The National Taxpayer Advocate of the U.S. Internal Revenue Service is convening the Inaugural...

The National Taxpayer Advocate of the

U.S. Internal Revenue Service is convening the Inaugural

International Conference on Taxpayer Rights

in Washington, D.C

Erich KirchlerUniversity of Vienna, Austria

2015

Slippery Slope Framework: The Impact of Power and Trust on

Taxpayer Compliance Behavior

1

ThanksTeam (actual)• Barbara Hartl• Christoph Kogler• Eva Hofmann• Janina Enachescu• Jennifer Stark• Linda Dezsö• Jerome Olsen• Matthias Kasper• Sebastian Beer

Team (past members)• Barbara Kastlunger• Stephan Muehlbacher• Boris Maciejovsky• Erik Hoelzl• Herbert Schwarzenberger• Katharina Gangl• Ingrid Wahl

• Master and PhD students

Guests• Anca Nichita• Larissa Batrancea• József Pántya

International cooperation• Henk Elffers (baptized: Slippery Slope

Framework) • James Alm• Jane Frecknall-Hughes• Veronika Grimm• Claus Lamm• Lucia Mannetti• Luigi Mittone• Aloys Prinz• Michael Wenzel• Paul Webley• Brian Erard• Valerie Braithwaite (Sabbatical)• Cooperation with colleagues in 44 countries• …

2

Overview

Social representations & attitudes towards taxes

Determinants of compliance and research paradigms Decisions under risk Understanding, services, norms and

fairness Interaction climate

Slippery Slope Framework Behavioral Insight

3

Taxes

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 are also 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).

4

Oishi, S., Schimmack, U. & Diener, E.(2011). Progressive taxation and the subjective well-being of nations. Psychological Science, 23, 86-92. 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).

Copyright © by Association for Psychological

Science5

Most citizens appreciate public goods and agree with policy regulations,

but many perceive their own contributions too high relative to what they get back.

Giving and Receiving

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Average perceived public expenditures and desired expenditures for various public goods, and perceived subjective utility and desired utility of public goods (Kirchler, 1997; 1 = very low, 5 = very high)

Public goodsPerceived amount of public expenditures

Education 2.99 1.10 4.16 0.77 2.62 1.31 3.54 1.36

Science and research 2.38 1.03 3.87 1.00 2.08 1.16 3.27 1.18

Pubic health 3.74 1.25 4.08 0.89 3.17 1.24 3.99 0.92

Economic development 3.21 1.07 2.89 0.99 2.11 1.13 2.75 1.20

Art and culture 3.37 1.12 2.67 0.94 2.47 1.25 3.10 1.18

Agriculture 2.85 1.04 3.23 0.99 2.12 1.12 2.61 1.32

Military defense 3.26 1.43 2.42 1.15 1.74 1.00 2.23 1.25

Social security 3.90 1.10 3.67 0.93 2.31 1.14 3.29 1.10

Public security 3.06 0.90 3.65 0.89 2.81 1.07 3.53 1.03

Construction of streets 3.46 1.27 3.13 0.96 3.17 1.14 3.33 1.04

Public transport 3.14 1.04 3.38 0.90 2.72 1.14 3.35 1.09

Housing construction 3.20 1.10 3.68 1.10 2.05 1.27 3.26 1.32

M SD

Total 3.21 0.38 3.43 0.41 2.45 0.65 3.19 0.63

Desired amount of public expenditures

Perceived individual utility of public goods

Desired individual utility of public expenditures

M SD M SD M SD

7

Overview





8

Fynantzer = Landbetrieger, der die Leute umbs Geld bescheisset

Basilius Faber, 1680Thesaurus editionis scholasticae

Tax inspector = Impostor who screws people for their money

Representations of taxes

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-1.5 -1 -0.5 0 0.5 1 1.5

-1.5 -1 -0.5 0 0.5 1 1.5

-1.5 -1 -0.5 0 0.5 1 1.5

Evaluation

Hard-working (vs. lazy)

Intelligent (vs. stupid)

Honest taxpayers

Typical taxpayers

Tax avoiders

Tax evaders

Honest taxpayers

Typical taxpayers

Tax avoiders

Tax evaders

Honest taxpayers

Typical taxpayers

Tax avoiders

Tax evaders

-1.5 -1 -0.5 0 0.5 1 1.5

-1.5 -1 -0.5 0 0.5 1 1.5

-1.5 -1 -0.5 0 0.5 1 1.5 Stu

dy in

pro

gres

s (K

irchl

er, E

. et a

l., 2

015)

: N =

64

whi

te c

olar

wor

kers

, sel

f-em

ploy

ed, s

tude

nts

Representations of taxes

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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

Germans have a tense relationship with taxes; however, they feel it is important to adhere to tax law

11

Tax morale and shadow economy Bruno Frey & Benno TorglerTax morale = intrinsic motivation to comply

13

□

□

□□□□□

□□□

□ □□

□ □□

Italy

Belgium

PortugalSpain

Sweden

Norway

FinlandNetherlands

IrelandFrance

Switzerland

GermanyDenmark

Great BritainAustria

USA

0

10

20

30

0.0 0.5 1.0 1.5 2.0 2.5 3.0

Degree of Tax Morale

Siz

e of

Sha

dow

Eco

nom

y (in

% o

f the

GD

P)

Social representations and attitudes drive behavior

(Schmölders, 1950s: tax mentality as attitude towards taxation and taxes = tax morale = attitudes = social representations etc.)

Tax morale and size of shadow economy (Alm & Torgler, 2005)

(Tax morale can be defined as a moral obligation to pay taxes, a belief in contributing to society by paying taxes.” (Torgler & Schneider, 2007; retrieved 2015-11-05 from http://ftp.iza.org/dp2541.pdf)

Overview





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Tax rateIncomeAudit probabilityFines

Tax compliance 1

Tax evasion

1 - p

p

No audit

Audit

Net income

Net income + evaded amount

Net income - fine

How to increase tax compliance ?Decision under risk

Allingham & Sandmo (1972); Srinivasan (1973)

Becker, G. S. (1968). Crime and punishment: An economic approach. Journal of Political Economy, 76, 169-217.

Sure option

Risky option

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The effect of deterrence measures is weak and sometimes oppostite to the intended effect…

Enforcing tax compliance: Command and control

Deterrence matters, but …

Metaanalyses

Andreoni, J., Erard, B., & Feinstein, J. S. (1998). Tax compliance. Journal of Economic Literature, 36(2), 818-860.

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. 15-31). London: Routledge.

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17

Command and control …is a simple answer to a complex phenomenon

For every complex problem there is an answer that is clear, simple, and wrong.

Henry Louis Mencken (12 September 1880-29 January 1956), was a twentieth-century journalist, satirist, social critic, cynic, and freethinker, known as the "Sage of Baltimore" and the "American Nietzsche”.

Enforcing tax complianceAudits and fines are necessary, but there is more…

What effect have fines ?What effect have repeated audits ?

(fine = price; bomb-crater effect; echo effect etc.)

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Overview





19

211955 1965 1975 1985 1995 2000

0

200

400

600

800

1000

1200

1400

1600

1800

Income taxes only

Entire tax code

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)

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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

Nina E. Olson

Taxpayers hire preparers because the tax code is hideously complex, return preparation is anything but straightforward, and a lot of money is on the line.

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More Than a ‘Mere’ Preparer: Loving and Return Preparation By Nina E. Olson Retrieved 2015-11-14 from http://www.taxpayeradvocate.irs.gov/userfiles/file/nta_taxnotes_lovingcase.pdf

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

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

Trust

0.74*** 0.13**

(0.22***) 0.12**

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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

Trust

0.73*** 0.14**

(0.22***) 0.11**

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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.

Fairness and social norms

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Fairness – capuchin monkeys

https://www.youtube.com/watch?v=lKhAd0Tyny0

• Distributive justice refers to the exchange of resources, both

benefits and costs• 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)

• Procedural justice refers to processes • (Leventhal, 1980: consistent, accurate and free of errors, representative and

ethical, and correctable in case of errors; see Tom Tylor)

• Retributive and restorative justice refer to perceived appropriateness of sanctions in case of norm breaking

Fairness

Diffusion of income tax evasion

Elffers (2000) writes, “[…] the gloomy picture of massive tax evasion is a phantom”.

31

Estimations of shadow economy (% of GDP)

(by Friedrich Schneider - January 2015; proxy for tax evasion)

USA 5.9

Canada 10.3

Australia 10.3

Europe (average 31 countries) 18.0

Retrieved 2015-11-07 from http://www.econ.jku.at/members/Schneider/files/publications/2015/ShadEcEurope31.pdf

Switzerland 6.5Austria 8.2UK 9.4Germany 12.2Italy 20.6Greece 22.4Romania 28.0Bulgaria 30.6

Tax law is not always clear… Complexity and unclear law opened 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.

The Problem is: Tax Avoidance

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Amancio Ortega GaonaInditext (e.g., Zara, Massimo Dutti, Bershka)

Wealth: 70,7 Billion US$ (2015) - Forbes

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News agency Bloomberg shows effects of profit shifting in 2014: Inditext (e.g., Zara, Massimo Dutti, Bershka) owns a small company located in the Netherlands, employing 173 people who made a profit in 2013 which is larger than the profit of the firms in Italy, France, Germany, GB in the past 5 years. Each employee made a profit of 3.1 Mio Euro. This small company is 7 times as profitable as Apple.

(Source: Die Presse, 18 March 2015)

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Tim Cook

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In an exclusive interview with the Financial Times ahead of the report’s

publication, Mr Maestri called the investigation 'very unfortunate.'

'We know that we didn’t do anything that was against the law…'… We simply followed the laws in the country over the 35 years that we have been in Ireland.'

… it is legal !

Apple under InvestigationBusiness Insider UK, September 29, 2014

37

ProblemEnforcement matters,…

thus, audits and fines are at least in part effective,

… but they are not reaching out to legal tax avoidance.

Audits and fines are ineffective in fighting tax planning against the spirit of the law, as long

as tax planning ranges within the brackets of the letter of the law.

38

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, a 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.

Tax avoidance

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Harsh Criticism

Starbucks paid „voluntarily“ money to HMRC (Volontarily? What? Taxes? Donation ? Charity ?)

Retrieved 2015-11-14 from http://www.bbc.com/news/uk-politics-23019514

44

Change of Perspective

View of humankind: Rational (egoistic) utility maximizers

All pursue the same goals

Education strategies: audits and fines

Change of Perspective

View of humankind: Social beings interacting in a social system

Strategies: positive interaction climate (trust, power)

Co-operative Relationships

OECD: Co-operative Compliance

Revenue bodies and their relationships with taxpayers and tax intermediaries need to be built on the principle of reciprocity. All parties shall be open to enhanced level of dialogue and co-operation.

Co-operative Relationships

Horizontal Monitoring (2005, The Netherlands, Austria-pilot, etc.)

Standard method of customs checking is characterized by “vertical supervision” and distrust.

Horizontal supervision operates on the basis of (reason based) trust.Compliance agreement bases on the key values

mutual trust, understanding and transparency.

Overview





50

The Slippery Slope Framework

Perception of authoritiesPower of authorities: perceived potential of tax

authorities to detect and to punish evasionTrust in authorities: taxpayers‘ perception of tax

authorities as benevolent and working for the common goodBehaviour of taxpayers

Compliance: degree of cooperation by taxpayersEnforced 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

Synergistic climate

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

Antagonistic climate:Command and controlAuditsFines

Slippery Slope FrameworkKirchler, Hoelzl and Wahl (2008)

Authority’s capacity to detect

and punish taxevaders

Authority’ benevolence and

investment in common

good 52

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

Cross-cultural testing of the SSF 44 countries study

53

Africa Asia Europe North America

Australia South America

EgyptGhana

MoroccoSouth Africa

BhutanChina

Hong KongIndia

IndonesiaIran

IsraelJapan

PakistanRussia

South KoreaThailandTurkey

UAE

AustriaFinlandFrance

GermanyGreece

HungaryIceland

ItalyLithuania

MaltaNorwayPoland

RomaniaSlovenia

SpainSweden

Switzerland

CanadaMexico

USA

Australia BrazilColombia

54

Research: 44 Countries

Power Low/ Trust Low

Power High/ Trust Low

Power Low/ Trust High

Power High/ Trust High

0

1

2

3

4

5

6

7

8

9Intended Tax Compliance

Voluntary Tax Compliance

Enforced Tax Compliance

Taxcompliance

Power low / trust low

Power high/ trust low

Power low / trust high

Power high/ trust high

India -1.55 0.000Iran -1.53 0.000Pakistan -1.28 0.000Indonesia -0.82 0.008Egypt -0.55 0.055Mexico -0.52 0.057Ghana -0.35 0.349France -0.34 0.353Romania-0.31 0.323Turkey -0.24 0.488UAE -0.20 0.611Norway -0.18 0.484Bhutan -0.16 0.611Israel -0.10 0.742Lithuania -0.07 0.814Morocco -0.01 0.972South Africa -0.00 0.990Portugal 0.06 0.849Slovenia 0.11 0.763Malta 0.13 0.682Thailand 0.18 0.568USA 0.20 0.617

Ireland 0.23 0.510Colombia 0.30 0.415Russia 0.37 0.248Finland 0.48 0.049China 0.50 0.109Sweden 0.50 0.069Australia 0.52 0.093Spain 0.53 0.086Brazil 0.54 0.066Hungary 0.63 0.074Greece 0.63 0.047UK 0.68 0.081Italy 0.70 0.015Austria 0.80 0.019Canada 0.82 0.028Hong Kong 0.88 0.021Switzerland 0.94 0.001Poland 1.11 0.000Iceland 1.12 0.000Germany 1.27 0.000Japan 1.88 0.000South Korea 1.90 0.000

Country t-value p

OECD

59

Coercive power - harsh power Legitimate power – soft power

(French & Raven, 1959; Raven, 1965, 1992, 1993; Raven, Schwarzwald & Koslowsky, 1998)

Coercive power: Bases of power are force and pressure, either through punishment and withdrawal of rewards

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Legitimate power: Bases of power are legitimization and expertise

Low legitimate power

Low reason-based trust

Voluntary compliance

targeted

High coercive power

High coercive power

Anger

not targeted

Fear

Rational decision: hiding/

enforced compliance

Enforced compliance

+

not targetedtargeted

Attention/prudence

Low coercive power

Voluntary compliance

Protection/security

High legitimate power

High reason-based trust

-

Low coercive power

Evasion

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Corruption

Transparency International (2014)

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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

Schneider, Buehn and Montenegro (2010)64

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

Happiness

Veenhoven (2009)66

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.

National Happiness

Trus

t

Power

Vee

nhov

en H

appi

ness

Overview





68

Deterrence (audits and fines)

Power (legitimization, professionalism and coercive power)

&

Trust building measures

Power matters!Power must be legitimized: power of authorities is effective if citizens trust the authorities. Trust is the necessary bases of power.Coercive power is effective if it is well targeted to prevent exploitation of cooperative citizens (leading to feelings of protection rather than fear and anger)

From enforced to voluntary compliance

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https://www.youtube.com/watch?v=qEa_KnOhY-Y

Wrap up

Change your perspective

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http://www.irs.com/

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https://www.gov.uk/government/organisations/hm-revenue-customs

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https://www.efd.admin.ch/efd/de/home.html

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http://www.bundesfinanzministerium.de/Web/DE/Home/home.html

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http://government.ru/en/department/69/events/

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http://uk.fm.dk/

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Home page of the Finnish Ministry of Finance

http://www.vero.fi/en-US (retrieved 15-11-2013)

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http://www.mnec.gr/?q=el

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Home page of the Austrian Ministry of Finance

https://www.bmf.gv.at (retrieved 15-11-2013)

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https://www.bmf.gv.at/

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The National Taxpayer Advocate of the U.S. Internal Revenue Service is convening the Inaugural...

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