the impact of tax knowledge on the perceptions of tax fairness and attitudes towards compliance

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

Lin Mei Tan Massey University and Carrol Chin-Fatt Massey University

Abstract Positive attitudes towards factors such as the perceived fairness of the tax system are considered to play an important role in the level of tax compliance within a country (Strumpel, 1968). The tax literature indicates that not only knowledge but an understanding of the tax system may have an effect on taxpayers' perceptions of fairness and attitudes towards compliance. This study examines the linkages between an increase in tax knowledge on perceptions of fairness and tax compliance attitudes by using students enrolled in an introductory taxation course in a New Zealand tertiary institution. Contrary to prior research, the results indicated that an increase in tax knowledge did not have a significant impact on perceptions of fairness and tax compliance attitudes.

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

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Introduction Tax non compliance has emerged as an area of worldwide concern particularly during 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 in non compliance was detected. Although tax evasion was estimated to be about 3.5% of GDP ($3.2 billion) in 1995 (Caragata, 1997), the actual amount of non compliance remains unknown. In any case, non compliance is a significant and growing problem for both tax policy makers and administrators.

In an attempt to encourage voluntary compliance and to deter taxpayers from non compliance with the tax regulations, the government recently revamped and introduced a more stringent tax penalty regime. The imposition of more sanctions, is based on the premise that people will be deterred from unacceptable behaviour as the costs of "flagging" the rules would outweigh the benefits. Undoubtedly, changes in tax law will affect taxpayer behaviour. However, the intentions of the changes may not work up to the policy makers' expectations as numerous factors may come into play in taxpayers' compliance behaviour.

The extant tax literature on non compliance indicated that not only economic factors affect taxpayer behaviour, but non economic factors can also have a significant impact. Amongst others, positive attitudes towards factors such as the perceived fairness of the tax system is considered by many social scientists to play an important role in the level of tax compliance within a country (Strumpel, 1968). Prior studies have indicated a positive correlation between perceptions of fiscal inequities and tax evasion (see Strumpel, 1968; Spicer and Lundstedt, 1976; and Song and Yarbrough, 1978). Accordingly, other strategies apart from sanctions 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 which government can use to change people's behaviour. He argued that people often fail to use a new product or service or behave unexpectedly because they are not 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 new behavior, information is what must be provided" (p.44). From a tax perspective, Lewis (1982) reinforces this view by asserting that:

When myths and misperceptions are replaced by knowledge, we expect a change in attitudes towards taxation even if the subjects' basic ideology and 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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knowledge. They assert that if the public does not understand the intent of the tax provisions, it is likely that they will perceive the income tax as unfair.

As not much research of this nature has been conducted in New Zealand, this study attempts to explore the effect of an increase in tax knowledge on the perceptions of fairness and compliance attitudes towards the New Zealand tax system. The paper is organised as follows. The second section provides a literature review of the concept of fairness, the relation between fairness attitudes and tax compliance, and the effects of knowledge on perceptions of fairness and attitudes towards compliance. Section 3 discusses the research method used for this study. The results are provided in Section 4, which is followed by a final section covering the summary and conclusion of the study.

Fairness, Tax Compliance Attitudes and Tax Knowledge Unequivocally, every citizen of a country would like a fair tax system. As early as the eighteenth century, Adam Smith (1776), one of the founders of modern economics, had already espoused "equity" as one of the four canons of taxation in The Wealth of Nations. His idea of equity was that taxpayers ought to contribute towards the support of the government based on either their "ability to pay" or on the benefits they gain from the government expenditures funded by taxation. Since then, most governments have recognised the importance of fairness in taxation and this concept (along with other concepts such as efficiency, simplicity and neutrality) have become the cornerstones of most income tax systems around the world.

The concept of fairness however, is not a simple one as the public may have different perceptions of what is fair. It is, therefore, a multi-dimensional concept. One dimension, as identified in the tax compliance literature, may involve the equity of the "exchange with the government" (i.e. taxpayers should pay according to the benefits received from the government). Another dimension may 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 tax system may be considered unfair if the "wealthy" are perceived to bear a smaller burden of tax as compared to those who are "less wealthy". Gerbing (quoted in Porcano and Price, 1992, p. 185), in identifying dimensions of fairness by using a factor analysis of 56 attitude items, found that only four of the factors could be considered as fairness dimensions. The four factors are: general fairness/distribution, attitude towards taxes of the wealthy, progressive versus flat rates, and exchange with the government. Porcano and Price (1992) also found that taxpayers' needs and abilities to pay were the most significant variables related to perceptions of a fair tax system.

A number of studies have been conducted, particularly in the last two decades, to examine the link between the various dimensions of perceptions of fairness

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mentioned above and tax compliance behaviour. However the findings have varied. Some researchers (such as Vogel, 1974; Spicer and Lundstedt, 1976; Spicer and Becker, 1980) suggest that dissatisfaction with the tax system is related to admitted evasion. Spicer and Becker (1980) found their subjects, when faced with hypothetical tax evasion decisions, significantly evaded more tax when they perceived themselves to be victims of fiscal inequity. Conversely they evaded less tax when they perceived themselves to be the beneficiaries of fiscal inequity. On the contrary, other researchers (such as Mason and Calvin, 1978; Mason and Lowry, 1981) reported no significant relationship between perception of fairness and tax compliance.

Despite the lack of conclusive evidence as to the effect of the perceptions of fairness on tax evasion, it is still an important factor that cannot be ignored. The concept of fairness has continuously been recognised as one of the criteria of a good tax system. Tax reforms, in New Zealand for instance, were usually made with the objective (among others) of increasing the fairness of the tax system. Therefore, tax policy makers should also be adopting different strategies to enhance the public's perceptions of tax fairness as well as their attitudes towards tax compliance.

Four strategies have been identified by Balch (1980) which governments could use to change people's behavioural patterns. They are: facilitation strategies, regulation strategies, incentive strategies and information strategies. Facilitation strategies focus on "making it easier" for people to adopt new behaviour, products or services. According to Balch (1980, p.56), "the government can make it easier for people to change their behaviour by providing facilities of various sorts which may be too costly in time, money or effort for individuals to provide themselves" (p.56). Therefore, to facilitate tax compliance, the government could look at ways of reducing taxpayers' time and the costs of complying with their tax obligations. Regulatory strategies, on the other hand, use threats such as fines and imprisonment when individuals fail to perform as required. It is based on the premise that the desired behaviour will be performed only under threat or imposition of sanctions for non performance. This strategy is the most widely used in taxation where penalties are usually imposed on taxpayers who 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 and producers are given maximum discretion to capitalise on the available incentives. It attempts to make people change their behaviours by raising the relative attractiveness of the desired behaviours. The New Zealand government has, at different times, provided different tax incentives to encourage or assist various types of taxpayers or business activities. Lastly, information strategies are used to 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 their perceptions of tax fairness, as it reduces taxpayers' uncertainty and misconceptions of the tax system.

Reviewing European taxation studies concerning the general degree of fiscal knowledge, Lewis (1982) concluded that general fiscal ignorance is a major contributor to negative feelings toward taxation, since the less educated tend to view taxation only in terms of its burden, and ignore the benefits and services provided from the revenue. Similar views were echoed in some earlier studies. A survey of taxpayers across the United States conducted by Westat Inc. (1980), for instance, indicated that 35% of the statements participants made involved misconceptions about the tax law or tax system.

Vogel (1974), in his survey of public opinion on the tax system in Sweden, where he found positive relationships between taxpayer's knowledge of the tax system and perceptions of fairness and compliance, concluded that:

... the data indicate the importance of education and information in the process of opinion formation. A deeper understanding of the benefits supported by taxes and of the technical reasons for tax laws and regulations are necessary preconditions to both positive attitudes about the tax system and appropriate fiscal behaviour. Education correlates negatively with dissatisfaction with the benefits paid for taxes and the distribution of tax burden (p.512).

There is also some empirical evidence of the linkage between an increase in tax knowledge and perceptions of fairness. White et al., (1990) for instance, investigated whether a formal income tax course affects a person's perception of fairness of the Federal income tax system. As a taxpayer's belief may be based on myths, they hypothesised that better knowledge of the tax law would increase taxpayer awareness and appreciation of fiscal policy goals. This in turn would increase perceived fairness. Their results indicated that the individual's attitudes are affected by an increase in understanding of both the mechanics of tax law provisions and study of tax policy underlying the enactment of the provisions. Interestingly, the experiment by Song and Yarbrough (1978) indicated a positive impact of increased fiscal knowledge on tax ethics scores. Roberts' research (1994) provided some indication that an increase in tax knowledge via the television could be effective in improving attitudes towards fairness and compliance. In another study, Eriksen and Fallan (1996) showed that their respondents' perceptions of fairness increased with improved tax knowledge. Their study further suggested that specific tax knowledge improved their respondents' tax ethics scores. In general, these results supported the hypothesis that an increase in tax knowledge enhanced taxpayers' perceptions of fairness of the tax system and compliance attitudes.

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However, there are also other studies which do not have such distinct results. Jackson and Jaouen (1989), for instance, investigated the effect of an appeal to conscience and the effect of a threat of punishment on jurors' attitude to tax compliance. Their results indicated that tax knowledge which were provided in the written form, did not have any significant effect on tax compliance. Hasseldine and Kaplan (1991) in their study on the effect of communicating three types of sanctions (economic, informal and positive conscience appeal) to taxpayers in New Zealand also found no significant differences in the respondents' perception of fairness. Only conscience appeal appeared to have an impact on the morality of tax evasion.

To enhance compliance, a number of strategies have been used by the New Zealand IRD over the years. Recently, for example, the IRD has been providing information to taxpayers to help them comply with the tax requirements. A great deal of information in the form of IRD booklets, technical information bulletins, newsletters, and pamphlets are continuously made available to taxpayers free of charge. However, such information, though very helpful, is aimed at facilitating taxpayer compliance with the tax system rather than to assist taxpayers to have a better appreciation of the tax law. The results of prior studies which focused on the impact of tax knowledge on perceptions of fairness and attitudes towards tax compliance are indeed interesting and intriguing. As no research of this nature has been conducted in New 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 their attitudes towards tax compliance.

Research Method Experimental Design An experiment was carried out using pre-testing and post-testing of the perceptions of the fairness of the New Zealand tax system of second year accountancy major students who were taking the compulsory introductory taxation2 paper.

Questionnaires were distributed to and collected from students who were present at 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 the principles of taxation had any influence on the students' perceptions of fairness of the tax system and their attitudes towards tax compliance. It was expected that by going through the tax course, students at the end of the course should not only have increased their tax knowledge but would also have acquired a better understanding of the principles of New Zealand income tax law.

The pre-test included 113 students and the post-test included 83 students. The fall 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 addition, the number of students present at each lecture was unlikely to remain constant as attendance at lectures was not compulsory.

Instrument The first part of the questionnaire covered the demographics of respondents. The second part of the questionnaire covered tax knowledge and included questions relating to principles of taxation and some specific knowledge of the tax law. The third part of the questionnaire related to perceptions of fairness and tax compliance attitudes. As discussed earlier, fairness cannot be defined explicitly as it is a multidimensional concept. However, the literature has indicated that many tend to perceive fairness in terms of how different levels of income earners are taxed, how the tax rate is structured, and how they personally perceive the general fairness of the tax system. Thus, the questions asked in this third part were based on the fairness dimensions used in the study conducted by McKee and Michael (1991) as they incorporated all the above three factors. The other factor, that is "exchange with the government", which the literature has identified as a possible fairness dimension was excluded from this study as it was felt that students, particularly those who are not working, may not be in a position to gauge the last factor appropriately. Accordingly, various questions that were indicators of the three factors only were included. Respondents were then asked to indicate their perception using a 5-point Likert scale (from very fair to very unfair for some questions and from strongly disagree to strongly agree for others).3

This part of the questionnaire also posed the question about their attitudes towards tax compliance. Their views concerning the acceptability of noncompliant reporting for certain transactions were used to gauge their tax compliance attitudes. Therefore, questions were asked how seriously they thought the crime was (from a scale of 1 no crime ... 4 extremely serious crime) if they underdeclared their income or overclaimed deductions, or if they made a barter payment to their tradesman. Higher scores therefore represented more serious crime. The purpose of asking these questions was to examine whether an increase in tax knowledge had any impact on their perception of the extent of illegality of such reporting behaviour.

As some questions could be considered sensitive, respondents were assured of the anonymity of their responses. As a result, it was not possible to match the response of a particular student from the pre-test to the post-test stage. Instead, group results from pre-test and post-test were treated as independent samples. Tax knowledge was measured in the pre and post-test using a score calculated from 20 questions concerning tax theory, fringe benefit tax, income tax, deductions and tax obligations.4 A score system was devised for the responses to each of the questions as follows: correct answer =3, do not know = 2 and wrong answer = 1.

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Table 1 Respondent Demographics

Age No. % Under 18 0 0.00 18-30 104 92.00 31-40 8 7.00 41-50 1 1.00 over 50 0 0.00

113 100% Sex Male 48 42.50 Female 65 57.50

113 100% Filed Tax Return before Yes 60 53.1 No 53 46.9

113 100% Working Yes 30 26.5 No 83 73.5

113 100% Type of student Local 60 53.1 International 53 46.9

113 100%

Results Profile of sample Table 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 a majority fell within the age bracket of 18-30 years. There were slightly more females than males. About 53% of the respondents had filed a tax return before. Only international students had not filed a return. The majority were full time students with about 27% either working part time or full time. Therefore the respondents in this sample had similar academic background and age, and there was a good mix of males and females as well as those who had or had not filed a return before.

Factor analysis Principal component analysis (using a varimax rotation)5 was applied to the 21 perception questions on fairness to test their construct validity. A summary of the 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 main factors. These factors accounted for 54% of the variation. The three factors were labelled as "personal fairness", "tax rate fairness" and "income level fairness." Those questions (seven of them) that did not load highly (significantly below 0.50) were dropped from the analysis. The Cronbach's alpha for the three factors indicated reasonable validity.

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Table 2 Results from factor analysis

Factor 1 - personal fairness

Factor 2 - tax rate fairness

Factor 3 - income level fairness

and Cronbach's alpha

No. of items Cronbach's

6

4

4

alpha

0.59

0.63

0.81

% of variance Eigenvalues explained

25% 17%

12%

3.077

2.289

2.157

The three questions concerning attitudes towards compliance were also factor analysed by using a varimax rotation. The analysis produced two main factors and they accounted for 81% of the variation. The first factor related to the illegality of under-declaring income and over-claiming tax deduction (labelled "IncDed") and the second factor related to the illegality of a barter-type transaction (labelled "Barter").

Pre-test to post-test analysis It was expected that the respondents who had undergone the introductory taxation course would have better tax knowledge of taxation at the end of the course than at the beginning. The results shown in Appendix 1 confirmed this hypothesis. The means score on tax knowledge was higher for post-test (mean = 50.52) as compared 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=9.44, p<0.0001).

To examine the impact of an increase in tax knowledge on perception of fairness, further analysis was conducted, using the scores from the factor analysis, to compare the changes in perception of fairness from the beginning (pre-test) to the end (post-test) of the course.

Although as shown in Table 3, the respondents improved their tax knowledge significantly, there was no significant change in their perception of fairness (see Appendix 1 for mean scores and standard deviation for each of the questions).

Pre and

t-value df

post-test Table 3

scores - changes in tax knowledge, perception of fairness, and compliance attitudes

Knowledge

9.44*

194

*p<0.0001

'Personal 'Tax rate 'Income fairness' fairness' level

fairness' 0.51 -1.78 0.50

185 185 185

Compliance 'IncDed'

0.41

188

attitudes 'Barter'

0.40

188

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This result appeared inconsistent with some of the results of prior studies conducted overseas. However, it appeared to be consistent with the results obtained by Hasseldine and Kaplan (1991) which indicated that knowledge about different types of sanctions did not significantly affect taxpayers' beliefs about the fairness of the tax system.

In the case of attitudes towards compliance, the means score for seriousness of crime if income was underdeclared at the post-test and pre-test stage was 2.79 and 2.68 respectively. The means score for seriousness of crime if an overdeduction was claimed at the post-test and pre-test stage was 2.78 and 2.76 respectively (see Appendix 1). Therefore, there was a slight increase in perception of seriousness of crime if tax evasion was committed. However, the difference between these at the pre and post-test, as shown in Table 3, was not significant. This indicated that an increase in tax knowledge also has no significant effect on the respondent's tax compliance attitudes. Again, the results appeared consistent with the findings of Hasseldine and Kaplan (1992) which indicated that knowledge provided about sanctions (other than the "conscience" appeal) did not increase beliefs about the immorality of evasion behaviour. It is, however, inconsistent with some prior research findings which suggest that increased tax knowledge improved respondents' attitude towards the seriousness of crime. It is worth noting that prior studies have also indicated that small amounts of tax evasion are usually perceived as more acceptable than large amounts of evasion (Lewis, 1979). The questions posed in this study did not specify the magnitude of evasion and therefore the response received may be affected by how each respondent made assumptions about the materiality of the amount of evasion.

A chi-square test was also carried out to test whether there were any significant differences between different age groups, sex, type of student, working status and prior filing of a tax return. The results indicated there were no significant differences.

Summary and Conclusion The purpose of this study was to examine the linkages between increase in tax knowledge and perceptions of fairness and tax compliance attitudes. However, unlike the results of some prior studies, the results obtained from this study indicate that an increase in tax knowledge did not have a significant impact on perception of fairness and tax compliance attitudes. This result is inconsistent with the findings of other researchers who found a positive linkage.

One of the possible reasons for the inconsistent results could be due to the type of 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 the fairness of the deductibility of the expenditure items and the includibility of different items of employee benefits at the pre-test and post-test stage. In contrast, the questions in this study relate more to the perceptions of fairness of the tax system in general, the tax treatment of different income groups and the tax rate structure. More specific questions, particularly on areas where there is a general tendency for the public to misconceive the intentions of the tax system, may provide a clearer indication of whether an increase in tax knowledge has any effect on the results.

Further, prior studies tend to assume that taxpayers have a misconception of unfairness and therefore that an increase in tax knowledge will enhance their perceptions of fairness. An increase in tax knowledge such as an understanding of the rationale of the tax law and tax system would certainly enable the public to make a better assessment of the existing law and system. Such knowledge should increase perception of fairness if the public indeed have any initial misconception. However, if there is no misconception, a better knowledge may not have any significant effect at all. This study indicates that the respondents perceived the tax system in general to be fair at the pre-test stage. Perhaps this explains the insignificant effect of tax knowledge at the post-test stage.

The results need to be interpreted with caution due to the several limitations of this study. The sample was not randomly selected and therefore the results cannot be easily generalised. The implication from Roberts' study (1994, p.79) is that students generally have less negative fairness attitude, but are more tolerant of rationales for cheating. The lack of a control group further makes it difficult to assess whether the post-test results reflect the influence of the knowledge alone or whether it is due to some other factors. The reduction in the number of students participating at the post-test may also have affected the internal validity of the study. Students who drop out of courses or did not attend classes may be students who are less motivated or less conscientious students. Therefore, the results may be biased towards more conscientious and motivated students.

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

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References Balch, G 1,1980, The Stick, the Carrot and other Strategies -A Theoretical Analysis of Government Intervention in Policy Implementation Penalties or Incentives?, eds Brigham K and Brown D W, London: Sage Publications.

Caragata, P J, 1997, The Economic and Compliance Consequences of Taxation: A Report on the Health of the Tax System in New Zealand, a draft paper presented to the Policy Adviser of Inland Revenue.

Eriksen, K, and Fallan, L, 1996, Tax Knowledge and Attitudes Towards Taxation: A Report on a Quasi-experiment, Journal of Economic Psychology, 17:387-402.

Hasseldine, J, and Kaplan, S E, 1991, The Effect of Different Sanction Communications on Hypothetical Taxpayer Compliance: Policy Implications from New Zealand, Public Finance, 47,1:45 - 60.

Inland Revenue Department Annual Report. 1996, Wellington.

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

LaTour, M, Champagne, P J, Rhiel, G S, and Behlling, R, 1990, Are Students a Viable Source of Data for Conducting Survey Research on Organisation and their Environments?, Review of Business and Economic 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 Admitted Income Tax Evasion, Law and Society, 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.

McKee, T M, and Michael, S, 1991, Taxpayer Perceptions of the Fairness of the Tax Reform Act of 1986: Do Tax Preparers and the IRS Need to Segment their Market?, Journal of Professional Services Marketing, 8,1:201-221.

Porcano, TM, and Price, C E, 1992, Some Evidence on the Association between Judgment Criteria and Fairness Perceptions, Advances in Taxation, 4:183-210.

Roberts, M L, 1994, An Experimental Approach to Changing Taxpayers'Attitudes Towards Fairness and Compliance via Television, The Journal of the American Taxation Association, 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, Public Administration Review, 38:442-457.

Spicer, M \V, and Becker, LA, 1980, Fiscal Inequity and Tax Evasion: An Experimental Approach. 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 Public Finance, ed Peacock, A, New York: Praeger Publ.

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

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

Westat Inc., 1980, Executive Summary, Individual Income Tax Compliance Factors Study, 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 the Effect of Knowledge of Income Tax Laws and Tax Policy on Individual Perceptions of Federal Income Tax Fairness, Advances in Taxation, 3:165-185.

Endnotes 1 The principle of horizontal equity is upheld if taxpayers who are in similar circumstances

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

2 The aim of the course is to provide a basic understanding of the taxation system in New Zealand, specifically its rationale and its practical expression in terms of taxes payable.

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

4 Appendix 2 provides a summary of the questions asked. Question 1 which comprised 3 sub-parts was counted as three questions.

5 Varimax rotation was used to maintain independence between factors as well as to provide clearer indications of interrelation of various perceptions. (LaTour et al., 1990.)

6 A scree plot was used to ascertain the number of factors. It provides information about whether factors consist of common variance or error variance (which should be ignored). Other information such as the factor loadings and size of eigenvalues are also used to ascertain how many factors to retain. The appropriate number of factors to use was discussed with a statistician.

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

Pre lest Post test

Tax knowledge 46(3.61) 50.5(3.05)

Factor 1 - Personal fairness Questions (Scale: Very fair 1...5 very unfair) 1 To the average taxpayer, I think the income tax system is 2.6(0.79) 2.7(2.28) 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 across taxpayers is

Questions (Scale: Strongly disagree I...5 Strongly agree) 4 Generally, I feel that income tax is a fair tax 3.3(0.8) 3.3(0.75) 5 On the whole, 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)

taxes Factor 2 • Tax rate fairness

Questions (Scale: Strongly disagree 1...5 Strongly agree) 7 High income earners have a greater ability to pay income taxes so it is 3.4(1.13) 3.5(0.98)

fair that 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(1.14) 2.4(1.12)

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

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

Factor 3 - Income level fairness Questions (Scale: Strongly disagree 1...5 Strongly agree) Qll 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(0.75) 3.1(0.76) than my fair share of income taxes.

Tax compliance attitudes Questions (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 2 Tax Knowledge This part of the questionnaire is designed to gauge the level of tax knowledge you have about certain principles and imposition of the New Zealand tax system. For each of the following questions, please indicate whether you think they are correct (yes), incorrect (no) or you do not know by ticking ( ) the appropriate columns.

Yes I No I Do Not Know

Tax Theory 1. The three main reasons governments impose taxes on their

citizens are: a. to provide public goods and services b. to redistribute wealth c. to manipulate the economy

2. New Zealand's personal income tax rate is progressive in nature.

3. New Zealand adopts a direct tax system only to raise revenue.

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

employees for employees* personal use. 5. FBT is a tax in lieu of income tax. 6. The tax rate applicable to FBT is 49 %.

Yes I No I Do Not Know

Income 7. Income tax is generally levied on any receipt of a regular

nature. 8. Income tax is generally levied on any receipt of cash only. 9. Income 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. The profits made by a share trader is liable for income tax.

Deductions 12. An expenditure necessarily incurred but for which no

income has arisen is deductible 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. Contingent liabilities constitute deductible expenses. 16. Taxpayers are entitled but not obligated to deduct

depreciation against business income.

Tax Obligations 17. Business taxpayers with losses are not required to furnish

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

assessments. | | |

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the impact of tax knowledge on the perceptions of tax fairness and attitudes towards compliance

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