Motivation and emotion/Book/2019/Tax evasion motivation

Tax evasion motivation:
What motivates tax evasion and what can be done about it?

Multimedia presentation (3 min)

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)

Case Study

Tax agent con caught and convicted "NSW man Nigel Bradshaw (also known as Bruce Bradshaw) has been sentenced to 12 months jail for ripping off his clients and the community through an income tax fraud. Between 2010 and 2015, Mr Bradshaw lodged a number of income tax returns and amended income tax returns containing false information. He fraudulently under-reported income in order to gain inflated refunds, substituting his postal and bank account details for his clients'. Refunds were funnelled through a bank account Mr Bradshaw controlled before being passed on to his unwitting clients, with Mr Bradshaw pocketing the inflated difference. On other occasions, Mr Bradshaw lodged correct income tax returns on behalf of his clients, but still siphoned off some refunds into his own accounts. His activities resulted in a loss to the Commonwealth of $84,063 and a loss to eight individual taxpayers of $12,069. His theft was uncovered when his former employer, a property investment services company in Sydney, cleaned out some old filing cabinets and found a number of notices of assessment (NOAs) that had been fraudulently altered. As well as his criminal conviction, Mr Bradshaw was issued with full reparation orders". (ATO,2019). Addressing the focus questions, this case study addresses why an individual may be motivated to evade tax (monetary gain), consequences, and resolution regarding what can be done.

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.

Tax evasion

"Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes."- Benjamin Franklin, 1789.

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.

Video break
Watch this video to develop a better understanding of tax evasion: https://www.youtube.com/watch?v=KPn75fw28O4

Factors and motives for tax evasion

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).

Case Study

Generally individual's are not rewarded for paying tax and this has garnered some development in the field of "what can be done" about tax evasion. As such, in order to minimize tax evasion, some eastern nations have implemented a 'reward for compliance' procedure and as such research is currently investigating the effects of these procedures. For example, "Japan offers audited taxpayers the opportunity to have a photo taken with the Emperor if they are found to be honest. In the Philippines, the names of audited taxpayers go into a lottery if they are found to be compliant with the VAT. South Korea provides access to airport VIP rooms, issues certificates and awards, and is considering the possibility of free parking in public parking facilities as rewards for honest taxpayers" (Torgler, 2010) , levels of compliance in these countries vs that of western countries should be investigated to asses the effects of such a policy and assessment of individual values cross culturally should also be a research point to be examined (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

Type	Definition
Amotivaiton	There is no motivation whatsoever.
Extrinsic	Motivation arises because of rewards and consequences. For example, an individual pays their tax so they don't go to jail.
Intrinsic	Motivation arises when individuals are driven by internal factors; they do something because it is enjoyable. For example, an individual does not evade tax payments because they feel happier when they abide by the law.

(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).

Case study

In 1991 Kerry Packer was famously called to appear before the Australian Federal Parliament 'Print Media Inquiry' and proclaimed that "I am not evading tax in any way, shape or form. Now of course I am minimizing my tax and if anybody in this country doesn't minimize their tax they want their heads read because as a government I can tell you you're not spending it that well that we should be donating extra". As such, Allingham and Sandmo's (1972) model of tax evasion and other variables affecting the individual level of tax evasion appear to be exemplified whilst the research by Torgler (2010) posits, members of a nation are more likely to abide by their governments rules if they feel their needs are being met.

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.

Due to the involvement of particular individuals in the proceedings of tax evasion, those with fame and money, these cases are often prolific in the media and garner mass attention from the wider public. See TIME magazine's list of prolific tax evasion cases.

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).

Figure 2. The fraud triangle

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).

Case study: Turner et al, (2018), Walter Anderson through the fraud triangle lens

Walter C. Anderson is a telecommunications mogul/ entrepreneur who was convicted of the largest personal tax evasion case in United States History. Anderson invested in many telecommunications ventures which he sold for large profits throughout the 1980s and 1990s, and is most well known for his entrepreneurial relationship to the privatization of Russia's Mir Space station. In 2005, Anderson was indicted on tax evasion charges, using offshore bank accounts to hide income from tax collection agencies, and was subsequently the IRS found that Anderson owed the IRS $248, 962, 929 in taxes. Assessing the Anderson case through the lens of The Fraud Triangle has since been then the subject of much research Perceived Opportunity Andersen's tax evasion scheme involved the use of several aliases with fake identification papers. These meticulously-constructed false identities allowed Anderson to build his large-scale tax evasion scheme. Anderson's opportunity to commit fraud was also seeded in entrepreneurial control and global operations. There is a unique opportunity offered to entrepreneurs with full control over the finances of their organization to attempt to evade paying taxes. Indeed, Anderson had complete access to the financial and accounting systems of his organizations. Anderson also leveraged and grew his offshore network to create the scheme that allowed him to shield his actual income from the IRS for so long. Companies that operate on an international scale may increase the complexity of their operations and increase the opportunities to hide fraud. Anderson's offshore operations in Panama and the British Virgin Islands allowed him to hide his actual income, and thus evade taxation. 2. Pressure Case studies posit a link between narcissism, antisocial behavior, and fraudulent financial behavior (such as tax evasion). It is noted that Anderson displayed narcissism, grandiose behavior, and indifference toward others. Throughout his trial, he was indignant and insistent about the inadequacies of the courts, the jails, and the IRS. He also demonstrated antisocial behavior, never marrying and never disclosing the movements of his financial schemes with others. Those who worked with him said that he rarely revealed his personal feelings beyond "his hatred of government and his fascination with space travel". Anderson's personality-based pressures to commit financial fraud were multiplied by pressures to uphold a reputation and compensate for other failures. Anderson consistently took risks in his career that were theatrical and newsworthy. The most notable was an attempt to pioneer the space tourism industry, demonstrating a concern with his legacy and reputation from the beginning. White-collar crimes are typically committed by those with high social standing and a reputation to uphold (Gillam, 2016). As a mogul with name recognition, Anderson fell into this category and his psychological desire to keep up the pace of his entrepreneurial escapades is apparent during his career. Anderson also never completed college and did not have the opportunity for traditional success. His failure to complete college may have contributed to the psychological need to overcompensate with financial or other success. Anderson may have felt these pressures as he made decisions along the path to commit fraud. 3.Rationalization Anderson continues to argue his innocence and denies committing tax fraud. His denial and disbelief in his own wrongdoing illustrate the depth of his rationalization. The basis for his rationalization seems to be his anti-government views. His distaste for the government can be seen in a 2000 interview in which he said that he wanted to build a space station to create a place where people could operate without government. His feelings that the government should not even exist allowed him to rationalize his evasion of tax. Before he was sentenced to prison, Walter Anderson told U.S. District Judge Paul L. Friedman, "I agree I'm responsible for what I did... but I'm not a criminal person. I believe I've tried to do the right thing most of my life." This compensatory rationalization is common among fraud perpetrators, and often provides psychological justification for their actions." (Turner, Albrecht, Albrecht, Conan, Rocha & Morales, 2018).

Statistics

Figure 3. Richard Murphy's estimate of the 10 countries with the largest levels of tax evasion.

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.

Developments for detection and prevention

Case study

In 2019 the Australia Tax Office (ATO) outline series of punishments or consequences for individuals partaking in the active evasion of tax including penalties, criminal convictions and prison sentences. Highlighting that through local and global partnerships the agency's access to data is growing; through multi agency approach audits, investigations and prosecutions governing agencies such as the ATO are increasingly making it more difficult for individuals to commit tax evasion.

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.

Figure 4. Individuals who are found guilty of tax evasion face criminal charges, fines and jail.

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).

See also

• List of taxes (Wikipedia)
• Tax competition (Wikipedia)
• Tax haven (Wikipedia)
• Tax resistance (Wikipedia)
• List of countries by tax rates (Wikipedia)
• Taxation by country (Wikipedia)
• Book chapter's relating to honesty (Wikiversity)
• Tax evasion (Wikipedia)

References

Albrecht, C., El-Bakri, J., Albrecht, S, Albrecht, C., Morales, V. (2015). How fraud affects corporate strategy; the case of general motors and John McNamara. Corporate Finance Review, 20, 5-13. Retrieved from https://ezproxy.canberra.edu.au/login?url=https://search-proquest-com.ezproxy.canberra.edu.au/docview/1734152919?accountid=28889

Allingham, M. G. & Sandmo, A. (1972). Income Tax Evasion: A Theoretical Analysis. Journal of Public Economics and Statistics, 1, 323-38. Retrieved from www3.nccu,edu.tw/

Alstadsæter, A., & Martin, J. (2017). Who participates in tax avoidance? Evidence from Swedish micro data. Applied Economics, 49, 2779-2796. doi: 10.1080/00036846.2016.1248285

Bloomquist, K. (2003). Tax evasion, income inequality and opportunity costs of compliance. National Tax Association, 91-104. Retrieved from ProQuest Central Retrieved from https://ezproxy.canberra.edu.au/login?url=https://search-proquest-com.ezproxy.canberra.edu.au/docview/195440724?accountid=28889

Burton, L., Westen, D., & Kowalski, R. (2015). Psychology Fourth Edition (4th ed.). New York, NY: John Wiley & Sons Inc.

Cebula, R., & Feige, E. (2012). America's unreported economy: measuring the size, growth and determinants of income tax evasion in the U.S. Crime, Law and Social Change, 57, 265-285. doi: 10.1007/s10611-011-9346-x

Clotfelter, T. C. (1983). Tax evasion and tax rates: An analysis of individual returns. The Review of Economics and Statistics, 65, 363-373. doi: 10.2307/1924181

Kahan, D. (1998). Social meaning and the economic analysis of crime. The Journal of Legal Studies, 27, 609-622. Retrieved from: https://heinonline-org.ezproxy.canberra.edu.au/HOL/Page?lname=&public=false&collection=journals&handle=hein.journals/legstud27&men_hide=false&men_tab=toc&kind=&page=609#

Kemp, R. Reckers, P. M. J. & Arrington, C. E. (1986). U.S. Tax reform: Tax Evasion Concerns. Business Economics, 21, 55-57. Retrieved from https://www.jstor.org

Milutinovic, M. (2018). Cryptocurrency, Ekonomika, 64, 105-122. doi: 10.5937/ekonomika1801105M

Ryan, R. M., & Deci, E. L. (2000). Self-determination theory and the facilitation of intrinsic motivation, social development, and well-being. American Psychologist, 55, 68-78. http://doi.org/10.1037/0003-066X.55.1.68

Torgler, B. (2010). Serious tax noncompliance. Criminology & Public Policy, 9, 535-542. doi:10.1111/j.1745-9133.2010.00648.x

Turner, E., Albrecht, C. Albrecht, C., Rocha, D., & Morales, V. (2018) A Historical View of the Walter Anderson Tax Evasion Scheme. Journal of Taxation, 128, 7-12. Retrieved from https://search-proquest-com.ezproxy.canberra.edu.au/docview/2034184666?rfr_id=info%3Axri%2Fsid%3Aprimo

Warneryd, K., & Walerud, B. (1982). Taxes and economic behavior: Some interview data on tax evasion in Sweden. Journal of Economic Psychology, 2, 187-211. doi:10.1016/0167-4870(82)90003-4

External links

• Data matching (ATO Website)
• Time magazine's list of the most prolific tax evasion cases (Time Magazine)
• Tax evasion vs. tax avoidance: what's the difference? (Nomad Capitalist, Youtube)
• Tax crime prosecution case studies (ATO Website)