Study: Information about intensified tax enforcement increases rental income tax reporting

A study by VATT Institute for Economic Research (VATT), Labour Institute for Economic Research (PT) and Finnish Tax Administration provides evidence that some landlords in Finland fail to declare rental income correctly. Reporting behaviour can be influenced by providing information about tax reporting and enforcement practices. The strongest effect was obtained when notifying potential landlords of the use of third-party information in tax enforcement.

Some 75% of potential landlords identified in the study reported rental income in 2015. In the experiment, some of these potential landlords received a letter from the Finnish Tax Administration with information on how to report rental income and on tax enforcement. The letter increased the share of potential landlords reporting rental income by 4%. In the subgroup of potential landlords, who had not reported any rental income in the previous year, the propensity to declare rental income increased by as much as 50%.

The letter also increased the overall amount of net rental income being reported. As a result, the amount of tax revenue from rental income increased.

- Rental income is an interesting form of income in that it is taxed based on the individuals’ own declaration. Indeed, as small-scale renting is very common, it is challenging to collect information about rental income from other sources than the landlords themselves, says Professor Kaisa Kotakorpi from Tampere University and VATT.

The study compares the impact of different types of letters. A letter informing potential landlords of the use of third-party information on ownership and occupancy of apartments by the tax authorities was the most effective.

- In some cases, landlords might not know how to report their rental income. They might also simply forget to do so. In such cases, it is useful to provide information about reporting practices. However, letters informing potential landlords about intensified enforcement were most effective, states Research Director Tuomas Kosonen from PT.

In Finland, rental income is subject to capital income tax, which is currently 30 or 34 %. In 2015, total net rental income reported was 1.6 billion €, and the associated tax revenue 480 million €.

The study was carried out as a randomized controlled experiment in collaboration with Finnish Tax Administration. The study used data on owners and occupants of all apartments in Finland.

Research report:

Essi Eerola, Tuomas Kosonen, Kaisa Kotakorpi, Teemu Lyytikäinen & Jarno Tuimala: Tax Compliance in the Rental Housing Market: Evidence from a Field Experiment