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Understanding Surveys of Taxpayer Honesty
Abstract
Standard models of taxpayer compliance have fallen short of predicting the degree of honesty found in the data. We contribute to the more recent literature assessing cultural factors in the decision to underreport. We find that there are two forms of possible misspecification in the current models of taxpayer compliance. First, we use econometric methods for detecting misclassification of the dependent variable in a probit model, applying them to a recent IRS-sponsored survey. We find evidence of misspecification, which may suggest that taxpayers are not fully truthful in their survey responses, a result that helps to reconcile findings from survey data with studies using other methods. Second, we divide the sample into those individuals who have an intense sense of "tax morality" and those who do not, in order to compare groups with differing tax cultures. We find that the two groups are indeed influenced differently by the factors that have been commonly found in the literature, such as opinions regarding the fairness of the tax system.
... While the burgeoning literature on educational incentives and taxes has not (yet) allowed for tax evasion, the impact of education on tax evasion outcomes has been investigated empirically. The findings are mixed: some studies do not observe a significant correlation (Dubin et al. 1987Dubin et al. , 1990 Wilson and Sheffrin 2005), while others report education variables to have a negative impact on compliance measures (Witte and Woodbury 1985; Beron et al. 1992, Chan et al. 2000, Ritsema et al. 2003), or a positive effect on tax fraud (Groot and van den Brink 2010). Finally, there is also evidence that educational attainments mitigate tax evasion activities (Dubin and Wilde 1988; Richardson 2006; Gërxhani 2007). ...
... On an individual level, the relationship between education and tax evasion behaviour may differ accordingly with age, if age is taken as an indicator of the extent to which the formation of human capital has been completed. 8 If income and wealth in all states of the world (that is 8 Empirical studies linking tax evasion behaviour to age generally use dummies such as for being 65 years of age or older ( Wilde 1987, 1988; Dubin et al. 1990; and Richardson 2006), or employ three to four age categories (Torgler 2005; Wilson and Sheffrin 2005). With the exception of Wilson and Sheffrin (2005) who observe a positive effect of age on honesty with respect to tax declarations, age is generally an insignificant covariate. ...
A strictly risk-averse individual with an exogenous gross income in period one can acquire human capital in the same period and evade taxes. Period-two income rises with educational investments in period one and can also be hidden from tax authorities. It is shown that a greater tax deductibility of educational investments and higher individual ability induce a positive correlation between tax evasion and educational investments in period two, whereas the relationship in period one is ambiguous. These theoretical predictions can explain diverse empirical findings on the correlation between education and tax evasion.
... Therefore, attitudes toward tax honesty need to be clarified and can be considered a vague construct [38]. This is also agreed by [39], who has shown that attitudes toward taxes are full of complexity and that the social structure of taxes influences tax compliance behavior. In this context, attitude refers to a person's evaluation of desirability or dissatisfaction [20]. ...
... Therefore, ceteris paribus, if tax morale is high, tax compliance is also expected to be higher. Wilson and Sheffrin (2005) used the US IRS taxpayers' compliance measurement program data and divided the sample into moral and immoral taxpayers. Moral taxpayers were those who did not tolerate evasion of low amount, whereas immoral taxpayers were those who have favourable attitudes towards evading higher amount. ...
The objective of the study was to evaluate the determinants of voluntary compliance in Self-Assessment Scheme in Nigeria, although with special reference to Akwa Ibom State. This was motivated by the growing emphasis on the need for tax authorities to assess and evaluate factors militating against effective tax revenue generation through Self-Assessment System in the developing economies like Nigeria. Data were collected from the Akwa Ibom State Board of Internal Revenue Service (SBIRS) office using questionnaire. The sample size was determined through Slovin's formula. Structured survey design was adopted in conjunction with descriptive statistics and regression analyses for estimating the test result. The model summary revealed that 80.8% of the variation in voluntary Tax Compliance is jointly attributable to the influence of individual, socioeconomic , and demographic factors such as Personal financial constraint, Awareness of offences and penalties, Tax rate, Ethics and attitude of taxpayers, Perception of equity and fairness, level of Income, and Level of education. The ANOVA summary also justifies that the independent variables have significant influence on voluntary tax compliance with F-calculated value of 233.763 being greater than its corresponding critical-F value of 0.308451 at p<0.05. The regression coefficients indicated a positive and significant relationship between Awareness of offences and penalties (0.337), Ethics and attitude of taxpayers (0.265), Perception of equity and fairness (0.260), Level of education (0.103) and Tax compliance. Personal financial constraint (0.051) has a positive but insignificant influence on tax compliance while Tax rate (-0.062) and level of Income (-0.055) have negative influence on tax compliance. Conclusively, individual factors, socioeconomic factors and demographic factors were identified as the determinants of tax compliance and that they significantly influence voluntary compliance in Self-Assessment System in Nigeria. It was therefore recommended that tax authorities should evolve equitable tax framework that will motivate, control, sensitize, and educate the taxpayers on voluntary compliance in Self-Assessment System in the country.
... Despite the above, the evidence from studies on tax compliance by gender shows that female entrepreneurs report a lower probability of underreporting revenue (Bazart & Pickhardt, 2009;Gërxhani, 2007;Lewis et al., 2009;Wilson & Sheffrin, 2005). The literature explains distinctions between genders based on fundamental discrepancies at the cognitive, emotional and behavioral level; different ethical standards; variations in risk propensity; and different participation levels by men and women in the workforce and government (Hasseldine & Hite, 2003;Kastlunger et al., 2010;Torgler & Valev, 2010). ...
This paper investigates factors that motivate entrepreneurs to completely operate within informality and the drivers of formal companies to underreport revenues. In particular, this work identifies and organizes the determinants of firm informality through a systematic literature review in Scopus and Web of Science databases. The article presents several contributions. First, it examines the two main frameworks of informality (structuralist/exclusion and legalistic/exit dimensions) and links this with the different roles of unregistered firms in economic development (survival, De Soto, and parasite views). It also studies the theoretical basis of informality, including economic, institutional, psychological, and sociological aspects. Second, the paper summarizes business informality determinants based on studies with different methodological approaches (macro, microeconomic), contexts (developed, emerging, transition economies), and periods (1983-2018). Our results show that firm informality is mostly addressed in the examined literature as a decision or voluntary choice by companies and entrepreneurs (legalistic vision). Third, the article proposes an integral theoretical model, according to which the firm informality level is determined by structural elements (company and entrepreneur’s characteristics) and environmental factors (corruption, bureaucracy, taxes, etc.). The analysis is relevant for researchers studying this subject and for policymakers as well.
... These hypothetical questions were aimed at soliciting unbiased responses from the respondents taking a clue from previous research studies (Nsor-ambala 2015). The study observed that responses from survey on tax compliance are unreliable due to responses biases and lack of perfect recall by respondents (Wilson and Sheffrin, 2005). However, in order to obtain holistic picture of the real tax compliance intentions of self-employed persons, direct questions were also administered to the same respondents in addition to the hypothetical questions to test for consistency and reliability in their responses and the results obtained from the direct questions are shown in the following. ...
The purpose of this study was to establish whether tax compliance intentions of tax-registered self�employed persons are still influenced by economic variables instead of non-economic variables which
are now at the centre stage in tax compliance research. A quantitative research design based on a
survey of 453 self-employed persons randomly selected from 15 Small Taxpayers’ Offices across the
Greater Accra region was used. Data was analysed using the Statistical Package for Social Sciences
(SPSS) version 24 software complemented with a correlation analysis and validated using multiple
regression and one-way analysis of variance. Results indicate that if the Ghana Revenue Authority
(GRA) conducts frequent audits on business records and activities, and imposes lower tax rates on
self-employed persons, a moderate but positive effect on tax compliance could be achieved. The results
also indicate that higher fines could have a moderate negative effect on tax compliance decisions.
Lastly, the level of income of self-employed persons was found to have weak but positive effects on
their tax compliance intentions. The overarching results from this study indicate that economic
variables do have positive but moderate effects on tax compliance intentions of self-employed persons
in developing economies. It was recommend that the tax administration authority should not place too
much emphasis on higher fines and imposition of higher income tax rates to encourage voluntary
compliance, but instead, should place more emphasis on auditing of records and returns, and engage
and provide holistic support to enable self-employed persons to grow and expand their businesses.
... However, it is important to emphasize that theoretical concepts, operationalizations, and measurement of attitudes vary considerably (Kirchler, 2007). While some authors understand attitudes as subjective evaluations of tax evasion (e.g., Porcano, 1988;Wärneryd & Walerud, 1982), others consider evaluations of crime in general (e.g., Wahlund, 1992) and general judgments of the government and state (e.g., Schmölders, 1960), or intolerance of tax evasion (e.g., Wilson & Sheffrin, 2005). Furthermore, some researchers refer to attitudes and moral beliefs about the propriety of evasion (e.g., Elffers, Weigel, & Hessing, 1987), moral attitudes towards tax evasion (e.g., Orviska & Hudson, 2002), or tax mentality including beliefs and evaluations of evasion and awareness of tax non-compliance in socially relevant groups (e.g., Lewis, 1978;Schmölders, 1960). ...
The motivation to comply or not to comply is considerably influenced by beliefs, attitudes, and social representations of taxpayers. These subjective conceptualizations and evaluations are often not objective or true, but they determine how citizens construct their subjective reality. Attitudes, judgments, and behavior intentions eventually shape people’s behavior which is often more affected by what they think than by what actually is. We first explain what social representations are, how they are related to individual attitudes, and to what extent both social representations and attitudes shape behavior according to the existing psychological literature. In the following section we present three of our own studies on taxpayers’ social representations of taxes and their attitudes towards tax evasion and tax avoidance. These empirical studies identify relevant differences in attitudes between different occupation groups: Self-employed entrepreneurs express less favorable views on taxes and the tax authorities and as a result feel more restricted and hindered in their work, while employed workers focus stronger on the exchange function between tax payments and the resulting provision of public goods. Despite the differences, in all occupation groups tax evasion is not perceived as a severe crime and tax evaders are even judged quite positively and as more intelligent than the typical tax payer. The most recent study suggests that tax evasion might not be evaluated as positive anymore as in earlier studies, but instead tax avoidance seems to be morally accepted and taxpayers engaging in tax avoidance are judged more positive than the typical taxpayer.
... Consequently self-reports differ from actually detected tax evasion behavior (Baldry, 1987;Effers, Robben & Hessing, 1991). Problems also emerge from untangling tax evasion from inadvertent non-compliance, taxpayers' memory lapses and calculation errors (Hessing, Effers & Weigl, 1988;Wilson & Sheffrin, 2005). ...
... Distributive justice (refers to exchange of resources, both benefits and costs), procedural justice (refers to the process of resources distribution) and the retributive justice (refers to perceived appropriateness of sanctions in the case of norm-breaking (Kirchler et al. 2008). Wilson and Sheffrin (2005) used the US IRS taxpayers' compliance measurement program data and divided the sample into moral and immoral taxpayers. Moral taxpayers are those who did not tolerate evasion of low amounts, whereas immoral taxpayers were defined as those who did not tolerate evasion of low amounts, whereas immoral taxpayers were defined as those who had more favorable attitudes towards evading higher amounts. ...
Despite the vital share of tax revenues in total government expenditures, tax to GDP ratio remains low in Rwanda amounting 15.0 % in 2014/2015 compared to the average of 18% in some developing countries. In addition to this low tax to GDP ratio, the informal sector which accounts for 44% of GDP, also contributes to government revenue loss. This study aimed at investigating factors affecting tax compliance both in formal and informal sectors using Multinomial Logistic Regression Analysis and the sample under study was made up by 793 respondents. The study revealed that the level of income, compliance costs, penalty rate, attitudes towards taxes, equity and fairness of the tax system and social norms are statistically significant to affect tax
... Whereas empirical studies consistently support a positive relationship between age and tax compliance (e.g., Vogel, 1974), the findings regarding sex are less consistent (for an early review, see Jackson & Milliron, 1986). In the case of significant sex differences, women have often been found to be more compliant than men (e.g., Bazart & Pickhardt, 2009;Gerxhani, 2007;Hasseldine, 1999;Lewis, Carrera, Cullis, & Jones, 2009;Mason & Calvin, 1978;Porcano, 1988;Spicer & Becker, 1980;Spicer & Hero, 1985;Vogel, 1974;Wilson & Sheffrin, 2005). Several studies, however, considered sex differences as a side-effect rather than the central research question. ...
We used decision-making experiments to investigate tax compliance of women and men and focused on gender-role orientation as well as on the second-to-fourth digit ratio (2D:4D), a putative marker of prenatal testosterone exposure. In 60 experimental periods, participants were endowed with a certain amount of money representing income and had to pay taxes. They were audited with a certain probability and fined in case of detected evasion. Both demographic sex and gender-role orientation were significantly related to tax compliance, whereas 2D:4D was not. Women and less male-typical individuals were more compliant than men and more male-typical individuals. Women and men also differed regarding their taxpaying strategies. Whereas for men audits increased subsequent evasion, women’s tax payments were less affected by prior audits.
... Previous research comparing tax behaviour across countries also often relies on a very small number of survey items (e.g., Alm & Torgler, 2006;Torgler, 2003;Torgler, 2005;Wenzel, 2004a;Wenzel, 2004b;Wenzel, 2007). Validity and reliability are rarely questioned (e.g., Wilson & Sheffrin, 2005). ...
Surveys on tax compliance and non-compliance often rely on ad hoc formulated items which lack standardization and empirical validation. We present an inventory to assess tax compliance and distinguish between different forms of compliance and non-compliance: voluntary versus enforced compliance, tax avoidance, and tax evasion. First, items to measure voluntary and enforced compliance, avoidance, and evasion were drawn up (collected from past research and newly developed), and tested empirically with the aim of producing four validated scales with a clear factorial structure. Second, findings from the first analyses were replicated and extended to validation on the basis of motivational postures. A standardized inventory is provided which can be used in surveys in order to collect data which are comparable across research focusing on self-reports. The inventory can be used in either of two ways: either in its entirety, or by applying the single scales independently, allowing an economical and fast assessment of different facets of tax compliance.
According to the United Nations Population Fund [42], a higher number of women in the workforce correlate with higher gross domestic product (GDP) growth. However, today, women have little access to seats in business boardrooms, even in developed markets. Sport can be powerful vehicle for change. The full participation of women in team activities such as sports nurtures the advanced leadership skills that the complex world economy so urgently needs [16]. This paper will explore the impact sports participation by women can have on development, entrepreneurship, and social change in Nigeria and Zambia.
Self-reported tenure is often used to determine job changes. We show there are substantial inconsistencies in these responses; consequently, we risk misclassifying job changes as stays and vice versa. An estimator from Hausman et al. is applied to a job change model for Ireland, and we find that ignoring misclassification may substantially underestimate the true number of changes and lead to diminished covariate effects. The main contribution of the paper is to control for misclassification when estimating the wage effects of job mobility. A two-step approach is adopted. We find ignoring misclassification leads to a significant downwards bias in the wage impact, and we provide an estimate that corrects for measurement error.
Since the 1950s (Schmölders, 1959) it is well known that behavioral aspects have an influence on tax evasion or tax compliance. In particular, interactions among the various entities involved in the taxation process (e.g. taxpayers, law makers, tax practitioners, tax authorities, etc.), and the dynamics that these interactions may generate, seem to play an important role for the actual level of tax compliance. However, the mainstream neoclassical approach to tax evasion (Allingham & Sandmo, 1972) cannot account for such interactions and dynamics. Therefore, during the last two decades new approaches (e.g. lab experiments, agent-based modeling, etc.) have been developed with a view to model how behavioral dynamics may foster or prevent tax evasion. In addition, empirical evidence has been generated that supports a role for such interaction dynamics. In this contribution we survey the main developments in this research area and provide some suggestions for further research.
This study employs a laboratory experiment to explore the joint effect of income source (earned versus endowed) and decision context (tax versus nontax) on tax compliance behavior. During the experiment, subjects faced various income levels and made multiple reporting decisions. The results indicate that overall compliance is not significantly affected by the interaction of income source and context. However, this joint effect influences the relationship between income level and compliance and how compliance behavior evolves over time. In both cases, the treatment group with earned income in a tax context displays behavior that is distinct from the other three groups.
In the emergent field of tax psychology, the focus on regulating tax evasion recently shifted towards searching for situational cues that elicit common goals compliance. Trust and reciprocity are argued to steer a socially-favorable environment that supports social tax ethics norms. Experiments, in which 256 participants played an economic trust game followed by a common goods game, found evidence for trust and reciprocity leading to individuals contributing to common goals. The more trust and reciprocity was practiced and experienced, the more common goals were supported – leveraging trust and reciprocity as interesting tax compliance antecedents. The results have widespread implications for governmental-citizen relations. Policy makers and public servants are advised to establish a service-oriented customer atmosphere with citizens breeding trust and reciprocity in order to reach common societal goals.
We conduct an empirical study on the determinants of the psychological costs of tax evasion, also known as tax morale. As
a preliminary step, we build a model of tax evasion including non-monetary considerations, show the relationship between tax
compliance and tax morale. In the empirical analysis of tax morale we find, using a binomial logit model, that the justification
of tax evasion can be explained by the presence of grievance in absolute terms (those who feel that taxes are too high, those
who feel that public funds are wasted, and those who accept underground economic activities); and grievances in relative terms
(the suspected level of others’ tax evasion). The sense of duty and the level of solidarity are also relevant factors, but
to a lesser extent.
KeywordsTax morale–Tax evasion–Reputation factor
It is commonly believed that voluntary tax compliance is affected by the nature of the expenditures and by the manner these expenditure decisions are made. This paper reports on the results of a series of laboratory experiments designed to examine the role of fiscal exchange, the uses of tax revenues and the decision process by which these uses are selected, in individual compliance behavior. Individuals respond positively when tax proceeds are directed toward programs they approve of and when they feel they are active in the decision process.
A joint analysis of tax preparation mode and federal income tax noncompliance is performed using individual level audit data. To control for the nonrandom allocation of taxpayers to their chosen modes of tax preparation, an endogenous switching specification is employed. The framework is then extended to control for two separate forms of measurement error. First, although behavioral models of tax noncompliance typically account only for deliberate misreporting, audit-based measures of noncompliance include both deliberate and unintentional reporting violations. A statistical procedure is developed to distinguish between these two alternative sources of noncompliance. Second, auditors are not always successful in uncovering noncompliance when it is present. A detection controlled estimation procedure is employed to account for detection errors.
Misclassification of dependent variables in a discrete-response model causes inconsistent coefficient estimates when traditional estimation techniques (e.g., probit or logit) are used. A modified maximum likelihood estimator that corrects for misclassification is proposed. A semiparametric approach, which combines the maximum rank correlation estimator of Han (1987) (Journal of Econometrics 35, 303–316) with isotonic regression, allows for more general forms of misclassification than the maximum likelihood approach. The parametric and semiparametric estimation techniques are applied to a model of job change with two commonly used data sets, the Current Population Survey (CPS) and the Panel Study of Income Dynamics (PSID).
This article presents an econometric analysis of income tax evasion and its detection based on individual-level data drawn from the Internal Revenue Service 1982 and 1985 Taxpayer Compliance Measurement Programs. I specify a model consisting of two equations: the first measures the extent of evasion; the second, the fraction of evasion detected. The empirical analysis explores the effects of income, the marginal tax rate, and various socioeconomic characteristics on filer evasion behavior, and it assesses the variability in detection rates among IRS examiners. Finally, I use the empirical estimates to construct new estimates of the income tax gap; the new estimates are very close to the previous IRS estimates.
This paper contains an empirical analysis of income tax noncompliance in Switzerland, based on the standard model of tax evasion. Noncompliance is found to be positively related to the marginal tax burden and negatively to the probability of audit, though the latter impact is only weak. There is no evidence of a significant deterrent effect of the penalty tax. The extended model reveals that noncompliance is positively related to inflation. Finally, noncompliance is significantly lower when citizens/taxpayers have direct control over government budgets, whereas the opposite holds when there is no such control. Copyright 1996 by Kluwer Academic Publishers
The effect of mismeasured variables in the most straightforward regression analysis with a single regressor variable leads to a least squares estimate that is downward biased in magnitude toward zero. I begin by reviewing classical issues involving mismeasured variables. I then consider three recent developments for mismeasurement econometric models. The first issue involves difficulties in using instrumental variables. A second involves the consistent estimators that have recently been developed for mismeasured nonlinear regression models. Finally, I return to mismeasured left hand side variables, where I will focus on issues in binary choice models and duration models.