Impact of Tax System on Compliance: Lessons from Australian Case Study

1. PA 546 Constantine Hadjilambrinos Does Using the Tax System to Collect Other Obligations Affect Tax Compliance?An Australian Case Study Lecture 11 November 15, 2005

2. PA 546 Constantine Hadjilambrinos Australian Federal tax agency is also responsible for collecting child support payments (CSS) and student loan obligations (HECS). • Similar proposals for U.S. systems, particularly for child support obligations. • Comparisons possible because both systems are taxpayer-active. • Article is interesting because it explores the motivations for voluntary compliance.

3. PA 546 Constantine Hadjilambrinos Motivation is to increase efficiency of collection of child support and student loans. • If collection of CSS and HECS through tax system is detrimental to voluntary compliance, there are hidden costs of collection.

4. PA 546 Constantine Hadjilambrinos Tax compliance traditionally understood in terms of benefits of successful evasion vs. costs of detection. • Monetary costs: fines and penalties. Cost = Risk of detection X Severity of fines and penalties • Social sanctions.

5. PA 546 Constantine Hadjilambrinos Fear not sufficient for explaining why people pay tax. Alternative/Complementary explanations: • Moral obligation—people pay tax because they believe it’s the right thing to do. Community norms, personal norms, tax morale • Perceived fairness of exchange—people pay tax because they trust government to use revenues to provide useful benefits. Contingent consent

6. PA 546 Constantine Hadjilambrinos Other factors known to affect tax compliance: • Age—Older taxpayers are less likely to cheat on taxes. • Gender—Women are less likely to cheat on taxes. • Income level—Poor people are more likely to cheat on taxes. Rich people are also more likely to cheat on taxes. When it comes to additional payments, it is reasonable to assume that likelihood of cheating will increase for poor people.

7. PA 546 Constantine Hadjilambrinos Hypotheses about the effects of adding child support and student loan payments • Additional payments have the effect of increasing the marginal tax rate. This increases the benefit to be derived from cheating—main effect hypothesis. • Additional payments could interact with constraints of deterrence, moral obligation, and trustworthiness, increasing incidence of cheating.

8. PA 546 Constantine Hadjilambrinos The survey • Mail survey—29% response rate • Measures—multi-item, multi-dimensional • Tax evasion: under-reporting income, engaging in cash economy, exaggerating deductions. • Additional payments: CSS and/or HECS. • Deterrence: perceived likelihood of getting caught, perceived likelihood of sanctioning, perceived severity of sanctions. • Moral obligation: personal norm of tax honesty, shame displacement and acknowledgement. • Trustworthiness: exchange trustworthiness, communal trustworthiness.

9. PA 546 Constantine Hadjilambrinos The results • Findings of previous research confirmed. • Only significant interaction relationships were with trustworthiness and with income level. • Tax evasion is higher after CSS and HECS payments, even after controlling for gender, age, income, and the constraint variables (deterrence, moral obligation, and trustworthiness—the main effect hypothesis is supported.