tax evasion and perceptions of tax fairness: a research note

AMITAI

ETZIONI

This research note addresses the debate as to whether tax evasion resultsfrom increased taxrates and economic incentives-as many economists claim-or from other factors as well,specifically taxpayers' perceptions that taxes are unfair. Using survey data collectedfrom1960-1980 and information on tax rates and estimates of tax evasion for that period, theauthor finds that tax evasion increased during this time, as did the percentage of Americansconsidering taxes unfair, even as tax rates remained stable. Moreover, those Americanspresumably having the lowest incentiyes to cheat were most likely to consider taxes unfair.This information leads the author to conclude that a growing sense that taxes are unfair ismore likely than increasing tax rates and ones level of income to lead to tax evasion.

Many economists have argued thataltruistic and public-minded behavioractually represents a form of "utilitymaximization" and is therefore self-serving. According to this viewpoint,people act ethically when such actionsenhance their own well-being, as whenthey give gifts to enhance their reputationsand/ or to receive gifts in return (Collard,

1978; Phelps, 1976). Furthermore, manyeconomists have maintained that, whenethical factors influence decisions andbehavior, they are intervening variablesprimarily reflecting "objective economicrealities" (Tobin, 1972, p. 55). As LeifJohanson says, "Economic theory...

INTRODUCTION

This article provides a limited empiricalcontribution to the study of the role ofethics

in behavior related to economics. Inusing the term "ethics" I am not referringto

a branch of philosophy, but am speak-ing of the standards and values affectingone's behavior. For example, people de-ciding whether it is more "proper" to savetheir money or accumulate debts, workersacting on the principle of "a days' work fora day's pay," and the couple consideringwhether they should consume all of theirassets during their own lifetimes or leavebequests to their children are basing theireconomic decisions and behavior on theirsense of what is ethical.

.The author acknowledges the assistance of JanetShope with research for this article.

Amitai Etzioni is University Professor of TheGeorge Washington University. Ge/man Library.Room 7/4J. 2/30 H Street. N. W.. Washington.D.C. 20052.

The Journal of Applied Behavioral ScienceVolume 22, Number 2, pages 177-185.Copyright @ 1986 by NTL Institute.All rights of reproduction in any form reserved.ISSN:

0021-8863.

178

THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE Vol. 22/No. 2/1986

perceptions and moral judgements of in-dividuals through their associations withfamily, friends, reference groups. (Lewis,1982, pp. 127-28)

Moreover, the economic deterministictheory that people with higher levels ofincome will have a greater disposition toevade taxes has not been supported bydata from several countries and periods oftime (Lewis, 1982, p. 129).1

THE FAIRNESS HYPOTHESIS

My hypothesis is the following: If a publicfeels increasingly over time that taxes areunfairly imposed, it will be increasinglylikely to evade paying these taxes. To testthis hypothesis and determine that in-creased tax evasion does not result fromhigher tax rates, I have taken a periodmarked by stable or declining tax ratesand simultaneously by an increased senseby taxpayers that the taxes are unfair toconduct a natural experiment. The studywas based on the American public from1960 to 1980.

tends

to suggest that people are honestonly to the extent that they have economicincentives for being so" (quoted by Sen,1977, p. 332).

In contrast, social scientists have con-ducted experiments indicating that manypeople prefer to cooperate and act accord-ing to their ethical standards rather thanviolate these standards to maximize utility-as in the case of the prisoner's dilemmaexperiment (Lave, 1962)-and that peo-ple tend not to take "free rides" at publicexpense, even when given ample oppor-tunity to do so (Marwell & Ames, 1981).Such experiments have produced acts ofauthentic altruism (Derlega & Grzelak,1982). Moreover, ethics has been found toaffect economics; for example, trust isessential to effective economic policy(Katona, 1975).

A specific debate has arisen betweeneconomists and social scientists with re-spect to tax evasion. Economists find acorrelation between the level of tax rev-enue and tax rates, opportunities to cheatwhen paying taxes, and the size of thepenalties imposed on tax evaders; socialscientists, however, call attention to thesignificance of ethics related to the pay-ment of taxes (Beicheit, Bievert, Daviter,Schmolders, & Strumpel, 1969; Enrick,1964; Strum pel, 1969). Many economistsmaintain that economic causes are re-sponsible for all-or nearly all-variancein observed economic behavior, whereassocial scientists argue that noneconomicfactors playa significant part along witheconomic factors in producing suchvariance.

Using numerous specific studies basedon public opinion surveys, experiments,and analyses of income tax returns, socialscientists have demonstrated that

Measures of fairness

As is often the case for analyses basedon public opinion polls conducted yearsbefore studies are made, the data neededdid not exactly match the data available.One cannot, of course, resurvey the pub-lics of previous decades; responses to suchquestions as "Did you think, in 1950, thattaxes were fair?" will not likely be suffi-ciently reliable. One must seek instead toglean insight from the data available.

One indication of the public's sense ofthe fairness of taxes, found in the resultsof polls, is the proportion of Americanssurveyed who agreed with the statementthat federal taxes are "too high." Thisfigure rose from 46% in 1960 to a peak of73%in 1976. The latest figure available for1980 is 71% (National Opinion Research

decisions to evade are not determined solelyby a taxpayer's interaction with the revenuesauthorities and the tax structure. The de-cision is also affected by the attitudes,

Tax Evasion and Perceptions of Tax Fairness: A Research Note 179

Table IPercentage of Americans Surveyedwho

Considered Federal Income TaxesToo High*

do

you feel about the present federalincome tax system-do you feel it is quite

fair to most people, or reasonably fair, orsomewhat unfair, or quite unfair to mostpeople?" Sixty-two percent of respondentsin 1976 stated the system was unfair, 64%said so in 1977, 67% said so in 1978, and64% said so in 1979 (H & R Block, 1979,p. 37; Opinion roundup, 1978, p. 26).Because this survey covered only fourconsecutive years, the resulting data aloneare insufficient for my inquiry. They do,however, parallel the findings cited for1961-1980 above.

Survey findings published by the Ad-visory Commission on IntergovernmentalRelations (1983) also indicate the public'ssense of the fairness of taxes. From 1972-1983, members of the American publicwere asked, "Which do you think is theworst tax, the least fair?" The responsesindicate a rising secular trend for federaltaxes, but a declining trend for state in-come tax, state sales tax, and local prop-erty tax (see Table 2). This question, ofcourse, is a comparative one: The answersindicate only that respondents generallyfelt federal taxes had become increasinglyless fair vis-a-vis the other taxes; all taxescould have become perceived as growingincreasingly fairer, for example,

"Respondents were asked, MDo you consider the amount of

income tax that you have to pay as too high, too low, or

about right?M

Source: Gallup (1972, 1978); Harris surve)' (1961, 1962,

1963,1964, 1966, 1967, 1969, 1973, 1974, 1975,1976, 1977, 1978, 1980); National Opinion Re-

search Center (1980).

Center, 1980). Table I presents the figuresfor each year from 1961-1980.

During the period 1976 to 1979, asurvey was conducted in which membersof the American public were asked aquestion directly related to fairness: "How

Table 2Responses by Americans Asked Which Tax They Considered the Worst/ Least Fair.

1972

1973 1974 1975 1977 1978 1979 1980 1981 1982 1983

37

36 36 3619 30 30 28

28

30

13 10 10 II II II

13

2020

23 17 18 15

45 31

2829

33 32 27 25 33 30

Percentage citing federalincome tax

Percentage citing stateincome tax

Percentage citing statesales tax

Percentage citing localproperty tax

Percentage answering"Don't Know" 13 15II II 14 10 II 10 10

9

9

.Respondents were asked, "Which do you think is the worst tax, the least fair?"

Source: Advisory Commission on Intergovernmental Relations (1983, pp. 8,40-43).

180 THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE Vol. 22/No. 2/1986

Table 3Estimated Increases in the Number of

Full-Time Participants in theUnderground Economy from 1950-1981

and the federal taxes as becoming fairer ata lower rate than the others. In a review ofthe continued trend defining federal taxesas growing worse, these findings seem tosupport the finding of a decline in publicsupport for federal taxes.

Data related to the survey results re-ported above do not indicate how re-spondents interpreted the descriptive term"fair." If they defined "fair" in terms of afair deal-that is, getting fair service forthe taxes they paid-the data will notreflect an ethical perception but an eco-nomic one. I assume, however, that therespondents interpreted this word tomean just, equitable, and impartial-atypical dictionary definition. This under-standing incorporates the notion of some-thing

that is normatively "right," notmerely quid pro quo.

Total employedreceiving wages and salariesself-employed

Total not in the labor force

adult menadult womenblack teenagers

Unemployed black teenagers

Total Increase

Number

inthousands

Source: O'Neill (1983. p. 13).

1983, p. 13). One measure of the under-ground economy-largely a cash econ-omy-is the ratio of cash holdings tochecking

account deposits. The relativeamount of cash holdings has increasedrapidly since the 1930s: In the late 1930s,cash holdings equalled 21% of deposits;by 1960, these holdings equalled 25.7% ofdeposits;

in 1976 such holdings wereestimated to equal 34% of deposits (see

Figure I).

MEASURES OF TAX EVASION

The underground economy has reportedlygrown dramatically from 1950 to 1981(see Table 3). An estimated 4.4 millionadditional people have become full-timeparticipants in this economy (O'Neill,

Figure

I. Growth in the underground economy (in billions of dollars)

Source: The underground economy's hidden force (1982, p. 66)

Tax Evasion and Perceptions of Tax Fairness: A Research Note

181

all. In 1965, 94.3% of the tax ultimatelydetermined to be due was paid volun-tarily; by 1973 this figure had decreased to91.2% and by 1981 it had decreased to89.3% (U.S. Congress, House Committeeon Ways and Means, 1979, p. 36; u.s.Department of the Treasury, InternalRevenue Service, 1983, p. 10). In short,according to all of the various measures,tax evasion increased from 1960-1980.

Table 4Trends in Underreporting and

Overreporting of Income, as Establishedby the Tax Compliance Program

1965 1969 1973

10.6

18.4 24.5

4 3.6 2.4

438.9 613.1 858.7

2.4 3.0 2.9

0.3 0.6 0.3

Underreported income (in

billions of dollars)

Overreported income (in

billions of dollars)

Income that should have

been reported (in billions

of dollars)

Percentage underreported*

Percentage overreported**

"This figure is obtained by dividing the amount ofunderreported income by the amount of income thatshould have been reported and multiplying the resultby 100.

""This figure is obtained by dividing the amount ofoverreported income by the amount of income thatshould have been reported and multiplying the resultby 100.

Source: U.S. Department of the Treasury, Internal

RevenueService(1979,p.1S2).

Through the Tax Compliance Programestablished by the Internal Revenue Ser-vice (IRS), the amount of income notreported or overreported to the IRS canbe estimated. In 1973, an estimated $1, l77million in individual income was notreported; in 1976 the figure increased to$2,103 million; in 1981 the figure in-creased to $4,740 million (U.S. Depart-ment of the Treasury, Internal Revenue

Service, 1983, pp. 77-80). Underreportedand overreported income has also risensince 1965, but not at the same rate. Table4 illustrates these trends for 1965-1973.

To measure unreported income, com-pliance with the law was examined interms of "voluntary reporting percent-ages" (VRP). These percentages relate theamount that should have been reported tothat which was voluntarily reported. TheIRS reports that from 1965 to 1973compliance with tax laws decreased over-

CORRELATION BETWEENFAIRNESS AND EVASIONThe

above data indicate that as the num-ber of Americans perceiving taxes as fairdeclined, during that same period (1960-1980) tax evasion increased. I am deliber-ately stating this in general terms ratherthan presenting more specific measure-ments of annual correlations or correla-tions

between degrees of increase in taxevasion and degrees of decline in the sensethat taxes are fair. This is because thesense of fairness and level of tax evasionare necessarily "soft" and thus more usefulfor indicating general trends than areother calculations.

This does not mean, however, that suchcorrelations have no bearing on the hy-pothesis advanced by many economiststhat the increase in tax evasion resultsfrom rising taxes. Indeed, some econo-mists might argue that such increases intaxes would also create increased percep-tions that taxes are unfair. To examinewhether increased taxes have been afactor in increased tax evasion, one mustdetermine the tax rates for 1960-1980.

THE EFFECT OF TAX RATES

According to Steurele and Hartzmark(1981, p. 147), "Federal income tax re-mained a fairly constant percentage ofpersonal income between 1947 and 1979.""Effective" tax rates-that is, rates as

THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE Vol. 22/No. 2/1986182

Table 5Federal Income Tax Rates as Percentage

of Personal Income

9.810.110.1

9.59.29.510.0

10.411.5

10.39.89.8

10.110.69.810.1

10.310.9

11.011.611.7

Source:

Peckman (1983. p. 332).

estimate

how many people they thoughtclaimed deductions of $100 or more

above the amount they were entitled toclaim; the median reported for all tax-payers was 401 out of I,OOO(H & R Block,1979, p. 69). Individuals whose estimateswere higher than average tended to feeltaxes were excessively high or somewhathigh, reporting an average median of 416and 423, respectively (H & R Block,

1979). Moreover, persons consideringtaxes excessively high also made up thehighest percentage (83%) of persons con-sidering the tax system unfair (H & R

Block, 1979, p. 37).

percentages of income-varied from9.2% to 12.1% during this period (if onedoes not include rates for 1951) (Steurele& Hartzmark, 1981). Peckman (1983,p. 332) indicates that the variance from1 96(}-1 98 I was even smaller, with thehighest rate being 1 1.7% and the lowest9.2%.

Most important, while tax evasionand perceptions that taxes are unfair rosein secular trends during these two decades,changes in federal tax rates formed nofirm pattern. Federal tax rates were as lowin 1975 (9.8%) as in 1960, and their high of1 1.7% in 1981 approximated the rate for1969 (11.5%) and 1963 (11.1%) (Peck-man, 1983, p. 322) (see Table 5). Hence,federal taxes do not appear to have causedeither the increase in tax evasion or theincrease in perceptions that taxes areunfair.

Could increases in other taxes havecaused a rising sense of unfairness? Em-ployment taxes (for Social Security) arenot thought of by most people as belong-ing to the same category as other taxes,for they are widely perceived as an"insurance scheme"-in which one paysnow for future benefits-and as a segre-gated system, which for many years theywere. Local and state taxes vary greatlythroughout the nation, but probably werenot relevant because-as Table 2 shows-people complained mostly about fed-eral taxes (although we should not dis-count the role of state and local taxes).Another factor may be the decline in theproportion of federal tax revenue col-lected from corporations, which decreasedfrom 22% in 1960 to 17.9% in 1970 and to13.9% by 1980. No poll data indicates,however, that the public is aware of thistrend.

Another indication of the direct re-lationship between tax evasion and theperception that taxes are unfair comesfrom a different source. A random sampleof adult Americans was asked in 1979 to

OTHER

DATAThus

far, the evidence presented has beenlimited to random samples of the nationalpopulation.

Additional insights can be


estimate that 169 out of 1,000 taxpayerscheated (H & R Block, 1979, p. 68). Thissame group had the highest percentage ofpersons (50%) who considered the taxsystem fair (H & R Block, 1979, p. 37).

gleaned by comparing data for varioussubgroups of the population. These dataindicate that those subgroups whosemembers feel more strongly than othersthat the tax burden is unfairly imposedare more likely to evade paying taxes thanare others. This occurs even for subgroupswhose members have relatively low in-comes and thus-according to economists-less economic incentive to evade taxes.

For example, the average income ofblack persons is lower than that of whitepersons; hence, blacks pay less money intaxes, on average. Yet data indicate thatblacks feel more strongly than whites thattaxes are unfair (64% of whites surveyedconsider the tax system unfair, whereas67% of blacks share this opinion) (H & R

Block, 1979, p. 37).Similarly, a survey taken in 1977

showed that more nonexecutive whitecollar employees (75%) felt the tax systemwas unfair than did executives (64%),even though the executives earned more(H & R Block, 1977, p. 5).

Also relevant is the association betweena person's perception that many peoplecheat on their tax payments and thatperson's perception that taxes are unfair(the person who senses that many cheatersexist is more likely to cheat as well). Thosesubgroups with high median perceptionsthat people evade taxes are the samesubgroups whose members tend moreoften to perceive that taxes are unfair;conversely, members of subgroups char-acterized by low median perceptions oftax cheaters also tended more often toconsider the tax system fair. A surveytaken in 1979 asked respondents to statehow many of 1,000 persons each respon-dent believed reported their individualincomes at a level $100 or more belowtheir actual incomes; the median numberestimated to cheat was 217. Those re-spondents who stated they consideredincome taxes were just gave a median

CONCLUSION ANDDISCUSSION

From 1960-1980, an increase occurred inthe percentage of Americans who seemedto consider taxes-especially federaltaxes-unfair. During this same period,evasion of taxes increased, although thetax rates remained basically flat. Thissuggests that a growing sense that taxesare unfair is more likely than increasingtax rates to cause tax evasion, contrary tothe suggestions of many economists. Thisconclusion is further supported throughcomparisons of subgroups of the Ameri-can public: Those whose members feelmost alienated from the system seem toevade taxes most frequently, even whentheir average income is relatively low andthese persons thus have a presumablysmaller incentive to evade taxes than domembers of subgroups with higher aver-age incomes.

In the future an increase in taxes iswidely expected to take place. At the sametime, if "loopholes" are closed and thetaxpayers' feelings of alienation becomestable or decline, the sense that taxes arefair may increase. Should this occur,another setting will be provided for anatural experiment to test the relativepower of two factors-tax rates and theperception of how fair taxes are-toinfluence tax evasion;

NOTE

I. I do not present a review of the vast literaturein this article for two reasons. First, Lewis (1982)has already done this recently, and done it very well.Second, I wish to keep this research note limited inscope (for several recent significant research re-

184 THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE Vol. 22/No. 2/1986

ports, see Grasmick & Scott, 1982; Scott & Gras-mick, 1981; Spicer & Becker, 1980),

REFERENCESAdvisory Commission on Intergovernmental Rela-

tions. (1983). Changing attitudes on govern-ment and taxes. Washington, DC: U.S.Government Printing Office.

Beicheit, B., Bievert, J., Daviter, J., Schmolders, G.,& Strumpel, B. (1969). Tax norms and taxreality. Koln und Opladen, West Germany:Westdeutscher Verlag.

H & R Block. (1977). The American public and theincome tax system (Vol. II). Kansas City, MO:H & R Block.

H & R Block. (1979). Third annual tax study.Kansas City, MO: H & R Block.

Collard, D. (1978). Altruism and economy. NewYork: Oxford University Press.

Derlega, V.J., & Grzelak, J. (1982). Cooperationand helping behavior. New York: AcademicPress.

Enrick, N.L. (1974). A further study of income taxconsciousness. National Tax Journal, 17,319-321.

Gallup, G. (1972). Gallup poll of public opinion.1935-1971. New York: Random House.

Gallup, G. (1978). Gallup poll of public opinion.1972-1977. Wilmington, DE: ScholarlyResources.

Grasmick, H.G., & Scott, W.J. (1982). Tax evasionand mechanisms of social control. Journal ofEconomic Psychology, 2, 213-230.

Harris survey. (1961). Orlando, FL: Tribune MediaServices.






Harris survey. (1969). Orlando, FL: Tribune Mediaservices.








Katona, G. (1975). Psychological economics. Am-sterdam: Elsevier.

Lave, L.B. (1962). An empirical approach to theprisoner's dilemma game. Quarterly Journal ofEconomics, 76,424-436.

Lewis, A. (1982). The psychology of taxation. NewYork: St. Martin's Press.

Marwell, G., & Ames, R.E. (1981). Economists ridefree, does anyone else? Journal of Public Eco-nomics, /5,295-310.

National Opinion Research Center. (1980). Generalsocial survey. Storrs, CT: Roper Public OpinionResearch Center.

O'Neill, D. (1983). Growth of the under-groundeconomy. 1950-1981: Some evidence from thecurrent population survey (a study preparedforthe use of the Joint Economic Committee, 98thCongress, 1st session). Washington, DC: U.S.Government Printing Office.

Opinion roundup. (1978). Public opinion, 1(1),21-36.

Peckman, J.A. (1983). Federal tax policy. Wash-ington, DC: Brookings Institute.

Phelps, E. (Ed.). (1976). Altruism, morality, andeconomic theory. New York: Russell SageFoundation.

Scott, W.J., & Grasmick, H.G. (1981). Deterrenceand income tax cheating: Testing interactionhypotheses in utilitarian theories. Journal ofApplied Behavioral Science, 17(3), 395-408.

Sen, ~. (1977). Rational fools. Philosophy ofPublic Affairs, 6(4), 317-344.

Spicer, M. W., & Becker, L.A. (1980). Fiscal in-equality and tax evasion: An experimentalapproach. National Tax Journal, 33(2), 171-175.

Steurele, E., & Hartzmark, M. (1981). Individualincome taxation, 1947-79. National Tax Jour-nal,34, 145-159.

Strumpel, B. (1969). The contribution of surveyresearch to public finance. In A.T. Peacock(Ed.), Quantitative methods in public finance.New York: Praeger.

Tobin, J. (1972). Wealth, liquidity and the pro-pensity to consume. In B. Strumpel, J.N. Mor-gan, & E. Zahn (Eds.), Human behavior ineconomic affairs (pp. 37-56). San Francisco:Jossey-Bass.

U.S. Congress, House Committee on Ways andMeans. (1979). Underground economy, hear-


ings before the Subcommittee on Oversight ofthe Committee on Ways and Means (96thCongress, 1st session). Washington, DC: U.S.Government Printing Office.U.S.

Department of the Treasury. (1979). Estimatesof income unreported on individual tax returns

(Publication 1104). Washington, DC: U.S.

Government Printing Office.U.S. Department of the Treasury, Internal Revenue

Service. (1983). Income tax compliance re-search: Estimates for 1973-1981. Washington,DC: U.S. Government Printing Office.

The underground economy's hidden force. (1982.AprilS). Business Week, pp. 64-<i8.

tax evasion and perceptions of tax fairness: a research note

Documents