Economic Psychology of Tax Behaviour: Literature Overview and The Slippery Slope Framework

Transcription

1 Economic Psychology of Tax Behaviour: Literature Overview and The Slippery Slope Framework Erich Kirchler University of Vienna Faculty of Psychology Moscow, 1-3 September 2010 Literature search Is tax evasion a hot topic in economics and social sciences? A search for citations in the Web of Science (2008; SSCI, SCI & A&HCI) yields confirming results: from the beginning g of documentation in 1945 to citations were produced (key words tax, taxes, taxation & evasion or compliance ) 1981 to to to In 1998, (Andreoni, Erard, & Feinstein, 1998) observed, there was a tide of research on tax compliance. This tide has grown until the present. Most of the publications are in the field of economics; the majority refers to the model of tax evasion developed by Allingham & Sandmo (1972) on the basis of Becker s (1968) theory of crime. The terms psychology or psychological appear in only 10% of the publications. 1

2 History 1927 Otto Veit 1950 Schmölders; tax knowledge and attitudes (tax morale) 1970 Attitudes, social norms (e. g., Vogel, 1974) 1972 Allingham & Sandmo (economic model, based on Gery Becker s theory of crime) 1980 Justice perceptions and tax ethics (e. g., Song & Yarbrough, 1978) (Late 1970s: IRS identified more than 60 determinants of tax behaviour) 1990 Withholding phenomena (e. g., Schepanski & Shearer, 1995) 2000 Interaction tax authorities tax payers (e. g., Braithwaite, 2003) 2008 (September) IRS / IBM workshop on indirect effects on tax compliance (predominantly procedural justice) Classification of research on tax behaviour 1. Introduction 2. Tax law, shadow economy and tax non-compliance 2.1 Complexity of tax law 2.2 Shadow economy 2.3 Tax non-compliance 3. Social representations of taxes 3.1 Subjective knowledge and mental concepts Subjective knowledge Subjective concepts of tax 3.2 Attitudes, social norms and opportunity of non-compliance Attitudes: Evaluation of non-compliance Norms Personal norms Social norms Societal norms Behaviour control: perceived opportunities of non-compliance 3.3 Fairness Distributive justice Procedural justice Retributive justice Individual and situational differences in justice concerns Social identification and justice concerns 2

3 Classification of research on tax behaviour 3.4 Motivation to comply Motivational postures Tax morale 4. Deciding to comply or not to comply 4.1 Audits probabilities, fines, tax rate and income effects Audit rates Fines Marginal tax rate Income 4.2 Repeated audits 4.3 Heuristics, biases and framing effects 5. Paying taxes out of pocket: self employment 6. Interaction between tax authorities and taxpayers 7. Cautious conclusions 7.1 Methodological concerns 7.2 Summary of research findings References Authors list Subject list The Economic Psychology of Tax Behaviour Erich Kirchler Universität Wien, Austria Foreword by Valerie Braithwaite Australian National University, Canberra Hardback (ISBN-13: ) This page is available online at 3

4 Classification of research on tax behaviour 1. Introduction 2. Tax law, shadow economy and tax non-compliance 2.1 Complexity of tax law 2.2 Shadow economy 2.3 Tax non-compliance 3. Social representations of taxes 3.1 Subjective knowledge and mental concepts Subjective knowledge Subjective concepts of tax 3.2 Attitudes, social norms and opportunity of non-compliance Attitudes: Evaluation of non-compliance Norms Personal norms Social norms Societal norms Behaviour control: perceived opportunities of non-compliance 3.3 Fairness Distributive justice Procedural justice Retributive justice Individual and situational differences in justice concerns Social identification and justice concerns 3.4 Motivation to comply Motivational postures Tax morale 4. Deciding to comply or not to comply 4.1 Audits probabilities, fines, tax rate and income effects Audit rates Fines Marginal tax rate Income 4.2 Repeated audits 4.3 Heuristics, biases and framing effects 5. Paying taxes out of pocket: self employment 6. Interaction between tax authorities and taxpayers 7. Cautious conclusions 7.1 Methodological concerns 7.2 Summary of research findings The tax system represents a social dilemma with individual interests being in conflict with collective interests: two or more people are interdependent for obtaining outcomes; if few people try to maximize their own outcomes, defeating is the rational choice. However, if a large number or all people maximize their outcome the effect is that sooner or later all get less than if they had chosen to cooperate. From a mathematical and economic perspective, the optimal strategy for rational individuals is not to cooperate. The neoclassical economic approach to tax behaviour departs from the assumption that individuals and groups are rational agents trying to maximize their outcome by avoiding taxes. 4

5 Audits and sanctionsin case of evasion are perceived as the dominant instruments to ensure cooperative behaviour. The likelihood of audits and sanctions in case of detection of evasion allows to conceive of the tax system as a game in which taxpayers choose between (a) a sure loss, namely the taxes due, and (b) a probable gain in case of evasion and non-detection or a probable major loss in case of evasion, detection and punishment. With regard to taxes, individuals are assumed to maximize their expected utility of the evasion by weighting the uncertain benefits of successful evasion against the risk of audits, detection and sanctions. In the early 1970s, Allingham & Sandmo (1972) and Srinivasan ( ) (1973) formulated independently from each other a model of tax evasion along these lines of reasoning which has since then dominated the academic research in economics and in part also in psychology. Audits probabilities, fines, tax rate and income effects o o o o Audit rates Fines Marginal tax rate Income 5

6 Average compliance rate by fine rate and audit probability (standard deviations in parentheses; Alm et al., 1995, p. 11) Audit Fine rate probability ( 4.0) 6.9 ( 3.2) 12.2 ( 4.2) ( 6.0) 21.4 ( 4.4) 39.8 ( 7.4) ( 8.0) 54.8 (10.6) 70.3 ( 7.5) In their review of tax compliance, (Andreoni et al., 1998) conclude, that audits have little specific deterrent value, and provide some explanations for this finding: One possible explanation is that audits may not turn out as badly as taxpayers initially fear. For example, if an audit fails to uncover non-compliance that is present or if a substantial penalty is not applied to discovered non-compliance, a taxpayer may conclude that it pays to cheat. Alternatively, perhaps taxpayers do find audits to be a negative experience, but the impact of this experience is to make them want to evade by more in the future in an attempt to get back at the tax agency... (p. 844). Tax evasion as a decision under uncertainty (Allingham & Sandmo, 1972; Srinivasan, 1973) Net income Net income + Net income eveaded amount fine p p Tax compliance Tax evasion 6

7 Compliance rate by audit probability and periods since last audit (Kirchler, Maciejovsky & Schwarzenberger, 2007) rate.6 Compliance Audit probability 30 % Audit probability 15 %.1 0 Basline Periods since last audit Bomb crater effects immediately after an audit (Guala & Mittone, 2002, p. 9) Tax payments (averages, first group) Value (Liras) Tax due Round Average tax paid Audit 7

8 Bomb crater effect Bomb crater effect (Mittone, 2006)? Misperceived probability or loss repair? Effect of Reinforcement schedules Oneway ANOVA: 4 conditions on tax payments + fines: F(3, 116) = 4.40, p<.01, η 2 =.10 8

9 Paying taxes out of pocket: self employment Most psychological studies on tax behaviour concentrate on income tax and determinants of compliance. People with wages and salaries and selfemployed people as well as small business owners are likely to be more compliant the more knowledge they have about taxes, the more positive their attitudes, the higher their ethical beliefs and the stronger social norms and their conviction that the tax system is fair, and the stronger deterrence perceptions in terms of audits and sanctions of evasion are. Also, perceived opportunities not to comply determine tax behaviour. However, opportunities vary considerably and are definitely higher in the group of self-employed and entrepreneurs. Opportunity to evade was found to be probably the most relevant determinant of non-compliance. Also cash economy activity is more prevalent among the self-employed. It can therefore be expected that self-employed and entrepreneurs are more exposed to tax evasion than employed people. Mental accounting! Hard work vs easy money? Structural relationship between duration of running a business, age of respondents, perceived limitation of freedom, attitudes towards taxes, tax morale and intention to evade (Kirchler, 1999) Duration of business in years -.18 Perceived limitation of freedom Age.36 Attitudes towards taxes Tax morale -.36 Intention to evade 9

10 Classification of research on tax behaviour 1. Introduction 2. Tax law, shadow economy and tax non-compliance 2.1 Complexity of tax law 2.2 Shadow economy 2.3 Tax non-compliance 3. Social representations of taxes 3.1 Subjective knowledge and mental concepts Subjective knowledge Subjective concepts of tax 3.2 Attitudes, social norms and opportunity of non-compliance Attitudes: Evaluation of non-compliance Norms Personal norms Social norms Societal norms Behaviour control: perceived opportunities of non-compliance 3.3 Fairness Distributive justice Procedural justice Retributive justice Individual and situational differences in justice concerns Social identification and justice concerns 3.4 Motivation to comply Motivational postures Tax morale 4. Deciding to comply or not to comply 4.1 Audits probabilities, fines, tax rate and income effects Audit rates Fines Marginal tax rate Income 4.2 Repeated audits 4.3 Heuristics, biases and framing effects 5. Paying taxes out of pocket: self employment 6. Interaction between tax authorities and taxpayers 7. Cautious conclusions 7.1 Methodological concerns 7.2 Summary of research findings Tax law is not always clear Owens & Hamilton (2004) collected experiences and innovations in taxation in various countries. They state that in OECD countries, one of the major problems in tax administration is what tax administration has to administer, the tax laws and how to interpret them (complexity, ambiguity, incomprehensibility of the law). Tax laws have become so intricate that even experts, such as accountants, attorneys, and tax officers have difficulty interpreting many of the law s provisions. Moser (1994) undertook a linguistic analysis of tax laws and claims several bad habits which make it difficult for ordinary taxpayers to understand the law. Lewis (1982) reports that the necessary education to understand the law is between 12 and 17 years in USA, UK, and Australia, respectively. Owens & Hamilton (2004) report that the number of words in the IRS Code (Income tax law, and entire tax code) increased steadily from 1955 to

11 Growth in number of words in the IRS Code from 1955 to 2000; adopted from quoted in Owens and Hamilton (2004, p. 349) Thousands of words Income taxes only Entire tax code Tax laws are not always clear Efforts to simplify the law are undertaken in almost all countries. I hold in my hand 1,379 pages of tax simplification. U.S. congressman Delbert L. Latta The Sydney Morning Herald, 9-10th July, 2005, brought a memorable report about much changes leading to no changes at all. Taxes giveth as GST taketh away Ross Gittins Everyone who s socially aware knows the introduction of the goods and services tax as it happens, exactly five years ago last week made the tax system a lot more regressive. Except that everyone is wrong. Associate Professor Neil Warren of Atax at the University it of NSW and Professor Ann Harding and Rachel Lloyd of Natsem at the University of Canberra have just produced a study of GST and the changing incidence of Australian taxes, which reaches some surprising conclusions Warren & Co conclude that, despite all the changes during the seven-year period in the tax and transfer system, the economy and the characteristics of households the distribution of the tax burden and the distribution of household income were remarkably stable. 11

12 Concepts of taxation Fynantzer = Landbetrieger, der die Leute umbs Geld bescheisset. Basilius Faber, Thesaurus eruditionis scholasticae Judgments of "typical taxpayers", "honest taxpayers", and "tax evaders (Semantic differential by Peabody) Descriptions lazy vs hard-working typical taxpayer honest ttaxpayer tax evader stupid vs intelligent typical taxpayer honest taxpayer tax evader Evaluations negativ vs positiv evaluation typical taxpayer honest taxpayer tax evader 12

13 Semantic space of associations to taxes by entrepreneurs, blue and white collar workers, civil servants, and students (Kirchler, 1998) Dimension lack of clarity technical tax terms economic regulator STUDENTS public constraint ENTREPRE- NEUERS public goods not categorized public deficit names of bureaucracy politicians BLUE COLLAR WORKERS and political institutions criticism of the government punishment and disincentive instrument for politicians criticism of politicians tax evasion necessary evil salary and income social security WHITE COLLAR WORKERS CIVIL SERVANTS social welfare social justice financial loss 1.50 Dimension Dimension 3.86 Norms Personal norms (moral conscience, ethical orientation, values, honesty, religious beliefs, political party preference, guilt and shame management) Social norms (behaviour regularity that is based on socially shared beliefs how one ought to behave which triggers the enforcement of the prescribed behaviour by informal social sanctions; Fehr, Fischbacher, Gächter, 2002). Societal norms (cultural norms, tax law, etc.) 26 13

14 Social norms... Self-categorisation theory offers a refined analysis of the relationship between social norms and social influence. As Wenzel (2004) explains, the analysis differs from traditional dual-process accounts of social influence that distinguish between informational and normative influence. The traditional approach assumes that the informational value of social influence leads to change of attitudes, whereas normative influence leads to mere outward compliance without being reflected in a change of one s personal beliefs. Norms are regarded as external pressure to which a person yields. In contrast, selfcategorisation theory argues for a unified social influence process where normative and informational influence are interactive processes. Normative influence is true influence based on the internalisation of the views of relevant others. As members of the same social group a person is similar to the group members and expects to hold similar views. 27 Effects of social norms on personal tax ethics at low versus high levels of identification (Wenzel, 2005) 0.3 Personal tax ethics (Time 2) identification weak strong -0.2 low high Social norm (Time 1) 28 14

15 Distributive justice Most studies on fairness focus on distributive justice: Horizontal justice (distribution of taxes and resources between taxpayers of comparable income groups) Vertical justice (distribution of taxes and resources across income groups) Exchange justice (fairness of tax payments and governmental provision of public goods and taxpayers participation) Average perceived public expenditures and desired expenditures for various public goods, and perceived subjective utility and desired utility of public goods (Kirchler, 1997; 1 = very low, 5 = very high) Public goods Perceived amount of public expenditures Desired amount of public expenditures Perceived individual Desired individual utility of utility of public goods public expenditures M SD M SD M SD M SD Education Science and research Pubic health Economic development Art and culture Agriculture Military defense Social security Public security Construction of streets Public transport Housing construction Total

16 Procedural justice Treatment of taxpayers, quality of information, access to and provision of information related to tax law and explanations of tax law. Efficiency of interaction with tax authorities, fair treatment and neutrality of tax authorities (Tyler, 2001). Retributive justice Unreasonable and intrusive audits, unfair penalties. Falkinger & Walther (1991) criticize that tax law foresee only punishment for wrong-doing but does not apply positive reinforcement). Tax amnesties: appropriateness of forgiving versus perceptions of unfair treatment of honest taxpayers and non-acknowledgement of their integrity. Types of Punishment (Wenzel & Thielmann, 2006): a) Behavior control: Punishment serves to sanction illegal behavior and balance is reached when the offender is punished for his/her behavior. Punishment serve prevention of further actions by the offender and any other person in the society. b) Value restoration : Punishment has the aim to re-establish social values. 16

17 Retributive and restorative justice; Fines and Incentives Unreasonable and intrusive audits, unfair penalties. Falkinger & Walther (1991) criticize that tax law foresee only punishment for wrong-doing but does not apply positive reinforcement). Tax amnesties: appropriateness of forgiving versus perceptions of unfair treatment of honest taxpayers and non-acknowledgement of their integrity. Motivation to comply Motivational postures (V. Braithwaite, 2003) & Tax morale (Schmölders (1960) defined tax morale as attitude of a group or the whole population of taxpayers regarding the question of accomplishment or neglect of their tax duties; it is anchored in citizens tax mentality and in their consciousness to be citizens, which is the base of their inner acceptance of tax duties and acknowledgment of the sovereignty of the state. (p. 97f). V. Braithwaite & Ahmed (2005) refer to tax moral as internalized obligation to pay tax. Similarly, Frey (1997) and Alm & Torgler (2005) define tax morale as intrinsic motivation to pay one s taxes, which Orviska & Hudson (2002) link to the concept of civic duty. Civic duty proposes that people are motivated not just by a concern to maximize their own well-being, but by a sense of responsibility and loyalty to the society and nation. Responsible citizens with high levels of civic duty are collaborative even if the system allows non-compliance. Their behaviour is not regulated externally by audits and sanctions but by their concern for the society.) 17

18 Motivational postures and statements representing them (Braithwaite, 2003a, p. 20) Motivational posture Commitment Capitulation Resistance Disengagement Game playing Description Commitment combines a positive orientation towards tax authorities and deference. The tax system is perceived as desirable, tax law and tax collection are perceived as fair. Committed taxpayers feel a moral obligation to pay their share and to act in the interest of the collective. Capitulation reflects a positive orientation in terms of acceptance of the tax authorities which hold legitimate power to pursue the collective s goals. As long as citizens act according to the law, authorities are perceived to act in a supportive way. Resistance reflects a negative orientation and defiance. The authority of tax officers may be doubted and their acts be perceived as controlling and dominating rather than as supportive. Also, disengagement reflects a negative orientation and correlates with resistance. Individuals and groups keep socially distant t and blocked from view and have moved beyond seeing any point in challenging tax authorities. Game playing expresses a view of law as something that can be moulded to suit one s purposes rather than as a set of regulations that should be respected as guideline of one s actions. In the field of tax behaviour, game playing refers to cop-and-robber games with taxpayers detecting loopholes for their advantages and perceiving tax officers as cops which engage in catching cunning taxpayers. Statements representing motivational postures a) Paying tax is the right thing to do. b) I feel a moral obligation to pay my tax. c) Overall, I pay my tax with good will. d) If you cooperate with the Tax Office, they are likely to be cooperative with you. e) The tax system may not be perfect, but it works well enough for most of us. f) No matter how cooperative or uncooperative the Tax Office is, the best policy is to always be cooperative with them. g) If you don t cooperate with the Tax Office, they will get tough with you. h) It s important not to let the Tax Office push you around. i) It s impossible to satisfy the Tax Office completely. j) If I find out that I am not doing what the Tax Office wants, I m not going to lose any sleep over it. k) I don t care if I am not doing the right thing by the Tax Office. l) If the Tax Office get thought with me, I will become uncooperative with them. m) I enjoy spending time working out how changes in the tax system will affect me. n) I enjoy talking to friends about loopholes in the tax system. o) I like the game of finding the grey area of tax law. Australian Taxation Office Compliance Model (Braithwaite, 2003b, p. 3; James et al., 2003b) Motivational Postures Regulatory strategies Disengagement g (individual or group has decided not to comply) Prosecution Command regulation (nondiscretionary; use full force of the law) Resistance (individual or group does not want to comply Capitulation (individual or group tries to comply without always succeeding) Commitment (individual or group is willing to do the right thing) Audit with/without penalty Real time business examinations, record keeping reviews Education, record keeping, service delivery (convenience, access, choice, control) Command regulation (discretionary; deter by detection) Enforced self-regulation (help to comply) Self-regulation (make compliance easy) Enforcement strategies 18

19 Slippery Slope Framework Tax climate Antagonistic: cops and robbers high social distance no respect negative Emotions cost-benefit calculation enforced cooperation Synergistic: cervice & client no social distance respect positive emotions feeling of responsibility voluntary cooperation New Public Management 19

20 Key elements Power of authorities: How potential of tax authorities to detect and to punish evasion is perceived by taxpayers Trust in authorities: Taxpayers perception of tax authorities as benevolent and working for the common good Compliance: Degree of cooperation by taxpayers Enforced compliance vs. voluntary compliance Power of authorities Perception of taxpayers Audit probability Sanctions Law Budget to detect evasion Enforced cooperation 20

21 Trust in authorities Peoples perception Low social distance Social norms Fairness: distributive, procedural and retributive Transparency of prcesses against evaders Voluntary cooperation Slippery slope framework Enforced tax compliance Voluntary tax compliance Maximum Compliance Minimum Maximum Maximum Power of authorities Minimum Minimum Trust in authorities 21

22 Voluntary tax compliance Enforced tax compliance Voluntary tax compliance Maximum Compliance Minimum Maximum Power of authorities Minimum Minimum Maximum Trust in authorities Based on - subjective e complexity of tax law - tax morale and attitudes - personal, social and societal norms - fairness considerations - motivational postures Enforced tax compliance Enforced tax compliance Based on Maximum - audits - fines - tax rate - income Compliance - sequences of audits - framing effects (withholding effects) Minimum Maximum Maximum Power of authorities Minimum Minimum Trust in authorities 22

23 Hypotheses Enforced tax compliance Resistence Maximum Voluntary tax compliance Commitment Compliance Minimum Maximum Maximum Power of authorities Minimum Minimum Trust in authorities Laboratory Experiment: Study 1 N = 64 Females & 56 Males Design: 2 (High power vs. Low power) x 2 (High trust vs. Low trust) 20 Periods tax simulation experiment (program: z-tree, Fischbacher, 2007) Income: 3500 ECU Tax liability: 1400 ECU Audit probability: 10% Fine: amount evaded d Questionnaire (7-point answering scales): Enforced compliance (α =.61; Resistance, Braithwaite, 2003) Voluntary compliance (α =.92; Commitment, Braithwaite, 2003) 23

24 Study 1 Results Study 1 Me ean contributions High trust Low trust High power Low power Trust: F(1,112) = 3.71, p =.06, η 2 =.03 Power: F(1,112) = 8.10, p <.01, η 2 =.07 Trust x Power: F(1,112) = 1.32, p =.25 Covariates: sex =.54, age = 23.68, income = 1.71 Study 1 Results Study 1 Enforced compliance (Resistance, Braithwaite, 2003) Enforced compliance High trust Low trust High power Low power Voluntary compliance (Commitment, Braithwaite, 2003) Trust: F(1,112) = 50.02, p <.01; η 2 =.31 Power: F(1,112) = 19.87, p <.01; η 2 =.15 Trust x Power: F(1,112) = 3.45, p =.07 Voluntary compliance High trust Low trust High power Low power Trust: F(1,112) = 94.17, p <.01, η 2 =.46 Power: F(1,112) = 1.28, p =.26 Trust x Power: F(1,112) = 4.49, p =.04, η 2 =.04 Covariates: sex =.54, age = 23.68, income =

25 Study 2 Study 2: Online Experiment: N = 41 Females & 86 Male; Self employed people Design: 2 (High power vs. Low power) x 2 (High trust vs. Low trust) Questionnaire (7-point answering scales): Compliance (α =.84) Enforced compliance (α =.63; Resistance, Braithwaite, 2003) Voluntary compliance (α =.93; Commitment, Braithwaite, 2003) Strategic evasion (α =.83) Study 2 Results Study 2: Compliance Compliance High trust Low trust High power Low power Trust: F(1,120) = 7.96, p <.01, η² =.06 Power: F(1,120) = 9.38, p <.01, η² =.07 Trust x Power: F(1,120) = 0.00, p =.96 Covariates: sex = 0.32, age = 38.54, income =

26 Study 2 Results Study 2: Enforced compliance (Resistance, Braithwaite, 2003) Enforced compliance High trust Low trust High power Low power Trust: F(1,120) = 54.71, p <.01, η² =.31 Power: F(1,120) = 17.89, p <.01, η² =.13 Trust x Power: F(1,120) = 4.14, p <.05, η² =.03 Voluntary compliance (Commitment, Braithwaite, 2003) Voluntary compliance High trust Low trust High power Low power Trust: F(1,120) = 54.97, p <.01, η² =.31 Power: F(1,120) = 3.12, p =.08, η² =.03 Trust x Power: F(1,120) = 2.86, p =.09 Covariates: sex = 0.32, age = 38.54, income = 2.87 Study 2 Results Study 2: Strategic evasion 7 Strategic evasion High power Low power 1 High trust Low trust Trust: F(1,120) = 2.37, p =.13 Power: F(1,120) = 0.06, p =.81 Trust x Power: F(1,120) = 4.86, p =.03, η² =.04 Covariates: sex = 0.32, age = 38.54, income =

27 Study 3 Representative Sample: N = 3071 (A, UK, CZ) Questionnaire (7-point answering scales): Trust (α = ) Power (α = ) Enforced compliance (α = ) Voluntary compliance (α = ) Study 3 Enforced Compliance LLR-Glättung R²=.08 Trust β= -.08; p=.08 Power β=.26; p<.01 Trust b power β= -.07; p=.13 27

28 Study 3 Voluntary Compliance LLR-Glättung R²=.16 Trust β=.40; p<.01 Power β=.01; p=.89 Trust x power β= -.07; p=.10 Study 3 Compliance LLR-Glättung R²=.10 Trust β=.20; p<.01 Power β=.21; p<.01 Trust x power β= -.10; p=.03 28

29 The slippery slope framework: An attempt to formalization Aloys Prinz, University of Munster Slippery slope framework Enforced tax compliance Voluntary tax compliance Maximum Compliance Minimum Maximum Maximum Power of authorities Minimum Minimum Trust in authorities 29

30 30