax rules relating to declaring sales and stocks so that SKAT can now automatically calculate any taxable profits earned."

Source: Skattereformen, Forårspakken 2.0 (Spring Tax Package 2.0)

Media reviews and publications

Article in the newspaper Politiken from 23 April 2010: Danes evade tax to the tune of DKK 8 billion

The Danish Ministry of Taxation - Spring Package 2.0 2009: Growth, climate, lower tax

The publication 'Unwilling or Unable to Cheat? Evidence from a Tax Audit Experiment i Denmark' (with Henrik Jacobsen Kleven, Martin Knudsen, Søren Pedersen and Emmanuel Saez). Econometrica 79, 2011, 651-692.

Earlier version: NBER Working Papers 15769, February 2010.