ethical standards, attitudes toward risk, and intentional noncompliance: an experimental...

Ethical Standards, Attitudes Toward Risk, :and Intentional Noncompliance: An Experimental Investigation

Dipankar Ghosh Terry L° Crain

ABSTRACT. Prior research has investigated the influence of decision maker characteristics on decision choice. This research examines the effect two personality traits of taxpayers, attitude towards risk and ethical standards, on intentional noncompliance. A taxpayer who is more (less) ethical will have lower (greater) intentional noncompliance, while a taxpayer who is more (less) risk averse will have lower (greater) intentional noncomphance. However, this study also found significant correlation between risk attitudes and ethical standards. This is because tax evasion is not just a gamble which can be explained by merely considering the risk variable. To understand tax evasive behavior better requires incorporation of noneconomic factors in the analysis, such as ethical standards, although risk attitudes may be an important explanatory factor. The current research suggests that individuals with lower ethical standards wilt have more intentional noncompliance. However, since ethical standards are correlated with attitude toward risk, the Internal kevenue Service (IP,.S) can partially overcome the influence of ethics by making the tax audit environment more uncertain. Thus, the research results justify the decision of the II:kS not to release atl its audit parameters because it makes the audit environment less uncertain.

Dipankar Ghosk's research interests are in judgment and decision making, transfer pricing, and negotiation. He has published in Decision Science, Journal of Conflict Management, International Journal of Accounting, and Journal of Management Accounting Research.

Terry L. Crain's research interests are in tax policy, tax equity, and the effects of taxation on taxpayer decision. He has published in Decision Science, International Journal of Accounting, and Journal of the American Taxation Association.

1. I n t r o d u c t i o n

Prior studies have investigated the influence o f decision maker characteristics on decision choice (Taylor and Dunnet te , 1974; Wiggins et al., 1969). For example, research has demonstrated that a decision maker's attitudes toward risk is an important characteristic in a number of different contexts (Hogarth, 1987; Schoemanker 1990). Evidence also suggests that a decision maker's ethical standards affect choice behavior (Carmella, 1985; Trevino, 1986 and Youngblood, 1990).

In the context o f tax noncompliance behavior, the importance o f taxpayers' personality characteristics are being increasingly examined because it appears these variables may contribute to an understanding o f compliance (Collins et al., 1992). This study reports results of a laboratory exper iment conducted to understand how attitudes toward risk (measured through an instrument developed by Kogan and Watlach, 1964) and ethical standards (measured through an instrument developed by Christie, 1970) affect tax noncompl iance behavior. The rest o f the paper is organized as follows. The next section provides a b r ie f discussion o f the theory and states the hypothesis to be tested. The research me thod and results are discussed in the third section. Finally, the last section presents the conclusions and implications for future research.

2. T h e o r y a n d hypo thes i s

Taxpayer ethics are a nebulous concept to define. Generally, ethics are understood to describe an individual's moral principles or value-or iented

Journal of Business Ethics 14: 353-365, 1995. © 1995 Kluwer Academic Publishers. Printed in the Netherlands.

354 D. Ghosh and T. L. Crain

decisions based on his or her internalized beliefs and attitudes) Song and Yarbrough (1978) apply this notion to explain tax ethics as norms of behavior governing citizens' decision choices as taxpayers in their relationship with the govern- ment.

The standard economic models of decision making specify that decisions should maximize expected utility (French, 1986). Therefore, in choosing among various decision alternatives, the one with the most favorable expected utility is selected and implemented. For example, a taxpayer may be considering underreporting his or her tax liability by $100 and estimates the probability of audit to be 5 percent. If audited, the taxpayer would have to pay the $100 plus a penalty of (say) 50 percent of the taxes owed. ($50). If we ignore interest rates and treat the taxpayer as risk-neutral, then the expected utility analysis has two alternatives: (1) not underreport, in which case the result is maintaining some existing wealth level, W, and (2) underrreport the liability, which can have two outcomes - W plus $100 if the taxpayer is not audited, and W minus $50 if the taxpayer is audited. The expected utility of being honest is simply U(H0, and the expected utility of underreporting is 0.95 [U(W + 100)1 + 0.05 [ U ( W - 5 0 ) ] . For the risk-neutral taxpayer, one can assume that U(W) = 0 and U (W + X)=X for convenience, and the result is that the expected utility of being honest is 0, compared to 92.5 for improper reporting. The taxpayer therefore underreports the liability.

The expected utility formulation allows for risk attitudes to be represented in the shape of the utility function. A concave shape implies risk aversion. A risk averse person would refuse a fair bet such as a coin toss for $1, because the added utility of the extra dollar is smaller in magnitude than the subtracted utility of losing. A convex shape represents risk seeking, and such a person would take the bet because the possible added utility is greater than the equally possible subtracted utility.

The same kind of analysis has applied the normative economic model to criminal behavior, such as white-collar crimes (e.g., Becker, 1967). Failure to report tax liability in compliance with

tax laws can be considered a form of criminal behavior. 2 Criminal behavior has been viewed by many social scientists as rational acts resulting when individuals evaluate the expected utility of both criminal and noncriminal acts, and choose the one alternative with the highest net payoff. Thus, if the gains from the unethical act such as underreporting tax liabilities outweigh the risks, then people will indulge in such unethical acts (cf. Carroll, 1989). This viewpoints suggests that both ethical standards and risk attitudes of taxpayers affect tax noncompliance decisions.

Results from prior research suggest that risk attitudes and ethical standards may explain intentional noncompliance and also allude to a possible linkage between these two personality characteristics and taxpayer behavior. For instance, Collins et al. (1992) found certain personality variables (conformity, responsibility, value orthodoxy, and risk propensity) helpful in distinguishing the profiles of the different groups of noncompliant taxpayers. 3 Both responsibility and value orthodoxy - the two terms which capture the essence of ethical standards - were significant in explaining noncompliance behavior of only two of the four groups of taxpayers whereas risk was significant for only one of the groups. Nevertheless, in all these occasions, the direction of the association was correct; that is, noncompliance was negatively associated with responsibility and value orthodoxy and positively associated with risk propensity. However, the authors provided no information regarding any association between these personality traits. In spite of these results, one must be cautious in how they are interpreted given some of the limitations of the survey methodology used to collect the data in that study; for example, individuals may not respond truthfully to sensitive questions (Klepper and Nagin, 1989).

In an earlier study, the ABA Commission on Taxpayer Compliance (ABA, 1987, p. 21) observed that many taxpayers choose to comply, even in the face of a high opportunity to cheat without detection. One explanation may be that some individuals choose not evade on moral grounds (Baldry, 1986). 4 Another explanation may be that the general population is mostly risk neutral (cf. Schoemaker, 1990). This means that

Ethics, Risk, and Noncompliance 355

perhaps by only generating an extremely risk- seeking function woutd induce a taxpayer to indulge in unethical behavior even though he or she perceives a low chance of being audited and faces a relatively small ]oss.

The above discussion provides the basis for the following hypothesis:

H I The more (less) risk seeking a taxpayer is and the lower (greater) is his or her ethical standards, the greater (lesser) will be his or her levd of intentional noncompliance.

3o Research m e t h o d

3.I. Research variables

3.1.1. Risk Preference of Taxpayers. Risk preference of the taxpayer is one of the independent variables of interest in this study. Attitudes toward risk was measured using an instrument based on psychologicaI constructs and was developed by Kogan and Wallach (1964). This instrument, called Choice.Dilemma Questionnaire (CDQ), contains descriptions of a series of 12 situations that a persor~, might encounter in everyday life. The central person in each situation is faced with a choice between two alternative courses of action. Alternative X is more desirable and attractive than alternative Y, but the probability of achieving X is less than that of achieving !". For each situation, the respondents are asked to indicate the minimum probability of success they would require before recommending that the more attractive or desirable alternative, X, be chosen. For each of the 12 scenarios, respondents are asked to indicate their choices on a ten-point scate that ranges from 1 (risk tolerant) to 10 (risk averse). Responses from this instrument were summed to derive a relative measure of risk attitude, with higher scores indicating a greater degree of risk aversion. The CDQ instrument has been used in different contexts, such as the development of management information systems (Nutt, 1986) and the effect of decision-making attributes on decision processes (Taylor and Dunnette, 1974), for different methodologies, such as surveys (Brockhaus, 1980) and laboratory experiments (Ghosh and Ray, 1992), and for

different subject population, such as executives (Brockhaus, 1980) and students (Umanath et al., 1993).

3.I.2. Ethical standards. The second independent variable of interest is ethical standards of the taxpayer; this characteristic was measured using the Mach IV scale of Christie and Gels (1970). The Mach IV scale is a 20-item instrument designed to measure Machiavellianism with higher scores on this scale indicating lower ethical standards. The scale items are presented in a standard six-category Likert format with half the items reversed. These items are rated "strongly agree" (7 points) to strongly disagree (1 point); no response is scored 4 points. Christie and Gels suggest that a constant of 20 points be added to the total score to create a neutral score of 100 points. Adding the constant, the lowest possible score is 40 points and the highest is 160. Christie and Gels (t970) report a mean reliability for the Mach IV across nine subject populations of 0.79 and a mean item test correlation of 0.38. In prior research, this Machiavellianism approach found the subjects to be more deceitful (McLaughlin, 1970), less ethical (Long, 1976), and more manipuaative and told lies of greater magnitude (Geis et al., 1970; Bergner, 1972).

3.1.3. Intentional Noncompliance. In previous experimental studies on tax noncompliance, subjects were typically required to determine their tax liabilities from the information provided on income and expenses. Noncompliance was measured as the difference between the determined amount of tax liability and some "correct" amount. But this measure of compliance con- founds intentional with unintentional noncompliance. Therefore, in the current study the subjects first determined their tax liability from the information provided. During the determining stage they could "buy" for a certain fee (for example, from professional tax advisors) specific cues to ascertain their tax liabilities. This reduced the scope of unintentional noncompliance by alleviating the problem of having to know the tax laws in order to comply. Further, it promoted realism in the experiment by making the subjects perform some meaningful role which enhanced


the attention level of the subjects (Fromkin and Streufert , 1976; Lindzey and Aronson, 1968), thus reducing the scope of demand characteristics in the experiment (Orne, 1969). 5 In the next step they reported their tax liabilities; the difference between their reported amount and determined amount was the measure of intentional noncompliance.

3.1.4. Penalty and Tax Rates. Prior research has shown noncompliance decreases monotonically with an increase in either penalty rates or tax rates (Jackson and Milliron, 1986). Therefore, these two factors were controlled for in this experiment by using a uni form penalty rate (20%) and a uniform tax rate (33%).

3.2. Experimental task and an overview of the experiment

The hypothesis was determined using a between- subjects experimental design. The subjects were told that in the previous year they were employed in a firm which, towards the latter part o f that year, transferred t h e m from its branch office to its headquarters located in another region of the U.S. Although the firm did not reimburse their moving expenses, nevertheless they agreed to the transfer as it significantly improved their career prospects. The task was to determine their taxable income for the previous year and pay the appropriate income tax to the IRS. The items to be considered were: (1) their annual salary, (2) their moving expenses, and (3) the income taxes to be paid. The issue of moving expenses was considered for the task since it is common enough so that the subjects can relate to, and at the same time it is complex enough to be ambiguous (in the debriefing questionnaire, subjects were asked to assess, on a scale which ranged from 0 (not difficult at all) to 10 (very difficult), how difficult the task would have been if the cues were not available. The responses ranged from 3 to 10, with an average of 6.37).

The experimental material for each participant was a randomly chosen ID#, an overview statement, and a set o f three large sealed envelopes; the entire material was distributed randomly

among the subjects. The experiment was conducted in three stages. The overview statement: (1) narrated the facts related to their transfer, (2) explained briefly what they will do in each of three stages, (3) showed how they earn their compensation, (4) emphasized that the chance of their tax return, which they will "file" in stage two, being selected for audit is that of the IRS auditing the returns filed by individuals with similar income, and (5) discussed the penalty for not reporting the taxes if they are audited.

In stage one the subjects determined their deductible moving expenses; material for this stage was in one of the large envelopes (marked "Stage I"). It included a "Moving Expense Schedule" and the instructions on how to complete it (refer to Appendix 1), and the nine detailed facts o f the various nature of expenses incurred by them in connection with their move (refer to Appendix 2). As explained earlier, in determining their tax liability, subjects had an opt ion to "buy" a series o f nine cues, each corresponding to a fact of the moving expense. These cues were determined with some help from the information obtained from the IRS taxpayer hotline on moving expenses. This information, though it essentially gives only a general idea on the items to be considered for moving expenses, did help in identifying the nature of the information to be included in each of the cues. The cue for each fact, which was sealed in an envelope and numbered corresponding to the fact number o f the moving expenses, indicated what amount could be claimed, or could not be claimed, as moving expense. They could be bought in any sequence, each for $100, and it was up to the subjects to decide how many cues to buy. In stage one the subjects completed the moving expense schedule, sealed it in an envelope specified for that purpose, and turned it in to the experimenter; only then could they proceed to stage two. This was done to separate the "determining" stage o f tax compliance from the "reporting" stage.

In stage two the subjects reported their taxable income and their income tax. The instructions (contained in a large envelope marked "Stage II") reiterated that their chances o f being audited is the same as that of the IRS auditing the returns


filed by individuals with similar income, 6 their compensation, and the penalty structure. Lastly, it included a schedule titled "Individual Tax Form." Taxable income was computed as annual satary less allowable deductions. An income tax at the rate of 33 percent was assessed on taxable income (refer to Individual Tax Form in Appendix 3). Subjects were compensated at a rate of 0.5 percent of their cash balance. This balance was determined by subtracting from their annual salary the moving expenses paid (whether deductible or not), expenses for the cues for tax advice, income tax, and a penalty (if applicable). This penalty was an additional 20% of the unpaid tax (refer to Appendix 4)]

In stage three the subjects completed a post- experimentaL1 questionnaire, containing two sections. Section one obtained demographic information regarding the subject, and section two inctuded certain questions pertaining to the project.

4~. Da ta analysis a n d results

4.1. Subjects

A total o f 54 students voluntarily participated in the experiment. All the subjects were enrolled in an advanced undergraduate business course at a major U.S. university and had prior in-class experience in preparing individual tax returns. An analysis o f each subject's intentional noncompliance amount indicated that it was not affected by any of the nofi-theoretical variables, namely, age, gender, academic major, semester standing or work experience°

4.2. Manipulation check

The analysis o f the data on unintentional and intentional noncompliance indicates that the manipulation to differentiate the reporting stage from the determining stage was indeed successful: the mean unintentional noncompliance was $434.98 while mean intentional noncompliance was $907.82 (t = 3.36; p = 0.001I). Further, a paired comparison T-test showed that the differ-

ence between the two aspects o f noncompliance was statistically significant (t = 3.16; p = 0.0027).

4.3. Attitudes toward risk, ethical standards, and intentional noncompliance

The research hypothesis examines the effect of taxpayers' attitudes toward risk (RISK) and ethical standards (ETHICS) on intentional noncompliance (INT). The variable RISK was distributed with a mean of 66.74 and standard deviation of 10.15 and ranged from 50 to 102. The variable ETHICS was distributed with a mean of 85.67 and standard deviation of 8.38 and ranged from 64 to 97. Correlations (Pearson) were run between the two independent variables and it was found that RISK and ETHICS were significantly correlated (coefficient -0.4003, significant at the 0.000t level). Therefore, before proceeding further, RISK and E T H I C S were examined to find out whether there was any multicollinearity problem. The cotlineari~7 diagnostics approach ofBetstey et al. (1980) indicated that such a problem did not exist. Thus, the hypothesis was first tested using the normal regression analysis approach. Next, a stepwise regression analysis was conducted to get additional insight into the relationships between the independent variables and the dependent variable.

The results of the regression analysis are presented in Table I. Using both the variables RISK and ETHICS, it was found that the model was significant (F = 20.97, p = 0.0001). An exami- nation of the source variable showed both RISK (t = -3.582, p = 0.0008) and ETHICS (t = 3.509, p = 0.0009) to be significant. 8 The stepwise regression confirmed the significance o f RISK and ETHICS on INT. The variable RISK first entered the model (partial R 2 = 0.32; F statistics = 24.32), followed by E T H I C S (partial R 2 = 0.13, F statistics = 12.32). The results therefore indicated support for Hypothesis 1; that is both attitudes toward risk and ethical standards affected choice behavior. Further, signs o f the T-scores suggest the nature of the choice. Thus, the more (less) risk averse an individual, the less (more) is his or her intentional non-


TABLE I Effect of taxpayers' ethical standards, attitudes toward risk and intentional noncompliance

Panel A. Regression analysis for testing hypothesis 1 (n = 54).

Source df SS M S F Value p R 2

Model 2 16510550 8255275 20.97 0.0001 0.45 Error 51 20081656 393757

Variable df Parameter Standard T-score p estimate error

Intercept 1 -306.33 1536.81 -0.199 0.8428 Risk 1 -41.56 11.60 -3.582 0.0008 Ethics 1 44.67 12.73 3.509 0.0009

Panel B. Stepwise regression analysis results (n = 54).

Step Variable entered Partial R 2 Model R 2 F value p

1 Risk 0.3187 0.3187 24.32 0.0001 2 Ethics 0.t325 0.4512 12.32 0.0009

compliance. Also, the greater (lesser) the ethical standards, the lesser (greater) is the intentional noncompliance. 'Correlation analysis (Pearson) confirmed both the suggestions: RISK and INT (coefficient -0.5645, significant at the 0.0001 level), and ETHICS and INT (coefficient 0.5596, significant at the 0.0001 level). We also analyzed the correlations of the demographic variables we collected (age, gender, major, semester standing, and work experience) and found no significant correlations with the dependent variable intentional noncompliance.

5. Conclus ion

We believe that experimental methods play a role in research on tax evasion. To do so they must be well designed and embedded in a theory which explains tax noncompliance in the abstract and as measured by self-report, official records, and experiments. The experimental study presented here demonstrates that personality characteristics are psychologically salient aspects in tax noncompliance decisions. Specifically, a taxpayer who is more (less) ethical will have

lower (greater) intentional noncompliance, while a taxpayer who is more (less) risk averse will have lower (greater) intentional noncompliance. The results support the suggestion of Jackson and Milliron (1986, p. 137) "that specific ethical measures are probably the most fruitful areas for future r e s e a r c h . . , on income tax compliance." However, the results also underline the suggestion of Collins et at. (1992) for research to consider the effects of personality traits, like ethical standards, and variables determining the economic gain from noncompliance, like attitudes toward risk.

The correlation of ethical standards and risk attitudes is an interesting finding. However, in the context of intentional noncompliance it makes intuitive sense because taxpayers with lower eth~ zal standards are deliberately underreporting; therefore, they are risking the possi- bility of being audited and penalized. That occurs because the taxpayer is risk seeking; that is, the net utility, or the utitity from the resources saved by paying reduced taxes and any disutility from the penalty if audited, is positive. An opposite argument can be made for taxpayers with higher ethical standards, lower intentional noncompli-


ance and risk averse behavior. The correlation between risk attitudes and ethical standards may explain why previous research, based on economic models of evasion, have not been very successful it..,, explaining intentional noncompliance (Spicer, 1986). That is because tax evasion is not just a gamble (Baldry, 1986) which can be explained by merely considering the risk variable. To understand tax evasive behavior better requires incorporation of noneconomic factors in the analysis, such as ethical standards, although risk attitudes may be an important explanatory factor as evidenced in the stepwise regression analysis.

The research question and the experimental design was very specific in their scope to avoid blurring the results. For example, the impact of other theoretical variables (such as tax rates, and penalty rates), which affect compliance decisions were controlled for in the experiment. Both attitudes toward risk and ethical standards were measured using a well-validated instrument; therefore, the veracity arid recall problems of survey research on ethics and noncompliance were avoided. Lastly, an attempt was made to separate intentional from unintentional noncompliance (in contrast to other experimental studies on tax compliance) as they are different constructs. Thus, specifying how ethical standards interact with these factors in affecting intentional noncompliance suggests a rich agenda for future research.

As with any research effort, limitations exist, and the results of the present experiment must be considered in light of those limitations. For

example, the results are parameterized by the features of the experimental design. Also, the results were obtained in an artificial laboratory setting. Nevertheless, the results should contribute to our understanding of the tax noncompliance dilemma, especially since reliable field data on individual compliance are nonexis- tent and are unlikely to be available in the near future.

The results of this research have interesting connotations. This research suggest that individuals with lower ethical standards will have more intentional noncompliance. However, since ethical standards are correlated with attitude toward risk, I1KS can partially overcome the influence of ethics by making the tax audit environment more uncertain; that is, make risk attitude a more critical variable. Thus, it justi- fies the decision of the IRS not to release all its audit parameters because it makes the audit environment less certain. Also, tax cheating could be deterred by increasing the risk involved (e.g. more surveillance, harsher penalties (Blumstein, 1983)).

Acknowledgements

The authors gratefully acknowledge the financial assistance of the University of Oklahoma Foundation for this research. We also thank the workshop participants at the University of Oklahoma, Frances Ayres, Julie Collins, and Dallas Blanchard for their helpful comments.

Append ix 1: Moving expense schedule

Section A. - Transportation of Household Goods 1. Transportation and storage for household goods and personal effects

Section B. - Expenses of Moving From Old Home to New Home 2. Travel and todging not including meals 3. 80% of meals 4. Add lines 2, and 3

Section C, - Pre-move Househunting Expenses and Temporary Quarters ('for any 30 days in a row after getting your job)

5o Pre-move travel and lodging not including meals 6. Temporary quarters expenses not including meals


7. 80% of meals for pre-move househunting and temporary quarters 8. Add lines 5, 6, and 7 (Max amount $1,500)

Section D. - Qualified Real Estate Expenses 9. Expenses of settling an unexpired lease

10. Expenses of buying your new home

Section E.-Deductible Moving Expenses 11. Direct expenses (Add lines 1 and 4) 12. Indirect expenses (Add lines 8, 9, and 10, maximum amount $3,000) 13. Deductible moving expenses (Add lines 11 and 12)

Note: (1) Ensure that you have entered your ID# at the top right-hand corner. (2) When completed, please make a note of the amount in line 13, then place this Moving Expense Form in the envelope provided and turn it in to the Supervisor before proceeding to stage II. (3) Return all other materials of stage I to the envelope in which they were contained.

Instructions for moving expense form

Who May Deduct: If you moved to a different home because of a change in the location of your job, you may be able to deduct your moving expenses. You must meet the following two tests. (a) Distance test: Your new principal place of work must be at least 35 miles farther from your old home than your old workplace was. (b) Time test: If you are an employee, you must work full time in the general area of your new workplace for at least 39 weeks during the 12 months immediately following your move. You may deduct moving expenses if you anticipate satisfying this test, even if the time test has not been met before your return is due.

Specific line instructions

Line 1. Enter on line 1 the actual cost to pack, move, store in transit, and insure your household goods and personal effects.

Line 2. Enter on line 2 the cost of travel from your old home to your new home. These include transportation, and lodging along the way. Automobile mileage is allowed at 9 cents per mile.

Line 3. On line 3 enter 80% of the amount spent for the cost of meals incurred while you traveled from your 01d house to your new house.

Line 5. Enter on the line 5 the costs of travel and lodging incurred to look for a home in the area of your new job. The amounts are deductible only if you took the trip after you got the new job and the primary purpose of the trip was to look for a new home.

Line 6. You may deduct the cost of lodging while occupying temporary quarters (for up to 30 days) in the area of your new workplace.

Line 7. On line 7 enter 80% of the amount spent for the cost of meals during pre-move househunting trips and while occupying temporary quarters ( for up to 30 days) in the area of your new workplace.

Line 8. Add lines 5, 6 and 7 subject to a maximum amount of $1,500.

Line 9. Enter on line 9 costs incurred to settle an unexpired lease.


Line 10. Enter on line 10 costs of buying a new home. Examples of qualified costs include (a) sales commissions, (b) cost of advertisement, (c) attorney's fees, and (d) title and escrow fees. Examples of costs you may not deduct are (a) loss on the sale of your home, (b) refitting draperies and carpets, (c) terminating club memberships, and charges for prepayment of interest.

Line t I. Add the direct expenses on lines 1 and 4.

Line 12. Add the indirect expenses on lines 8, 9, and 10 subject to an overall limitation of $3,000.

Line 13. Add the direct expenses from line 11 and the indirect expenses from line 12. The sum is your deduc¢ible expenses.

Appendix 2A: Facts {of moving expenses)

Fact #1~ On November 1, 1990, you flew to the home office for an visit. -While there, you accepted the new position. Since you would be moving soon, you decided to look at houses while you were in the area. Your total expenses incurred were round-trip airfare of $300, 2 nights lodging of $250, and food of $150o

Fact #2. On November 14, 1990, your realtor called and said she had found the perfect house for you. So you returned on November 20, 1990 to look at the house. Your expenses included round- trip airfare of$300, 2 nights lodging of $200, food of $150, and $10 to see a movie. You put a oontract on the house.

Fact #3, You had a lease on an apartment while living in the midwest. The lease was to expire on February 1, 1991. Your landlord charged you $500 to terminate the lease prematurely. He also kept your $300 deposit because you did not clean the apartment to his satisfaction.

Fact #4. You paid a fee of $5,500 to Acme Moving for transporting your furniture and personal effects from your old residence. Since your new house would not be ready for 60 days, you had your furniture stored in a warehouse at a cost of $500. Insurance on the furniture while in storage was $300.

Fact #5. You paid $700 to have some furniture repaired that Acme had damaged. Acme argued that the furniture was already damaged and paid you nothing for the damage.

Fact #6° You drove your car the 1,200 miles from your old residence to your new residence. The cost of your meals while en route was $200 and your lodging was $400.

Fact #7. You rented an apartment to stay in while your new house was being completed. You paid $1,000 rent for the 60 days, and were required to put a $100 security deposit. Other costs while you lived in the apartment included $500 for food and $50 for laundry.

Fact #8, Your new home was ready and you moved in on December 31, 1990. At closing, you paid $200 attorney fees, $350 appraisal fees, and $600 for 6 months of prepaid insurance.

Fact #9. Upon moving into your new home, you had your draperies altered at a cost of $500, to fit the windows in your new house. You also paid $300 to have your appliances connected.


Appendix 2B: Information (from a professional tax advisor)

1. Although you looked for a house on your first trip, the trip does not qualify as a househunting trip since the job had not been secured prior to the trip. Therefore none o f the costs in (1) are deductible.

2. The second trip qualifies as a househunting trip. $500 ($300 airfare and $200 lodging) is deductible amount on line 5, and $120 (80% o f $150) for food is deductible on line 7. The $10 for the movie does not qualify as a deductible expense.

3. The $500 payment made to the landlord is deductible as an "expense o f settling a lease" on line 9. The forfeiture o f the cleaning deposit is not deductible.

4. The $5,500 payment to Acme Moving is deductible on line 1. The cost o f in-transit storage is limited to 30 days storage, or 30/60 x ($500 + $300) = $400 and is also deductible on line 1.

5. Although qualifying insurance costs are deductible, losses for damaged property is not a deductible moving expense. Therefore, the $700 damage is not deductible.

6. The deductible amount for travel and lodging on line 2 includes $400 for lodging and $108 (1,200 x $0.09 per mile), or $508. Meals en route are deductible on line 3 and are l imited to 80% o f the amount spent, or $160.

7. You may deduct temporary living expenses for meals and lodging for up to 30 days in the new area. The deductible amount for the line 6 is $500 (30/60 x $1,000). The deductible amount for food that is included on line 7 is $200 (30/60 x $500 x 80%).

8. Deductible expenses o f buying a new home is $550 ($200 attorney fees x $350 appraisal fees). The $550 is deductible on line 10.

9. The payment to alter the draperies is not deductible. The $300 to have the appliance connected is included as transportation costs on line 1.

Appendix 3: Individual tax form

Enter your I D # here:

1. Salary Income $

2. Less: Deductible Moving expenses $

3. Taxable income $

4. Income tax rate

5. Income tax for 1990 (3) x (4) $

0.33

Note: (1) Ensure that you have entered your I D # at the top r ight-hand corner. (2) W h e n completed please place the individual Tax Form in the envelope provided and turn it in

to the supervisor before proceeding to stage III. (3) Re tu rn all o ther materials o f Stage II in which they were contained.


A p p e n d i x ,4: D e t e r m i n i n g m o n e t a r y c o m p e n s a t i o n

Salary Less: Actuat Moving Expenses Less: Professional tax advice (if requested) Less: Taxes (as per individual Tax Form) Less: Additional taxes and penalty (@ 20% o f the under reported tax)

I f audited

$18,000 13,468 x x x x x

x x x x x

x x x x x

Basis

Your

Note:

for your Monetary Compensation $ X

compensation for this project 0.5% of SX

This was the actual moving expense incurred, as detailed in Appendix 2A.

I fnot audited

$18,000 13,468 XXXXX

XXXXX

0

$ x

0.5% of SX

N o t e s

I The word ethics comes from the Greek word, ~thos, meaning character, guiding beliefs, and standards. 2 However, !in tax law, there are both criminal and civil penalties. The penalty for underreporting in the above example would possibly be a civil one. 3 The study defined personality traits (adapted from Jackson, 1976) as follows: (a) conformity - strong desire for approval from others, sensitive to public image; seeks to be popular. (b) responsibility- trustworthy, reputable, civic- minded, feels a strong obligation to be honest and upright; experiences a sense of duty to other people; has a strong and inflexible conscience. (c) value orthodoxy - traditional, moralistic, conven- tional; values traditional customs and beliefs; values may occasiomdly be seen by others as 'old fashioned;' takes a rather conservative view regarding contem- porary standards of" behavior. (d) risk propensity- venturesome, daring, rash; enjoys gambling and taking a chance; willingly exposes self to situations with uncertain outcomes; enjoys adven- tures having an element of peril. 4 Kohlberg (1984, p. 44) separates moral judgment into six stages of development. At the first stage, individuals are obedience and punishment oriented, while at the sixth stage individuals are conscience oriented. Kohlberg's work examines changes in moral judgment that occur over an individual's life from childhood to adutthoo~t. However, tax returns generally are filed by adults whose ethical standards are significantly developed. In' the current study, therefore, we measure the subjects' overall ethical standards and do not attempt to determine their stages of moral judgment development.

s On a scale of one to ten, where 10 represented very attentive and one represented inattentive, the subjects had a mean attention level of 8.86 6 The returns of two subjects were selected for audit. The first return was selected based on the largest deduction for moving expenses taken. The manner of selection was a proxy for the IIKS's discriminant function that selects returns based on a discriminant score. Three subjects took the total amount of the actual moving expenses as deductions. One of these three was randomly selected for audit. A second subject's return was selected for audit using a random method with replacement. That is, the above three subjects with the maximum amount of deduction were also considered for selection of the second subject. 7 Cash payments to the subjects ranged from $5.00 to $14.68 with an average of $9.94 per subject for participation in the one-half hour experiment. 8 The signs of the T-scores reflect the structure of the instruments. On the Kogan-Wallach (1964) RISK instrument, higher scores indicate a greater degree of risk aversion which result in lower intentional noncompliance; hence, the T-score has a negative value. Conversely, on the ETHICS instrument of Christie (1970), higher scores indicate lower ethical standards and, consequently, higher intentional noncompliance; hence, the T-score has a positive value.

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School of Accounting, College of Business Administration,

University of Oklahoma, Norman, OK 73019,

U.S.A.

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