University of Vienna, Austria

University of Vienna, Austria
Tax Psychology (1) Research Paradigms Erich Kirchler University of Vienna, Austria TARC Master Class London

Thanks Team (present members) Barbara Hartl Christoph Kogler
Eva Hofmann Jennifer Stark Katharina Gangl Stephan Muehlbacher Linda Dezsö Team (former members) Barbara Kastlunger Boris Maciejovsky Erik Hoelzl Herbert Schwarzenberger Ingrid Wahl Numerous Master & PhD students Visitors Anca Nichita Larissa Batrancea József Pántya International scholars Henk Elffers (baptized the Slippery Slope Framework) James Alm Jane Frecknall-Hughes Veronika Grimm Claus Lamm Lucia Mannetti Luigi Mittone Aloys Prinz Michael Wenzel Paul Webley Valerie Braithwaite (host during sabbatical year) Numerous researchers in 44 countries study …

Economic Psychology Self-Conception Ideas of Humankind
Objectivity & Intentions Methods (Psycho-) Logic Economic Decisions Rituals of Adults Lay Economic Theories The Invisible Hand Markets Mental Accounting Consumption, Saving, Loans Trick & Treat Marketing Policy Courage & Risk Businessmen/women 20 US Cents Work & Satisfaction Invulnerability Financial Markets Whatever you want! Currency & Inflation In the Shadow Counter-Productivity Nudges State: Power and Trust US$ Prosperity and Happiness 3 3

Taxes: Giving and Receiving
Fundamental activities of the state are, … collecting revenues to fund public activities, and … using taxes, charges and levies to influence and regulate markets as well as the behavior of citizens and organizations … (progressive) taxes as an instrument to re-distribute excessive differences in wealth Imposts can be used as an instrument to indirectly shape human behavior. Providing incentives and disincentives by decreasing or increasing costs enables the state to exert control over undesirable but legal behavior such as smoking, drinking alcohol, and eating unhealthy foods, or to discourage objectionable business activities (Freiberg, 2010, p. 122).

Oishi, S. , Schimmack, U. & Diender, E. (2011)
Oishi, S., Schimmack, U. & Diender, E.(2011). Progressive taxation and the subjective well-being of nations. Psychological Science, 23, Fig. 1. Scatter plot (with best-fitting regression line) showing mean global-life-evaluation rating as a function of progressive taxation (calculated as the difference between the highest and lowest tax rate; N = 54 nations). Scatter plot (with best-fitting regression line) showing mean global-life-evaluation rating as a function of progressive taxation (calculated as the difference between the highest and lowest tax rate; N = 54 nations). Copyright © by Association for Psychological Science

Giving and Receiving Most citizens appreciate public goods and agree with policy regulations, but many perceive their own contributions too high relativ to what they get back.

Overview Attitudes towards taxes Research paradigms
Decisions under risk Social dilemma Differential approaches Psychological contract Interaction climate Practical concequences Future research directions

Germans have a tense relationship with taxes; however, they feel it is important to adhere to tax law Tax mentality has deteriorated 4 factors 85% feel high tax pressure 2/3 claim, the temporal and financial burden to file taxes is too high The tax system is unjust 95% claim, the government spends tax money thriftlessly

Market Institute (Survey, 2012)
Taxes are too low right too high Strong desire for increasing taxes on wealth Work Financial transaction tax Black labour

Representations of taxes
Taxes are “legal theft”, Thomas Aquinas (1225–74) Said in the Middle Ages. Peter Sloterdijk (2010) Saint Mamas, Cyprus, protector of tax evaders (around year 300).

Authorities‘ perception of taxpayers
First contact on internet portals … (iconography)

Home page of the Austrian Ministry of Finance
(retrieved )

Home page of HMRC http://search2. hmrc. gov
Home page of HMRC home.page (retrieved )

Germany (retrieved )

https://www.bmf.gv.at (retrieved 12-09-2014)
Austria (retrieved )

Home page of the Finnish Ministry of Finance
(retrieved )

Enforcing tax compliance
Traditional model from law: command and control Traditional model from economics: rational cost-benefit analysis

Actors in the field Government Tax authorities Tax practitioners
Taxpayer Taxpayer Taxpayer Taxpayer

Research focus and paradigms
Type of tax: Income tax (VAT, inheritance tax, etc.) Actors in the field: Individual taxpayers; the “tax-interaction” context Tax behaviour research: Shift of attention from authoritarian-punitive to cooperativee interaction

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) Decision under risk: fines, audits Social dilemma: moral, norms, fairness Differential approaches: occupation, age, motivation Psychological contract: intrinsic motivation, tax authority’s interaction style Interaction climate: antagonistic vs synergistic tax climate; power, trust

Decision under risk Traditional model from law: command and control Traditional model from economics: rational cost-benefit analysis Deterrence To protect honest taxpayers from free riders, controls are necessary. Negative sanctions are necessary at an adequate level and in the proper form, depending on the ability of the tax offender to pay. Tax authorities need to cooperate intensively with legislators, judges, and international authorities.

How to increase and guarantee tax compliance ? Decision under risk
Tax rate Income Audit probability Fines Tax compliance 1 Tax evasion 1 - p p No audit Audit Net income Net income + evaded amount Net income - fine Sure option Risky option Allingham & Sandmo (1972); Srinivasan (1973) Becker, G. S. (1968). Crime and punishment: An economic approach. Journal of Political Economy, 76,

Average compliance rate by fine rate and audit probability (standard deviations in parentheses; Alm et al., 1995, p. 11) Audit Fine rate probability ( 4.0) ( 3.2) ( 4.2) ( 6.0) 21.4 ( 4.4) ( 7.4) ( 8.0) 54.8 (10.6) ( 7.5)

Effect on tax compliance of …
Why pay taxes? A review of tax compliance decisions Erich Kirchler, Stephan Muehlbacher, Barbara Kastlunger, Ingrid Wahl (2010) Effect on tax compliance of … Publication Method Level of Income Tax rate Audit probability Fines Ali, Cecil, & Knoblett (2001) Aggregate data – + 0/+** Alm, Jackson, & McKee (1992) Experiment Alm, McClelland, & Schulze (1992) Alm, Sanchez, & de Juan (1995) +** Anderhub, Giese, Güth, Hoffmann, & Otto (2001) Baldry (1987) Christian (1994) Clotfelter (1983) Collins & Plumlee (1991) Dubin, Graetz and Wilde (1990) Feinstein (1991) Fishlow & Friedman (1994) Friedland (1982) Friedland, Maital, & Rutenberg (1978) ~** Gërxhani & Schram (2006) Dutch sample Albanian sample Lang, Nöhrbaß, & Stahl (1997) Survey* – Mason & Calvin (1978) + Moser, Evans III, & Kim (1995) Experiment 0/–** Park & Hyun (2003) Pommerehne & Weck-Hannemann (1996) Aggregate data Porcano (1988) Schwartz & Orleans (1967) 0** Slemrod (1985) Slemrod, Blumenthal, & Christian (2001) +** Spicer & Lundstedt (1976) Spicer & Thomas (1982) Trivedi, Shehata, & Lynn (2003), Trivedi, Shehata, & Mestelman (2004) Vogel (1974) Wärneryd & Walerud (1982) Webley, Robben, Elffers, & Hessing (1991) Weck-Hannemann & Pommerehne (1989) 27 Note. + = positive effect on tax compliance; – = negative effect on tax compliance; 0 = no effect on tax compliance; ~ = ambiguous effect on tax compliance * In surveys fines and audit probabilities are sometimes measured by subjectively perceived audit and fine rates ** Interactions with other variables, for further details please consult the text

Metaanalyses Most people are honest !
Andreoni, J., Erard, B., & Feinstein, J. S. (1998). Tax compliance. Journal of Economic Literature, 36(2), Kirchler, E., Muehlbacher, S., Kastlunger, B. & Wahl, I. (2010). Why pay taxes? A review of tax compliance decisions. In J. Alm, J. Martinez-Vazques & B. Torgler (eds.). Developing Alternative Frameworks for Explaining Tax Compliance (pp ). London: Routledge. Most people are honest !

Andreoni et al. (1998, p. 844) “One possible explanation is that audits may not turn out as badly as taxpayers initially fear. For example, if an audit fails to uncover non-compliance that is present or if a substantial penalty is not applied to discovered non-compliance, a taxpayer may conclude that it pays to cheat. Alternatively, perhaps taxpayers do find audits to be a negative experience, but the impact of this experience is to make them want to evade more in the future in an attempt to ‘get back’ at the tax agency...”

Correlations between tax evasion and measures of psychological instigations and constraints (Elffers et al., 1987) Behavioural outcome measures Psychological variables 2-year self-report Documented status Documented amount of tax evaded Dissatisfaction Dissatisfaction with tax authorities Comprehensibility of rules Personality Competitiveness Alienation Tolerance of deviance Fear of punishment Social control Personal control (attitudes) + + + + - + -

Deterrence To protect honest taxpayers from free riders, controls are necessary. Negative sanctions are necessary at an adequate level and in the proper form, depending on the ability of the tax offender to pay. Tax authorities need to cooperate intensively with legislators, judges, and international authorities. The effect of deterrence measures is weak and sometimes oppostite to the intended effect…

What effect have fines ? What effect have repeated audits ?

A fine is a price ! Gneezy, U. & Rustichini, A. (2000). A fine is a price. Journal of Legal Studies 29(1) 1-18. Experimental group: Managements of 6 day care centers introduced a fine for late pick up of children; Control group: 4 day care centers did not introduce a fine.

Tax compliance (Kirchler, Maciejovsky & Schwarzenberger, 2005)
Misperceived probability & Loss repair Base-line Periods following audit .6 .5 .4 .3 .2 .1 Compliance Audit probability 30 % 34

Robust phenomena: the “bomb crater effect“ and the „echo effect“
(Guala & Mittone, 2005; Mittone 2006; Kastlunger et al. 2009; Maciejovsky et al. 2007) 35

business periods, respectively Guala and Mittone (2002, p. 12 and 13)
“Echo” effect in experiments with audits in the first and second half of 60 business periods, respectively Guala and Mittone (2002, p. 12 and 13) 100 200 300 400 500 1 7 13 19 25 31 37 43 49 55 4 10 16 22 28 34 40 46 52 58 Tax payments (averages, first group) Value (Italian Liras) Tax due Average tax paid Audit Round

There is more than audits and fines, …
situational and personal characteristics; social norms, fairness, … and perhaps the perception of taxpayers as cheaters is short-sighted.

Change of research perspectives… Decisions under risk
View of humankind: Rational (egoistic) utility maximizers; no differences: all pursue the same goals, all respond to tax office measures (audits, fines) similarly Education strategies: audits and fines

Change of research perspectives… Decisions under risk
View of system: Authorities Government Tax authority Authorities perceive taxpayers as egoistic utility maximizers and treat them accordingly Taxpayers Taxpayers

Change of research perspectives… Social dilemma
Hessing and Elffers (1993) treat tax evasion as defective behaviour within a social dilemma. The social dilemma paradigm made tax of interest to economic and social psychologists.

The tax system represents a social dilemma with individual interests being in conflict with collective interests: two or more people are interdependent for obtaining outcomes; if few people try to maximize their own outcomes, defeating is the rational choice. However, if a large number or all people maximize their outcome the effect is that sooner or later all get less than if they had chosen to cooperate. From a mathematical and economic perspective, the optimal strategy for rational individuals is not to cooperate. The neoclassical economic approach to tax behaviour departs from the assumption that individuals and groups are rational agents trying to maximize their outcome by avoiding taxes. Problem: Generalizability of findings is limited due to the fact that social dilemma research regards contributions of members of a group rather than contributions to an authority and exchange.

Bo Rothstein (2000) Two conditions need to be fulfilled: taxpayers need to trust that other taxpayers are paying their share, and rather than filling the pockets of tax bureaucrats tax authorities have to ensure that the money is invested in public welfare.

View of humankind: Rational utility maximizers; also social norms affect behavior. No individual differences: all pursue the same goals; participation (voting, voice), social norms (horizontal trust) and distributive justice (horizontal, vertical and exchange fairness) (In the experimental setting, authorities‘ behavior is invariant, reliable, predictable) Education strategies: audits and fines; fairness and social norms

View of system: Authorities Government Tax authority Taxpayers make assumptions about the behavior of other taxpayers and behave accordingly Taxpayers Taxpayers and social interaction

Change of research perspectives… Differential perspective
Taxpayers should not all be lumped together and perceived as a homogeneous group: they find themselves in various situations, have developed different personal values, prove generous when there are calls for donations for the socially disadvantaged or those affected by catastrophes, and often have a decided sense of community.

Person: Opportunity makes the thief Socio-demographic characteristics: age, gender, education, income, etc. … Religion, personal norms, personality characteristics, etc.

Demographic segmentation
Meta-analyses of effects of socio-demographic characteristics (Hofmann, E. et al., 2014) Approximately 459 studies; 570,000 participants Age: Studies: 416 (mainly EVS, ISSP, Latinobarometro, WVS) N = 550,870 r = .12*** Sex: Studies: 459 (mainly ESS, EVS, ISSP, Latinobarometro, WVS) N = 570,408 r = .06*** Education: Studies: 342 (mainly EVS, ISSP, Latinobarometro, WVS) N = 439,099 r = -.02*** Income: Studies: 340 (mainly EVS, ISSP, WVS) N = 390,902 r = -.04***

Motivational postures
Braithwaite & Ahmed: tax moral =“internalized obligation to pay tax”. Frey (1997) and Alm & Torgler (2005) define tax morale as “intrinsic motivation to pay one’s taxes”. Orviska & Hudson (2002) link morale to the concept of civic duty. Civic duty proposes that people are motivated by a sense of responsibility and loyalty to the society and nation. Their behaviour is not regulated externally by audits and sanctions but by their concern for the society.

Statements representing motivational postures
Motivational postures and statements representing them (Braithwaite, 2003a, p. 20) Motivational posture Description Statements representing motivational postures Commitment Deference Commitment combines a positive orientation towards tax authorities and deference. The tax system is perceived as desirable, tax law and tax collection are perceived as fair. Committed taxpayers feel a moral obligation to pay their share and to act in the interest of the collective. Paying tax is the right thing to do. I feel a moral obligation to pay my tax. Overall, I pay my tax with good will. Capitulation Capitulation reflects a positive orientation in terms of acceptance of the tax authorities which hold legitimate power to pursue the collective’s goals. As long as citizens’ act according to the law, authorities are perceived to act in a supportive way. If you cooperate with the Tax Office, they are likely to be cooperative with you. The tax system may not be perfect, but it works well enough for most of us. No matter how cooperative or uncooperative the Tax Office is, the best policy is to always be cooperative with them. Resistance Resistance reflects a negative orientation and defiance. The authority of tax officers may be doubted and their acts be perceived as controlling and dominating rather than as supportive. If you don’t cooperate with the Tax Office, they will get tough with you. It’s important not to let the Tax Office push you around. It’s impossible to satisfy the Tax Office completely. Deterrence Disengagement Also, disengagement reflects a negative orientation and correlates with resistance. Individuals and groups keep socially distant and blocked from view and have moved beyond seeing any point in challenging tax authorities. If I find out that I am not doing what the Tax Office wants, I’m not going to lose any sleep over it. I don’t care if I am not doing the right thing by the Tax Office. If the Tax Office get thought with me, I will become uncooperative with them. Game playing Game playing expresses a view of law as something that can be moulded to suit one’s purposes rather than as a set of regulations that should be respected as guideline of one’s actions. In the field of tax behaviour, game playing refers to “cop-and-robber” games with taxpayers detecting loopholes for their advantages and perceiving tax officers as cops which engage in catching cunning taxpayers. I enjoy spending time working out how changes in the tax system will affect me. I enjoy talking to friends about loopholes in the tax system. I like the game of finding the grey area of tax law.

Australian Taxation Office Compliance Model and Motivational Postures (adapted from Braithwaite, 2003b, p. 3, James et al., 2003) Prosecution Disengagement Resistance Capitulation Commitment Command regulation (non-discretionary; use full force of the law) Command regulation (discretionary; deter by detection) Enforced self-regulation (help to comply) Self-regulation (make compliance easy) Audit with/ without penalty Real time business examinations, record keeping reviews Education, record keeping, Service delivery (convenience, access, choice, control REGULATORY STRATEGIES MOTIVATIONAL POSTURE ENFORCEMENT STRATEGIES

View of humankind: Social beings with different motivational postures Education strategies: responsive regulation

View of system: Authorities Government Tax authority Segmentation and responsive regulation Taxpayers Individuals characterized by motivational postures

Diffusion of income tax evasion
10-15% of underreported income Porcano (1988), the U.S. IRS estimated 10-15% of underreported income in Five years later the tax gap was about 17% of true liability. Andreoni and colleagues (1998) estimate that over 25% of all U.S. taxpayers underpaid their taxes in In developed countries, tax evasion is estimated to reach 20% of the level of tax revenues, while in developing countries the percentages are even higher (Orviska & Hudson, 2002). Slemrod et al. (2001) explain that the detected rate of non-compliance is 7.3%, but varies widely across types of gross income and deductions. In 1988, voluntary reporting was 99.5% for wages and salaries, but only 41.4% for self-employed income. In 2002, King & Sheffrin report that according to the U.S. IRS, 99% of wage income is correctly reported, but less than 70% of income from unincorporated businesses is correctly reported. There is little doubt that non-compliance should be contained and evasion, in particular, needs to be combated. It is, however, wrong to assume that the majority of people try to evade or avoid paying taxes. Long and Swingen (1991) write that some taxpayers are not predisposed to evade and do not search for ways to cheat. Survey studies and experiments on income tax behaviour show that honesty characterises a majority of participants (e.g., V. Braithwaite, 2003d; James & Alley, 2002; Kirchler, Muehlbacher, Hoelzl, & Webley, 2005). Antonides and Robben found that 4.2% of participants in their study corrected their tax files to their disadvantage, whereas 23.8% corrected them to their advantage (Antonides & Robben, 1995). Assuming that those negatively correcting their files made unintentional mistakes, and an equal percentage of those who positively corrected their files did so also undeliberately, then less than 20% were intending to cheat. On the basis of 1982 U.S. IRS audit data, Alexander and Feinstein (1987) report that approximately one quarter of all taxpayers make accurate tax reports. According to their analysis, 13.5% overstate their taxes, presumably due to errors in completing tax returns. If the same percentage understates their taxes due to errors, then more than half of taxpayers tend to be honest. Hessing, Elffers, and Weigel (1988) estimate that more than two thirds of taxpayers declare their income honestly. The assumption that taxpayers are generally compliant is challenged by the wide use of tax preparers and studies contending that taxpayers generally demand aggressive advice (Duncan, LaRue, & Reckers, 1989; Jackson, Milliron, & Toy, 1988; Milliron, 1988). These studies were conducted from tax preparers’ view, but investigations from taxpayers’ perspectives reveal a different picture. The use of a tax practitioner does not seem primarily driven by the desire to avoid paying taxes, but by the uncertainty about the tax law and the motivation to report correctly. 25% underpaid 7.3% non-compliance, wide variation across types of income and deductions voluntary reporting 99.5% for wages and salaries, but only 41.4% for self-employed Elffers (2000) writes, “[…] the gloomy picture of massive tax evasion is a phantom”. 4.2% corrected their tax files to their disadvantage, 23.8% corrected them to their advantage. Assuming that those negatively correcting their files made unintentional mistakes, and an equal percentage of those who positively corrected their files did so also undeliberately, then less than 20% intend to cheat. ¼ make accurate reports. 13.5% overstate their taxes, presumably due to errors. If the same percentage understates their taxes due to errors, then more than half of taxpayers tend to be honest. 2/3 declare their income honestly The use of a tax practitioner does not seem primarily driven by the desire to avoid paying taxes, but by the uncertainty about the tax law and the motivation to report correctly.

Legal vs illegal tax behavior
Tax evasion Tax avoidance

Profit shifting and aggressive tax planning
Amazon Apple Google Starbucks etc. Sullivan (2012, quoted by Fuest, Spengel, Finke, Hecknmeyer & Nusser, 2013) … tax avoidance strategies by exploitation of loopholes in existing tax laws and profit shifting … lead to effective tax rates … on foreign profits by Apple and Google of 1% and 3%, respectively, thus approaching 0%. 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...” Complexity and unclear law opens space for interpretations, negotiations etc. The concern of legality grew with growing business globalisation, increasing complexity of business structures, the nature of financing and transactions, and tax flight by establishing businesses off shore, tax heavens, and money laundering (Owens & Hamilton, 2004). Modern organised noncompliant business acts within the law, exploiting the law’s shortcomings and loopholes.

Profit shifting and aggressive tax planning
To effectively combat aggressive tax avoidance and to increase tax justice, Hey, Schreiber, Pönnighaus and Bierbrauer (2013) underline the need for an international consensus how to jointly regulate taxpaying behavior of people and businesses. It is necessary to respond to multinational corporations’ activities by developing rules and instruments to effectively control and influence their behavior to enforce compliance. It is necessary to establish a sense of wrong-doing in the society, reflected judgment of unfairness of tax avoidance and evasion, and to effectively regulate taxpaying behavior. How shall a sense of wrong-doing be established in the society? It is necessary to invest in a climate of cooperation basing on power of authorities and trust in authorities.

Change of research perspectives… Psychological contract
Taxpayers are not necessarily unwilling to contribute to the commons; most experience a psychological contract of reciprocity between the authorities and themselves and are intrinsically motivated to cooperate if the distribution of burden and benefits and the procedures are perceive fair. Fairness Frans de Waal

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