Erich KirchlerUniversity of Vienna, Austria

TARC Master ClassLondon - 2014

Tax Psychology (5)Slippery Slope Framework

- Type of tax: Income tax (VAT, inheritance tax etc.)- Actors in the field: The “tax-interaction” context- Tax behaviour research: Shift of attention from

authoritarian-punitive to cooperate interactionDecisions under risk Social dilemma Differential perspectives Psychological contract Interaction climate

Research focus and paradigms

Government

Tax authorities

Tax accountants

Taxpayer

Taxpayer Taxpayer Taxpayer

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)

Actors in the field: The “tax-interaction” context

Change of research perspectives• 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)

Fines, audits

Moral, norms, fairness

Occupation, age, motivation

Intrinsic motivation, tax authority’s interaction style

Antagonistic vs synergistic tax climate; power, trust

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.

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.

Social norms .....

THE BEHAVIORALIST AS TAX COLLECTOR:USING NATURAL FIELD EXPERIMENTS TO ENHANCE

TAX COMPLIANCE

Michael HallsworthJohn A. List

Robert D. MetcalfeIvo Vlaev

Working Paper 20007http://www.nber.org/papers/w20007

NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue

Cambridge, MA 02138March 2014

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

Fairness

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)

Distributive justice

Procedural justiceProcedural 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.

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.

What shall be done to improve tax compliance ?

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.”

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

Method

2. Correlation between service orientation and tax compliance

• Private taxpayers: r = .22, p < .001• Entrepreneurs: r = .22, p < .001

4. Mediation analyses:Private taxpayers

Sobel test: z = 2.57, p < .01Sobel test for mediation analyses with control variables (socio-demographic, economic and psychological): z = 2.20, p < .05

Service Tax compliance

Trust0.74*** 0.13**

(0.22***) 0.12**

4. Mediation analyses:Entrepreneurs

Sobel test: z = 3.72, p < .001Sobel test for mediation analyses with control variables (socio-demographic, economic and psychological): z = 1.80, p < .05

Service Tax compliance

Trust0.73*** 0.14**

(0.22***) 0.11**

Taxpayers

Tax authority

Government

Power &Trust

Voluntary cooperation vs enforced compliance

View of system:Authorities

Individuals and groups interacting in social system

Inte

ract

ion

clim

ate;

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gmen

tatio

n an

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Interaction climate (Integration of economic and psychological perspectives

Slippery Slope Framework

Power : Antagonistic climate„Cops and robbers“ orientation• High social distance• No respect• Negative emotions• Cost-benefit calculation• Enforced compliance

Trust : Synergistic climate„Service & client“ orientation• No social distance• Mutual respect• Positive emotions, trust• Feeling of responsibility• Voluntary cooperation

Tax climate

Key elements

• Power of authorities: Perceived potential of tax authorities to detect and to punish evasion

• 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 cooperation

Power of Authorities

Maximum

Minimum Minimum

Trust in Authorities

Maximum

Compliance

Minimum

Maximum

Enforced Tax Compliance

Voluntary Tax Cooperation

Compliance

Minimum

Maximum

Kirchler, Hoelzl and Wahl (2008)Slippery Slope Framework of Tax

Compliance

Power of Authorities

Maximum

Minimum Minimum

Trust in Authorities

Maximum

Compliance

Minimum

Maximum

Enforced Tax Compliance

Voluntary Tax Cooperation

Compliance

Minimum

Maximum

Kirchler, Hoelzl and Wahl (2008)Slippery Slope Framework of Tax Compliance

Synergistic climate

Subjective complexity of tax lawTax morale and attitudesPersonal, social and societal normsFairness considerationsMotivational postures

Antagonistic climate:Command and controlAuditsFines

OECD From Enhanced Relationships to

Co-operative Compliance

Revenue bodies and their relationships with taxpayers and tax intermediaries need to be built on the principle of reciprocity in which all parties can seek to co-operate within a framework that both recognises the statutory obligations and protections available and can go beyond these to produce better participation and tangible benefits for each party.

+ disclosure and transparency, with all parties being open to enhanced level od dialogue and co-operation to allwo collaboration in the identification and resolution of areas of risk and concern; and

+ mutual co-operation in advancing enquiries and reaching proportionate resolutins quickly and with finality.

HORIZONTAL MONITORING (e.g., Austria, Slovenia, The Netherlands)

22

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.

Scenarios

Trust• Procedural fairness• Distributive fairness• Positive social

representations• Transparency• Social norms

Power• Audit probabilities• Efficiency of audits• Amount of fines• Budget of tax office• Competence of tax office

Studies: Laboratory experiment and online experiment

Manipulation

Study 1Laboratory 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

Study 1: Results

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600

800

1000

1200

1400

High trust Low trust

Me

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High power

Low power

Covariates: sex = .54, age = 23.68, income = 1.71

Study 1: Results

Voluntary cooperation (Commitment, Braithwaite, 2003)

Enforced compliance (Resistance, Braithwaite, 2003)

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High trust Low trust

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High power

Low power

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High trust Low trust

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High power

Low power

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

Study 2: Results (Compliance)

1234567

High trust Low trust

Co

mp

lian

ce

High power

Low power

Covariates: sex = 0.32, age = 38.54, income = 2.87

Study 2: Results

Voluntary cooperation (Commitment, Braithwaite, 2003)

Enforced compliance (Resistance, Braithwaite, 2003)

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High trust Low trust

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Low power

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High trust Low trust

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High power

Low power

Study 2: Results (strategic evasion)

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High trust Low trust

Str

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High power

Low power

Survey in Austria

Representative sample of self employed: 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)

Study 3

Tax compliance by power of authorities and trust in authorities

Enforced compliance by power of authorities and trust in authorities

Voluntary cooperation by power of authorities and trust in authorities

Cross-cultural testing of the SSF (44 countries study)

Experimental testing of the main assumptions of the slippery slope framework in 44 countries on 5 continents

Africa Asia Europe North America

Australia South America

EgyptGhana

MoroccoSouth Africa

BhutanChina

Hong KongIndia

IndonesiaIran

IsraelJapan

PakistanRussia

South KoreaThailandTurkeyUAE

AustriaFinlandFrance

GermanyGreeceHungaryIceland

ItalyLithuania

MaltaNorwayPoland

RomaniaSlovenia

SpainSweden

Switzerland

CanadaMexico

USA

Australia BrazilColombia

Sample

Countries 44

N (economics students) 14,694

N per Country 326

M (SD) Age 21.49 (3.30)

Female percentage 52%

Studies 88%

Cross-cultural testing of the SSF (44 countries study)

Scenarios

Manipulation of TRUST (high/low) & POWER (high/low)

…Varosia’s legislation 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]

• 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.”

• Intended tax compliance (3 items)– “How likely would you pay your tax completely honest?”

• Voluntary tax compliance (5 items)– “When I pay my taxes in Varosia as required by the regulations, I do so

to support the state and other citizens.”

• Enforced tax compliance (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.”

Scales / Items

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 trust manipulation on perceived power and vice versa

SAME PATTERN OF RESULTS IN EACH COUNTRY

Results I: Manipulation checks

Multivariate ANOVA:Trust: F(3, 14370) = 576.35, p < 0.001, η2 = .12Power: F(3, 14370) = 2374.46, p < 0.001, η2 = .36Significant effect of the covariate gender: women are more compliant than men!

Power Low/ Trust Low

Power High/ Trust Low

Power Low/ Trust High

Power High/ Trust High

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Intended Tax ComplianceVoluntary Tax ComplianceEnforced Tax Compliance

Inte

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Results II: Intended tax compliance

Results of analyses of varianceEnforced Compliance• 29,5% of 98,2% of variance are explained by the experimental condition• 4,8% of 1,8% of variance are explained by the country

Voluntary Compliance• 9,3% of 95,5% variance are explained by the experimental condition• 0,1% of 4,5% variance are explained by the country •  

Intended Compliance • 17,7% of 95,5% variance are explained by the experimental condition• 0,3% of 4,5% variance are explained by the country

 

Trust• 53,8% of 99,3% variance are explained by the experimental condition• 5,8% of 0,7% variance are explained by the country

Power• 54,9% of 99,8% variance are explained by the experimental condition• 6,8% of 0,2% variance are explained by the country

Power > trustAustraliaAustriaBrazilCanadaChinaColombia FinlandGermanyGreeceHong KongHungary IcelandIrelandItalyJapanMaltaPolandPortugalRussiaSloveniaSouth Africa

South KoreaSpainSwedenSwitzerlandThailandUK USA

Trust > powerBhutan Egypt *FranceGhanaIndia *Indonisia *Iran *IsraelLithuania

Mexico *Marocco NorwayPakistan *RomaniaTurkeyUAE

(* relevant difference)

Corruption Perception Index

Variable B SE B β

Constan

t

56.80 1.46  

Trust 9.56 2.44 .50***

Power 7.87 2.44 .41**

R2   .75  

F   62.21***  

Note. N = 44

**p < .01. ***p < .001.

Corruption

Trus

t

Power

Cor

rupt

ion

Per

cept

ion

Inde

x

  Shadow Economy Index

Variable B SE B β

Constan

t

22.98 1.12  

Trust -2.51 1.86 -.27

Power -3.55 1.86 -.38

R2   .39  

F   12.95***  

Note. N = 44

***p < .001.

Shadow Economy

Trus

t

Power

Sha

dow

Eco

nom

y In

dex

  Veenhoven Happiness

Variable B SE B β

Constan

t

6.69 .11  

Trust .165 .18 .18

Power .468 .18 .50*

R2   .42  

F   14.75***  

Note. N = 43

*p < .05. ***p < .001.

Happiness

Trus

t

Power

Vee

nhov

en H

appi

ness

Note: SWB is the extend of satisfaction with life as inferred from the World Database of Happiness; it is displayed on the z-Axis and the manifestations per country are shown in a colored spectrum on the right side of the figure.

Strategic regulation

“State regulation implies that governments act … in the ‘public interest’ …” (Freiberg, 2010, p. 5).

According to Arie Freiberg “Regulation is essentially about the use of power (Freiberg 2010, p. 84).

Power is defined as the potential and perceived ability of a party to influence another party’s behavior (e.g., Freiberg, 2010; French & Raven, 1959).

French and Raven (1959) and Raven (1965) developed a concept of bases of social power which distinguishes between

coercive power,

reward power,

legitimate power,

expert power,

referent power, and

information power.

Coercive power is related to the potential to punish and reward. It originates from the pressure applied through either punishment or remuneration.

Legitimate power originates from the legitimization of the authorities, expert knowledge, skills, access to information, and identification with the powerful party. In French and Raven’s (1959) theory it bases on legitimate power, expert power, information power, and referent power. Legitimate power operates through the accepted right to influence others by means of, for instance, agreed election rules, the norm of reciprocity (Gouldner, 1960), social responsibility, and equity norms (Berkowitz & Daniels, 1963).

Coercive power

Legitimate power

Impact of coercive and legitimate power on intended tax compliance

(Hofmann, Gangl, Kirchler & Stark, 2012)

Design: 2 (low vs high coercive power) x 2 (low vs high legitimate power)

Experimental online questionnaire:

4 Scenarios: low/high coercive & low/high legitimate power

e.g., tax authorities are lenient/strict toward tax evaders and in-/competent.

Scales (72 items): intended tax compliance, implicit trust, reason-based trust, antagonistic climate, service climate, enforced compliance, voluntary cooperation.

Convenience sample: 121 taxpayers

Sex: 50.4% females

Age: M = 38.77 years, SD = 12.15, range 20–68

Education: 47.9% university degree, 28.1% qualifications for university entrance

Employment: 61.2% employed, 38.4% self-employed

Results

Intended compliance:coercive power (CP)F(1, 117) = 1.00, p = .32legitimate power (LP)F(1, 117) = 23.67, p < .001, η2 = .17 Implicit trust:

CP: F(1, 117) = 0.37, p = .54LP: F(1, 117) < 2.02, p = .16

Reason-based trust:CP: F(1, 117) < 0.01, p = .95LP: F(1, 117) = 86.02, p < .001, η2 = .42

Enforced compliance:CP: F(1, 117) = 26.29, p < .001, η2 = .18LP: F(1, 117) = 2.51, p = .12

Antagonistic climate:CP: F(1, 117) = 1.80, p = .18LP: F(1, 117) = 75.86, p < .001, η2 < .39

Service climate:CP: F(1, 117) = 0.45, p = .51LP: F(1, 117) = 84.93, p < .001, η2 = .42

Voluntary cooperation:CP: F(1, 117) = 1.14, p = .29LP: F(1, 117) = 27.47, p < .001, η2 = .19

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Intended tax compliance

Voluntary cooperation

Enforced compliance

Implicit trust

Service climate

Antagonistic climate

Reason based trust

Power Low legitimateLow coercive

Power High legitimateLow coercive

Power High legitimateHigh coercive

Power Low legitimateHigh coercive

Dynamic aspects and regulation of interaction climateHypotheses and first empirical results

Power has both positive and negative effects on trust.

The exertion of power may evoke suspicion and mistrust in the group the measures are imposed on, which can lead to a vicious circle: mistrust of one party provokes mistrust of the other party, which justifies and deepens the mistrust of the first.

Power can have positive effects on trust. Bachmann (2001) for instance proposes that de-personalized forms of power (i.e., the power of a system) such as the law can be perceived as a necessary precondition for trust.

λ= .063

λ= .0

07

N = 500 self-employed61% maleAge: 20-65 yrsFebruary 2014

Perceived direction of (coercive) power and anticipated emotionsErich Kirchler, Katharina Gangl, Barbara Hartl, Eva Hofmann (2014)

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3

1 3 2

Items for Cluster Analysis:

As the tax authority takes targeted action against tax evaders, I am feeling protected by the authority.  As the tax authority indiscriminately takes action against all taxpayers, I’m feeling chased by the authority.  Who pays his/her taxes honestly, does not have to fear audits and fines.

Even who pays his/her taxes honestly, has to fear indiscriminate audits and fines.      

Diffuse threat- non compliance

Targeted action- compliance

Jeffrey Owens (OECD)

Workshop at the Economics University Vienna, December 2013

Problems of making good tax policy:

well-trained staff (train and keep them; salaries)

lack of dialog between commissioners & business (mistrust behavior)

lack of targeted research to benchmark and impose performance of tax administrators