The backfiring effect of auditing on tax compliance

Using country-level data from 2003–2014, we examine the association between auditing level (measured as number of verification actions taken by tax authorities per 100 taxpayers in each country) and tax compliance (measured as business executives’ perception of tax evasion). Our hypothesis is that compliance increases until a certain auditing level is reached, and decreases beyond that level (i.e., an elevated auditing level backfires). In line with our expectation, the results of a series of tests indicate that there is a U-shaped association between auditing and tax evasion. We discuss how a potential backfiring effect may depend on the extent to which compliance is voluntary.     

Social norms and tax compliance: Framing the decision to pay tax

Observed levels of tax compliance are higher than predicted levels (when predictions are based on Allingham and Sandmo's neoclassical model of tax evasion). They are higher if social norms recognise the importance of compliance. But how do social norms frame decisions to pay tax? Can prospect theory be applied to shed insight into the way that social norms exert their influence? An analysis of questionnaire responses (from Italy and from the UK) suggests that they exert their influence by changing the reference points that individuals use when they code changes as ‘gains’, or ‘losses’. The evidence suggests that social norms frame the decision to pay tax by changing individuals’ perceptions of their entitlement to income. This consideration is important when designing policy to deter evasion.     

The slippery slope framework on tax compliance: An attempt to formalization

Kirchler, Hoelzl, and Wahl (2008) presented with the so-called ‘slippery slope’ framework a new approach to understand tax compliance. The slippery slope approach supposes two routes to tax compliance: deterrence of tax evasion by audits and fines on the one hand, and building a trusting relationship with taxpayers by services and support on the other hand. In this paper, the slippery slope framework is formalized by assuming two groups of taxpayers: compliance-minded and evasion-minded persons. Defining reaction functions for persons of both groups with respect to coercive and persuasive power instruments of tax authorities, the typical slippery slope picture emerges that characterises the authorities’ work. As a consequence, both groups of policy tools are considered necessary to generate tax compliance. In addition to that, it is shown that coercive and persuasive power may be substitutes or complements to each other, depending of the parameters of the taxpayers’ reaction functions. As a further crucial determinant of tax compliance, the behaviour of the fellow citizens with respect to taxpaying is identified.     

Misperceptions of social norms about tax compliance: From theory to intervention

Taxpayers may estimate others’ acceptance of tax evasion as being greater than their own. This self–other discrepancy in tax ethics could undermine people’s tax compliance as they conform to the misperceived social norm. Feedback about the self–other discrepancy could correct the misperception and improve compliance. This approach was first tested in a scenario study with 64 students. Respondents showed the expected self–other discrepancy in tax ethics and feedback about the finding increased their hypothetical compliance. Further results showed that the effect was due to the intervention improving the perception of others’ tax ethics, as expected. Study 2, a field experiment with 1500 Australian taxpayers, replicated the self–other discrepancy and provided taxpayers with information about the result. Compared to control groups, the feedback did not affect work-related expenses claims but significantly reduced other deduction claims.     

The effects of official and unofficial information on tax compliance

The administration of tax policy has shifted its focus from enforcement to complementary instruments aimed at creating a social norm of tax compliance. In this paper we provide an analysis of the effects of information regarding the past degree of tax evasion at the social level on the current individual tax compliance behavior. We build an experiment where subjects declare their income after receiving either a communication of the average tax evasion rate (“official information”) or a private message from a group of randomly matched peers about their tax behavior (“unofficial information”). We use the experimental data to estimate a dynamic econometric model of tax evasion and find three main results. First, tax compliance is very persistent, but less so in the presence of information. Second, the higher the officially communicated past tax evasion rate, the higher the degree of persistence: former evaders are more likely to evade again (and evade more), and former compliant individuals are more likely to comply again (and, when evading, evade less). Third, when an unofficial communication of past evasion (compliance) from all their peers is received, both former evaders and compliant individuals are more likely to evade (comply) again.     

A self-interest analysis of justice and tax compliance: How distributive justice moderates the effect of outcome favorability

Compliance with tax authorities has been studied mainly in the fields of economics and psychology. The focus has respectively been on self-interest motives and justice concerns in tax compliance. We argue that both concerns are less divergent than is often thought. Specifically, we studied the moderating role of distributive justice on the relationship between outcome favorability and tax compliance in two cross-sectional surveys. It is generally believed that favorable outcomes increase compliance because they decrease what can be gained from non-compliance. The present research addresses the role of distributive justice in this process. Since people believe that distributive fairness guarantees their long-term outcomes, favorable present outcomes now imply favorable future outcomes and unfavorable present outcomes now imply unfavorable future outcomes. Thus, we expected fair outcomes to result in a strong relationship between outcome favorability and compliance. On the basis that unfair outcomes are believed to result from chance, outcome favorability should have a weaker relationship with compliance when outcomes are unfair. Even when controlling for other variables, this prediction was supported by both studies.     

An agent-based model of network effects on tax compliance and evasion

Agent-based models are flexible analytical tools suitable for exploring and understanding complex systems such as tax compliance and evasion. The agent-based model created in this research builds upon two other agent-based models of tax evasion, the Korobow et al., 2007, Hokamp and Pickhardt, 2010 models. The model utilizes their rules for taxpayer behavior and apprehension of tax evaders in order to test the effects of network topologies in the propagation of evasive behavior. Findings include that network structures have a significant impact on the dynamics of tax compliance, demonstrating that taxpayers are more likely to declare all their income in networks with higher levels of centrality across the agents, especially when faced with large penalties proportional to their incomes. These results suggest that network structures should be chosen selectively when modeling tax compliance, as different topologies yield different results. Additionally, this research analyzed the special case of a power law distribution and found that targeting highly interconnected individuals resulted in a lower mean gross tax rate than targeting disconnected individuals, due to the penalties inflating the mean gross tax rate in the latter case.     

Commitment to Social Change:

The purpose of this paper is to examine commitment as it relates to the pursuit of social change. This is done through the analysis of accounts by veterans of their involvement in feminist social movement organizations (FSMOs). They convey their stories of commitment to the feminist movement with language that one might use to describe an intimate relationship. The collective voice suggests considerable sacrifice and dedication. It also reveals a deep belief that they were betrayed by movement beneficiaries. This sense of betrayal is rooted in the expectation that movement commitment would increase as attacks by the New Right on the FSMOs rose. The paper concludes with discussion of the relevancy of studying commitment to social change for both micro and macro social work theory and practice.     

Misperception of chance and loss repair: On the dynamics of tax compliance

Previous experimental studies on tax behavior have been particularly concerned with determining the absolute effect of detection rate and punishment on tax filing, leading to mixed results. In this paper, we shed some additional light on the effectiveness of audit probability and sanctions by drawing upon a dynamic setting with particular focus on the time lag between audits. Our results showed that tax compliance decreased immediately after a random audit, suggesting that subjects were prone to misperception of chance. Sanctions decreased compliance to a lesser extent; they were, however, associated with the tendency of subjects to repair their losses by increasing their capital stock.     

Time-based versus money-based decision making under risk: An experimental investigation

This paper investigates whether individuals make similar decisions under risk when the outcomes are expressed in time versus monetary units. We address this issue in two studies measuring individual risk preferences and prospect theory parameters (i.e., utility curvature, probability weighting, and loss aversion) for both time and money. In the first (resp., second) study we consider relatively small (resp., large) time and monetary outcomes. We find that individuals hold similar risk preferences for time and money; we also find evidence that “time is money” with regard to the utility curvature for gains, loss aversion, and decision weighting. However, individuals have different valuations of losing time and money. The utility function for small losses of money is more concave and variable than the utility function for small losses of time (Study 1), but the utility function for large losses of time is more concave and variable than that for large losses of money (Study 2). We argue that these results reflect a difference in the perceived slack of the respective resource.     

The role of beliefs,trust, and risk in contributions to a public good

This paper experimentally investigates if and how beliefs, trust, and risk attitudes are associated with cooperative behavior. By applying incentivized elicitation methods to measure these concepts, we find that beliefs about others’ cooperation and trust are positively correlated with cooperation in a public goods game. However, even though contributing to a public good resembles a situation of making decisions under strategic uncertainty, elicited risk preferences do not seem to explain cooperation in a systematic way.     

Income in jeopardy: How losing employment affects the willingness to take risks

Identifying the determinants of risk-taking is crucial for our understanding of a variety of choices. Using German panel data, we find that people become more risk-averse when losing work. The immediate income loss does not mediate this effect. It seems also unrelated to the loss of non-monetary benefits of work and to changes of worker’s emotional state. However, we find that risk aversion responds the more strongly to losing work the more future income is at stake, and that the effect manifests itself already on the eve of job loss when people do not yet suffer from the consequences of the event. We conclude that lower future income expectations and more uncertainty about future incomes may explain the effect of job loss on risk attitude. Our results might imply that a recession may reinforce itself as it induces people to fear job loss, which raises their risk aversion and might therefore reduce the willingness to invest in risky projects. Moreover, self-assessed risk attitude seems to measure absolute risk aversion and thus not only an underlying risk preference parameter.     

Social networks and occupational choice: The endogenous formation of attitudes and beliefs about tax compliance

The paper analyses the emergence of group-specific attitudes and beliefs about tax compliance when individuals interact in a social network. It develops a model in which taxpayers possess a range of individual characteristics – including attitude to risk, potential for success in self-employment, and the weight attached to the social custom for honesty – and make an occupational choice based on these characteristics. Occupations differ in the possibility for evading tax. The social network determines which taxpayers are linked, and information about auditing and compliance is transmitted at meetings between linked taxpayers. Using agent-based simulations, the analysis demonstrates how attitudes and beliefs endogenously emerge that differ across sub-groups of the population. Compliance behaviour is different across occupational groups, and this is reinforced by the development of group-specific attitudes and beliefs. Taxpayers self-select into occupations according to the degree of risk aversion, the subjective probability of audit is sustained above the objective probability, and the weight attached to the social custom differs across occupations. These factors combine to lead to compliance levels that differ across occupations.     

The willingness to pay–willingness to accept gap revisited: The role of emotions and moral satisfaction

While many earlier studies have found that people’s maximum willingness to pay for having a good is often substantially lower than their minimum willingness to accept not having it, more recent experimental evidence suggests that this discrepancy vanishes for standard consumption goods when an incentive-compatible design without misconceptions is used. This paper hypothesises that there is nevertheless a discrepancy for goods with a perceived moral character, such as contributions to a good cause, and moreover that the reason for this discrepancy can largely be explained by differences in emotions and moral perceptions. The results from a real-money dichotomous-choice experiment, combined with measurements of emotions and morality, are consistent with these hypotheses.     

Framing of information on the use of public finances, regulatory fit of recipients and tax compliance

Information campaigns to increase tax compliance could be framed in different ways. They can either highlight the potential gains when tax compliance is high, or the potential losses when compliance is low. According to regulatory focus theory, such framing should be most effective when it is congruent with the promotion or prevention focus of its recipients. Two studies confirmed the hypothesized interaction effects between recipients’ regulatory focus and framing of information campaigns, with tax compliance being highest under conditions of regulatory fit. To address taxpayers effectively, information campaigns by tax authorities should consider the positive and negative framing of information, and the moderating effect of recipients’ regulatory focus.     

Power,justice, and trust: A moderated mediation analysis of tax compliance among Ethiopian business owners

We explored the moderating roles of legitimate and coercive power held by the tax authority in the relationship between procedural justice, trust in the tax authority, and voluntary tax compliance. Drawing from fairness heuristic theory and the slippery slope framework of tax compliance, we predicted that procedural justice fosters voluntary tax compliance, particularly when legitimate power of the tax authority is low and when coercive power of the authority is high. Moreover, we predicted that these interactive effects are mediated by (cognition-based) trust. Finally, we predicted that coercive power of the tax authority is positively related with enforced tax compliance. The results of a field study among Ethiopian business owners supported most predictions. This research is among the first to integrate social–psychological and deterrence-related factors to understand tax compliance behavior in a developing country.     

Fear and caring: Procedural justice,trust, and collective identification as antecedents of voluntary tax compliance

We investigated the interactive roles of procedural justice of the tax authority, trust in the tax authority, and identification with the nation in predicting voluntary tax compliance. Drawing from fairness heuristic theory and relational models of justice, we predicted that the relationship between procedural justice and voluntary tax compliance that has been found particularly among citizens with low (vs. high) trust in the tax authorities is restricted to citizens who weakly (vs. strongly) identify with the nation. The results of a field study with samples of Ethiopian and US taxpayers as respondents largely support our predictions. This research integrates the role of important and well-studied social psychological factors that shape voluntary tax compliance and reveals support for the hypothesis in a developing (i.e., Ethiopia) and a developed (i.e., US) nation – nations with strongly divergent tax climates.     

Worries of the poor: The impact of financial burden on the risk attitudes of micro-entrepreneurs

We randomly expose the owners of small retail businesses in Vietnam to scenarios that trigger financial worries and study the effect of this intervention on risk attitudes using an incentive-compatible elicitation method. We find that entrepreneurs exposed to financial worries behave less risk-averse than those assigned to a placebo treatment. This effect is stronger for owners of shops which are smaller and those less exposed to large income shocks in their everyday business. We further show that the effect of financial worries on risk attitudes is not explained by changes in the cognitive functioning of the treated. The findings are consistent with previous results from laboratory experiments with students in developed countries. As such, the paper provides evidence for the external validity of these findings in the context of micro-entrepreneurship in a developing country and points to financial worries as one understudied psychological channel for the effect of material deprivation on decision-making.     

Risk preferences after a typhoon: An artefactual field experiment with fishers in the Philippines

When are risk preferences stable and when do they change? In general, individual preferences tend to be consistent across time and space but extreme shocks, such as natural disasters, appear to change how people make economic decisions. We conduct an artefactual field experiment with fishers on a remote island in the Philippines and investigate the effect of Typhoon Bopha on risk preferences, along with fairness and time preferences. The typhoon destroyed coral reefs and reduced populations of fish, weakening food security. Comparing individuals from communities that were directly hit by the typhoon with those that were not, we observe evidence that those affected by the typhoon are less risk averse. Stratifying our sample by gender, we observe strong evidence that females affected by the typhoon are more risk-loving than females unaffected by the typhoon. These results are consistent with the hypothesis that extreme negative events cause individuals to be more willing to accept greater risk in return for a larger financial reward.     

Risk mitigation and trust: Experimental Evidence from Jordan and the United States

This paper examines how trust and trustworthiness respond to lowering the principal’s risk in cultural settings focused on risk mitigation vs. risk prevention. We employ a binary-choice trust game and show that principals are confronted with a complex optimization problem: risk mitigation lowers the principal’s cost of betrayal but if agents are inequality averse or reciprocally minded, it can also increase its likelihood. This may be exacerbated in cultures not used to fostering trust by risk mitigation. Our experiments suggest that lowering risk only increases trust in the United States but not in Jordan. In both countries, trustworthiness decreases as the principal’s vulnerability decreases. We extend our findings to naturally occurring vulnerabilities in addition to the financial ones created in the laboratory.