asian review of accounting volume 8 issue 1 2000 [doi 10.1108_eb060720] tan, lin mei; chin-fatt,...

8/10/2019 Asian Review of Accounting Volume 8 issue 1 2000 [doi 10.1108_eb060720] Tan, Lin Mei; Chin-Fatt, Carrol -- The I

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The Impact of Tax Knowledge on the Perceptions ofTax Fairness and Attitudes Towards Compliance

Lin M ei TanMassey UniversityandCarrol Chin-FattMassey University

AbstractPositive attitudes towards factors such as the perceived fairness of thetax system are considered to play an important role in the level of taxcompliance within a country (Strumpel, 1968). The tax literature indicatesthat not only knowledge but an understanding of the tax system mayhave an effect on taxpayers' perceptions of fairness and attitudes towardscompliance. This study examines the linkages between an increase in taxknowledge on perceptions of fairness and tax compliance attitudes byusing students enrolled in an introductory taxation course in a NewZealand tertiary institution. Contrary to prior research, the resultsindicated that an increase in tax knowledge did not have a significantimpact on perceptions of fairness and tax compliance attitudes.

We wish to thank Duncan Hedderley of the Statistics Research and Consulting Centre, MUniversity for his assistance with the SAS program and the statistical analysis. We also wish toReg Mathews, Stuart Tooley and Grant Richardson for their comments on earlier versions opaper.

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The Impact of Tax Knowledge on the Perceptions of Tax Fairnessan d Attitudes Towards Compliance

IntroductionTax non compliance has emerged as an area of worldwide concern particularlyduring the last decade. The New Zealand Inland Revenue Department (IRD)annual report for the year ending 30 June 1996 showed that NZ$43 8 million innon compliance w as detected. Although tax evasion was estimated to be about3.5% of GDP ($3 .2 billion) in 1995 (Caragata, 1997), the actual amount of noncompliance remains unknown . In any case, non compliance is a significant andgrow ing problem for both tax policy makers and administrators.

In an attempt to encourage voluntary com pliance and to deter taxpayers fromnon compliance with the tax regulations, the government recently revampedand introduced a more stringent tax penalty regime. The imposition of moresanctions, is based on the premise that people will be deterred from unacceptablebehaviou r as the costs of flagging the rules would outweigh the benefits.

Undoubtedly, changes in tax law will affect taxpayer behaviour. However, theintentions of the changes may not work up to the policy make rs' expectationsas num erous factors may come into play in taxpaye rs' compliance behaviour.

Th e ex tant tax literature on non com pliance indicated that not only economicfactors affect taxpayer behaviour, but non economic factors can also have asignificant impact. Amongst others, positive attitudes towards factors such asthe perce ived fairness of the tax system is considered by many social scientiststo play an important role in the level of ax compliance within a country (Strumpel,1968). Prior studies have indicated a positive correlation between perceptionsof fiscal inequities and tax evasion (see Strumpel, 1968; Spicer and Lundstedt,1976; and Song and Yarbrough, 1978). Accordingly, other strategies apart fromsanctions should also be examined by policy makers to enhance tax compliance.

Balch (1980), a researcher in political psychology, identified information strategy(apart from regulation, facilitation and incentive strategy) as one method w hichgovernment can use to change people's behaviour. He argued that people oftenfail to u se a new product or service or behave unexpectedly because they arenot aware of it, or are uncertain about its consequences. He asserted that, if

the lack of information is the main gap between the potential and the newbehavior, information is what must be provided (p.44). From a tax perspective,Lew is (1982) reinforces this view by asserting that:

When myths and misperceptions are replaced by knowledge, we expecta change in attitudes towards taxation even if the subjects' basic ideologyand values remain unchanged and the tax law is unchanged.Misperception probably plays a major role shaping fairness evaluations(p. 71).

White, Curatola and Samson (1990) also emphasised the importance of tax

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Asian Review of Accounting, Volume 8. Number I, 2000

knowledge. They assert that if the public does not understand the intent oftax provisions, it is likely that they will perce ive the income tax as unfair.

As not much research of this nature has been conducted in New Z ealand, study attempts to explore the effect of an increase in tax knowledge on perceptions of fairness and compliance attitudes towards the New Zealandsystem. The paper is organised as follows. The second section provideliterature review of the concept of fairness, the relation between fairness attituand tax compliance, and the effects of knowledge on perceptions of fairnand attitudes towards compliance. Section 3 discusses the research methused for this study. Th e results are provided in Section 4 , which is followed bya final section covering the summary and conclusion of the study.

Fairness, Tax Com pliance Attitudes and Tax Knowledge

Unequivocally, every citizen of a country would like a fair tax system. As earlyas the eighteenth century, Adam Smith (17 76), one of the founders of modeconomics, had already espoused equ ity as one of the four canons of taxatin The Wealth of Nations. His idea of equity was that taxpayers ought tocontribute towards the support of the governmen t based on either their abito pay or on the benefits they gain from the government expenditures funby taxation. Since then, most governments have recognised the importancfairness in taxation and this concept (along with other concepts such as efficiesimplicity and neutrality) have become the cornerstones of most income systems around the world.

Th e concept of fairness however, is not a simple one as the public may hdifferent perceptions of what is fair. It is, therefore, a multi-dimensional concept.On e dimension, as identified in the tax compliance literature, may involveequity of the exchang e with the governm ent (i.e. taxpayers should paccording to the benefits received from the government). Another dimensmay involve the equity of the taxpayer's burden vis-a-vis other taxpayers'burdens (i.e. focusing on horizontal and vertical equity1). For instance, the taxsystem may be considered unfair if the wealthy are perceived to beasmaller burden of tax as compared to those who are less wea lthy . Gerb(quoted in Porcano and Price, 1992, p. 185), in identifying dimensions of fairnessby us ing a factor analysis of 56 attitude items, found that only four of the faccould be considered as fairness dimensions. The four factors are: genefairness/distribution, attitude towards taxes of the wealthy, progressive verflat rates, and exchange with the governm ent. Porcano and Price (1992) afound that taxpayers' needs and abilities to pay were the most significant variarelated to perceptions of a fair tax system.

A num ber of studies have been conducted, particularly in the last two decades,

to examine the link between the various dimensions of perceptions of fairn

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The Impact of Tax Knowledge on the Perceptions of Tax Fairnessand Attitudes Towards Compliance

mentioned above and tax compliance behaviour. However the findings havevaried. Some researchers (such as Vogel, 1974; Spicer and Lundstedt, 1976;Spicer and Becker, 1980) suggest that dissatisfaction with the tax system isrelated to admitted evasion. Spicer and Becker (1980) found their subjects,when faced with hypothetical tax evasion decisions, significantly evaded m ore

tax when they perceived themselves to be victims of fiscal inequity. Converselythey evaded less tax when they perceived them selves to be the beneficiaries offiscal inequity. On the contrary, other researchers (such as Mason and C alvin,1978; Mason and Lowry, 1981) reported no significant relationship betweenperception of fairness and tax compliance.

Despite the lack of conclusive evidence as to the effect of the perceptions offairness on tax evasion, it is still an important factor tha t cannot be ignored. Theconcept of fairness has continuously been recognised as one of the criteria of agood tax system. Tax reforms, in New Zealand for instance, were usually madewith the objective (among others) of increasing the fairness of the tax system.Therefore, tax policy makers should also be adopting different strategies toenhance the public's perceptions of tax fairness as well as their attitudes towardstax compliance.

Fou r strategies have been identified by Balch (1980) which governments coulduse to change people's behavioural patterns. They are: facilitation strategies,regulation strategies, incentive strategies and information strategies. Facilitationstrategies focus on making it easier for people to adopt new behaviour, productsor services. According to Balch (1980, p.56), the government can make iteasier for people to change their behaviour by providing facilities of varioussorts which may be too costly in time, money or effort for individuals to providethemselves (p.56 ). Therefore, to facilitate tax com pliance, the governmentcould look at ways of reducing taxpay ers' time and the costs of complying withtheir tax ob ligations . Regulatory strategies, on the other hand, use threats suchas fines and imprisonment when individuals fail to perform as required. It isbased on the premise that the desired behaviour will be performed only underthreat or imposition of sanctions for non performance. Th is strategy is the m ostwidely used in taxation where penalties are usually imposed on taxpayers w ho

fail to comply with their tax obligations. In contrast to the other types of strategies,incentive strategies are a more indirect form of intervention where users andproducers are given maximum discretion to capitalise on the available incentives.It attempts to make people change their behaviours by raising the relativeattractiveness of the desired behaviours. The New Zealand government has, atdifferent tim es, provided different tax incentives to encourage or assist varioustypes o f taxpayers or business activities. Lastly, information strategies are usedto signal benefits not previously linked by users to a product, service or behaviour.They can also be used to motivate change. Amongst the four strategies,information strategy is perhaps the most appropriate one to enhance the

perceptions of fairness. From a normative perspective, an increase in tax

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knowledge should improve the attitudes of taxpayers in relation to thperceptions of tax fairness, as it reduces taxpayers' uncertainty amisconceptions of the tax system.

Review ing European taxation studies concerning the general degree of fiknowledge, Lewis (1982) concluded that general fiscal ignorance is a macontributor to negative feelings toward taxation , since the less educated tenview taxation only in terms of its burden, and ignore the benefits and servprovided from the revenue. Similar views were echoed in some earlier studA survey of taxpayers across the United States conducted by Westat Inc. (1980),for instance, indicated that 35% of the statements participants made involmisconceptions about the tax law or tax system.

Vogel (1974), in his survey of public opinion on the tax system in Swed

where he found positive relationships between taxpayer's know ledge of thesystem and perceptions of fairness and com pliance, concluded that:

... the data indicate the importance of education and information in theprocess of opinion formation. A deeper understanding of the benefitssupported by taxes and of the technical reasons for tax laws andregulations are necessary preconditions to both positive attitudes aboutthe tax system and appropriate fiscal behaviour. Education correlatesnegatively with dissatisfaction with the benefits paid for taxes and thedistribution of tax burden (p.512).

The re is also some em pirical evidence of the linkage between an increasetax knowledge and perceptions of fairness. W hite et al., (1990) for instaninvestigated whether a formal income tax course affects a person's perceptof fairness of the Federal income tax system. As a taxpayer's belief maybased on my ths, they hypothesised that better knowledge of the tax law woincrease taxpayer awareness and appreciation of fiscal policy goals. Thisturn would increase perceived fairness. Their results indicated that the individuattitudes are affected by an increase in understanding of both the mechanictax law provisions and study of tax policy underlying the enactment of provisions. Interestingly, the experiment by Song and Yarbrough (1978) indicateda positive impact of increased fiscal knowledge on tax ethics scores. Roberesearch (1994) provided some indication that an increase in tax knowledge viathe television could be effective in improving attitudes towards fairness compliance. In another study, Eriksen and Fallan (1996) showed that threspo nden ts' perceptions of fairness increased with improved tax knowledTheir study further suggested that specific tax knowledge improved threspondents' tax ethics scores. In general, these results supported the hypothesisthat an increase in tax knowledge enhanced taxpayers' perceptions of fairn

of the tax system and compliance attitudes.

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How ever, there are also other studies which do not have such distinct results.Jackson and Jaou en (1989), for instance, investigated the effect o f an appeal toconscience and the effect of a threat of punishment on jurors' attitude to taxcompliance. Their results indicated that tax knowledge which were provided inthe written form, did not have any significant effect on tax compliance. Hasseldineand Kaplan (1991) in their study on the effect o f comm unicating three types o fsanctions (economic, informal and positive conscience appeal) to taxpayers inNew Zealand also found no significant differences in the respondents' perceptionof fairness. Only conscience appeal appeared to have an impact on the moralityof tax evasion.

To enhance compliance, a number of strategies have been used by the NewZealand IRD over the years. Recently, for example, the IRD has been providinginformation to taxpayers to help them comply with the tax requirements. Agreat deal of information in the form of IRD booklets, technical informationbulletins, newsletters, and pamphlets are continuously made available totaxpayers free of charge. However, such information, though very helpful, isaimed at facilitating taxpayer compliance with the tax system rather than toassist taxpayers to have a better appreciation of the tax law. The results ofprior studies which focused on the impact of tax know ledge on perceptions offairness and attitudes towards tax compliance are indeed interesting andintriguing. As no research of this nature has been conducted in Ne w Zealand,this study explores the impact of an increase in tax knowledge on taxpayers'perceptions of fairness of the income tax system as well as the ir attitudes tow ards

tax compliance.

Research MethodExperimental DesignAn experiment was carried out using pre-testing and post-testing of theperceptions of the fairness of the New Zealand tax system of second yearaccountancy major students who were taking the compulsory introductorytaxation2 paper.

Questionnaires w ere distributed to and collected from students who were presentat the beginning of the course (pre-test) as well as at the end of the course(post-test). The aim was to test whether an increase in knowledge of theprinciples of taxation had any influence on the students' perceptions of fairnessof the tax system and their attitudes towards tax compliance. It was expectedthat by going through the tax cou rse, students at the end of the course shouldnot only have increased their tax knowledge but would also have acquired abetter understanding of the principles of New Zealand income tax law.

Th e pre-test included 113 students and the post-test included 83 students. Thefall in number was inevitable as there are usually some students who will

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withdraw from a course or drop out of a course for various reasons. In additthe number of students present at each lecture was unlikely to remain constas attendance at lectures was not compulsory.

Instrument

The first part of the questionnaire covered the demographics of respondentsThe second part of the questionnaire covered tax knowledge and includquestions relating to principles of taxation and some specific knowledge of thtax law. The third part of the questionnaire related to perceptions of fairnand tax compliance attitudes. As discussed earlier, fairness cannot be defiexplicitly as it is a multidimensional concept. However, the literature has indicatedthat m any tend to perceive fairness in term s of how different levels of incoearners are taxed, how the tax rate is structured, and how they personaperceive the general fairness of the tax system. Thus, the questions askedthis third part were based on the fairness dimensions used in the study conduby M cK ee and M ichael (1991) as they incorporated all the above three factTh e other factor, that is exchange with the government , wh ich the literathas identified as a poss ible fairness d imension w as excluded from this studyit was felt that students, particularly those w ho are not working, may not ba pos ition to gauge the last factor appropriately. Accordingly, various questithat were indicators of the three factors only were included. Respondents wthen asked to indicate their perception using a 5-point Likert scale (from veryfair to very unfair for some questions and from strongly disagree to stronagree for others).3

This part of the questionnaire also posed the question about their attitudes towardstax compliance. Their views concerning the acceptability of noncomplireporting for certain transactions were used to gauge their tax complianattitudes. Therefore, questions were asked how seriously they thought the crw as (from a scale of 1 no crime ... 4 extrem ely serious crime) if thunderdeclared their income or overclaimed deductions, or if they made a bapaym ent to their tradesman. Higher scores therefore represented more sericrime. T he purpose of asking these questions was to examine whether an increasein tax know ledge had any impact on their perception of the extent of illegalit

such reporting behaviour.

As some questions could be considered sensitive, respondents were assuredthe anonymity of their responses. As a result, it was not possible to match response of a particular student from the pre-test to the post-test stage. Instegroup results from pre-test and post-test were treated as independent sampTax know ledge was measured in the pre and post-test using a score calculafrom 20 questions concerning tax theory, fringe benefit tax, income tadeductions and tax obligations.4 A score system was devised for the responsesto each of the questions as follows: correct answer =3, do not know = 2 andwrong answer = 1.

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Table 1Respondent Demographics

Age No. %Under 18 0 0.00

18 -3 0 104 92.003 1 -4 0 8 7.004 1 - 5 0 1 1.00over 50 0 0.00

113 100%SexMale 48 42.50Female 65 57.50

113 100%Filed Tax Return beforeYes 60 53.1No 53 46.9

113 100%WorkingYes 30 26.5No 83 73.5

113 100%Type of studentLocal 60 53.1International 53 46.9

113 100%

ResultsProfile of sampleTable 1 contains the demographic data for the respondents at the pre-test stage.As most of the respondents were students, it was not surprising to find that amajority fell within the age bracket of 18-30 years. There were slightly morefemales than males. About 53% of the respondents had filed a tax return before.Only international students had not filed a return. The majority w ere full timestudents with about 27% either working part time or full time. Therefore therespondents in this sample had similar academic background and age, and therewas a good mix of males and females as well as those wh o had or had not fileda return before.

Factor analysisPrincipal com ponent analysis (using a varimax rotation)5 was applied to the 21perception ques tions on fairness to test their construct validity. A summ ary ofthe results are shown in Table 2. By looking at the scree plot6 and eigenvalues,factor analysis of the responses to all the 21 questions produced three mainfactors. These factors accounted for 54% of the variation. The three factorswere labelled as personal fairness , tax rate fairness and incom e levelfairness. Those questions (seven of them) that did not load highly (significantlybelow 0.50) were dropped from the analysis. The Cronbach's alpha for the

three factors indicated reasonable validity.

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Table 2Results from factor analysis

Factor 1 - personal fairnessFactor 2 - tax rate fairness

Factor 3 - income level fairness

and Cronbach s alpha

No. of items Cro nba ch's

64

4

alpha

0.59

0.63

0.81

% of variance Eigenvaluesexplained

25%

17%

12%

3.077

2.289

2.157

The three questions concerning attitudes towards compliance were also facanalysed by using a varimax rotation. The analysis produced two main factand they accounted for 8 1 % of the variation. T he first factor related to tillegality of under-declaring income and over-claiming tax deduction (labellIncDed ) and the second factor related to the illegality of a barter-typ

transaction (labelled Barter ).

Pre test to post test analysisIt was expected that the respondents who had undergone the introductotaxation course would have better tax knowledge of taxation at the end of tcourse than a t the beginning. The results shown in Appendix 1 confirmed thishypo thesis. The means score on tax know ledge was higher for post-test (me= 50.52) as com pared to that of the pre-test (mean = 46 .01). The t-test results(see Table 3) indicated a significant difference between the two scores (t=9.4p


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This result appeared inconsistent with some of the results of prior studiesconducted overseas. However, it appeared to be consistent with the resultsobtained by Hasseldine and Kaplan (1991) which indicated that knowledgeabout different typ es of sanctions did not significantly affect taxpayers ' beliefsabout the fairness of the tax system.

In the case of attitudes towards compliance, the means score for seriousnessof crime if income was underdeclared at the post-test and pre-test stage was2.79 and 2.68 respectively. The means score for seriousness of crime if anoverdeduction was claimed at the post-test and pre-test stage was 2.78 and2.76 respectively (see Appendix 1). Therefore, there was a slight increase inperception of seriousness of crime if tax evasion was committed. However, thedifference betw een these at the pre and post-test, as shown in Table 3, was no tsignificant. This indicated that an increase in tax knowledge also has no

significant effect on the respondent's tax compliance attitudes. Again, the resultsappeared cons istent with the findings of Hasseldine and K aplan (1992) whichindicated tha t knowledge provided about sanctions (other than the conscienceappeal) did not increase beliefs about the immorality of evasion behaviour. It is,however, inconsistent with some prior research findings which suggest thatincreased tax knowledge improved respondents' attitude towards the seriousnessof crime. It is worth noting that prior studies have also indicated that smallamounts of tax evasion are usually perceived as more acceptable than largeamounts o f evasion (Lew is, 1979). The questions posed in this study did notspecify the magnitude of evasion and therefore the response received may beaffected by how each respondent made assumptions about the materiality ofthe amount of evasion.

A chi-square test was also carried out to test whether there were any significantdifferences betw een different age groups, sex, type of student, working statusand prior filing o f a tax return. The results indicated there were no significantdifferences.

Summary and ConclusionThe pu rpose o f this study was to examine the linkages between increase in taxknow ledge and perceptions of fairness and tax com pliance attitudes. How ever,unlike the results of some prior studies, the results obtained from this studyindicate that an increase in tax knowledge did not have a significant impac t onperception of fairness and tax compliance attitudes. This result is inconsistentwith the findings of other researchers who found a positive linkage.

One of the possible reasons for the inconsistent results could be due to the typeof questions posed to the respondents about fairness. White et al. (1990) used

questions which concentrated on perceptions of fairness of different types of

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tax expenditures and tax changes. Their participants were asked to rate fairness of the deductibility of the expenditure items and the includibilitydifferent items of employee benefits at the pre-test and post-test stage.contras t, the questions in this study relate more to the perceptions of fairness ofthe tax system in general, the tax treatmen t of different income groups andtax rate struc ture. More specific questions, particularly on areas where thea general tendency for the public to m isconceive the intentions of the tax system,may provide a clearer indication of whether an increase in tax knowledge any effect on the results.

Further, prio r studies tend to assume that taxpayers have a misconceptionunfairness and therefore that an increase in tax knowledge will enhance tperceptions of fairness. An increase in tax know ledge such as an understandingof the rationale of the tax law and tax system would certainly enable the pu

to m ake a be tter assessment of the existing law and system. Such know leshould increase perception of fairness if the public indeed have any inimiscon ception. However, if there is no misconception, a better knowledge mnot have any significant effect at all. Th is study indicates that the respondperceived the tax system in general to be fair at the pre-test stage. Perhaps explains the insignificant effect of tax know ledge at the post-test stage.

Th e results need to be interpreted with caution due to the several limitationthis study. The sample was not randomly selected and therefore the resu

cannot be easily generalised. The implication from Rob erts' study (1994, pis that students generally have less negative fairness attitude, but are mtolerant of rationales for cheating. The lack of a control group further m akdifficult to assess whether the post-test results reflect the influence of knowledge alone or whether it is due to some other factors. The reductionthe num ber of students participating at the post-test may also have affectedinternal validity of the study. Students wh o drop out of courses or did not attclasses may be students wh o are less motivated or less conscientious studeTherefore, the results may be biased towards more conscientious and motivstudents.

As this study is only exploratory, future research could perhaps extend study to a wider population. Other ways of increasing or disseminating knowledge, apart from using a formal classroom environment, could alsoinvestigated. Rob erts' (1994) suggestion of using mass media, such as television,may be an effective method for improving public perceptions about tax fairand attitudes towards compliance and could be explored. A more direct approachof providing tax knowledge such as explaining the rationale behind introduction of a specific tax provision may also be more effective in chang

the public's perception of fairness and tax attitudes.

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ReferencesBalch, G 1,1980, The Stick, the Carrot and other Strategies -A Theoretical Analysis ofGovernment Intervention in Policy Imp lementation Penalties or Incentives?, edsBrigham K and Brown D W, London: Sage Publications.

Caragata, P J, 1997, The Economic and Compliance Consequences of Taxation: AReport o n the Health of the Tax System in New Zealand a draft p aper presented to thePolicy Adv iser of Inland Revenue.

Eriksen, K, and Fallan, L, 1996, Tax Knowledge and Attitudes Towards Taxation: AReport on a Q uasi-experiment, Journal of Econom ic Psychology, 17:387-402.

Hasseldine, J, and K aplan, S E, 1991, The Effect of Different Sanction Communicationson Hypo thetical Taxpayer Compliance: Policy Implications from New Zealand, PublicFinance, 47,1 :45 - 60.

Inland Revenue Department Annual Report. 1996, Wellington.

Jackson, B R, and Jaouen, P R, 1989, Influencing Taxpayer Compliance through SanctionThreat or Appeals to Conscience, Advances in Taxation, : 131-147.

LaTour, M, Champagne, P J, Rhiel, G S, and Behlling, R, 1990, Are Students a ViableSource of Data for Conducting Survey Research on Organisation and theirEnvironments?, Review of Business and Econom ic Research, 26,1:68-82.

Lewis, A, 1979, An Empirical Assessment of Tax Mentality, Public Finance, 43 ,2 :244-

257.

Lewis, A, 1982, The Psychology of Taxation, Oxford: Martin Robertson.

Mason, R, and Calvin, L D, 1978, A Study of Adm itted Incom e Tax Evasion, Law andSociety, 13:73-89.

Mason, R, and Lowry, H, 1981, An Estimate of Income Tax Evasion in Oregon, Corvallis,OR : Survey Research Center, Oregon State University.

McK ee, T M, and M ichael, S, 1991, Taxpayer Perceptions o f the Fairness of the TaxReform Act of 1986: Do Tax Preparers and the IRS Need to Segment their Market?,Journal of Professional Services Marketing 8,1:201-221.

Porcano, T M , and Price, C E, 1992, Some Evidence on the Association between JudgmentCriteria and F airness Perceptions, Advances in Taxation, 4:183-210.

Roberts, M L, 1994, An Experimental Approach to Changing Taxpayers'Attitudes TowardsFairness and Compliance via Television, The Journal of the American TaxationAssociation, 16,1:67-86.

Smith, A, 1776, The Wealth of Nations, Volume 2, London: Methuen.

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Song, Y, and Yarbrough, T E, 1978, Tax Ethics and Taxpayer Attitudes: A Survey, PublicAdministration Review , 38:442-457.

Spicer, M \V, and Becker, LA , 1980, Fiscal Inequity and Tax Evasion: An E xperimentalApproach. National Tax Journal 33,2,171-175.

Spicer, M W, and Lundstedt, S B , 1976, Understanding Tax Evasion, Public Finance,31,295-305.

Strumpel, B , 1968, Contribution of Survey Research in Quantitative Analysis in PublicFinance, ed Peacock, A, New York: Praeger Publ.

Vogel, J, 1974, Taxation and Public Opinion in Sweden: An Interpretation of R eSurvey Data, National Tax Journal 27,4:499-513.

Wartick, M L, 1994, Legislative Justification and the Perceived F airness of Tax Changes: a Referent Cognition's Theory Approach, Journal of American TaxationAssociation, 16,2,106-123.

Westat Inc., 1980, Executive Summa ry, Individual Incom e Tax Com pliance FactorsStudy, Study for the Internal Revenue Service, Rockville, Md: Westat Inc.

White, R A, Curatola, A P, and Samson, W D, 1990, A Behavioral Study Investigating theEffect of Knowledge of Income Tax Laws and Tax Policy on Individual Percep tionFederal Incom e Tax Fairness, Advances in Taxation, 3:165-185.

Endnotes1 The principle of horizontal equity is upheld if axpayers who are in similar circumstances

pay the same amount of tax. On the other hand, a tax system is considered vertiequitable if taxpayers with greater ability to pay bear more tax than those with a lesserability to pay.

2 The aim of the course is to provide a basic understanding of the taxation systeNe w Z ealand, specifically its rationale and its practical expression in terms of tpayable.

3 In the factor analysis, responses to six of the questions were reversed so that loscores signified fairness.

4 Append ix 2 provides a summ ary of the questions asked. Question 1 which comprised3 sub-parts was counted as three questions.

5 Varimax rotation was used to maintain independence between factors as well aprovide clearer indications of interrelation of various perceptions. (LaTour et1990.)

6 A scree plot was used to ascertain the number of factors. It provides informaabout whether factors consist of common variance or error variance (which shoulignored ). Other information such as the factor loadings and size of eigenvaluesalso used to ascertain how many factors to retain. The app ropriate number of fato use was discussed with a statistician.

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Appendix 1Mean (and standard deviation) for Perception of fairness, tax knowledge andtax com pliance attitudes

Pr e lest Post test

Tax knowledge 46(3.61) 50.5(3.05)

Factor 1 - Personal fairnessQuestions (Sca le: Very fair 1...5 very unfair)1 To the average taxpayer, I think the income tax system is 2.6(0 .79) 2.7 (2.2 8)2 To me personally, I believe the income tax system is 2.7 (0.98) 2.8 (0.94)3 Generally, I believe the manner in which the income tax burden is 2.8 (0.9) 2.8 (0.83)

distributed acro ss taxpayers is

Questions (Scale: Strongly disagree I...5 Strongly agree4 Generally, I feel that income tax is a fair tax 3.3(0.8) 3.3(0.75)5 On the who le, the burden of income taxes is unfairly distributed 3.1 (0.8) 3.1 (0.86)6 Current tax laws require me to pay more than my fair share of income 2.9 (0.8) 3.05(0.88)

taxesFactor 2 Tax rate fairness

Questions (Scale: Strongly disagree 1...5 Strongly agree7 High income earners have a greater ability to pay income taxes so it is 3.4(1.13) 3.5(0.98 )

fair tha t they should pay a higher rate of tax than low income earners.8 A fair tax rate should be the same for everyone regardless of their 2.7(1.1 4) 2.4 (1.1 2)

income e.g. if one person pays 15% tax rate, everyone should pay 15%tax rate whether they are wealthy or poo r.

9 It is fair that high income earners pay proportionally more tax than low 2.9 (1.12) 3.0 (0.98)income earners.

10 The share of total income taxes paid by high income earners is much 2.9 (0.76) 2.9 (0.78)too high

Fact or 3 - Income level fairnessQuestions (Scale: Strongly disagree 1...5 Strongly agreeQ l l Middle income earners pay more than a fair share of the income tax 3.2(0.78) 3.3(0.73 )

burden.

Q12 The share of total income taxes paid by low income earners is much too 3.0 (0.88) 3.2 (0.83)high.

Q13 The share of total income taxes paid by middle income earners is much 3.2 (0.68) 3.2 (0.67)too high.

Q14 Compared to the amount paid by more wealthy taxpayers, I pay more 3.1(0.7 5) 3.1 (0.76)than my fair share of income taxes.

Tax compliance attitudesQuestions (Scale: No serious crime 1...4 Extremely serious crime)

Not Declaring an extra source of income in your tax return 2.7 (0.64) 2.8 (0.67)Claiming a non-existent deduction in your tax return 2.8 (0.67) 2.8 (0.71)Making a barter payment to your tradesman 1.8(0.84) 1.7(0.81)

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Appendix 2Tax K nowledgeThis part of the questionnaire is designed to gauge the level of tax knowleyou have about certain principles and imposition of the New Zealand tax system.For each of the following questions, please indicate whether you think they acorrect (yes), incorrect no) or you do not know by ticking ( ) the appropriatecolumns.

Yes I No I Do NotKnow

Tax Theory1. Th e three main reasons governments impose taxes on their

citizens are:a. to prov ide public goods and servicesb. to redistribute wealthc. to manipulate the economy

2. New Zeala nd's personal income tax rate is progressive innature.3. New Zealand adopts a direct tax system only to raise

revenue.

Fringe Benefit Tax (FBT)4. FB T is a tax levied on all benefits provided by employers to

employe es for employees* personal use.5 . FB T is a tax in lieu of income tax.6. Th e tax rate applicable to FBT is 49 %.

Yes I No I Do NotKnow

Income7. Incom e tax is generally levied on any receipt of a regular

nature.8. Incom e tax is generally levied on any receipt of cash only.9. Incom e tax is generally levied on any receipt of gains or

profits.10. For the 1997 income year there are three tiers to the

personal income tax rates.11 . Th e profits made by a share trader is liable for income tax.

Deductions12. An expenditure necessarily incurred but for which no

incom e has arisen is ded uctible in the year it is incurred.13 . Provision for doubtful debts is deductible for tax purposes.14 . A taxpayer can claim expenses for the business use of a

taxpayer's house.15 . Contingen t liabilities constitute deductible expenses.16. Taxp ayers are entitled but not obligated to deduct

depreciation against business income.

Tax Obligations17 . Busine ss taxpayers with losses are not required to furnish

tax returns in the year of loss.18. Taxpay ers generally have a right to appeal against their tax

assessments. | | |

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asian review of accounting volume 8 issue 1 2000 [doi 10.1108_eb060720] tan, lin mei; chin-fatt,...

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