Motivation and emotion/Book/2019/Tax evasion motivation

Overview

 * Focus points and questions:


 * What is motivation?
 * What is tax evasion?
 * What motivates people to evade paying tax?
 * Theoretical Focus (Self-Determination Theory) (The Fraud Triangle) (Case Study: Walter Anderson)
 * Specific psychological variables associated with tax evasion
 * Statistics on tax evasion
 * Research discussing the direction of enforcement of tax payment (what can be done about tax evasion)

What is motivation?
Motivation is an individual's driving force of behaviour that leads them to pursue or avoid (Burton, Westen & Kowalski, 2010). An individual can be motivated to perform behaviours based on a goal, a physiological need or an innate desire, and often the field is examined through a multitude of perspectives.

What is tax?
A tax is a compulsory financial charge imposed on an individual or entity by a government organisation in order to fund various public expenditures. Failure to pay direct or indirect taxes is punishable by law.

What is tax evasion?
Tax evasion is the active minimisation of one's tax liabilities illegally, usually by not disclosing that one is liable to tax or by giving false information to the governing body about one's taxable income. To wilfully fail to pay taxes is a legal offence and therefore those individuals or institutions found to be evading the payment of tax can be subject to criminal charges. Generally, an individual is not considered to be guilty of tax evasion unless the failure to pay the taxable amount is deemed intentional, as such research examines the motivational factors for individuals avoidance of tax payments.

Theoretical perspectives
The effects of punishments and reward have long been examined and observed by motivational and behavioural psychologists (see Thorndike, 1911; Skinner, 1953; Nuttin & Greenwald, 1968), as such, applying this research and its hypothesis' to the motivation relating to tax evasion is the subject of much research. Some have theorised that the individual tax evasion depends on the probability of detection and the level of punishment provided by law. (Alligham & Sandmo, 1972).

Punishment and reward motivations
The behaviourist perspective, in particular operant conditioning, identifies that individual behaviour is more likely to be repeated when the behaviour leads to reinforcement, whilst avoiding behaviours associated with punishment (Burton, Westen & Kowalski, 2010). As such, whilst individuals are generally not rewarded for paying tax, they can be seen as motivated to avoid criminal punishment for evasion of tax.

Researchers have also denoted the influence of other people related to the individual and the effect this may have on the individual's level of tax evasion. Kahan (1998) stressed this, "When they perceive that many of their peers are committing crimes, individuals infer that the odds of escaping punishment are high and the stigma of criminality is low. To the extent that many persons simultaneously draw these inferences and act on them, moreover, their perceptions become a self-fulfilling reality” . Furthermore, assessing the government of a particular nation and their levels of individual tax evasion is also an area of research that should be examined. Generally, if a nation's people feel their interests are being looked after by the government then they are more willing to comply with that governments laws, and the adverse for those nations who feel their interests are not being met by a government (see Tyler, Casper & Fisher, 1989). And in these systems, whereby individuals feel the government is not taking care of its people, individuals may evade tax payments as a means to limit income into the government and therefore minimise their control of a state (Torgler, 2010).

Self-determination theory
Intrinsic and extrinsic motivation (broadly depicted in figure 1); Intrinsic motivation refers to either the enjoyment or interest in an activity for its own sake (Burton, Westen & Kowalski, 2010), whereas extrinsic motivation is driven externally through reward and punishment (Ryan & Deci, 2000). As is depicted in figure 1, one of the identifying factors of extrinsic motivation is money, and behaviours that are elicited in the hopes of achieving monetary reward (such as tax evasion) are extrinsically motivated.

Self-determination theory posits that three types of motivation elicit human behaviour: amotivaiton, extrinsic and intrinsic motivation (Ryan & Deci, 2000) and As such, an individual's motivation to evade tax can be elicited by any of these factors depending on circumstance and personality. See the table 1 for further description of self-determination theory:Table 1.

Elements of motivational forces as outlined and described by self-determination theory (Ryan & Deci, 2000)

Developing a profile for individuals who evade tax
Allingham and Sandmo (1972) present that for an atypical risk-neutral individual, maximisation of expected reward (money) implies that evasion will tend to increase with marginal tax rates (Allingham & Sandmo, 1972; Clotfelter, 1983). As such, their research posits the idea that if the pay off is substantial, the individual whom actively chooses to partake in tax evasion will increase their tendency and propensity to do so, however, the exact level of tax evasion that an individual commits is dependent on detection probability and the level of legal punishment/repercussion. Allingham and Sandmo's (1972) model of tax evasion identifies individual variables that make tax evasion more likely, these include tax rate, the unemployment rate and the individual's level of dissatisfaction with the government or governing body. Alstadsæter and Martin (2017) concluded that as individual amounts of wealth rises so to does the level of tax evasion, as such individuals whom are wealthier and particularly the very wealthy are almost 10 times more likely to actively evade tax when compared to the median middle class person (Alstadsæter & Martin, 2017).

Personality factors influencing tax evasion
Studies focused on the premise of motivation for tax evasion have found significant correlation between a number of variables and individual motivation for intentional tax avoidance. A 2003 study by Bloomquist, found that in a sample size of US citizens, an increase in financial duress caused by income equality increased individuals likelihood of tax evasion (Bloomquist, 2003). Extending this focus on mechanisms for tax evasion facilitation, a 1982 study by Warneryd & Walerud with a sample size of Swedish citizens, found a significant correlation between negative attitudes (leading to a focus on non-financial pressures), if an individual had a greater opportunity for tax evasion versus the wider population and an individual's personal belief's being more lenient in relation to tax related crimes, all contributed to a higher chance for individuals to engage in tax related crime (Warneryd & Walerud, 1982). Examining these conclusions, researchers can then hypothesise about the variables associated with individual tax evasion motivation and develop protocols for prevention of the crime.

The fraud triangle
The Fraud Triangle (depicted in figure 2) represents three elements necessary for the theory to be implied to a situation. A perceived pressure (debt, high bills, unexpected financial needs, etc.) a perceived opportunity (an individual actually having the chance to facilitate fraud such as tax evasion) and a way for the individual to rationalise the fraud as acceptable (depending on the individual and the circumstance these may vary, from business optimisation to career advancement through perception from the outer-world, e.g. if an individual has more money they are generally perceived as being more successful, as such an individual may evade tax payments to secure a more financially enticing persona). The theory has been adapted to many instances of fraud, from organisational behaviors to tax evasion. According to the theory, if one of the three elements is not applicable an individual will not commit fraud, as such, minimisation strategies for tax evasion should focus on these factors. Subsequently, researchers have posited that whilst all elements are essential if an individual is to commit fraud, the intensity levels of these elements can vary. For example, when the pressure for an individual's perceived opportunity for fraud is more intense, the rationalisation for the fraudulent action may be weaker and the fraud will still occur (Albrecht, El-Bakri, Albrecht, Albrecht & Morales, 2015).



To highlight the connection between the Fraud Triangle and tax evasion, researcher's have highlighted the example of cryptocurrency, whereby individuals trade in a form of money given without documentation (Milutinovic, 2018). Some of those engaged in the activity pertaining to cryptocurrency have cited the motivation to avoid tax payments on their income as a means for facilitation of their irregular financial usage situation (Albrecht, El-Bakri, Albrecht, Albrecht & Morales, 2015).

Statistics


In 2009, Catherine Rampell of the New York Times wrote "Accurate statistics on levels of tax evasion are hard to come by, since the official statistics from the Internal Revenue Service reflect the agency's resources to pursue tax cheats as much as, if not more than, they reflect the actual frequency of tax-related crimes at any given time". As such, obtaining representative figures that are a snapshot of tax evasion levels at any one time are difficult to find due to the sensitivity of the weight the information bares. Figure 3 depicts an estimate of the countries with the largest level of tax evasion (Murphy, 2011).

In 2017 the Australian Tax Office (ATO) reported that 13.9 million Australians lodged a tax return from the last financial year as well as 970,000 companies, of those tax paying Australian's it is suggested that a number of Australian's actively evaded tax. Following our framework for personal profiling of those individuals whom are more likely to be involved in tax related crimes agency's are able to investigate these figures further and on a case to case basis.

Technological advances
Through the use of sophisticated technology such as data modelling, tracking and matching governing agencies can identify illegal behavior earlier.

Refining of analytical models and researching of new and emerging individuals tax crime and evasion methodologies.

Information from a range of third-party sources is used for a range of education and compliance activities, as such, data matching allows governing agencies to:


 * pre-fill tax returns, making it easier for people to lodge
 * reassure the community we protect honest people and businesses from unfair competition
 * ensure people and businesses:
 * lodge tax returns and activity statements when required
 * correctly declare their income and claim offsets and other benefits
 * comply with their obligations
 * detect people and businesses operating outside the tax system, detect fraud against the Commonwealth and recover debt.

Prosecution and criminal conviction
Agencies such as the ATO and IRS actively assist in advising and working with government on law reform, with the goal of limiting individual opportunities for tax crime; whilst also aiming to increase capacity for data and information sharing with other connected agencies.



Citizens of countries who impose tax can expect differing prosecution and criminal convictions for tax evasion; depending on the severity of the level of tax evasion an individual has been convicted of, these convictions can affect a person's employment and ability to travel outside of their home country (depicted in figure 4).

Reward for Tax Law Compliance

Many Eastern nations have enlisted the policy for rewards for tax compliance. The effects of these rewards in these nations versus western nations is yet to be established, however should be the subject of future research.

What can be done
Through these widely available resources and educational tools, we can expect that those individuals partaking in tax evasion are aware of the consequences for the behavior. By increasing research into individual's reasoning for tax evasion agencies are constantly updating their means for detection of tax related crimes, whilst also informing the population of how not to partake in tax crime and reasons for adhearing to the individual countries tax laws or a punishment will result if caught.

As such; the research provided through interdepartmental collaboration would suggest that the theory of punishment as a means to cease a behavior is the most effective when analyzing the action to be taken for individuals actively evading tax payments.

The implementation of the U.S Tax Reform Act of 1986 has been cited as a means that reduced tax evasion substantially, as such laws should be reexamined and constantly adapting for reducing tax evasion.

Conclusion
Individual tax evasion is an ever prevalent behavior that is being addressed in a number of ways across the globe. Depending on the theoretical approach for understanding the motivation for tax evasion used, one is able to hypothesize around the factors associated with individual tax evasion, develop a strategy to facilitate the understanding for individual tax evasion, and develop an approach for minimization.

Researchers posit that the separate analysis of case studies is paramount in understanding the motivation behind individual tax evasion. Identifying the individual's opportunity, pressure and rationalization for their actions pertaining to tax evasion is exemplified through the fraud triangle, and as a note for "what can be done" research should focus on these three elements in developing prevention, detection and profiling strategies. Turner and colleagues (2018), posit that tax evasion can be prevented through the increase of probability detection and the increase of penalties for tax evasion. i.e. decreasing perceived opportunity, decreasing perceived pressure and decreasing rationalization. (Turner, Albrecht, Albrecht, Conan, Rocha & Morales, 2018).