Treating taxpayers respectfully

Evidence from research

• Fairness and mutual understanding matters to taxpayers – and for compliance
• Respectful treatment in audits affects subsequent compliance
• Emotions are important, too
• Do positive rewards work?

Fairness and mutual understanding matters to taxpayers – and for compliance

In general, procedural fairness in the tax administration’s treatment seems to matter to taxpayers. Based on a nation-wide survey of Australians' views of their tax system and its administration (the Community Hopes, Fears and Actions Survey), Braithwaite (2003) documents that in terms of overall fairness, perceptions of insufficient procedural fairness from the tax office is an important factor along with economic self-interest and satisfaction with the nation’s democracy. However, not only does fairness matter to taxpayers, it also affects compliance. Using data from Australia as well, Kirchler, Niemirowski & Wearing (2006) demonstrate that the degree to which taxpayers and tax officials share beliefs and evaluations about a range of issues (including tax law complexity, tax mentality, ethics and social norms and judgments of tax officers and tax preparers’ support) is related to taxpayer compliance. This is important, because it indicates that procedural fairness matters: psychological theories propose that parties’ mutual view of the central issues at hand shapes the quality of an interaction, and that the quality of interaction, in turn, is a highly important aspect of perceived (and actual) procedural fairness.

Respectful treatment in audits affects subsequent compliance

While respectful treatment appears valuable in itself also when it comes to audits, research indicates that it also affects subsequent compliance of audited taxpayers. Frey & Feld (2002) shows that taxpayers’ willingness to pay their taxes (known as tax morale) is supported, or even raised, when tax officials treat them with respect in cases of less than full compliance. Measuring different approaches to taxpayer treatment via a survey sent to the tax authorities of the 26 Swiss cantons, the authors also find that when tax officials approach taxpayers instrumentally, forcing them to pay their dues, taxpayers tend to respond by actively trying to avoid taxation. Based on a survey of 652 taxpayers who has experienced enforcement from the Australian Taxation Office, Murphy (2008) shows that feelings of resentment can mediate the relationship between disapproval and compliance. Specifically, the taxpayer’s perception of the enforcement experience (stigmatic or reintegrative) can influence feelings of resentment, which then affects how punishment influences subsequent compliance behavior.

Emotions are important, too

Recently, researchers have begun to study the role of emotions in tax situations, investigating if certain types of emotions have systematic effects on compliance. For example, Maciejovsky, Schwarzenberger, Kirchler (2012) conducts a series of experimental studies to investigate how emotions affect tax ethics. The study shows that affective priming and the ease with which tax information is retrieved moderate tax ethics, and that the relative effectiveness of deterrence —such as audit probabilities and tax fines— is moderated by affect. Enachescu et al. (2019) show that tax decisions elicit different emotions, which do seem to have an impact on compliance. Specifically, the researchers find that both positive emotions in general and specific negative feelings of self-blame, anger, and fear are important: Both self-employed and employed participants reported higher compliance intentions after having positive experiences with the tax authorities as compared to negative ones, and these effects were mediated in different ways by anger-related, self-blame-related, and positive emotions. Thus, while the study of the significance of emotions in tax situations has yet to yield clear policy recommendations, they do support the general idea of a multifaceted policy approach that emphasizes not only enforcement, but also cognitive and affective aspects of human behavior.

Do positive rewards work?

Although rewarding honest taxpayers to increase compliance sounds good on paper, the answer from empirical research remains unclear. On the one hand, Bazart & Pickhardt (2011) shows via a lab experiment that positive rewards in the form of individual lottery winnings for fully compliant taxpayers can have a strong positive impact on tax compliance, as they pull potential tax evaders into the compliant taxpayer domain. However, the authors note that this holds especially for men and in economies with a low rate of tax compliance. On the other hand, Brockmann, Genschel & Seelkopf (2016) find that reward treatments significantly affected tax behavior in their experiment – but not in a straightforward manner: Women altered their behavior as expected and complied somewhat more, while men reacted strongly in the opposite manner and evaded a much higher percentage of taxes than under the baseline.