Henry S.J. Robben, Paul Webley, Henk Elffers, and Dick J. Hessing

A Cross-National Comparison of Attitudes, and Social

Personality, Behaviour, Comparison in Tax

Evasion Experiments

Abstract

This paper reports on an experimental study of tax evasion in which members of the Dutch public participated. Three variables were manipulated: type of social comparison (personal or categorical), nature of comparison (inferior, neutral, or superior), and the period in which the tax return was audited. In addition, participants completed a series of questionnaires based on the work of Hessing and Elffers (1985). No effects of type and nature of social comparison on the propensity to evade taxes and on the magnitude of taxes evaded were found. The frequency of tax evasion was positively correlated with alienation, competitiveness, disinhibition, and attitudes to tax evasion and negatively correlated with age. The magnitude of tax evasion was positively correlated only with alienation and competitiveness. This pattern of correlations is generally similar to findings obtained in research on documented tax evasion behaviour, although in contrast to the latter research, attitudes towards tax evasion were significant correlates of experimental evasion behaviour. These findings were also broadly comparable to a similar British experimental study except that tax evasion was more frequent in the Dutch sample.

The authors want to thank Marion van Engelen for collecting most of the data. Stephen Lea's help in converting the computer programme is greatly appreciated.

Authors' addresses: Henry S.J. Robben, Henk Elffers, and Dick J. Hessing, Erasmus University, Faculty of Law, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands; Paul Webley, Department of Psychology, Washington Singer Laboratories, University of Exeter, Exeter EX4 4QG, England.

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Tax Evasion Experiments

Introduction

Tax evasion is a serious problem for revenue authorities (estimates of the percentage of gross national product that evades taxation range from 4% to 25%) and one that has both economic and psychological aspects. Economic approaches to evasion have generally assumed that people are rational decision makers and have treated evading income tax as formally equivalent to buying a risky asset with a particular rate of return. Such models usually involve objective variables such as fine rates and the probability of detection (e.g., Allingham & Sandmo, 1972). By way of contrast, psychological and sociological models have usually concentrated on subjective and societal variables, such as perceived risks, attitudes towards evasion, and social norms. Furthermore, instead of regarding motivation as given, they are concerned with individual differences in predispositions to evade (for a review of different approaches, see Hessing, Elffers, Weigel, & Kinsey, 1988).

This, rather caricatured, difference also extends to the investigative methods employed. Surveys and other self-report methods have been extensively used by sociologists and psychologists whereas economists have preferred econometric modelling. Recently, however, a shared interest in laboratory experimentation has developed (Friedland, Maital, & Rutenberg, 1978; Spicer & Becker, 1980; Webley, Morris, & Amstutz, 1985). Furnham and Lewis (1986) discuss some "obvious weaknesses" of t~e simulation studies reported up to now. They suggest that the relationship between simulation and reality is not perfect, and that usually small samples have been used, more often than not consisting of students instead of "long-standing" taxpayers. However, they conclude that experimental studies could be useful if these weaknesses were rectified and "subjective" variables, i.e. attitudes and perceptions, were studied as well as "objective" variables, such as tax rates and probability of detection. This paper describes such a study, based on that of Webley, Robben, and Morris (1988). They made some important improvements on earlier simulations. A sample of the general public was used, measurements of attitudes and personality variables were obtained, and subjects were presented with an environment in which some economic parameters were present but not manipulated.

The fact that experimental studies of tax evasion do not fully match the real-life situation does not lessen the value of the approach. The aim

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in tax evasion experiments is not so much to create "mundane realism" (Aronson & Carlsmith, 1968) as a convincing experimental psychological realism. In an experiment one is trying to devise an instrument with which a certain behaviour (or part of it) may be measured more validly and/or reliably than by current questionnaire methodology. The hazards of relying on self-reports when investigating tax evasion behaviour have been demonstrated by Elffers, Weigel, and Hessing (1987). With the quite exceptional help of the Dutch Ministry of Finance and using a very complicated methodology to guarantee confidentiality, they studied two carefully audited groups of individuals; one group who had made accurate returns, the other who had evaded tax. They showed that documented and self-reported tax evasion did not correspond at all; furthermore, personality variables predicted documented evasion whereas attitudes and subjective norms correlated with self-reported evasion. Thus it is not possible to take at face value respondents' answers to the question whether they have evaded taxes when filing a tax return. The method Elffers et al. describe to explore these inconsistencies is, however, difficult to implement and requires cooperation by the tax authorities. Experimental studies may be able to fill part of the gap between the easy administrable surveys and this more difficult approach.

To further develop the experimental approach, information is needed on how well such studies do in comparison to survey and documented-behaviour research. The Webley et aL (1988) study showed that similar personality variables predict evasion within an experiment as predict documented evasion. This cross-validation certainly adds to the credibility of results obtained using an experimental approach.

Social Comparison and Tax Evasion

Tax evasion has been linked to a number of social psychological variables, such as social influence, equity, normative pressures, and social comparison. In the case of inequity, people perceive a difference in fiscal treatment between themselves and others in similar positions. Tax evasion is associated with feelings of inequity (Warneryd & Walerud, 1982). Other effects of the social environment include the influence of other people on the individual taxpayer's behaviour. Spicer and

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Lundstedt (1976), for example, have shown - using surveys - that self­reported tax evasion is positively related to the number of people one knows to have evaded taxes. One should, however, be cautious in interpreting these findings as causal explanations of tax evasion, as they may constitute rationalizations on the respondents' part.

Comparing oneself with others may thus influence individual taxpaying behaviour. In this paper, social comparison theory (more specifically Rijsman's, 1974, 1983, elaboration of Festinger's, 1954, theory) was used to derive hypotheses about tax evasion behaviour. As will be made clear below, in the experiment subjects had to carry out a rather complex business management task. The rationale behind this was to investigate the question of whether people (taxpayers) refer to the position of others in order to obtain cues about how to behave in this particular situation. As almost everyone who took part had no personal experience of conducting a business, they would find it difficult to judge their performance during the business management task. A comparison standard is then needed as no objective information is present for the subjects (Festinger, 1954).

In the present experiment, participants had to manage a small shop and make decisions regarding advertising, information acquisition, pricing of products, and fiscal matters. Subjects were given information about their performance in relation to other individual (imaginary) participants. This information constituted the comparison standard which classified subjects' performance either as inferior, similar, or superior to the competitors' performance. This standard was presented quite saliently as it was expected that subjects would need to evaluate their business results in order to establish their dis/satisfaction with the "reward" for their performance (von Grumbkow & Wameryd, 1986, p. 235). Presenting subjects with this information is believed to induce a motivation in them to change their behaviour in order to change their relative position. Changes are dependent on the relative position occupied by the comparison others and whether comparison takes place at an individual or group level. Given that people like to have as high an income as possible, one could consider obtaining income as an ability of a certain kind (in the present experiment certainly, but perhaps even more so in real life). In Festinger's (1954) terms, abilities and opinions form a basis on which people compare themselves with others in order to gain a positive image of themselves. The situation subjects were presented with

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may be characterised as a forced comparison of a competitive nature (Wheeler & Zuckerman, 1977).

Cross-national investigations may be undertaken to exploit natural differences in independent variables or to ascertain the extent to which theories and findings are general or confined to specific socio-cultural settings. The present study is of this second type. An important aim of this research was to describe the results of the present investigation in the light of previous research. This comparison should yield evidence on the cross-validation of the experimental technique.

Method

Subjects

A random sample from the local telephone directory was made of telephone numbers starting with a pre-selected code. Then a letter was sent inviting the recipient (or one of his family members over 21 with job experience) to participate in an economic behaviour research project involving microcomputers. A few days after this mailing the recipients were contacted by telephone and asked personally whether they were inu rested in taking part. Of 291 persons contacted, 22 women and 50 mel· agreed to participate, a response rate of just under 25%. The subjects were aged between 21 and 71, with an average of 40 years. All subjects were tested individually.

Design

Three between-groups factors were employed in the study, type of comparison (individual, categorical), nature of comparison (inferior, similar, superior), and period in which the tax return was audited. The first factor was manipulated by informing subjects that their business results were to be compared with those of another individual subject, or by telling subjects they were allocated to a cooperative of shop-keepers, whose results would be compared with those of another cooperative. Subjects were led to believe that the comparison thus was to be made on an individual performance level or a collective performance level.

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By informing subjects that their performance was either inferior, similar, or superior to their competitors' performance, the second factor was operationalised. The performance of the subject in terms of net income was explicitly presented at the end of each period and at the end of each year. In the latter case, a statement about the subject's position relative to the comparison otherls was made. This information about relative performance was independent of subjects' actual performance and was stable across the years, Le., subjects always received information pertaining to their initial relative position.

During the simulation, each subject was audited once; the audit occurred either in the first, fourth, seventh, or eleventh period.

The dependent measures were (a) the overall frequency of underdeclaring and the overall percentage of income declared, (b) the frequency of underdeclaring and the percentage of income declared in each of the three years of the simulation (there were four periods per year), and (c) the difference between the evasion measures for years 1 and 2, and for years 2 and 3.

Procedure

The study was divided into two parts, the first being the shop simulation and the second involving completing a questionnaire measuring sociodemographics, attitudes, norms, perceptions, personality attributes, and risk taking behaviour. Both parts took, on average, the same amount of time to complete for the subjects, 83 minutes in alL

To maximise comparability the shop simulation was the same as in Webley et al.'s (1988) second study with the text carefully translated into Dutch. After some information on how to operate the computer the subjects read, from the computer screen, instructions about the shop simulation. In brief, they were told to imagine that they had set themselves up as shopkeepers and would have to make a series of decisions (e.g., about the selling prices of their products) over a three year period. During the simulation they made pricing decisions on two product lines for each quarter of each year (twelve in all) and declared their income, also on a quarterly basis. In each quarter subjects were able to buy information (e.g., about seasonal variations in sales) and decide whether to advertise or not. At the end of each quarter the subjects were

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informed whether they had been audited or not and their gross income, net income, and fines to date displayed. People were instructed to act as they themselves saw fit under the present circumstances, and to try to run their business as successfully as possible.

The questionnaire measured attitudes toward underreporting income and toward claiming unwarranted deductions (using semantic differentials, see Elffers et aI., 1987), alienation (Zeller, Neal, & Groat, 1980), disinhibition (Hauber, Toomvliet, & Willemse, 1986, after Zuckerman, 1979), social support (a one item measure asking how people in the direct environment would react to the respondents' possible tax evasion behaviour: negative, indifferent, or positive), and social orientation (Liebrand, 1982).

Subjects received a bottle of red wine for their participation in the simulation study. For completing the questionnaire they were given a choice between a lottery-ticket with a chance of 1 in 100 of winning 100 guilders, a ticket with a chance of 1 in 25 of winning 25 guilders, and an unconditional reward of 2.50 guilders. This choice constituted a measure of behavioural risk-taking by the subjects. Prizes were paid immediately in cash or transferred by bank.

Hypotheses

Based on Rijsman's (1974, 1983) social competItIOn theory two hypotheses were formulated about subjects' behaviour during the simulation. For subjects in the personal comparison condition, those in the inferior or equal performance conditions were expected to change their tax behaviour so as to obtain a higher income. Tax evasion would be more pronounced in these conditions than in the superior performance condition. The idea behind this is that people seek to distinguish themselves from others in a positive sense; they want to perform better. If people are already performing in a superior way, this drive necessarily will be less than when performing equally or in an inferior way.

For the subjects in the categorical comparison condition the reverse was expected; people in the superior condition would show a greater change in tax evasion behaviour than subjects in the inferior and equal performance conditions. Essential to this notion is the idea that "the only feasible way to build up ... similarity with the status of the own category is

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to perform as the category does" (Rijsman, 1983, pp. 290-291). Conversely, for the inferior and equal conditions, this tendency to identify with the own category will be absent or very weak.

What was expected then, was interaction between type and nature of social comparison with regard to the changes in tax evasion behaviour elicited from year to year in the experiment.

Previous research showed a possibly larger deterrent effect when tax returns were audited earlier in taxpayers' careers. For instance, Webley et al. (1988) included the period in which a SUbject's return was audited as an exploratory variable. They found an indication that early audits were associated with less evasion, but not significantly so. The present study included an identical variable to explore this issue further.

Results

Simulation Data

First, the data obtained in the simulation were analysed using 2 x 3 x 4 analyses of variance with type of comparison (individual, categorical), nature of comparison (inferior, similar, superior) and period in which the audit occurred as between groups factors and the overall frequency of underdeclaring and overall percentage of income declared as dependent measures. The effect of nature of comparison nearly reached significance for the percentage of income declared (F = 2.93, df = 2,48, p <.063) and a significant interaction was found between nature of comparison and the audit variable for frequency of underdeclaring (F = 2.73, df = 6, 48, p < .05) and for percentage of income declared (F = 2.79, df= 6, 48,p <.05). This interaction is somewhat complicated (see Table 1), but to simplify a little, those in the neutral and inferior conditions on average evaded more when audited in later periods (4th, 7th, or 11th) than when audited in the first, whereas for those in the superior condition this pattern was reversed. No other significant effects were found. With regard to the measures of change in tax evasion behaviour, no significant main or interaction effects were obtained.

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Table 1: Frequency of Evading Taxes as a Function of Nature of Comparison and the Audit Variable

Nature of comparison Period in which audit occurred 1

Inferior Similar Superior

1

4.8 2.3 6.8

4.6

1 Selected quarters in a three year period.

Questionnaire Data

4

4.3 4.3 3.4

4.0

7

7.3 4.9 6.0

6.1

11

4.4 4.7 3.3

4.1

5.2 4.1 4.9

Table 2 shows the significant correlations between the various measures and tax evasion. Attitudes towards not reporting income and towards claiming unwarranted deductions, a strong sense of not

Table 2: Variables Significantly Related to Experimental Tax Evasion Behaviour

Variable Correlation Percentage not reported

Agel -.21

Employment status2 -.23

Alienation3 .46 .23

Disinhibition3 .29

Competitiveness3 .27 .29

Not reporting all income3 .37

Unwarranted deductions3 .30

1 In years. 2 1 = Having a job, 2 = without a job. 3 A high score indicates a stronger presence of that characteristic.

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belonging to our society, a self-serving rather than other directed orientation (competitiveness), and a tendency to express oneself with socially proscribed behaviours (disinhibition) were all positively associated with frequency of underdeclaring. The percentage of income not declared was correlated with the alienation and the self-serving orientation measures. No relationships between the personality or attitude variables and the measures of change in tax evasion were found.

Cross-National Comparisons

The experimental results of this study can be compared to those of Webley et al. (1988), as the simulation is an exact replication. In both studies there were no significant effects of social comparison on any of the dependent measures. There is, however, a striking difference between

Table 3: Correlations Between Attitudes, Subjective Norms, Personality Attributes, and Tax Evasion Behaviour During the Simulation in Three Different Studies

Variables Tax evasion behaviour

Robben et al. Webley et al. Hessing & Elffers

Attitudes

Underreporting income .37 n.s . n.s.

False deductions . 30 n.s. n.s.

Subjective norms

Social support n.s. n.s. n.s.

Personality attributes

Alienation .46 .28 .22

Competitiveness .27 n.s . .17

Disinhibition . 29

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the samples. In the Dutch sample far more evaders were present than in the British sample: 52 out of 72 evaded at least once compared to 30 out of 72 in the British sample ( X2 = 12.5, df = 1, P < .00 1).

The present data can also be compared with questionnaire data from Webley et al. and the findings of Elffers et al. (1987) (Table 3). Unlike the Elffers et al. and the Webley et al. studies, attitudes towards evading taxes by underreporting income and by overstating deductions correlated significantly with the number of periods in which tax was evaded. In the Webley et al. study competitiveness (self-serving orientation) was not positively related to tax evasion behaviour, whereas in this study it is, in accordance with the Hessing and Elffers (1985) model.

Discussion

As in previous experiments in which the effects of social comparison on tax evasion behaviour were investigated, no significant results were obtained (Webley, Morris, & Amstutz, 1985; Webley, Robben, & Morris, 1988) for any of the measures of tax evasion. One reason for this may be that the subjects clearly were not aware of the real (and hidden) meaning of the experiment. Research by Rijsman (1974,1983) has shown that the predicted effects are obtained when the comparison dimension is made explicit to the subjects but, for obvious reasons, in this study tax evasion was not made salient to the subjects. However, nor on the dimension with respect to which they thought they were compared (final net income), were there any effects of social comparison although subjects were explicitly informed about their relative position. It thus appears that the social comparison variables did not motivate subjects to change their evasion behaviour.

From Table 2 we see that the decision to evade taxes (as represented by the frequency variable) and the magnitude of tax evasion are clearly distinct in that they are related to different demographic and personality variables. Only the alienation and self-serving orientation measures seem to form shared influencing parameters. The results suggest that people who are young, with a job, not society-oriented and with positive attitudes towards the behaviour are most likely to be associated with tax evasion behaviour. In contrast with other tax evasion experiments (Spicer & Becker, 1980; Spicer & Hero, 1985), no effect of sex was found on

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either the decision to evade taxes or the size of the misrepresentation of income.

By contrasting the present results with those obtained in research on documented tax evasion behaviour, one can get some idea of how well the experimental data match the pattern of variables that have been useful in explaining real behaviour. Webley et al. (1988) reported a similar comparison which generally supported the model delineated by Hessing and Elffers (1985). The Webley et al. and Hessing and Elffers studies indicated that personality variables represented the strongest correlates of tax evasion behaviour, with attitudinal variables being of little importance. In this study, on the other hand, attitudes toward evading tax correlated significantly with tax evasion behaviour. A possible explanation might be that in the present study, unlike the earlier ones, tax evasion behaviour and attitudes toward that behaviour were measured within a short time of each other. This may have made it more likely that subjects would provide answers to the attitude items that were congruent with their behaviour.

Conclusions

The results of the experiment showed that there were no effects of social comparison on tax evasion behaviour in either sample. This replicates the findings of Webley et al. (1988), and suggests that social comparison may have little influence on tax evasion behaviour. This is further accentuated by the absence of any association of the social support variable. Not only were subjects (in both samples) indifferent to the social comparison variables, but their perception of how others in their environment would react to their evading taxes was not related to tax evasion in the experiment.

The existence of significant behavioural differences between the national samples may stimulate (experimental) cross-national research on tax evasion. However, it seems that the different ratios of evaders and non-evaders may have an impact upon these differences, indicating that caution should be exercised in similar investigations.

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