Tax Psychology: Understanding Taxpayer Behavior Framework

1. Tax Psychology (5) Slippery Slope Framework Erich Kirchler University of Vienna, Austria TARC Master Class London - 2014

2. Research focus and paradigms • Type of tax: Incometax (VAT, inheritancetax etc.) • Actors in the field: The “tax-interaction” context • Taxbehaviourresearch: Shift of attentionfromauthoritarian-punitive tocooperateinteraction Decisions under risk Social dilemma Differential perspectives Psychological contract Interaction climate

3. Government Actors in the field: The “tax-interaction” context Governance and regulation, image of taxpayers, tax law, tax rate Images of government, tax accountants and taxpayers, audits and fines, interaction style Images of government and tax authorities, taxpayers and their goals Images of government and tax authorities, attitudes, tax morale, knowledge of tax law, norms (personal, social, societal), justice (distributive, procedural, retributive) Tax authorities Taxaccountants Taxpayer Taxpayer Taxpayer Taxpayer

4. Change of research perspectives Fines, audits • Focus on the individual: paying taxes as decision under risk (Allingham & Sandmo, 1972; Srinivasan, 1973) • Focus on the social group: paying taxes as a social contribution dilemma (e.g., Dawes, 1980) • Focus on differences between taxpayers (Braithwaite, 2003; 2009) • Focus on the relationship between taxpayer and tax authority: Tax compliance as the result of a psychological contract (Feld & Frey, 2007; 2010) • Focus on the climate: The interaction climate of all stakeholders shapes tax compliance (Kirchler, 2007; Kirchler, Hoelzl, & Wahl, 2008) Moral, norms, fairness Occupation, age, motivation Intrinsic motivation, tax authority’s interaction style Antagonistic vs synergistic tax climate; power, trust

5. Social norms • Wenzel (2005b) refers to social norms as perceived frequency or acceptance of tax evasion among a reference group. • Taxpayers who perceive others as behaving according to socially accepted rules and who communicate with others about appropriate behaviour will adopt the socially shared norms and behave appropriately. If the reference group signals that non-compliance will be tolerated, then compliance will decrease. • If a taxpayer believes that non-compliance is widespread and a socially accepted behaviour, then this taxpayer will more likely not comply.

6. Social norms ..... Wenzel (2004) concludes that taxpayers are influence by other taxpayers’ behaviour and they are more likely to be influenced by other taxpayers who are considered members of one’s relevant self-category; that is, members of the group with which a taxpayer identifies. Social norms elicit concurring behaviour when taxpayers identify with the group to whom the norms are ascribed. Taxpayers then internalise the social norms and act accordingly.

7. Social norms ..... THE BEHAVIORALIST AS TAX COLLECTOR: USING NATURAL FIELD EXPERIMENTS TO ENHANCE TAX COMPLIANCE Michael Hallsworth John A. List Robert D. Metcalfe Ivo Vlaev Working Paper 20007 http://www.nber.org/papers/w20007 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 March 2014

8. Fairness • Wenzel (2003) provides a conceptual framework for justice and fairness considerations: • Distributive justice refers to the exchange of resources, both • benefits and costs • Procedural justice refers to the processes of resource • distribution • Retributive justice refers to perceived appropriateness of • sanctions in case of norm breaking

9. 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)

10. Procedural justice • Procedural justice refers to the processes of resource collection and distribution. • Procedures are regarded as fair if the people involved are treated in a way they think is appropriate. According to Leventhal (1980), treatments are considered fair if decisions and processes are perceived as being • consistent, • accurate and • free of errors, • representative and • ethical, and • correctable in case of errors. • In discussing public trust and confidence in institutions, Tyler (2001a) argues that the key issue that shapes public views is a process-based evaluation of the fairness of procedures that are used to exercise authority. • Central to this process is the communication of respect for the individual.

11. What shall be done to improve tax compliance ? Norms and justice Establishment and communication of social norms of correct behavior is necessary; and measures need to be taken that strengthen the identification of citizens/residents with the community. Focus needs to be on justice on the distributive, procedural, and retributive levels.

12. Service climate Taxpayers need to be segmented according to their needs, so that appropriate services can be offered to facilitate tax honesty and tailored to meet needs at one “point of sale.”

13. Method Sample Two representative samples of • 807 private Dutch taxpayers (50.4% men; age: 50.45, SD = 16.88) • 1377 Dutch entrepreneurs (68,3% men; age: 48.67, SD = 11.22) Data collection • administered by a market research agency employed by the Dutch tax administration • Online questionnaires, telephone interviews, paper-pencil survey

14. 2. Correlation between service orientation and tax compliance • Private taxpayers: r = .22, p < .001 • Entrepreneurs: r = .22, p < .001

15. 4. Mediation analyses:Private taxpayers Trust Sobel test: z = 2.57, p < .01 Sobel test for mediation analyses with control variables (socio-demographic, economic and psychological): z = 2.20, p < .05 0.13** 0.74*** Service Taxcompliance (0.22***) 0.12**

16. 4. Mediation analyses:Entrepreneurs Trust Sobel test: z = 3.72, p < .001 Sobel test for mediation analyses with control variables (socio-demographic, economic and psychological): z = 1.80, p < .05 0.14** 0.73*** Service Taxcompliance (0.22***) 0.11**

17. Interaction climate (Integration of economic and psychological perspectives View of system: Authorities Government Tax authority Power &Trust Voluntarycooperationvsenforced compliance Interaction climate; segmentation and responsive regulation Taxpayers Individuals and groups interacting in social system

18. SlipperySlope Framework • Taxclimate • Power : Antagonisticclimate • „Cops and robbers“ orientation • High socialdistance • Norespect • Negative emotions • Cost-benefitcalculation • Enforcedcompliance • Trust : Synergisticclimate • „Service & client“ orientation • Nosocialdistance • Mutual respect • Positive emotions, trust • Feeling of responsibility • Voluntarycooperation

19. Key elements Power of authorities: Perceived potential of tax authoritiestodetectandtopunishevasion Trust in authorities: Taxpayers‘ perception of tax authoritiesasbenevolentandworkingforthecommongood Compliance: Degree of cooperationbytaxpayers Enforcedcompliancevsvoluntarycooperation

20. SlipperySlope Framework of Tax Compliance Kirchler, Hoelzland Wahl (2008) EnforcedTaxCompliance VoluntaryTaxCooperation Maximum Maximum Compliance Compliance Minimum Minimum Maximum Maximum Power of Authorities Trust in Authorities Minimum Minimum

21. SlipperySlope Framework of Tax Compliance Kirchler, Hoelzland Wahl (2008) EnforcedTaxCompliance VoluntaryTaxCooperation Synergisticclimate Subjective complexityof tax law Taxmorale and attitudes Personal, social and societalnorms Fairness considerations Motivational postures Maximum Maximum Compliance Compliance Antagonisticclimate: Command and control Audits Fines Minimum Minimum Maximum Maximum Power of Authorities Trust in Authorities Minimum Minimum

22. OECD From Enhanced RelationshipstoCo-operative Compliance Revenue bodies and theirrelationshipswithtaxpayers and tax intermediaries needtobebuilt on theprinciple of reciprocity in which all partiescanseektoco-operatewithin a frameworkthatbothrecognisesthestatutoryobligations and protectionsavailable and cangobeyondthesetoproducebetterparticipation and tangiblebenefitsforeachparty. + disclosure and transparency, with all partiesbeing open toenhancedleveloddialogue and co-operation toallwocollaboration in theidentification and resolution of areas of risk and concern; and + mutual co-operation in advancingenquiries and reachingproportionateresolutinsquickly and withfinality. HORIZONTAL MONITORING (e.g., Austria, Slovenia, The Netherlands)

23. Horizontal MonitoringThe Netherlands • In 2005, the Dutch Tax and Customs Administration initiated the “horizontal monitoring” program, first involving 20 of the largest businesses. After positive feedback of the participating businesses, the program was extended to SME’s as well.In the horizontal monitoring approach the Dutch Tax and Customs Administration and taxpayers enter into a compliance agreement, based on the key values mutual trust, understanding and transparency. The compliance agreement covers a range of taxes. • The standard method of customs checking is characterized by ‘vertical supervision’ and distrust. The Dutch Tax and Customs Administration carries out its activities by selecting and checking. The principle of horizontal supervision is based on the notion that the Dutch Tax and Customs Administration operates on the basis of trust rather than distrust. This is a not implicit trust but it is trust based on experiences from the past (what is the reputation of the company at the Dutch Tax and Customs Administration) and the fact that businesses would take their own responsibility.

24. Studies: Laboratory experiment and online experiment Manipulation Scenarios • Power • Audit probabilities • Efficiency of audits • Amount of fines • Budget of tax office • Competence of tax office • Trust • Procedural fairness • Distributive fairness • Positive social representations • Transparency • Social norms

25. Study 1 Laboratory Experiment: 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 Questionnaire (7-point answering scales): → Enforced compliance → Voluntary cooperation

26. 1400 1200 1000 800 High power Mean contributions. 600 Low power 400 200 0 High trust Low trust Study 1: Results

27. 7 6 5 High power Enforced compliance 4 Low power 3 2 1 High trust Low trust Study 1: Results Enforced compliance (Resistance, Braithwaite, 2003) Voluntarycooperation(Commitment, Braithwaite, 2003) 7 6 5 High power Voluntarycooperation 4 Low power 3 2 1 High trust Low trust Covariates: sex = .54, age = 23.68, income = 1.71

28. Online Experiment: N = 41 females & 86 males; self employed taxpayers 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 cooperation (α = .93; Commitment, Braithwaite, 2003) → Strategic evasion (α = .83) Study 2

29. 7 6 5 High power Compliance 4 Low power 3 2 1 High trust Low trust Study 2: Results (Compliance)

30. 7 6 5 High power 4 Enforced compliance Low power 3 2 1 High trust Low trust 7 6 5 High power Voluntarycooperation. 4 Low power 3 2 1 High trust Low trust Study 2: Results Enforced compliance (Resistance, Braithwaite, 2003) Voluntarycooperation(Commitment, Braithwaite, 2003) Covariates: sex = 0.32, age = 38.54, income = 2.87

31. 7 6 5 High power Strategic evasion 4 Low power 3 2 1 High trust Low trust Study 2: Results (strategicevasion)

32. Study 3 Survey in Austria Representative sample of selfemployed: N = 491 Questionnaire (7-point answering scales): → Trust (α = .89 - .91) → Power (α = .70 - .77) → Enforced compliance (α = .47 -.61) → Voluntary cooperation(α = .50 - .74)

33. Taxcomplianceby power of authorities and trust in authorities

34. Enforcedcomplianceby power of authorities and trust in authorities Voluntarycooperationby power of authorities and trust in authorities

35. Cross-culturaltesting of the SSF (44 countries study) Experimental testing of the mainassumptions of the slipperyslopeframework in 44 countries on 5 continents

37. Sample Cross-culturaltesting of the SSF (44 countries study)

38. Scenarios Manipulation of TRUST (high/low) & POWER (high/low) …Varosia’slegislation is [not] transparent and the government offers [no] the opportunity of free counselling on judicial subjects and tax issues in information centers. Furthermore, Varosia’s public authorities are [little] very service-oriented and [not] interested in supporting Varosia’s citizens… [TRUST] …The chance to be audited for self-employed people is very [low] high. This is to say that self-employed are [not] audited very often. Therefore, [not] very many of the committed tax offences can be detected… [POWER]

39. Scales / Items • Manipulation checks:trust & power (3 items) • “The governmental authorities in Varosia act fair towards their citizens.” • “The governmental institutions in Varosia are very effective in the suppression of tax criminality.” • Intendedtaxcompliance (3 items) • “How likely would you pay your tax completely honest?” • Voluntarytaxcompliance (5 items) • “When I pay my taxes in Varosia as required by the regulations, I do so to support the state and other citizens.” • Enforcedtaxcompliance (5 items) • “When I pay my taxes in Varosia as required by the regulations, I do so because a great many tax audits are carried out.”

40. Results I: Manipulation checks TRUST: Mean (SD) Low vs. high trust: 2.82 (1.61) vs. 6.27 (1.77) F(1, 14661) = 16402.14, p < 0.001, η2= .53 POWER: Mean (SD) Low vs. high power: 3.05(1.74) vs. 6.85(1.79) F(1, 14661) = 19070.65, p < 0.001, η2= .57 INTERACTION TRUST x POWER: Significant (positive) influence of trustmanipulation on perceived power and viceversa SAME PATTERN OF RESULTS IN EACH COUNTRY

41. Results II: Intendedtaxcompliance Multivariate ANOVA: Trust: F(3, 14370) = 576.35, p < 0.001, η2= .12 Power: F(3, 14370) = 2374.46, p < 0.001, η2= .36 Significanteffect of thecovariategender: womenaremorecompliantthanmen!

42. Results of analyses of variance EnforcedCompliance • 29,5% of 98,2% of varianceareexplainedbythe experimental condition • 4,8% of 1,8% of varianceareexplainedbythecountry Voluntary Compliance • 9,3% of 95,5% varianceareexplainedbythe experimental condition • 0,1% of 4,5% varianceareexplainedbythecountry Intended Compliance • 17,7% of 95,5% varianceareexplainedbythe experimental condition • 0,3% of 4,5% varianceareexplainedbythecountry Trust • 53,8% of 99,3% varianceareexplainedbythe experimental condition • 5,8% of 0,7% varianceareexplainedbythecountry Power • 54,9% of 99,8% varianceareexplainedbythe experimental condition • 6,8% of 0,2% varianceareexplainedbythecountry

46. Trust > power Bhutan Egypt * France Ghana India * Indonisia* Iran * Israel Lithuania Power > trust Australia Austria Brazil Canada China Colombia Finland Germany Greece Hong Kong Hungary Iceland Ireland Italy Japan Malta Poland Portugal Russia Slovenia South Africa South Korea Spain Sweden Switzerland Thailand UK USA Mexico * Marocco Norway Pakistan * Romania Turkey UAE (* relevant difference)

47. Corruption Corruption Perception Index Trust Power

48. Shadow Economy Shadow Economy Index Trust Power

49. Happiness Veenhoven Happiness Trust Power

50. Note: SWB istheextendofsatisfactionwithlifeasinferredfromthe World Database ofHappiness; itisdisplayed on thez-Axis andthemanifestations per countryareshown in a coloredspectrum on therightsideofthefigure.