Turning Resistance into Compliance: Evidence from a longitudinal study

of tax scheme investors

Tina Murphy

Centre for Tax System Integrity

6th June 2005

Today’s talk

The dispute between the ATO and tax scheme investors

Can apply the lessons learned here to taxpayers caught or prosecuted for serious non-compliance

2002 and 2004 survey: tracked changes in attitudes over time

Case Study: Mass marketed schemes

In 1996, ATO noticed increase in number of taxpayers involved in schemes

Increase in $ being claimed:$54m in 93/94 to $1b +

in 97/980

200

400

600

800

1000

1200

1400

87 88 89 90 91 92 93 94 95 96 97 98

Sch

eme

ded

uct

ion

s (

$m)

Year

Problem with schemes When ATO analysed the arrangements:

Commercial nature may have been OKBut were concerned with the way they were structured

and financed Investments largely funded through tax deductionsLittle private capital at risk

In 1998, took action against 42000 investors Saw it as a way of discouraging future marketing

and investment in schemes ATO went back 6 years and penalised those who

invested as early as 1992

Investor reaction Investors argued their accountants / financial

planners sold schemes as legitimate investments Resented the implication they were ‘tax cheats’ Disappointed with the lack of consultation In 1998/99 thousands of complaints made to the

Ombudsman Fighting funds set up Majority refused to pay up – more than 50% still

had not paid in 2002 (despite interest accumulating on debts)

Matter referred to a Parliamentary Senate Committee in 2000

Without a doubt some of the investors would have been sophisticated taxpayers who knew what they were doing (but majority blindly followed advice of the marketers)

More than likely a lot of myths and propaganda about the ATO were being developed by the power players involved in schemes

This led to the ATO being put on the defensive about the approach they took

Our past research Conducted Interviews and 2002 Survey:

Investors more resistant than general populationMeasured through Val Braithwaite’s Motivational

Posture of ‘Resistance’

55% of taxpayers in general population score high on measure of resistance

87% of investors in 2002 survey were found to be resisters (coupled with refusal to pay their tax debts makes them a difficult group to manage)

Industry

factors * industry definition* region* size, segment,

participants * profit margins* cost structures* industry regulation* industry issues

- competition- seasonal factors- infrastructure- labour

Sociological* norms* reciprocity* age* gender* education level* ethnic background

Economic

* interest rates* tax system* Govt policies/* international influence* inflation

Psychological

* risk* fear* trust* values* fairness/equity* opportunity to evade

Business profile* Structure - sole

trader, partnership,trust, company

* Business activities- type; local, inter-state, international

* financial data* business age

THE ATO COMPLIANCE MODEL

REGULATORYSTRATEGIES

MOTIVATIONALPOSTURES

Prosecution

Command Regulation

(Nondiscretionary)

Command Regulation

(Discretionary)

Enforced SelfRegulation

SelfRegulation

ENFORCEMENT STRATEGIES

Audit

with/without

Penalty

Real TimeBusiness Examinations/

Record Keeping Reviews

Education/ Record Keeping/Service Delivery

Resistance

Disengagement

AccommodationManagerial

Capture

(convenience, access, choice, control)

What characterises a Resister?

According to Braithwaite (2003), Resisters: Actively resist the self-regulatory system Likely to view ATO with antagonism See ATO as trying to catch taxpayers out rather than trying to help

them Believe people should take a stand against the ATO (may involve

avoiding their tax obligations or being uncooperative)

So in some respects, this posture highlights taxpayers who may be a challenge for the ATO to manage (but good news is that this group can be turned around—unlike those who disengage from the system)

Why were so many Resistant?

Was it just the fact that they had tax debts they didn’t want to pay?

Was it more than just the money?Was it something about the type of person

they were?Was it to do with the ATO’s approach to

handling the matter?

2001 Interview Study In initial exploratory interviews:

30 investors interviewedKept referring to how they felt they had been treated by

the ATOFelt poorly treated by ATOLetters rude and legalisticFelt the ATO’s handling of schemes was unfairFelt the ATO initially saw them all as tax cheatsUpset they hadn’t been consultedDisliked the idea that interest was charged going back 6 yearsFelt the wealthy got away with investing in these schemes

earlier Led me to procedural justice literature

Procedural Justice “Concerns the perceived fairness of the procedures

involved in decision-making and the perceived treatment one receives from the decision maker” (Tyler, 1990)

People’s reactions to experiences with authorities have been found to be rooted in their evaluations of the fairness of procedures used If procedures seen to be fair, will be more likely to trust that

authority, will see authority status as more legitimate, and be more inclined to accept decisions (even if outcomes are unfavourable)

People found to challenge authority if they believe the procedures are unfair

This pattern of results found in many different regulatory contexts (policing, workplaces, court system, tax, environment, etc)

Important point to note

Procedural justice theory does NOT suggest that punishment should not be used!

In fact, it suggests that punishment should be used if appropriateSome people have also misinterpreted CTSI’s work in

saying that we don’t believe in punishment. This is NOT true

It is the way in which this punishment is implemented that is important to consider

2002 National Survey Study

2001 interview study suggested that procedural justice was an important element in investors’ reactions to ATO (Murphy, 2003).

But study conducted on investors in Kalgoorlie – perhaps a particularly resistant group??

In 2002, conducted a national survey on 6,000 scheme investors (2,292 responded)Those who were more resistant were more likely to feel

they were treated in a procedurally unfair wayAlso less likely to trust the ATO and more likely to

question ATO’s legitimacy (Murphy, 2004)

Present Study

Shortly after collecting survey data in 2002, ATO announced settlement offer to scheme investors

I had attitudinal measures from before settlement offer (gave me opportunity to study changes in attitudes after offer made)

Conducted follow-up survey in 2004 (contacted 1250 investors, 659 participated)

Findings

Interested in: Investors who were resisters in 2002 and 2004 (resister

group) – N=289 – 44% continued to resist Investors who were resisters in 2002 but NOT in 2004

(non-resister group) – N=125 – 19% had change of heart

Why was it that some people continued to hold resistant views while others became less resistant over time?

Compared the 2 groups on a number of measures

DemographicsMeasure Group Mean SD Difference

Age Non-resister

Resister49.91

50.97

8.75

8.66

No

Income Non-resister

Resister83.42

78.36

55.03

55.93

No

Education Non-resister

Resister5.94

5.74

1.63

1.67

No

Tax debt Non-resister

Resister47,286

56,829

49,717

65,296

No

Eligible for offer

Non-resister

Resister1.13

1.12

0.43

0.40

No

Compliance Behaviour

Investors asked whether they thought their scheme-related experience had affected their taxpaying behaviour in a negative way

Resisters affected significantly more so

1

1.5

2

2.5

3

3.5

4

4.5

5

resistant both resist02 nonresist04

Degree taxpaying behaviour was affected

Influen

ce o

n b

eh

avio

ur

group

Compliance Behaviour cont’d

Taxpayers asked to expand how it was affected: I now try to avoid paying tax as much as possible I no longer declare all my income I now use the tax system in a negative way to recoup

my losses I am now more defiant towards the ATO I now look for ways to purposefully cheat the tax

system I now look for many ways to recoup my losses

Resisters Mean = 2.20 vs Non-resisters Mean = 1.80 over 6 items (scores out of 5; higher number means more non-compliance)

Compliance Behaviour cont’d

2002 evasion behaviour assessed and 2004 evasion behaviour assessed (eg. a) did they fail to lodge tax return; b) did they not declare cash income; c) did they make illegitimate deductions; d) did they refuse to pay back scheme tax debt)Resisters and Non-resisters did not differ at Time 1 (2002)But did differ at Time 2 (2004) – resisters more non-compliant

99% of cash income was declared by Non-resisters, only 65% declared by Resisters in 2004 (N = 19 and 62, respectively)

Changes in Attitudes

Explored changes over time for the following attitudes:Perceptions of procedural justiceTrust in the ATOPerceived legitimacy of the ATOObligation to obey the ATO

Attitude changes - 2002 to 2004

Proc. justice Trust

1

1.5

2

2.5

3

3.5

4

4.5

5

resist both resist02 nonreist04

Change in trust

Time 1Time 2

Tru

st

Group

1

1.5

2

2.5

3

3.5

4

4.5

5

resist both resist02 nonreist04

change in procedural justice judgements

Time 1Time 2

proc

edur

al ju

stic

e ju

dge

me

nts

Group

Attitude changes - 2002 to 2004

Legitimacy Obligation to obey

1

1.5

2

2.5

3

3.5

4

4.5

5

resist both resist02 nonreist04

Changes in legitimacy judgments

Time 1Time 2

legi

tima

cy ju

dgem

ents

Group

1

1.5

2

2.5

3

3.5

4

4.5

5

resist both resist02 nonreist04

Changes in obligation to obey ATO

Time 1Time 2

oblig

atio

n to

obe

y

Group

Views on Settlement Offer

Outcome fairness Procedural fairness

1

1.5

2

2.5

3

3.5

4

4.5

5

resist both resist02 nonreist04

Views on Outcome fairness

Out

com

e fa

irnes

s

Group

1

1.5

2

2.5

3

3.5

4

4.5

5

resist both resist02 nonreist04

Views on procedural fairness of ATO's handling of settlement offer

pro

cedura

l just

ice

jud

gem

ents

Group

Views on Settlement Offer

Satisfaction ratings Alleviated original concerns

1

1.5

2

2.5

3

3.5

4

4.5

5

resist both resist02 nonreist04

Satisfaction with ATO's handling of settlement process

Sat

isfa

ctio

n ra

tings

Group

1

1.5

2

2.5

3

3.5

4

4.5

5

resist both resist02 nonreist04

Alleviated original concerns over ATO's handling of schemes

Alle

viate

d c

on

cern

s

Group

Views on Settlement Offer

Offer allowed me to put matter behind me

Respect for ATO as a result

1

1.5

2

2.5

3

3.5

4

4.5

5

resist both resist02 nonreist04

Offer allowed me to put matter behind me

Deg

ree

to w

hich

mat

ter

put

beh

ind

Group

1

1.5

2

2.5

3

3.5

4

4.5

5

resist both resist02 nonreist04

I now have more respect for the ATO as a result of settlement offer

Resp

ect

fo

r A

TO

Group

Summary of Findings

Those investors who became less resistant towards ATO after settlement offer:Were more likely to be compliant in 2004

(resisters were more non-compliant)Were more trusting of the ATO in 2004Saw the ATO as more legitimate in 2004Were more likely to feel settlement offer was

handled in a procedurally fair manner

Implications of findingsTwo points:

1. Findings demonstrate that people’s motivational postures are fluid and changeable over time (one group who continued to be resistant (44%), other group resistant in 2002 but not 2004 (19%))

2. Way regulator handles a case can have serious ramifications for the way people view the regulator, as well as for their subsequent compliance behaviour.

These have implications for how the ATO interprets and uses the Compliance Model

Some tempted to pigeon hole non-compliers as always having resistant or disengaged postures and treat them according to this view (i.e. hit them hard)

Reasoning behind this is that it will bring them into compliance and deter them from engaging in non-compliance in the future

Industry

factors * industry definition* region* size, segment,

participants * profit margins* cost structures* industry regulation* industry issues

- competition- seasonal factors- infrastructure- labour

Sociological* norms* reciprocity* age* gender* education level* ethnic background

Economic

* interest rates* tax system* Govt policies/* international influence* inflation

Psychological

* risk* fear* trust* values* fairness/equity* opportunity to evade

Business profile* Structure - sole

trader, partnership,trust, company

* Business activities- type; local, inter-state, international

* financial data* business age

THE ATO COMPLIANCE MODEL

REGULATORYSTRATEGIES

MOTIVATIONALPOSTURES

Prosecution

Command Regulation

(Nondiscretionary)

Command Regulation

(Discretionary)

Enforced SelfRegulation

SelfRegulation

ENFORCEMENT STRATEGIES

Audit

with/without

Penalty

Real TimeBusiness Examinations/

Record Keeping Reviews

Education/ Record Keeping/Service Delivery

Resistance

Disengagement

AccommodationManagerial

Capture

(convenience, access, choice, control)

True that this strategy may deterHowever, our research suggests that such a

strategy can on occasion produce reactance and widespread resistance. Also, in such situations, an argument can be made for procedural unfairness (eg. Aggressive tone to letters, too

long to make decision, no consultation, etc)Which can lead to further non-compliance &

defiance towards authorities More costly in the long term

Ayres & Braithwaite (1992) suggest that the perception of fairness is important for nurturing voluntary complianceStart initial encounters with persuasion and explanation

(educate them about why what they did was wrong – and keep them informed about decision processes)

Tyler’s (1990) work in context of policing and justice systems finds that people can handle negative outcomes if they believe the procedures used were fair and respectful.

ConclusionDeterrence is important and the law is

important.Eg. Important to prosecute people who deserve

to be prosecuted.

Without deterrence and the possibility of punishment, non-compliance may get out of hand.

However, the manner in which the law is administered, and perceived by the public, is just as important.

Conclusion cont’d For a regulatory system to work effectively,

regulators need to manage both the application of law and punishment, as well as how the public may react to it.Be proactive beforehand rather than reactive after the

event in developing an effective, fair and respectful enforcement strategy;

This applies to people who may have made an innocent mistake on their tax returns all the way up to those who have committed a serious form of non-compliance and need to be prosecuted.

If regulators do both of these things well, they will be able to turn some resisters into long-term compliers.

Thank you