Does Using the Tax System to Collect Other Obligations Affect Tax Compliance? An Australian Case Study Lecture 11 November 15, 2005 PA 546 Constantine Hadjilambrinos

Australian Federal tax agency is also responsible for collecting child support payments (CSS) and student loan obligations (HECS). PA 546 Constantine Hadjilambrinos Similar proposals for U.S. systems, particularly for child support obligations. Comparisons possible because both systems are taxpayer-active. Comparisons possible because both systems are taxpayer-active. Article is interesting because it explores the motivations for voluntary compliance. Article is interesting because it explores the motivations for voluntary compliance.

PA 546 Constantine Hadjilambrinos  If collection of CSS and HECS through tax system is detrimental to voluntary compliance, there are hidden costs of collection. Motivation is to increase efficiency of collection of child support and student loans.

Tax compliance traditionally understood in terms of benefits of successful evasion vs. costs of detection. PA 546 Constantine Hadjilambrinos Monetary costs: fines and penalties. Monetary costs: fines and penalties. Cost = Risk of detection X Severity of fines and penalties Social sanctions. Social sanctions.

PA 546 Constantine Hadjilambrinos Fear not sufficient for explaining why people pay tax. Alternative/Complementary explanations: Moral obligation—people pay tax because they believe it’s the right thing to do. Moral obligation—people pay tax because they believe it’s the right thing to do. Community norms, personal norms, tax morale Perceived fairness of exchange—people pay tax because they trust government to use revenues to provide useful benefits. Perceived fairness of exchange—people pay tax because they trust government to use revenues to provide useful benefits. Contingent consent

Other factors known to affect tax compliance: PA 546 Constantine Hadjilambrinos Age—Older taxpayers are less likely to cheat on taxes. Age—Older taxpayers are less likely to cheat on taxes. Gender—Women are less likely to cheat on taxes. Gender—Women are less likely to cheat on taxes. Income level—Poor people are more likely to cheat on taxes. Rich people are also more likely to cheat on taxes. Income level—Poor people are more likely to cheat on taxes. Rich people are also more likely to cheat on taxes. When it comes to additional payments, it is reasonable to assume that likelihood of cheating will increase for poor people. When it comes to additional payments, it is reasonable to assume that likelihood of cheating will increase for poor people.

Hypotheses about the effects of adding child support and student loan payments PA 546 Constantine Hadjilambrinos Additional payments have the effect of increasing the marginal tax rate. This increases the benefit to be derived from cheating—main effect hypothesis. Additional payments have the effect of increasing the marginal tax rate. This increases the benefit to be derived from cheating—main effect hypothesis. Additional payments could interact with constraints of deterrence, moral obligation, and trustworthiness, increasing incidence of cheating. Additional payments could interact with constraints of deterrence, moral obligation, and trustworthiness, increasing incidence of cheating.

The survey PA 546 Constantine Hadjilambrinos Mail survey—29% response rate Mail survey—29% response rate Measures—multi-item, multi-dimensional Measures—multi-item, multi-dimensional Tax evasion: under-reporting income, engaging in cash economy, exaggerating deductions. Tax evasion: under-reporting income, engaging in cash economy, exaggerating deductions. Additional payments: CSS and/or HECS. Additional payments: CSS and/or HECS. Deterrence: perceived likelihood of getting caught, perceived likelihood of sanctioning, perceived severity of sanctions. Deterrence: perceived likelihood of getting caught, perceived likelihood of sanctioning, perceived severity of sanctions. Moral obligation: personal norm of tax honesty, shame displacement and acknowledgement. Moral obligation: personal norm of tax honesty, shame displacement and acknowledgement. Trustworthiness: exchange trustworthiness, communal trustworthiness. Trustworthiness: exchange trustworthiness, communal trustworthiness.

The results PA 546 Constantine Hadjilambrinos Findings of previous research confirmed. Findings of previous research confirmed. Only significant interaction relationships were with trustworthiness and with income level. Only significant interaction relationships were with trustworthiness and with income level. Tax evasion is higher after CSS and HECS payments, even after controlling for gender, age, income, and the constraint variables (deterrence, moral obligation, and trustworthiness—the main effect hypothesis is supported. Tax evasion is higher after CSS and HECS payments, even after controlling for gender, age, income, and the constraint variables (deterrence, moral obligation, and trustworthiness—the main effect hypothesis is supported.