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Information Processing in Tax Compliance Decisions

Periodic Reporting for period 1 - TaxInfoProcessing (Information Processing in Tax Compliance Decisions)

Reporting period: 2018-10-01 to 2020-09-30

As acknowledged by the science and research programs of the European Union, the topic of tax fraud and tax evasion, represents a complex challenge for European countries. The scale of lost revenue due to tax evasion is staggering, one of the highest estimates refers to the amount of € 860 billion a year (Murphy, 2012). There are serious negative consequences for the fight against inequalities: Unpaid taxes limit the capacity of member states to invest in social and economic policies, as well as social protection systems. Various economic and socio-psychological factors have been identified as determinants of tax compliance, such as audit probability, level of fine, social norms, and considerations of fairness. However, these factors have an observable influence in some situations but not in others. Empirical studies neither reveal consistent effects of purely economic factors (audits, fines) on tax payments, nor of socio-psychological factors (social norms, fairness considerations). To determine when these factors have a more pronounced influence on tax compliance decisions and when their influence is suppressed, information processing must be considered in combination with actual decisions. So far, research in the field has neglected information processing and concentrated exclusively on decision outcomes. This ambitious and novel research project applies the investigation of cognitive processes underlying decision making to the important field of tax research where this approach has been neglected so far. The main objective of this research project was to investigate cognitive processing of information that underlies tax compliance decisions, considering both economic and socio-psychological determinants of tax behaviour. The main novelty within the field of tax compliance research is the application of eye-tracking and MouselabWeb as research tools, which allow to observe which information is inspected, for how long and in which order, to investigate information processing in combination with actual behaviour. In line with the recently influential slippery slope framework of tax compliance (Kirchler, Hoelzl, & Wahl, 2008), the central premise of the project is that socio-psychological factors, such as social norms and fairness perceptions, influence the extent to which evasion and compliance decisions are based on economic considerations. Special attention is paid to inter-individual differences in information processing and their relation to underlying motivational postures.
The conducted studies suggest that even in a setting where only financial incentives matter and factors like social norms and perceived fairness play a very limited role, people do not make compliance decisions only based on the motive of outcome maximisation. The data on information processing shows more attention to audit probability and potential fines - and especially calculation-transitions between these two factors - do not result in more decisions to evade when it seems attractive to evade from a financial point of view. This clearly confirms the assumption that tax decisions are not exclusively driven by the motive of outcome-maximisation. The experimental data concerning social norms reveals that informing participants about actual attitudes towards tax evasion has a positive impact on compliance. Additionally, presenting information that suggests that tax compliance is the norm and tax evasion is not perceived as tolerable by the majority results in less attention to information on whether it is financially attractive to cheat or not. Similarly, perceptions of procedures as unfair results in longer decision times due to more attention to information on whether it might pay off to cheat on taxes. The conducted studies reveal individual differences in behaviour and information processing. Decisions to fully comply care made faster and involve less attention to information on whether evasion is financially attractive or not compared to decisions to evade, which is in line with the idea of differentiating between voluntary and enforced tax compliance.
These new insights have the potential to crucially inform policy-making, as they corrobate the importance of perceived fairness, social norms and trust as a precondition for voluntary tax compliance and encourage policies that promote cooperation, rather than relying exclusively on the deterrent effects of audits and fines.