Incentivising tax evasion in small business

Team: Valerie Braithwaite, Eliza Ahmed, Monika Reinhart and Julie Ashby

Question

What does it mean to have a voluntary taxpaying culture in the small business context?

Similar to the models that regulators use to improve compliance: Kagan & Scholz, Mitchell, the ATO’s Easier, Cheaper and more Personalized program

A model of self-regulation

Ability

Willingness Pathways

Willingness

Our goal is to understand

Commitment to Honest Taxpaying

or

How does commitment to honest taxpaying compare with capacity in predicting tax evasion?

What does honest taxpaying mean to small business owners?

What factors promote and what factors undermine commitment to honest taxpaying?

Three studies asking three questions

Study 1:

Study 2:

Study 3:

Data bases

Study 1: QuantitativeCommunity Hopes, Fears and Actions Survey (CHFAS)244 small business owners or self-employed individuals from a random national sample of 2040 citizens

Study 2: QualitativeAustralian Tax System – Fair Or Not Survey (ATSFONS)260 small business owners or self-employed individuals from a random national sample of 2374 citizens

Study 3: QuantitativeAustralian Tax System – Fair Or Not Survey (ATSFONS)302 small business owners or self-employed individuals from a random national sample of 2374 citizens

Study 1 Predicting tax evasion

Commitment to honest taxpaying -.35***

Not knowing what the tax office expects

.26***

Tax is a low organizational priority

.16*

Poor ability to keep documentation and records

High feeling of competence to do tax

Financial struggle because of tax

Tax refund more often than not

Reliance on others

Ideal honest, no-fuss adviser -.14*

* p < .05; ** p < .01; *** p < .001

Study 2

1. In your own words, what do you expect the tax office to deliver to you?

2. In your own words, what do you expect the tax office to deliver to the Australian community?

3. In your own words, what is your responsibility to the tax office?

Finally, if you have any comments that you would like to add, please write them below.

Study 2 Themes

Honesty and being law abiding (propriety)

“My responsibility is to be honest; to accept and live within laws laid down by government; if I disagree, then use legal options available as a taxpayer and vote to have the law changed.”

Obedience

“I am obliged to pay whatever is decided or legislated … Taxation - yes, representation -no. There was a revolution over this 200 years ago in America. A similar thing got crushed at Eureka Stockade. History repeats … we wish.”

Study 2 Themes (continued)

The fairness slide

“To pay what is due and fair. ”

“[To] contribute a reasonable proportion of earnings without jeopardising our standard of living.”

“To provide them with our tax return that is as honest as we can get it while bearing in mind that we also do small cash jobs that we don’t declare.”

Study 2 Themes (continued)

The struggle to make good

“Financially I have no future.”

“[I want] a tax system where you don’t get penalized for honesty and hard work.”

“Why a corporation/large tax defaulter is negotiated with, while a lower income earner is sent to the wall is beyond me.”

Study 2 Themes (continued)

Reform

“A better tax system that respects hard working taxpayers and rewards those people in a way that stops them from feeling that they are working only to pay tax.”

“It seems to me that if you wish to work longer hours you are penalised for this by paying excessive taxes.”

“Give us more incentive to earn larger salaries and to spend money that will create more jobs.”

Study 2 Themes (continued)

Lack of even-handedness in the system

Distancing from the wealthy:

“There are obviously too many loopholes in the present system, meaning a significant percentage of unscrupulous companies and individuals are not contributing.”

“Why companies, executives, politicians have more tax/financial advantages than your average ‘blue collar worker’ has angered and confused me for years.”

“People who earn larger incomes are the only people to obtain expensive ‘accounting’ which minimises greatly their obligations - Mr and Mrs Average and small business carry more than their share.”

Study 2 Themes (continued)

Lack of even-handedness in the system

Distancing from the poor:“The backbone and the main provider of tax levies is from the middle bracket, however there is no opportunity or reward received… the bludgers get $14,000 grants when we all have to struggle to pay our mortgages and 50% tax.”

“[We need] more fairness towards hardworking Australians as opposed to those who could not be bothered to work.”

And politicians:“While politicians continue to exploit loopholes and enjoy tax free perks, we will never have an equitable system for all Australians.”

Study 2 Themes (continued)

Virtue in paying, virtue in enforcing

“I expect them to do their job, get through their work and do it correctly, and show no favours to high flyers and other high profile people. … I expect them to be honest to the Australian people who pay their wages.”

“Apprehend tax cheats, particularly companies or corporations and high salary earners who use the system to avoid legitimate tax obligations.”

Tax avoidance was seen to be a widespread problem:

“The rich are getting richer and the poor pay more tax.”

Study 2 Themes (continued)

The protection of a tax adviser “[My responsibility is] to get on with our own business and engage an honest and reputable accountant.”

“I accept my yearly tax returns as supplied by my accountant to be true to the best of my honest ability.”

“I place my trust in my accountant – mistakes still come back to me!”

Study 2 Themes (continued)

Discontent with treatment from the tax office

“ I expect the tax office to treat me justly and with respect. They are public servants not government overlords.”

“Treat me as an honest person and not a criminal who has yet to be caught.”

“I would like them to adopt a more human face and not [act like an] untouchable institution.”

A more extreme respondent vented his wrath in this way:

“The tax office is almost as bad as the Taliban.”

Study 2 Themes (continued)

A sense of hopelessness

“Taxation, a very necessary evil, should not be, in this country, such a messy, unfair burden on the small and innocent citizen. However, while the rich and influential are pandered to, there is not much hope of a decent reform.”

“We know that the tax system favours the wealthy and will probably never be fair to the lower income earner.”

Variables extracted from Study 2

Justice - paying more than my fair share compared with other Australians- interpersonal and procedural justice: respect, consult, trust- belief in trust norms: hope for the future

Socially integrative aspirations and actions - humility - social integration

Perceived deterrence

Bypass routes - shame displacement- dissociation

Variables from Study 1

Commitment to honest taxpaying Ideal honest, no-fuss adviserTax evasion

Distributive, Procedural,Relational Justice

Socially Integrative Aspirations and Actions

Commitment to Honest Taxpaying

Perceived Deterrence

Bypass withShame Management

Bypass withDissociation

Non-evasion,Honest Tax Adviser

Conclusions

1. Commitment to honesty is important.

2. Pathways to honesty are important.

3. Deterrence reinforces honesty.

4. Injustice will break down honesty.

5. The types of injustice that are important in this context are believing that you are paying more tax than others and you are not being treated respectfully and inclusively.

Questions

1. What is the role of socially integrative aspirations and actions ?

2. How does the moral bypass work ?

3. What kinds of justice are important in what kinds of situations ?