1. Erich Kirchler University of Vienna, Austria TARC Master Class London - 2014 Tax Psychology (2) Social representations and communication

2. 22 Economic understanding of adults Lay theories of economic relations (in contrast to expert knowledge of, for example, economists): Are developed on the basis of daily experiences Schematically simplified; stereotypes Provide explanations and orientations for behaviour

3. 3 1. Knowledge about taxes

4. 4 Complexity of tax law Tax law is not always clear… Slemrod et al. (2001, p. 459): “… although one can assert that legality is the dividing line between evasion and avoidance, in practice the line is blurry; sometimes the law itself is unclear, sometimes it is clear but not known to the taxpayer, sometimes the law is clear but the administration effectively ignores a particular transaction or activity.”

5. 5 Tax law is not always clear… Owens & Hamilton (2004) collected experiences and innovations in taxation in various countries. They state that in OECD countries, one of the major problems in tax administration is what tax administration has to administer, the tax laws and how to interpret them (complexity, ambiguity, incomprehensibility of the law). Tax laws have become so intricate that even experts, such as accountants, attorneys, and tax officers have difficulty interpreting many of the law’s provisions. Owens & Hamilton (2004) report that the number of words in the IRS Code (Income tax law, and entire tax code) increased steadily from 1955 to 2000.

6. 6 Thousands of words Growth in number of words in the IRS Code from 1955 to 2000; adopted from www. taxfoundation/org/compliancetestimony.html; quoted in Owens and Hamilton (2004)

7. 7 Tax law is not always clear… Moser (1994) undertook a linguistic analysis of tax laws and claims several bad habits which make it difficult for ordinary taxpayers to understand the law. Lewis (1982) reports that the necessary education to understand the law is between 12 and 17 years in USA, UK, and Australia, respectively. Readability is the ease with which text can be read and understood. Various factors to measure readability have been used, such as "speed of perception," "perceptibility at a distance," "perceptibility in peripheral vision," "visibility," "the reflex blink technique," "rate of work" (e.g., speed of reading), “eye movements” and fatigue in reading.“ The Flesch formulas: Flesch- Kincaid readability test

8. 8 Tax laws are not always clear… Efforts to simplify the law are undertaken in almost all countries. “I hold in my hand 1,379 pages of tax simplification.” U.S. congressman Delbert L. Latta

9. 9 Subjective knowledge Tax law is complex. Sakurai & Braithwaite (2003) found in an survey with more than 2,000 Australian taxpayers that a relatively small percentage of respondents described themselves as fully competent: 36% denied fully the question, “I feel competent to do my own income tax return.”, 26% indicated to feel a little competent, 25% a fair bit, 12% very much. It is not surprising that more than three thirds rely on tax agents, 6.5% on tax office staff, and 20% on other people. According to Blumenthal & Christian (2004) close to 60% of the 128 million individual income tax returns in the USA filed for tax in 2001 were signed by a preparer.

10. 10 Poor understanding of tax law, taxation and tax rates breed distrust. Low tax knowledge is correlated with low compliance. Using education as a proxy for tax knowledge, it was found that higher education correlates with compliance (Kinsey & Grasmick, 1993; Song & Yarbrough, 1978; Spicer & Lundstedt, 1976; Vogel, 1974). Schmölders (1960) reports in his influential study on tax morale in Germany that agreement with governmental activities and fiscal policy was higher in higher educated groups. Several survey studies found a positive relationship between (subjective or objective) tax knowledge and attitudes towards taxes and fairness assessments (Cuccia & Carnes, 2001; Kirchler & Maciejovsky, 2001; Niemirowski et al., 2002; Park & Hyun, 2003) Kirchler, Maciejovsky & Schneider (2003) assessed tax knowledge of fiscal officers, students of economics and business administration, business lawyers, and entrepreneurs, using a multiple choice test consisting of ten items, and correlated their knowledge with fairness judgments of tax avoidance, tax evasion and tax flight. Tax knowledge was neither correlated with the perceived fairness of tax evasion nor with the perceived fairness of tax avoidance. However, for business lawyers and entrepreneurs it was found that profound tax knowledge is positively correlated with perceived fairness of tax avoidance, indicating that the better the knowledge the fairer was tax avoidance perceived.

11. 11 2. Representations of taxes

12. 12 Representations of taxes Fynantzer = Landbetrieger, der die Leute umbs Geld bescheisset Basilius Faber, 1680 Thesaurus editionis scholasticae Tax inspector = Impostor who screws people for their money

13. Representations of taxes Peter Sloterdijk (2010) “The modern democratic state gradually transformed into the debtor state... This metamorphosis has resulted,…, from a prodigious enlargement of the tax base – most notably, with the introduction of the progressive income tax… … each year, modern states claim half of the economic proceeds of their productive classes and pass them on to tax collectors, and yet these productive classes do not attempt to remedy their situation with the most obvious reaction: an antitax civil rebellion.”

14. Attitudes and tax morale Schmölders (1960): Tax morale is the “attitude of a group or the whole population of taxpayers regarding the question of accomplishment or neglect of their tax duties; it is anchored in citizens’ tax mentality and in their consciousness to be citizens, which is the base of their inner acceptance of tax duties and acknowledgment of the sovereignty of the state.” (p. 97f).

15. Bruno Frey & Benno Torgler Tax morale = intrinsic motivation to comply

16. 16 □ □ □ □ □ □ □ □ □ □ □ □ □ □ □ □ Italy Belgium Portugal Spain Sweden Norway Finland Netherlands Ireland France Switzerland Germany Denmark Great Britain Austria USA 0 10 20 30 0.00.51.01.52.02.53.0 Degree of Tax Morale Size of Shadow Economy (in % of the GDP) Attitudes drive behavior (Schmölders: tax morale) Tax morale and size of shadow economy (Alm & Torgler, 2005)

17. 17 Lay theories Lay theories are often explained on the basis of the Theory of Social Representations (Moscovici, 1981)

18. 18 Social representations [...] a system of values, ideas and practices with a twofold function; first, to establish an order [...] and secondly to enable communication to take place among the members of a community [...] (Moscovici, 1961/1973) „Common-sense-theories” on fundamental issues that are of concern to the community (Moscovici & Hewstone, 1983); everyday knowledge Combine psychological and sociological elements (social groups, strata)

19. 19 Definition: Wagner (1994) Social representations are …: Metaphoric images, representations, conceptions of socially relevant phenomena; often pictographically-symbolically, linguistically expressed; unite cognitive, affective, evaluative and conative aspects Perspective of individual knowledge-systems Formation processes, change-dynamics and elaborations in social interactions, in everyday discourse, in social/societal discourse Perspective of collective discourse A concept, which makes it possible to refer social and individual analysis-systems to each other and to explain how social processes lead to individual, socially grounded representations Perspective of „macro-reduction of individual knowledge systems to social processes”

20. 20 The function of social representations: buffer- function for novel and unfamiliar phenomena When unfamiliar phenomena surface in everyday discourse, two scenarios can be distinguished: The unfamiliar challenges core ideas of the social representation comprehension problems The unfamiliar only challenges aspects of the social representation, but not the core the unfamiliar is integrated into the social representation

21. 21 Social representations comprise: Core: determines the meaning and identity of a social representation and consists of explicit or implicit fundamentals of the representations and Periphery: protects the core, to adjust the social representation to context and time. Social representations develop through: Anchoring: The unfamiliar is classified and ascribed with a meaning. Objectification: The abstract concepts are turned into something concrete and assume real respectively physical representations (e.g. the word „bravery” is envisaged as a hero)

22. 22 Society, social groups Threatening or unfamiliar phenomenon or event (e.g. implementation of the Euro, publication of the theory of psychoanalysis) Collective examination, search for related contents, copies etc. Anchoring to and interpretation on the basis of familiar contents and representations. The social discourse leads to objectification, i.e. to representations in the form of pictures, metaphors, symbols, etc. The unfamiliar phenomenon becomes familiar and part of common sense Novel social representation Social identity The “world” of the society or social group is enriched by a novel representation The novel representations adds to the social identity of the society or social group Sociogenesis of social representations (Wagner et al., 1999)

23. 23 Attitudes Allport (1935, p. 810): “A mental and neural state of readiness, organised through experience, exerting a directive or dynamic influence upon the individual’s response to all objects and situations with which it is related.” Stroebe (1980): Attitudes towards an attitude object consist of The opinions on the object (cognitive aspect) The sympathy (affective aspect) and The behavioral intentions (conative aspect).

24. 24 Attitudes Thomas (1991) Affect Cognition Behavior Attitude object (people, social groups, situations, actions etc.) Measurable independent variable Intervening variable Measurable dependent variable Attitude Reactions of the autonomic nervous system; verbal comments on emotions Perceptual judgments; verbally uttered opinions Manifest behavior; information on own behavior

25. 25 Attitudes and behavior Attitudes cannot be observed directly, but represent a relevant basis of behavior.

26. 26 Measuring attitudes Psychobiological level: –E.g. pulse rate, electrodermal responses, ECG, EEG, fMRI (neuro-economics) –Registration of eye movements (search of information sequence of information search): „Spotlight – Viewer”: Selective attention of the consumers while watching advertisements Advantage: Little technical, financial, organizational, and temporal effort in comparison to classical eye- tracking

27. Information search: the spotlight-viewer (…rather than eye tracking) (Berger, 2009) E.g., experiments on information search (audit probability, fines, social norms…)

28. 28 Measuring attitudes Behavioral observation –E. g., “lost letters” Surveys and interviews –Qualitative methods (e.g. in-depth interviews) –Quantitative methods (e.g. direct surveys) –Combined methods (e.g. associations)

29. 29 Qualitative methods In-depth interview : Collection of associations with the “object”: inquire all “object” attributes that are deemed important and then analyze the cognitive structure that lies behind them by repeatedly asking “why-questions” Focus groups: The interaction provides an insight into complex behavioral patterns and personal motives: host, video or audio recordings Qualitative-quantitative method: Associative network (see below)

30. 30 „Direct” attitude measurement How do you rate taxes [VAT, income tax, etc.]? Remember : Not the attitude per se is measured “directly”, but the verbally uttered opinions are inquired directly. Very badBad NeitherGoodVery good Quantitative methods

31. 31 Likert’s method of added ratings Attitudes as disapproval or approval of an attitude object Development of the scale: Collection of favorable and unfavorable statements Multi-point rating of agreement – disagreement Item analyses & selection, administration of the scale The added score of the answers represents the attitude index

32. 32 Likert method – an example Paying taxes on time is a citizen’s duty Cheating on taxes is a minor crime Strongly agree Strongly disagree 1 2 3 4 5 5 4 3 2 1

33. 33 Multi-attribute-models Fishbein (1963), Fishbein & Ajzen (1975): Only few object features/traits are perceived Attitude as a function of the subjective probability and evaluation of these traits A ij = 1/n * ∑ (P ijk * E ijk ) k=1 n Probability that k is present Evaluation of trait k

34. 34 Multi-attribute-models - example Trait of XHow likely is this trait?How do You evaluate this trait? Unlikely Likely BadGood honest responsible 17 17 Attitude = 1 / 2 * ( (3 * 5) + (5 * 1) ) = 10 „safe”„expensive” 2 mentioned traits

35. 35 Not wrongA bit wrongWrongSeriouslywrong Attitudes towards taking undue benefits and not declaring income (bar charts indicate percentages of judgments of morally wrong behaviour, lines indicate percentages of people who might show the behaviour; adopted from Orviska and Hudson (2002, p. 91) Total sample Sample below 40 years 0% 10% 20% 30% 40% 50% 60% Taking undue benefits Not declaring income Morally wrong (bar charts) Not wrong A bit wrongWrongSeriously wrong Very likelyFairly likely Not very likely Not at all likely Very likelyFairly likelyNot very likely Not at all likely Would do (lines)

36. Representations of taxes Although most citizens appreciate public goods and agree with policy regulations, people neither like to pay taxes to fund public goods nor to pay so called corrective taxes. People like public goods but claim taxes are too high!

37. 37 Task TAX-I

38. 38

39. 39 Semantic differential („classic” method; Osgood, 1970) Active Good Ugly Fast Weak Big Powerful Friendly … Passive Bad Beautiful Slow Strong Small Powerless Unfriendly … 1 2 3 4 5 6 7 Potency Activity Valence AB

40. 40 Semantic differential (description vs evaluation; Peabody, 1985) Basic idea: separation of the evaluative and descriptive components Example: Description of the manner/demeanor of a company on the market via pairs of traits such as prudent/imprudent, timid/bold Use of prudent or bold → Evaluation of the company is positive Use of timid and imprudent → Evaluation of the company is negative Use of prudent or timid → Description of the company as risk-averse Use of bold or imprudent → Description of the company as willing to take risks

41. 41 Evaluative aspect = (scale a + scale b) /2 Descriptive aspect = |scale a – scale b| /2 or reverse one scale X evaluative aspect = (1 + 3) /2 = 2 descriptive aspect = (-1 + 3)/2 =1 thrifty+3+2+10-2-3extravagant stingy-3-20+1+2+3generous X thrifty+3+2+10-2-3extravagant stingy-3-20+1+2+3generous Y Y evaluative aspect = (-1 + -1) /2 = -1 descriptive aspect = (1 + -1)/2 =0 Semantic differential (description vs evaluation; Peabody, 1985)

42. 42 Analyses: Content of the associations Evaluation (+/0/-): “polarity index”, “neutrality index” Sequences: in combination with the frequency of “core” and “peripheral” Links Too high 1 - Unjust 5 + Burden 2 + Necessary 3 0 Theft 4 - Evil 6 + Associative network (de Rosa, 1993)

43. Task Taxes - 0 + Semantic Differential Honest taxpayers are…

44. Tax evader Honest taxpayer Honest taxpayer 44 Lazy versus hard-working Stupid versus intelligent Typical taxpayer Honest taxpayer Tax evader Typical taxpayer Honest taxpayer Tax evader Negative versus positive evaluation Typical taxpayer Honest taxpayer Descriptive dimensions Evaluative components Judgments of “typical taxpayers”, “honest taxpayers”, and “tax evaders” (Semantic Differential - Peabody) Table 1: Judgments of taxpayers (values range from -3 to +3) Descriptive dimensionstypical taxhonest taxtax evaderpayer _____________________________________________________ 16.lazy - hard-working.36 a1.46 b.52 c 17.stupid - intelligent -.22 a.24 b 1.10 c Table 2: Evaluative components of ratings of taxpayers by employment group type of taxpayerblue-collarwhite-collarcivilentre-studenttotal workerworkerservantpreneur ________________________________________________________________________________ typical taxpayer-.28-.56-.26-.43-.44-.38 honest taxpayer.31.30.70.33.32.40 tax evader.10.14-.06-.03.31.08 Tax evader

45. 45 BLUE COLLAR WORKERS Public deficit Criticism of the government Associations to taxes of entrepreneurs, civil servants, students, white, and blue collar workers (explained variance: Dimension 1 = 38%; Dimension 2 = 30%; Dimension 3= 17%; Kirchler, 1998) Dimension 2 Dimension 3 Dimension 1 1.50 -.69 0-.80 0.86 -1.36 -.77 0.89 Lack of clarity Technical tax terms Economic regulator Not categorized Bureaucracy Names of politicians and political institutions Punishment and disincentive Tax evasion Necessary evil Social security Social welfare Social justice CIVIL SERVANTS Salary and income Financial loss Criticism of politicians Instrument for politicians Publicgoods Public constraint STUDENTS ENTREPRE NEUERS WHITE COLLAR WORKERS

46. 46 Attitudes and behavior Hidden measurment: Haire (1950): Customers complained about the taste and smell of the novel product instant coffee. Judgments were seen as “rationalizations”, a negative attitude was suspected. Indirect method: Construction of two shopping lists of a hypothetic housewife, description of this housewife

47. 47 Indirect attitude measurement (Haire, 1950) ½ kg bread 1 kg sugar 1 pack coffee beans 2 kg apples 1 salami 1 head of lettuce ½ kg bread 1 kg sugar 1 pack Nescafe 2 kg apples 1 salami 1 head of lettuce Described as „lazy”, „ill planning”, „wasteful”, „with little sense of family”

48. 48 Indirect attitude measurement Imagine an entrepreneur who is married, with two children, runs a firm… evades taxes. Imagine an entrepreneur who is married, with two children, runs a firm… avoids taxes. Imagine an entrepreneur who is married, with two children, runs a firm… pays on time correct taxes. Describe the entrepreneur, the personality, etc.