Slippery Slope Framework:
The Impact of Power and Trust on
Taxpayer Compliance Behavior
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 Kirchler
University of Vienna, Austria
2015
1
Thanks
Team (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
5
Science
Giving and Receiving
Most citizens appreciate public goods and agree with policy
regulations,
but many perceive their own contributions too high relative
to what they get back.
6
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 goods
Perceived amount of Desired amount of
public expenditures public expenditures
M
SD
M
SD
Perceived individual Desired individual utility of
utility of public goods
public expenditures
M
SD
M
SD
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
Total
3.21
0.38
3.43
0.41
2.45
0.65
3.19
0.63
7
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
8
Representations of taxes
Fynantzer
= Landbetrieger,
derscrews
die Leute
Tax inspector
= Impostor who
umbs
bescheisset
peopleGeld
for their
money
Basilius Faber, 1680
Thesaurus editionis scholasticae
9
Study in progress (Kirchler, E. et al., 2015): N = 64 white colar workers, self-employed, students
Representations of taxes
Evaluation
Honest taxpayers
Typical taxpayers
Tax avoiders
Tax evaders
-1.5
Hard-working (vs. lazy)
-1.5
Honest taxpayers
-1
-0.5
-0.5
0
0.5
0.5
1
1.5
1.5
-1
-0.5
-0.5
0
0.5
0.5
1
1.5
-1
-0.5
-0.5
0
0.5
0.5
1
1.5
1.5
Typical taxpayers
Tax avoiders
Tax evaders
Intelligent (vs. stupid)
-1.5
-1.5
1.5
Honest taxpayers
Typical taxpayers
Tax avoiders
Tax evaders
-1.5
-1.5
10
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
11
Tax morale and shadow economy
Bruno Frey & Benno Torgler
Tax morale = intrinsic motivation to comply
(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)
30
Size of Shadow Economy (in % of the GDP)
Social representations
and attitudes drive
behavior
□ Italy
20
□ Belgium
Norway
□ Spain
□
Portugal □
□
Sweden
Finland□
Germany
Netherlands □
□
Ireland □ □ Denmark
France□ □Great Britain
Austria
□□
□USA
Switzerland
10
0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Degree of Tax Morale
13
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
14
How to increase tax compliance ?
Decision under risk
Sure option
Risky option
Allingham & Sandmo (1972); Srinivasan (1973)
15
Becker, G. S. (1968). Crime and punishment: An economic approach. Journal of Political Economy, 76, 169-217.
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.
The effect of deterrence measures is weak
and sometimes oppostite to the intended
effect…
16
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”.
17
Enforcing tax compliance
Audits 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.)
18
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
19
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)
Thousands of words
1800
1600
1400
1200
1000
Income taxes only
Entire tax code
800
600
400
200
0
1955
1965
1975
1985
21
1995
2000
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: FleschKincaid readability test
22
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.
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
23
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
Trust
0.13**
0.74***
Service
Tax compliance
(0.22***) 0.12**
Sobel test: z = 2.57, p < .01
Sobel test for mediation analyses with control variables (socio-demographic,
economic and psychological): z = 2.20, p < .05
27
4. Mediation analyses:Entrepreneurs
Trust
0.14**
0.73***
Service
Tax compliance
(0.22***) 0.11**
Sobel test: z = 3.72, p < .001
Sobel test for mediation analyses with control variables (socio-demographic,
economic and psychological): z = 1.80, p < .05
28
Fairness and social norms
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.
29
Fairness
• 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
https://www.youtube.com/watch?v=lKhAd0Tyny0
Fairness – capuchin monkeys
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
Canada
Australia
Europe (average 31 countries)
Switzerland
Austria
UK
Germany
Italy
Greece
Romania
Bulgaria
5.9
10.3
10.3
18.0
6.5
8.2
9.4
12.2
20.6
22.4
28.0
30.6
Retrieved 2015-11-07 from http://www.econ.jku.at/members/Schneider/files/publications/2015/ShadEcEurope31.pdf
The Problem is: Tax Avoidance
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.
33
Amancio Ortega Gaona
Inditext (e.g., Zara, Massimo Dutti, Bershka)
Wealth: 70,7 Billion US$ (2015) - Forbes
34
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)
35
Tim Cook
36
Apple under Investigation
Business Insider UK, September 29, 2014
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 !
37
Problem
Enforcement 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
Tax avoidance
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.
43
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, Austriapilot, 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
 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
50
The Slippery Slope Framework
Perception of authorities
Power of authorities: perceived potential of tax
authorities to detect and to punish evasion
Trust in authorities: taxpayers‘ perception of tax
authorities as benevolent and working for the
common good
Behaviour of taxpayers
Compliance: degree of cooperation by taxpayers
Enforced compliance vs voluntary cooperation
Slippery Slope Framework
Kirchler, Hoelzl and Wahl (2008)
Enforced Tax
Compliance
Voluntary Tax
Cooperation
Maximum
Maximum
Subjective
complexity of tax
law
Compliance
Tax morale and
attitudes
Personal, social
and societal norms
Fairness
Minimum
considerations
Maximum Motivational
postures
Compliance
Antagonistic
climate:
Command
and control
Audits
Fines
Minimum
Authority’s
capacity to detect
and punish tax
evaders
Synergistic climate
Maximum
Power of
Authorities
Trust in
Authorities
Minimum
Minimum
Authority’
benevolence and
investment in
common
good 52
Cross-cultural testing of the SSF
44 countries study
Experimental testing of the main assumptions of the slippery slope
framework in 44 countries on 5 continents
53
Africa
Asia
Europe
North
America
Australia
South
America
Egypt
Ghana
Morocco
South Africa
Bhutan
China
Hong Kong
India
Indonesia
Iran
Israel
Japan
Pakistan
Russia
South Korea
Thailand
Turkey
UAE
Austria
Finland
France
Germany
Greece
Hungary
Iceland
Italy
Lithuania
Malta
Norway
Poland
Romania
Slovenia
Spain
Sweden
Switzerland
Canada
Mexico
USA
Australia
Brazil
Colombia
54
Research: 44 Countries
Tax
compliance
9
Intended Tax
Compliance
8
Voluntary Tax
Compliance
7
Enforced Tax
Compliance
6
5
4
3
2
1
0
Power
/
Powerlow
Low/
trust low
Trust
Low
Power
Power high/
High/
trust low
Trust
Low
Power
/
Powerlow
Low/
trust
Trusthigh
High
Power
Power high/
High/
trust
Trusthigh
High
56
57
58
Country
India
Iran
Pakistan
Indonesia
Egypt
Mexico
OECD
Ghana
France
Romania
Turkey
UAE
Norway
Bhutan
Israel
Lithuania
Morocco
South Africa
Portugal
Slovenia
Malta
Thailand
USA
t-value
-1.55
-1.53
-1.28
-0.82
-0.55
-0.52
-0.35
-0.34
-0.31
-0.24
-0.20
-0.18
-0.16
-0.10
-0.07
-0.01
-0.00
0.06
0.11
0.13
0.18
0.20
p
0.000
0.000
0.000
0.008
0.055
0.057
0.349
0.353
0.323
0.488
0.611
0.484
0.611
0.742
0.814
0.972
0.990
0.849
0.763
0.682
0.568
0.617
Ireland
Colombia
Russia
Finland
China
Sweden
Australia
Spain
Brazil
Hungary
Greece
UK
Italy
Austria
Canada
Hong Kong
Switzerland
Poland
Iceland
Germany
Japan
South Korea
0.23
0.30
0.37
0.48
0.50
0.50
0.52
0.53
0.54
0.63
0.63
0.68
0.70
0.80
0.82
0.88
0.94
1.11
1.12
1.27
1.88
1.90
0.510
0.415
0.248
0.049
0.109
0.069
0.093
0.086
0.066
0.074
0.047
0.081
0.015
0.019
0.028
0.021
0.001
0.000
0.000
0.000
0.000
0.00059
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
Legitimate power: Bases of power are
legitimization and expertise
60
Low legitimate
power
Low reasonbased trust
High legitimate
power
High reasonbased trust
+
Low coercive
power
High coercive
power
not targeted
Anger
Evasion
High coercive
power
targeted
Fear
Rational decision:
hiding/
enforced
compliance
Attention/
prudence
Enforced
compliance
not targeted
Low coercive
power
targeted
Protection/
security
Voluntary
compliance
Voluntary
compliance
61
Corruption
Transparency International (2014)
62
Corruption
Corruption Perception Index
Corruption Perception Index
β
Variable
B
SE B
Constant
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.
Shadow Economy
Schneider, Buehn and Montenegro (2010)
64
Shadow economy
Shadow Economy Index
Shadow Economy Index
β
Variable
B
SE B
Constant
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.
Happiness
Veenhoven (2009)
66
National Happiness
Veenhoven Happiness
Veenhoven Happiness
β
Variable
B
SE B
Constant
6.69
.11
Trust
.165
.18
.18
Power
.468
.18
.50*
R2
.42
F
14.75***
Note. N = 43
*p < .05. ***p < .001.
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
68
From enforced to voluntary compliance
Deterrence
(audits and fines)
Power
(legitimization,
professionalism
and coercive
power)
&
Trust building
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)
measures
69
Wrap up

https://www.youtube.com/watch?v=qEa_KnOhY-Y
Change your perspective
70
http://www.irs.com/
71
https://www.gov.uk/government/orga
nisations/hm-revenue-customs
72
https://www.efd.admin.ch/efd/de/ho
me.html
73
http://www.bundesfinanzministerium.
de/Web/DE/Home/home.html
74
http://government.ru/en/department/
69/events/
75
http://uk.fm.dk/
76
Home page of the Finnish Ministry of Finance
http://www.vero.fi/en-US (retrieved 15-11-2013)
77
http://www.mnec.gr/?q=el
78
Home page of the Austrian Ministry of Finance
https://www.bmf.gv.at (retrieved 15-11-2013)
79
https://www.bmf.gv.at/
80