Erich Kirchler University of Vienna, Austria TARC Master Class London - 2014

1. Tax Psychology (2) Social representations and communication Erich Kirchler University of Vienna, Austria TARC Master Class London - 2014

2. Economic understanding of adults Lay theories of economic relations (in contrast to expert knowledge of, for example, economists): • Are developed on the basis of daily experiences • Schematically simplified; stereotypes • Provide explanations and orientations for behaviour 2

3. 1. Knowledgeabouttaxes

4. Complexity of tax law Tax law is not always clear… Slemrod et al. (2001, p. 459): “… although one can assert that legality is the dividing line between evasion and avoidance, in practice the line is blurry; sometimes the law itself is unclear, sometimes it is clear but not known to the taxpayer, sometimes the law is clear but the administration effectively ignores a particular transaction or activity.”

5. 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. 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 2000.

6. Growth in number of words in the IRS Code from 1955 to 2000; adoptedfrom www. taxfoundation/org/compliancetestimony.html; quoted in Owens and Hamilton (2004) Thousands of words

7. Tax law is not always clear… 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. Readability is the ease with which text can be read and understood. Various factors to measure readability have been used, such as "speed of perception," "perceptibility at a distance," "perceptibility in peripheral vision," "visibility," "the reflex blink technique," "rate of work" (e.g., speed of reading), “eye movements” and fatigue in reading.“ The Fleschformulas: Flesch-Kincaid readability test

8. 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

9. Subjective knowledge Tax law is complex. Sakurai & Braithwaite (2003) found in an survey with more than 2,000 Australian taxpayers that a relatively small percentage of respondents described themselves as fully competent: 36% denied fully the question, “I feel competent to do my own income tax return.”, 26% indicated to feel a little competent, 25% a fair bit, 12% very much. It is not surprising that more than three thirds rely on tax agents, 6.5% on tax office staff, and 20% on other people. According to Blumenthal & Christian (2004) close to 60% of the 128 million individual income tax returns in the USA filed for tax in 2001 were signed by a preparer.

10. Poor understanding of tax law, taxation and tax rates breed distrust. Low tax knowledge is correlated with low compliance. Using education as a proxy for tax knowledge, it was found that higher education correlates with compliance (Kinsey & Grasmick, 1993; Song & Yarbrough, 1978; Spicer & Lundstedt, 1976; Vogel, 1974). Schmölders (1960) reports in his influential study on tax morale in Germany that agreement with governmental activities and fiscal policy was higher in higher educated groups. Several survey studies found a positive relationship between (subjective or objective) tax knowledge and attitudes towards taxes and fairness assessments (Cuccia & Carnes, 2001; Kirchler & Maciejovsky, 2001; Niemirowski et al., 2002; Park & Hyun, 2003) Kirchler, Maciejovsky & Schneider (2003) assessed tax knowledge of fiscal officers, students of economics and business administration, business lawyers, and entrepreneurs, using a multiple choice test consisting of ten items, and correlated their knowledge with fairness judgments of tax avoidance, tax evasion and tax flight. Tax knowledge was neither correlated with the perceived fairness of tax evasion nor with the perceived fairness of tax avoidance. However, for business lawyers and entrepreneurs it was found that profound tax knowledge is positively correlated with perceived fairness of tax avoidance, indicating that the better the knowledge the fairer was tax avoidance perceived.

11. 2. Representations of taxes

12. Representations of taxes Fynantzer = Landbetrieger, der die Leuteumbs Geld bescheisset Basilius Faber, 1680 Thesaurus editionisscholasticae Tax inspector = Impostor who screws people for their money 12

13. Representations of taxes Peter Sloterdijk (2010) “The modern democratic state gradually transformed into the debtor state... This metamorphosis has resulted,… , from a prodigious enlargement of the tax base – most notably, with the introduction of the progressive income tax… … each year, modern states claim half of the economic proceeds of their productive classes and pass them on to tax collectors, and yet these productive classes do not attempt to remedy their situation with the most obvious reaction: an antitax civil rebellion.”

14. Attitudes and tax morale Schmölders (1960): Tax morale is the “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).

15. Bruno Frey & Benno TorglerTaxmorale = intrinsicmotivationtocomply

16. Attitudes drive behavior (Schmölders: tax morale) Tax morale and size of shadow economy (Alm & Torgler, 2005) 30 Size of Shadow Economy (in % of the GDP) Italy □ 20 Belgium □ Norway Spain □ □ □ Portugal □ Sweden □ Finland Germany Netherlands □ □ Denmark □ □ Ireland 10 □ Great Britain France □ Austria □ □ □ USA Switzerland 0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Degree of Tax Morale 16

17. Lay theories Lay theories are often explained on the basis of the Theory of Social Representations (Moscovici, 1981) 17

18. Social representations [...] a system of values, ideas and practices with a twofold function; first, to establish an order [...] and secondly to enable communication to take place among the members of a community [...] (Moscovici, 1961/1973) • „Common-sense-theories” on fundamental issues that are of concern to the community (Moscovici & Hewstone, 1983); everyday knowledge • Combine psychological and sociological elements (social groups, strata) 18

19. Definition: Wagner (1994) Social representations are …: Metaphoric images, representations, conceptions of socially relevant phenomena; often pictographically-symbolically, linguistically expressed; unite cognitive, affective, evaluative and conative aspects Perspective of individual knowledge-systems Formation processes, change-dynamics and elaborations in social interactions, in everyday discourse, in social/societal discourse Perspective of collective discourse A concept, which makes it possible to refer social and individual analysis-systems to each other and to explain how social processes lead to individual, socially grounded representations Perspective of „macro-reduction of individual knowledge systems to social processes” 19

20. Social representations comprise: • Core: determines the meaning and identity of a social representation and consists of explicit or implicit fundamentals of the representations and • Periphery: protects the core, to adjust the social representation to context and time. Social representations develop through: • Anchoring: The unfamiliar is classified and ascribed with a meaning. • Objectification: The abstract concepts are turned into something concrete and assume real respectively physical representations (e.g. the word „bravery” is envisaged as a hero) 21

21. Threateningorunfamiliarphenomenonorevent (e.g. implementationofthe Euro, publicationofthetheoryofpsychoanalysis) Society, socialgroups Collective examination, searchforrelatedcontents, copies etc. The “world” ofthesocietyorsocialgroupisenrichedby a novelrepresentation Anchoringtoandinterpretation on thebasisoffamiliarcontentsandrepresentations. Socialidentity The socialdiscourseleadstoobjectification, i.e. torepresentations in the form ofpictures, metaphors, symbols, etc. The novelrepresentationsaddstothesocialidentityofthesocietyorsocialgroup Novelsocialrepresentation The unfamiliarphenomenonbecomesfamiliarandpartofcommon sense Sociogenesis of social representations (Wagner et al., 1999)

22. Attitudes Allport (1935, p. 810): “A mental and neural state of readiness, organised through experience, exerting a directive or dynamic influence upon the individual’s response to all objects and situations with which it is related.” Stroebe (1980): Attitudes towards an attitude object consist of The opinions on the object (cognitive aspect) The sympathy (affective aspect) and The behavioral intentions (conative aspect). 23

23. AttitudesThomas (1991) Measurable independent variable Intervening variable Measurable dependent variable Reactions of the autonomic nervous system; verbal comments on emotions Affect Attitude object (people, social groups, situations, actions etc.) Perceptual judgments; verbally utteredopinions Attitude Cognition Manifest behavior; information on own behavior Behavior 24

24. Attitudes and behavior Attitudes cannot be observed directly, but represent a relevant basis of behavior. 25

25. Measuring attitudes • Psychobiological level: • E.g. pulse rate, electrodermal responses, ECG, EEG, fMRI (neuro-economics) • Registration of eye movements (search of information sequence of information search): „Spotlight – Viewer”: Selective attention of the consumers while watching advertisements Advantage: Little technical, financial, organizational, and temporal effort in comparison to classical eye-tracking

26. Information search: the spotlight-viewer (…rather than eye tracking) (Berger, 2009) E.g., experiments on informationsearch (auditprobability, fines, socialnorms…)

27. Measuring attitudes • Behavioral observation • E. g., “lost letters” • Surveys and interviews • Qualitative methods (e.g. in-depth interviews) • Quantitative methods (e.g. direct surveys) • Combined methods (e.g. associations) 28

28. Qualitativemethods • In-depth interview: Collection of associations with the “object”: inquire all “object” attributes that are deemed important and then analyze the cognitive structure that lies behind them by repeatedly asking “why-questions” • Focus groups: The interaction provides an insight into complex behavioral patterns and personal motives: host, video or audio recordings • Qualitative-quantitative method: Associative network (see below) 29

29. Very bad Bad Neither Good Very good Quantitative methods „Direct” attitude measurement How do you rate taxes [VAT, income tax, etc.]? Remember: Not the attitude per se is measured “directly”, but the verbally uttered opinions are inquired directly. 30

30. Likert’s method of added ratings Attitudes as disapproval or approval of an attitude object Development of the scale: • Collection of favorable and unfavorable statements • Multi-point rating of agreement – disagreement • Item analyses & selection, administration of the scale • The added score of the answers represents the attitude index 31

31. 5 4 3 2 1 1 2 3 4 5 Likertmethod – an example Paying taxes on time is a citizen’s duty Cheating on taxes is a minor crime Strongly disagree Strongly agree 32

32. Multi-attribute-models Fishbein (1963), Fishbein & Ajzen (1975): • Only few object features/traits are perceived • Attitude as a function of the subjective probability and evaluation of these traits Evaluation of trait k n Aij = 1/n * ∑ (Pijk * Eijk) k=1 Probability that k is present 33

33. honest responsible Multi-attribute-models - example Trait of X How likely is this trait? How do You evaluate this trait? Likely Unlikely Bad Good 1 7 1 7 Attitude = 1 / 2 * ( (3 * 5) + (5 * 1) ) = 10 2 mentioned traits „safe” „expensive” 34

34. Attitudes towards taking undue benefits and not declaring income (bar charts indicate percentages of judgments of morally wrong behaviour, lines indicate percentages of people who might show the behaviour; adopted from Orviska and Hudson (2002, p. 91) Taking undue benefits Not declaring income 60% Total sample 50% Sample below 40 years 40% 30% 20% 10% Morally wrong (bar charts) 0% A bit wrong Wrong Seriously wrong Not wrong Not wrong A bit wrong Wrong Seriously wrong Would do (lines) Very likely Fairly likely Not very likely Very likely Fairly likely Not very likely Not at all likely Not at all likely

35. Representations of taxes Although most citizens appreciate public goods and agree with policy regulations, people neither like to pay taxes to fund public goods nor to pay so called corrective taxes. People like public goods but claim taxes are too high!

36. Task TAX-I 37

38. Semantic differential („classic” method; Osgood, 1970) A B Potency Active Good Ugly Fast Weak Big Powerful Friendly … 1 2 3 4 5 6 7 Passive Bad Beautiful Slow Strong Small Powerless Unfriendly … Activity 1 2 3 4 5 6 7 Valence 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 39

39. Semantic differential (description vs evaluation; Peabody, 1985) Basic idea: separation of the evaluative and descriptive components Example: Description of the manner/demeanor of a company on the market via pairs of traits such as prudent/imprudent, timid/bold Use of prudent or bold→ Evaluation of the company is positive Use of timid and imprudent→ Evaluation of the company is negative Use of prudent or timid→ Description of the company as risk-averse Use of bold or imprudent→ Description of the company as willing to take risks 40

40. Semantic differential (description vs evaluation; Peabody, 1985) X Evaluative aspect = (scale a + scale b) /2Descriptive aspect = |scale a – scale b| /2 or reverse one scale Y X evaluative aspect = (1 + 3) /2 = 2 descriptive aspect = (-1 + 3)/2 = 1 Y evaluative aspect = (-1 + -1) /2 = -1 descriptive aspect = (1 + -1)/2 = 0 41

41. Theft 4 - Too high 1 - Burden 2 + Necessary 30 Unjust 5 + Evil 6 + Associative network (de Rosa, 1993) Analyses: • Content of the associations • Evaluation (+/0/-): “polarity index”, “neutrality index” • Sequences: in combination with the frequency of “core” and “peripheral” • Links Taxes 42

42. Task • Taxes • Semantic Differential • Honest taxpayersare… - 0 + - 0 + - 0 + - 0 + - 0 + - 0 + - 0 + - 0 + - 0 + - 0 + - 0 + - 0 +

43. Judgments of “typical taxpayers”, “honest taxpayers”, and “tax evaders” (Semantic Differential - Peabody) Descriptive dimensions Lazy versus hard-working Typical taxpayer Honest taxpayer Honest taxpayer Table 1: Judgments of taxpayers (values range from -3 to +3) Descriptive dimensions typical tax honest tax tax evader payer payer _____________________________________________________ 16. lazy - hard-working .36 a 1.46 b .52 c 17. stupid - intelligent -.22 a .24 b 1.10 c Table 2: Evaluative components of ratings of taxpayers by employment group type of taxpayer blue-collar white-collar civil entre- student total worker worker servant preneur ________________________________________________________________________________ typical taxpayer -.28 -.56 -.26 -.43 -.44 -.38 honest taxpayer .31 .30 .70 .33 .32 .40 tax evader .10 .14 -.06 -.03 .31 .08 Tax evader Tax evader Stupid versus intelligent Typical taxpayer Honest taxpayer Honest taxpayer Tax evader Taxevader Evaluative components Negative versus positive evaluation Typical taxpayer Honest taxpayer Honest taxpayer Tax evader evader Tax 44

44. Associations to taxes of entrepreneurs, civil servants, students, white, and blue collar workers (explained variance: Dimension 1 = 38%; Dimension 2 = 30%; Dimension 3= 17%; Kirchler, 1998) Technical tax terms Lack of clarity Financial loss Economic regulator .89 STUDENTS ENTREPRE Public constraint NEUERS Not categorized Public goods Names of politicians Bureaucracy Public deficit BLUE COLLAR WORKERS and political institutions Criticism of the government Punishment and disincentive 0 Dimension 2 Tax evasion Necessary evil Instrument for politicians Social security Salary and income WHITE COLLAR WORKERS -.77 CIVIL SERVANTS Criticism of politicians Social welfare Social justice -1.36 1.50 .86 0 0 -.80 Dimension 1 Dimension 3 -.69 45 45

45. Attitudes and behavior • Hidden measurment: • Haire (1950): Customers complained about the taste and smell of the novel product instant coffee.Judgments were seen as “rationalizations”, a negative attitude was suspected. Indirect method: Construction of two shopping lists of a hypothetic housewife, description of this housewife 46

46. ½ kg bread 1 kg sugar 1 pack Nescafe 2 kg apples 1 salami 1 head of lettuce ½ kg bread 1 kg sugar 1 pack coffee beans 2 kg apples 1 salami 1 head of lettuce Indirect attitude measurement (Haire, 1950) Described as „lazy”, „ill planning”, „wasteful”, „with little sense of family” 47

47. Imagine an entrepreneur who is married, with two children, runs a firm… evades taxes. Imagine an entrepreneur who is married, with two children, runs a firm… avoids taxes. Imagine an entrepreneur who is married, with two children, runs a firm… pays on time correct taxes. Indirect attitude measurement Describe the entrepreneur, the personality, etc. 48