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Turning Resistance into Compliance: Evidence from a longitudinal study
of tax scheme investors
Tina Murphy
Centre for Tax System Integrity
6th June 2005
Today’s talk
The dispute between the ATO and tax scheme investors
Can apply the lessons learned here to taxpayers caught or prosecuted for serious non-compliance
2002 and 2004 survey: tracked changes in attitudes over time
Case Study: Mass marketed schemes
In 1996, ATO noticed increase in number of taxpayers involved in schemes
Increase in $ being claimed:$54m in 93/94 to $1b +
in 97/980
200
400
600
800
1000
1200
1400
87 88 89 90 91 92 93 94 95 96 97 98
Sch
eme
ded
uct
ion
s (
$m)
Year
Problem with schemes When ATO analysed the arrangements:
Commercial nature may have been OKBut were concerned with the way they were structured
and financed Investments largely funded through tax deductionsLittle private capital at risk
In 1998, took action against 42000 investors Saw it as a way of discouraging future marketing
and investment in schemes ATO went back 6 years and penalised those who
invested as early as 1992
Investor reaction Investors argued their accountants / financial
planners sold schemes as legitimate investments Resented the implication they were ‘tax cheats’ Disappointed with the lack of consultation In 1998/99 thousands of complaints made to the
Ombudsman Fighting funds set up Majority refused to pay up – more than 50% still
had not paid in 2002 (despite interest accumulating on debts)
Matter referred to a Parliamentary Senate Committee in 2000
Without a doubt some of the investors would have been sophisticated taxpayers who knew what they were doing (but majority blindly followed advice of the marketers)
More than likely a lot of myths and propaganda about the ATO were being developed by the power players involved in schemes
This led to the ATO being put on the defensive about the approach they took
Our past research Conducted Interviews and 2002 Survey:
Investors more resistant than general populationMeasured through Val Braithwaite’s Motivational
Posture of ‘Resistance’
55% of taxpayers in general population score high on measure of resistance
87% of investors in 2002 survey were found to be resisters (coupled with refusal to pay their tax debts makes them a difficult group to manage)
Industry
factors * industry definition* region* size, segment,
participants * profit margins* cost structures* industry regulation* industry issues
- competition- seasonal factors- infrastructure- labour
Sociological* norms* reciprocity* age* gender* education level* ethnic background
Economic
* interest rates* tax system* Govt policies/* international influence* inflation
Psychological
* risk* fear* trust* values* fairness/equity* opportunity to evade
Business profile* Structure - sole
trader, partnership,trust, company
* Business activities- type; local, inter-state, international
* financial data* business age
THE ATO COMPLIANCE MODEL
REGULATORYSTRATEGIES
MOTIVATIONALPOSTURES
Prosecution
Command Regulation
(Nondiscretionary)
Command Regulation
(Discretionary)
Enforced SelfRegulation
SelfRegulation
ENFORCEMENT STRATEGIES
Audit
with/without
Penalty
Real TimeBusiness Examinations/
Record Keeping Reviews
Education/ Record Keeping/Service Delivery
Resistance
Disengagement
AccommodationManagerial
Capture
(convenience, access, choice, control)
What characterises a Resister?
According to Braithwaite (2003), Resisters: Actively resist the self-regulatory system Likely to view ATO with antagonism See ATO as trying to catch taxpayers out rather than trying to help
them Believe people should take a stand against the ATO (may involve
avoiding their tax obligations or being uncooperative)
So in some respects, this posture highlights taxpayers who may be a challenge for the ATO to manage (but good news is that this group can be turned around—unlike those who disengage from the system)
Why were so many Resistant?
Was it just the fact that they had tax debts they didn’t want to pay?
Was it more than just the money?Was it something about the type of person
they were?Was it to do with the ATO’s approach to
handling the matter?
2001 Interview Study In initial exploratory interviews:
30 investors interviewedKept referring to how they felt they had been treated by
the ATOFelt poorly treated by ATOLetters rude and legalisticFelt the ATO’s handling of schemes was unfairFelt the ATO initially saw them all as tax cheatsUpset they hadn’t been consultedDisliked the idea that interest was charged going back 6 yearsFelt the wealthy got away with investing in these schemes
earlier Led me to procedural justice literature
Procedural Justice “Concerns the perceived fairness of the procedures
involved in decision-making and the perceived treatment one receives from the decision maker” (Tyler, 1990)
People’s reactions to experiences with authorities have been found to be rooted in their evaluations of the fairness of procedures used If procedures seen to be fair, will be more likely to trust that
authority, will see authority status as more legitimate, and be more inclined to accept decisions (even if outcomes are unfavourable)
People found to challenge authority if they believe the procedures are unfair
This pattern of results found in many different regulatory contexts (policing, workplaces, court system, tax, environment, etc)
Important point to note
Procedural justice theory does NOT suggest that punishment should not be used!
In fact, it suggests that punishment should be used if appropriateSome people have also misinterpreted CTSI’s work in
saying that we don’t believe in punishment. This is NOT true
It is the way in which this punishment is implemented that is important to consider
2002 National Survey Study
2001 interview study suggested that procedural justice was an important element in investors’ reactions to ATO (Murphy, 2003).
But study conducted on investors in Kalgoorlie – perhaps a particularly resistant group??
In 2002, conducted a national survey on 6,000 scheme investors (2,292 responded)Those who were more resistant were more likely to feel
they were treated in a procedurally unfair wayAlso less likely to trust the ATO and more likely to
question ATO’s legitimacy (Murphy, 2004)
Present Study
Shortly after collecting survey data in 2002, ATO announced settlement offer to scheme investors
I had attitudinal measures from before settlement offer (gave me opportunity to study changes in attitudes after offer made)
Conducted follow-up survey in 2004 (contacted 1250 investors, 659 participated)
Findings
Interested in: Investors who were resisters in 2002 and 2004 (resister
group) – N=289 – 44% continued to resist Investors who were resisters in 2002 but NOT in 2004
(non-resister group) – N=125 – 19% had change of heart
Why was it that some people continued to hold resistant views while others became less resistant over time?
Compared the 2 groups on a number of measures
DemographicsMeasure Group Mean SD Difference
Age Non-resister
Resister49.91
50.97
8.75
8.66
No
Income Non-resister
Resister83.42
78.36
55.03
55.93
No
Education Non-resister
Resister5.94
5.74
1.63
1.67
No
Tax debt Non-resister
Resister47,286
56,829
49,717
65,296
No
Eligible for offer
Non-resister
Resister1.13
1.12
0.43
0.40
No
Compliance Behaviour
Investors asked whether they thought their scheme-related experience had affected their taxpaying behaviour in a negative way
Resisters affected significantly more so
1
1.5
2
2.5
3
3.5
4
4.5
5
resistant both resist02 nonresist04
Degree taxpaying behaviour was affected
Influen
ce o
n b
eh
avio
ur
group
Compliance Behaviour cont’d
Taxpayers asked to expand how it was affected: I now try to avoid paying tax as much as possible I no longer declare all my income I now use the tax system in a negative way to recoup
my losses I am now more defiant towards the ATO I now look for ways to purposefully cheat the tax
system I now look for many ways to recoup my losses
Resisters Mean = 2.20 vs Non-resisters Mean = 1.80 over 6 items (scores out of 5; higher number means more non-compliance)
Compliance Behaviour cont’d
2002 evasion behaviour assessed and 2004 evasion behaviour assessed (eg. a) did they fail to lodge tax return; b) did they not declare cash income; c) did they make illegitimate deductions; d) did they refuse to pay back scheme tax debt)Resisters and Non-resisters did not differ at Time 1 (2002)But did differ at Time 2 (2004) – resisters more non-compliant
99% of cash income was declared by Non-resisters, only 65% declared by Resisters in 2004 (N = 19 and 62, respectively)
Changes in Attitudes
Explored changes over time for the following attitudes:Perceptions of procedural justiceTrust in the ATOPerceived legitimacy of the ATOObligation to obey the ATO
Attitude changes - 2002 to 2004
Proc. justice Trust
1
1.5
2
2.5
3
3.5
4
4.5
5
resist both resist02 nonreist04
Change in trust
Time 1Time 2
Tru
st
Group
1
1.5
2
2.5
3
3.5
4
4.5
5
resist both resist02 nonreist04
change in procedural justice judgements
Time 1Time 2
proc
edur
al ju
stic
e ju
dge
me
nts
Group
Attitude changes - 2002 to 2004
Legitimacy Obligation to obey
1
1.5
2
2.5
3
3.5
4
4.5
5
resist both resist02 nonreist04
Changes in legitimacy judgments
Time 1Time 2
legi
tima
cy ju
dgem
ents
Group
1
1.5
2
2.5
3
3.5
4
4.5
5
resist both resist02 nonreist04
Changes in obligation to obey ATO
Time 1Time 2
oblig
atio
n to
obe
y
Group
Views on Settlement Offer
Outcome fairness Procedural fairness
1
1.5
2
2.5
3
3.5
4
4.5
5
resist both resist02 nonreist04
Views on Outcome fairness
Out
com
e fa
irnes
s
Group
1
1.5
2
2.5
3
3.5
4
4.5
5
resist both resist02 nonreist04
Views on procedural fairness of ATO's handling of settlement offer
pro
cedura
l just
ice
jud
gem
ents
Group
Views on Settlement Offer
Satisfaction ratings Alleviated original concerns
1
1.5
2
2.5
3
3.5
4
4.5
5
resist both resist02 nonreist04
Satisfaction with ATO's handling of settlement process
Sat
isfa
ctio
n ra
tings
Group
1
1.5
2
2.5
3
3.5
4
4.5
5
resist both resist02 nonreist04
Alleviated original concerns over ATO's handling of schemes
Alle
viate
d c
on
cern
s
Group
Views on Settlement Offer
Offer allowed me to put matter behind me
Respect for ATO as a result
1
1.5
2
2.5
3
3.5
4
4.5
5
resist both resist02 nonreist04
Offer allowed me to put matter behind me
Deg
ree
to w
hich
mat
ter
put
beh
ind
Group
1
1.5
2
2.5
3
3.5
4
4.5
5
resist both resist02 nonreist04
I now have more respect for the ATO as a result of settlement offer
Resp
ect
fo
r A
TO
Group
Summary of Findings
Those investors who became less resistant towards ATO after settlement offer:Were more likely to be compliant in 2004
(resisters were more non-compliant)Were more trusting of the ATO in 2004Saw the ATO as more legitimate in 2004Were more likely to feel settlement offer was
handled in a procedurally fair manner
Implications of findingsTwo points:
1. Findings demonstrate that people’s motivational postures are fluid and changeable over time (one group who continued to be resistant (44%), other group resistant in 2002 but not 2004 (19%))
2. Way regulator handles a case can have serious ramifications for the way people view the regulator, as well as for their subsequent compliance behaviour.
These have implications for how the ATO interprets and uses the Compliance Model
Some tempted to pigeon hole non-compliers as always having resistant or disengaged postures and treat them according to this view (i.e. hit them hard)
Reasoning behind this is that it will bring them into compliance and deter them from engaging in non-compliance in the future
Industry
factors * industry definition* region* size, segment,
participants * profit margins* cost structures* industry regulation* industry issues
- competition- seasonal factors- infrastructure- labour
Sociological* norms* reciprocity* age* gender* education level* ethnic background
Economic
* interest rates* tax system* Govt policies/* international influence* inflation
Psychological
* risk* fear* trust* values* fairness/equity* opportunity to evade
Business profile* Structure - sole
trader, partnership,trust, company
* Business activities- type; local, inter-state, international
* financial data* business age
THE ATO COMPLIANCE MODEL
REGULATORYSTRATEGIES
MOTIVATIONALPOSTURES
Prosecution
Command Regulation
(Nondiscretionary)
Command Regulation
(Discretionary)
Enforced SelfRegulation
SelfRegulation
ENFORCEMENT STRATEGIES
Audit
with/without
Penalty
Real TimeBusiness Examinations/
Record Keeping Reviews
Education/ Record Keeping/Service Delivery
Resistance
Disengagement
AccommodationManagerial
Capture
(convenience, access, choice, control)
True that this strategy may deterHowever, our research suggests that such a
strategy can on occasion produce reactance and widespread resistance. Also, in such situations, an argument can be made for procedural unfairness (eg. Aggressive tone to letters, too
long to make decision, no consultation, etc)Which can lead to further non-compliance &
defiance towards authorities More costly in the long term
Ayres & Braithwaite (1992) suggest that the perception of fairness is important for nurturing voluntary complianceStart initial encounters with persuasion and explanation
(educate them about why what they did was wrong – and keep them informed about decision processes)
Tyler’s (1990) work in context of policing and justice systems finds that people can handle negative outcomes if they believe the procedures used were fair and respectful.
ConclusionDeterrence is important and the law is
important.Eg. Important to prosecute people who deserve
to be prosecuted.
Without deterrence and the possibility of punishment, non-compliance may get out of hand.
However, the manner in which the law is administered, and perceived by the public, is just as important.
Conclusion cont’d For a regulatory system to work effectively,
regulators need to manage both the application of law and punishment, as well as how the public may react to it.Be proactive beforehand rather than reactive after the
event in developing an effective, fair and respectful enforcement strategy;
This applies to people who may have made an innocent mistake on their tax returns all the way up to those who have committed a serious form of non-compliance and need to be prosecuted.
If regulators do both of these things well, they will be able to turn some resisters into long-term compliers.