the relation between fair taxation and tax...

International Review of Research in Emerging Markets and the Global Economy (IRREM)

An Online International Research Journal (ISSN: 2311-3200)

2017 Vol: 3 Issue: 1

1122 www.globalbizresearch.org

The Relation between Fair Taxation and Tax Evasion

Sebastian E. Spiegel,

Department of Economics,

Friedrich-Schiller University Jena, Germany.

E-mail: [email protected]

_____________________________________________________________________

Abstract

Recent analyses of tax evasion describe the link between the intrinsic motivation to pay taxes,

the so called tax morale, and the willingness to evade. The existing level of tax morale is nor

exogenous and neither a national characteristic. Tax morale is influence by the relation

between tax authorities/ governments and taxpayers. Believes about governmental waste of

money or an insatiable state who is looting the taxpayers could create an anti-tax

atmosphere. In such an atmosphere, not paying taxes could be seen as legitimate. One

particular issue is the perception of tax fairness. Based on the theories of reciprocity and

reactance taxpayers should be more likely to evade, if they feel treated unfair. To prove this

hypothesis, this paper uses data from two German surveys performed by the author. The

impact of fairness consideration on the attitude towards tax evasion is investigated by

relating the respondent’s perception of German tax fairness to their reported thoughts about

the justifiability of tax evasion, by the help of an ordered logit regression. The respondents

were also asked if they evaluate themselves as being influenced by fairness concerns when it

comes to evasion. A second important task of this paper is to clarify if taxpayers differentiate

between illegal tax evasion and legal tax avoidance and to what extend the impact of

perceived unfairness differ between both.

__________________________________________________________________________

Key Words: Public Economics; Taxation; Tax Evasion; Tax Avoidance; Fairness; Trust

JEL-Codes: H11; H20; H26

mailto:[email protected]




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1. Introduction

The new blacklist of the German taxpayer association includes 110 examples of public

waste of taxes on all levels of the government (BdSt 2016, p. 1). Same examples of tax waste

are very famous and known even beyond the German borders, for example the new Berlin

Airport. Prominent examples like that are occasionally used by taxpayers to explain why they

try everything to reduce their tax payment. And tax waste is only one particular argument

from a longer list of possible excuses for underpaying taxes. Summing up all these and other

arguments, scholars refer to the influence of (perceived) tax fairness on the tax behaviour.

Beliefs about waste of money by governmental branches or an insatiable state exploiting

the taxpayers might be a force that creates an overall “anti-tax” atmosphere. In the presence

of a hostile government that uses taxes to finance its own existence, like the famous stationary

bandits of Mancur Olson (1993, pp. 136-137), not paying one’s taxes might be seen as a

legitimate way to restore fairness (Bordignon 1993, p. 346). In his book “Free to choose”,

Milton Friedman (Friedman and Friedman 1980/1983) also points out that there is no

situation in which people spend money more careless than in the case that they spend money

they took from other people for the purposes of other people. This is one of the reasons for his

famous quote that those in power will always spend everything they get and therefore it is

always good to reduce taxes (Friedman and Friedman 1980/1983). As a possible

consequence, evading taxes becomes a possibility to reduce taxes on your own account.

Therefore, the objective of this paper is to analyse to what extent concerns about the fairness

of the tax system explain tax under-payments. Furthermore, the paper includes the distinction

between illegal under-payments (tax evasion) and efforts to legally reduce payments (tax

avoidance) and examine how the later is influence by fairness considerations.

The remainder of the paper is organized as follows. Section 2 will summarize the current

literature about the relation between fairness concerns and tax non-compliance. The third

section will explain the value added of this paper by describing an own surveys conducted in

Germany in 2016. Results will be presented in Section 4. Section 5 will draw conclusions.

2. The Relation between Fairness of Taxation and Non-Compliance

2.1 Fairness as Influence Factor for the Tax Morale

Over the years different drivers of intentional tax non-compliance had been discussed.

Two of them are particularly important: deterrence mechanisms and tax morale (Torgler und

Schneider 2009, p. 203). This paper deals with the second group since it includes the idea of

fairness as an important influence factor. An approach that is oriented towards tax morale

would be to create a synergistic tax climate (Kirchler et al. 2008). Here, taxpayers and tax

administration work together (Niesiobedzka 2014, p. 3). Thus, they create a trustful climate

where people cooperate voluntarily (Muehlbacher et al., 2011) and the default expectations of




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the society is that people comply. Recent studies provide evidence that these injunctive norms

influence individual ethical standards, hence personal norms (Bobek et al. 2013, p.465). In

contrast, the cooperation between citizens and government is limited when people feel treated

unfairly by the authority (Tyler et al. 1989). Such a climate is called antagonistic (Kirchler et

al. 2008). This is important since paying taxes is one of the most basic forms of cooperation.

The perception of being treated unfairly could be based on an individual approach (taxpayers

think that they are asked to contribute a too high share) or on a more general approach where

they see the whole tax system as being unfair (Torgler 2003a, p. 291). Based on this, many

researchers discussed a close relation between tax evasion and tax fairness perception

(Jackson and Milliron 1986). Two elements of this relation have to be distinguished: the

procedural fairness of the tax collection process and the perceived distributive fairness of the

tax burden as such (Welsh 2006, p. 165). An unfair collection process creates a non-

cooperative environment which increases the probability for tax evasion efforts (Kirchler et

al. 2008) since tax morale as the basis for voluntary payments (Niesiobedzka 2014, p. 3) is

reduced. The focus of this paper will lie on the second field: distributive fairness. People

evaluate the tax burden they are confronted with in accordance to criteria of fairness based on

two main principles: equivalence and capacity (Fichte et al. 2013, p. 9). Therefore, tax

fairness could be measured either according to the idea of exchanging taxes against

governmental spending (benefit principle) or according to the ability-to-pay principle

(Kirchler 1997). The later includes vertical as well as horizontal comparisons (Kirchler and

Maciejovsky 2002). Taxpayers especially compare their tax payment with what they think

others have to/ do pay (Dornstein 1987). This source of possible perceived unfairness could

lead to more efforts to evade taxes when taxpayers try to change their payments to what they

think is a fair share (Bordignon 1993).

As mentioned above, tax compliance is influenced by a variety of factors. To measure the

influence of fairness it is important to single-out its impact. The best way to do that is to

understand the process of tax evasion as a three-step procedure, as proposed by Elffers

(2000). In this framework tax morale influences specifically the willingness to evade taxes.

Aspects like the aforementioned important role of deterrence mechanisms are separated from

this consideration since they occur on other steps. This paper will look at the willingness to

evade taxes only and not at tax evasion as it is realized (non-compliance). Therefore, I

measure the willingness to evade as the perceived justification of tax evasion. Having the

possibility for a two-sided relation in mind, there could be different reasons why taxpayers

see evasion as justified. It is necessary to take perspectives into account that are both

rationally based as well as morally based (Cullis and Lewis, 1997). The justification based on

morality is the one of self-defence (Torgler 2003a, p. 291) and restoring fairness (Bordignon




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1993, p. 346), whereas the rationality based justification is the one that adjusts the own tax

morale to legitimize the own participation in tax evasion (Niesiobedzka 2014, p. 2) in a

feedback process (Wenzel 2005, p. 505).

An increase in the willingness to evade taxes can be described as a decline in morale costs

(Sheffrin and Triest 1992, pp.194-195) or overstepping a morale threshold (Elffers 2000,

p.186). It was shown that personal ethical norms are one of the most important drivers for

compliance intentions (Bobek et al. 2013, p.465). In early discussions about tax morale, it was

mostly treated like a black box (Feld and Frey 2002, pp. 88-89; McKerchar et al. 2013, p.5),

i.e. a phenomenon that, in itself, could not be observed but merely rated according to its

outcome. Today, empirical studies have developed a better idea of the evolvement of tax

morale but for a long time studies going empirically deeper into the origins of tax morale

were very rare (Torgler and Murphey 2004). One of these insights comes from Wenzel (2005)

who argued that the causality between tax morale and tax evasion might be two-sided. While

tax morale influences compliance, there is a feedback loop that adjusts tax morale to justify

actual compliance behaviour (Wenzel 2005, p. 505).

Empirically, the convincing theoretical arguments for the relation between subjective

evaluations of the tax system and the attitude towards tax evasion is challenged by the fact

that the evidence is mixed. On the one hand there is evidence from surveys (e.g. Spicer and

Lundstedt 1976 or Roberts and Hite 1994, p. 45) as well as experiments (e.g. Spicer and

Becker 1980) that the tax fairness perception has an influence on tax compliance. On the

other hand, however, not all studies could confirm that (Hite 1990; Kaplan et al.1986). Some

even argue that a tax system that is regarded as unfair is an excuse for tax evasion, rather than

a motivation (Wärneryd and Walerud 1982). Roberts and Hite (1994, p. 43) also highlight the

importance of demographic variables for the tendency of non-compliance. One reason for the

mixed evidence could, however, be seen in the fact that the studies try to find a relation

between fairness and actual compliance rather than fairness and a sole willingness oriented

measure. Therefore, they are ignoring the fact that evasion is the result of a multiple-step

procedure (Elffers 2000, p. 185) in which fairness considerations are related only to the first

step. Indeed, reviewing the empirical literature shows one great weakness: there are no clear

definitions of the measured indicators. Understanding the path to tax evasion as a more

complex process will sensitize for the existence of influence factors that have contradicting

impact on different stages of the process. It is because of this factors that we have to single

out measures for the different steps and ignore this fact weakens the empirical results. Good

examples for the necessity and also to difficulties to disentangle different influence factors

could be found in McKerchar et al. (2013, p.18).




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2.2 Different Approaches to Reduce the Own Tax Burden

To investigate whether or not the attitude towards tax compliance is affected by the

perception of tax fairness, it is important to distinguish between three different terms. On the

one hand, reducing one’s own tax burden could be done following legal ways. The first way

is to use loopholes in the tax code and all kinds of possible deductions, this approach is called

tax avoidance (Kirchler 2007). A second way is to change one’s location, e.g. move to a tax

haven, a behaviour which is called tax escape (Kudrle 2016, p. 1166) or tax flight (Kirchler et

al. 2003, p. 536). On the other hand, there is illegal tax evasion where income is under-

reported or deductions are exaggerated in full awareness of the fact that this is an illegal act

(Hessing et al. 1989). All forms have in common that they describe intentional actions. There

would be a fourth term, however, “non-compliance”, that includes unintentional tax evasion

as well (Robben et al. 1990, p. 342). This will, however, not be discussed in more detail here.

From the point of view of the governmental budget there is no difference between illegal tax

evasion and legal behaviour like tax avoidance or tax escape (Kirchler and Maciejovsky 2002,

p. 8). Thus, economic theory usually does not differentiate between these three (Cross and

Shaw 1982). The similarities in the consequences for the budget, however, do not render this

behaviour equal in the eyes of the citizens (Kirchler et al. 2003). Furthermore, next to legal

and illegal acts, people also differentiate between moral and non-moral behaviour (Etzioni,

1988). For tax avoidance and tax evasion there is a consensus that the first is both legal and

ethical whereas the latter is seen as being illegal and unethical. Especially interesting,

however, is that tax escape is both seen as legal but also unethical (Kirchler et al. 2003, p.

545). This two-dimensional analysis could change the role of tax morale. Even citizens with a

high intrinsic motivation to pay taxes (Cummings et al. 2009; Alm and Torgler 2006) or a full

inner acceptance of the need to pay taxes (Schmölders 1975, p. 98) could be willing to use

approaches that are both legal and not seen as unethical. In other words: tax moral could be a

barrier against unethical behaviour but since tax avoidance is not seen as unethical (Kirchler

et al. 2003, p. 545), it is likely to be less affected. In this case, taxpayers could believe paying

taxes is the morally right thing to do (Niesiobedzka 2014, p. 2) and nonetheless take efforts to

reduce their payments. The number of studies about the differences between both is, however,

rather low (Kirchler et al. 2003, p. 537); mainly because there is a substantial grey area

rendering the differentiation rather difficult (Slemrod and Yitzhaki 2000). One issue in this

grey area is behaviour that is in line with the words of the tax law but clearly against the spirit

behind them (McBarnet 2001). Despite this it is important to keep in mind the people for

argue that even tax evasion could be morally justifiable depending on the circumstances (Mc

Gee et al. 2016, p.11).




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For the analysis of fairness it is important to differentiate between the three ways

mentioned above since one possible explanation for personal tax reduction behaviour is the

wish to restore fairness (Bordignon 1993, p. 346). Analyses of the various methods of tax

payment reduction show that these measures are not only considered as being different in

terms of legality and morality but also in terms of fairness. Especially tax avoidance is seen as

being rather fair in comparison to tax evasion (Kirchler et al. 2003, pp. 547-548). In addition,

tax fairness perception is broadly confirmed as a crucial psychological element for the attitude

towards tax evasion (Dornstein 1987, Kirchler 1997). It therefore seems reasonable to

consider that the first choice to deal with experienced unfairness could be the use of a fair

method rather than answering unfair behaviour of the state with one’s own unfair behaviour.

In this case, the first choice answer would be tax avoidance, a method that is associated with

cleverness rather than fraud (Kirchler et al. 2003, pp. 549-550). Nevertheless, there still

remains the motivation to use unfair methods in response to state behaviour that is perceived

as being unfair. Such a reaction would be in line especially with the theory of reciprocity

(Fehr and Gächter 2000). The situation of practicing tax evasion because the tax system is

seen as unfair could be compared with the observation that employees are more likely to steal

company property after the company had cut their wages (Greenberg 1997). Often this,

retaliation becomes even more complicated and unfairer than the retaliated action (similar

Fehr and Gächter 2000, p. 159).

3. Framework of the Survey

This paper will contribute to the discussion on tax evasion and fairness by examining

participants’ self-assessment of being influenced by ideas of fairness when thinking about tax

evasion. In this paper, the willingness to evade is measured particularly as a perceived

justification of tax evasion. The main advantage of this measurement procedure is that it takes

into account the subjective nature of the willingness step as well as the importance of personal

social norms (Bobek et al. 2013, p.451) and demographic influences (Roberts and Hite 1994,

p. 43). In addition, the problem of relating fairness considerations directly to compliance is

avoided. As described before the complex nature of the path to become an evader creates the

need for a measure that is only correlated with intentions and not with actions, sine the later

are subject to many other influence factors. Therefore, self-assessment is in this case more

adequate than actual (known) compliance behaviour (as used e.g. in McKerchar et al. 2013,

p.8). Justification was selected as in indicator since it reveals attitudes towards evasion which

should be good approximation for willingness.

To investigate the relation between fairness and tax behaviour, two surveys with a total of

811 participants from Germany are used. One student survey with 277 respondents and an




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online response pool survey with 534 complete answers1. Table A 1 in the appendix present

demographic information about the respondents. More precisely, additional questions were

added to block F of the questionnaire. Three different approaches are used to reveal the

relation between fairness and the willingness to evade. The first two ways are descriptive and

based on the answers to the questions F001 and F004_01 as described below. The third way is

analytical and applies the ordered logit regression method. The analysis applies the following

hypothesis:

Hypothesis 1: The fairer survey participants perceive the tax system, the less likely they

see tax evasion as being justifiable.

To begin with question F001 offers 13 possibly excuses and the participants were asked

to choose up to three they would most likely accept. Asking this question is justified by the

literature showing that across different groups there is an agreement about the ethical

justifiability of tax evasion but differences in the evaluation of justifying arguments (Mc Gee

et al. 2016, p.11). The available answers range from general ones like unfair tax system to

more specific ones like low governmental investment.2 Several answers are related to the

different aspects of fairness. This should make it possible to see if fairness as a general

concept is taken seriously and also what problems are most likely to influence this perception.

The list especially includes options for the main criteria of tax system fairness: complexity,

horizontal fairness (with the example of capital and labour), vertical fairness (represented by

an income group differentiation), benefit principle (with the example of state investment) and

self-interest. Next to that, there is an item for draconic tax inspections as reference to the

ideas of backfire (Sheffrin and Triest 1992) and procedural fairness (Niesiobedzka 2014).

Further, some common excuses are available for selection: waste of tax money, tax freedom

for big enterprises and record tax gains.

Since the benefit principle is often used to model tax fairness (Kirchler 1997), it was

again referred to in a separate question.3 The participants were asked to what extent the

amount of publicly financed goods influences the frequency of tax evasion. Also, the issue of

governmental waste of tax money was addressed separately by asking the participants about

the frequency of tax waste in Germany.4

Another important feature is the comparison between tax evasion and tax avoidance with

respect to the influence of fairness on the application of these tools. The specific questions

1 For a more detailed description of the survey design and the method of recruiting respondents see

Spiegel and Kloss 2018. 2 For an overview consider the question overview, appendix B. 3 Question F002. 4 Question F003.




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that indicate differences between tax avoidance and tax evasion5 do not include a question

about tax escape since this method is not available for the majority of the citizens (similar

Kirchler et al. 2003, p. 548). As judging a method you are not able to apply as being unfair

and unethical is simple and leaves open the need for a clear control group (e.g. business

owners as used by Kirchler et al. 2003), it would not make much sense to ask for tax escape.

As argued in chapter 2, there are reasons to assume that fairness considerations are more

strongly related with tax avoidance rather than tax evasion. To underline this point, the

second hypothesis does not only claim that there should be a difference between both

concepts but more specifically how this is related to the role of fairness.

Hypothesis 2: Considerations of fairness are more influential for tax avoidance than for

tax evasion.

Moving on, there is a specific question about the role of the personal tax burden on the

likelihood of evasion.6 After asking the participants about all these possible reasons or

excuses, question F007 asks about the justification of tax evasion in general. Finally, and

since trust plays an important role for tax morale and compliance (Tyler 1997), question F008

asks to what extent the participants trust the federal government.

4. Descriptive Results and Further Analysis

4.1 Descriptive Survey Results

The results of the two surveys often differ from each other significantly. These

differences are presented by giving the full sample figures first and provide the results for the

general (i.e. non-student) sample and the student sample separately afterwards if there is a

substantial difference. The existence of a substantial difference is fully in line with

expectations and the literature since many students are not directly confronted with carrying

the burden of income taxation (similar Mc Gee et al. 2016, p.11). To figure out whether or not

an unfair tax system is seen as a justification for underpayment, it is first important to know to

what extent people consider tax evasion as justified. Question F007 asks this question and the

results are very clear. A majority of 68% (59% of students and 72% of general) claims that

tax evasion is never justified. Another 24% choose rarely justified. Within the remaining the

share of always in contrast to often is substantially high (3.5% always and 4.5% often). This is

especially due to the fact that in the student survey the share of always is even higher than the

share of often (9% always and 8% often).

Turning to the question of the most acceptable justifications for tax evasion,7 four

answers were chosen much more often than the others. 38.5% of all respondents see an unfair

5 Questions F004_01 and F004_02. 6 Question F004_03. 7 Question F001.




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tax system as the most acceptable excuse for tax evasion making it the number one answer. It

is followed by waste of tax money, too complex tax rules and low tax payments for

international enterprises. All of these four answers were selected by more than 30% of the

participants putting them way ahead different treatment of capital and labour on place

number five with just 20%. In both sub-surveys the same four categories constitute the top

four, but within these four, students rank waste of tax money higher; whereas in the general

survey the concerns about tax collection from international enterprises were more important.

Next to the chosen items themselves, one can also draw conclusions from the number of items

chosen by a participant. The participants were asked to select up to three items. 20

participants selected zero items and did not accept any of the possible excuses, 91 selected

one item, 101 two and 433 selected three items. Since there was no technical limitation, 38

participants decided to choose even more than three items. It is worth mentioning that 69%

selected three or more justifications in the full sample and also 66% selected three or more

when the sample was limited to the participants who argued that evasion was never justified

in F007. One could have expected this difference to be higher, however, when it comes to the

participants who selected zero items in F001. 95% belong to the group who claimed they see

evasion as never being justified.

With unfair tax system being the most frequent answer, one could expect high

confirmation ratings for question F004_01: An unfair tax system justifies illegal tax evasion.

This was, however, not the case. Only 16% (23% of students and 12% of general) answer

with agree or agree completely. This divergence could be explained by the differences in the

formulation of the question. F004_01 asks if an unfair tax system justifies tax evasion

whereas F001 could be read as: “If you accepted any justification, would you accept the

following?” Another reason for this difference could be the usage of the word “illegal” in the

question, since a question’s wording can influence which kinds of opinions are presented

(McColl et al. 2001, p. 58). Even with both questions asking about illegal tax evasion

specifically, the explicit use of this word in the question could frame the respondents in a

certain way, just as respondents are influenced by the use of words that imply specific values,

so-called “prestige” words (Smith and Squire 1990). Question F004_01 also shows a pattern

that was already expected in F001. Those participants who argued that they see evasion as

never being justified in F001, differ significantly from the full sample. In the subsample

(F007=1), only 7% chose agree or agree completely. Additionally, the number for the answer

not at all rose from 55% in the unrestricted sample to 70% in the restricted. Comparing the

result for tax evasion with the question about an unfair tax system as a justification for legal




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tax avoidance,8 previous findings that citizens differentiate between both (Etzioni 1988 or

Kirchler et al. 2003) are confirmed. A qualified majority of 70% (77% of students and 66% of

general) agree on this statement. The much higher role that the respondents allocate to

fairness when it comes to tax avoidance also confirms hypothesis 2.

Governmental waste of tax money received the second largest amount of selections and

even the highest amount in the student sub-survey. Question F003 asked for the frequency of

tax waste in Germany. 84% (87% of students and 83% of general) believe that taxes are

wasted frequently or even very frequently while nobody (0 respondents) believes that taxes

are never wasted. Besides that, frequently was chosen more often than very frequently,

however, both get higher numbers than rarely. Another assessment of the government comes

from question F008, asking to what extent people trust the federal government. 47% report

that they trust only a little or not at all (53% of students and 45% of general). Splitting up this

result, 14% claim that they have no trust in the government (20% of students and 11% of

general) compared to only around 2% declaring full trust.

Theoretical models of tax morale often use the benefit principle to include fairness

considerations (Kirchler 1997). This principle, however, does not seem to be the most

influential factor for fairness (Spiegel and Kloss 2018). Even more, it has been argued that the

equivalence principle (the foundation of the benefit principle) cannot be appropriate to

explain tax fairness (Neumark 1970, p. 44). These concerns are partly transferred to the

results for tax evasion justification. Only 36% (38% of students and 34% of general) think

that there is a strong or very strong influence.9 On the other end of the scale 18% percent

claim that there is zero influence. This finding should, however, be treated very carefully

since one could argue that a perceived high amount of waste of tax money is somehow a

threat to fairness in terms of the benefit-principle. An interesting conclusion on the influence

of high personal tax burden on the probability of tax evasion can be drawn from question

F004_03. 79% (85% of students and 76% of general) would agree that there is a relation.

While the participants think that there is a relation, they do not accept it as a justification as

less than 10% chose this option in question F001.

To analyse the role of fairness perception for tax evasion it is necessary to reconsider the

assessment of fairness of the German tax system in question A001. Table 1 shows the survey

results for this question. Having 5 possible answers, a median value of 3 would imply that

positive and negative views outbalance each other. Since the values are 2, however, the

majority appears to be critical of the fact that the German tax system is fair. It is especially

worth noticing that almost no participant selected very fair. Even though very unfair is the

8 Question F004_02. 9 Question F002.




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second lowest category, it was chosen by a substantial amount of respondents while very fair

was not. Another criteria one can look at is the mode, here it turns out that more unfair is the

most selected alternative in both subsamples. Taken together, the two surveys report that the

majority perceives the German tax system as being unfair. Table 1 provides median and

mode, since the mean would not be adequate for this ordinal outcome variable (Cohen et al.

2000).

Table 1: Results of Question A001

A001: Do you perceive the German tax system as …

Values of A001 All respondents Students General

1 (very unfair) 106

(14%)

58

(23%)

48

(10%)

2 ( more unfair) 305

(41%)

97

(38%)

209

(43%)

3 (neither fair nor

unfair)

182

(24%)

55

(21%)

127

(26%)

4 (more fair) 146

(20%)

42

(16%)

104

(21%)

5 (very fair) 7

(1%)

5

(2%)

2

(0%)

Median 2 2 2

Mode 2 2 2

4.2 Discussion of Ordered Logit Model Results

Keeping these results in mind, an ordered logit model was used to further investigate the

relationship between fairness and tax evasion. Using a method that treats the variables as

ordinal is necessary as the expressions of values and feelings on a Likert scale will create an

ordinal variable (Hansen 2003). It would not be adequate to reduce the model to a binary logit

model since dichotomization could never be close to the optimal (Ananth and Kleinbaum

1997, p.1330), given the significant number of neutral responses. Furthermore, all measures

that are based on computing a mean are excluded since they are not applicable for ordinal

outcome variables (Cohen et al. 2000).

The analysis focuses on the justifiability of tax evasion (Question F007) as the dependent

variable.10 To get a first impression, the following model is estimated using the perceived

fairness of the German tax System (Question A001), the thoughts about tax waste (Question

F003) and the reported trust in the federal government (Question F008) as explanatory

variables.

𝐽𝑢𝑠𝑡𝑖𝑓𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦 = 𝛽1 ∗ 𝐹𝑎𝑖𝑟𝑛𝑒𝑠𝑠 + 𝛽2 ∗ 𝑊𝑎𝑠𝑡𝑒 + 𝛽3 ∗ 𝑇𝑟𝑢𝑠𝑡 + 𝛽𝑖 ∑ 𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑠 (6.1)

10 Note: Since the item one (never justified) accounts for a large share of answers, it appeared

reasonable to transform the variable into a binary form differentiating only between never justified (0)

versus somehow justified (1). However, a logit model with this binary variable performed much worse

according to all criteria than an ordered logit model with a 4-digit variable.




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As controls, age and gender are used. Perceived fairness and tax waste as the two major

concerns are represented by the question about fairness (A001) and tax waste (F003),

respectively. F008 adds the important role of trust. It was shown that trust is an indirect

channel for the effects of tax fairness on compliance (Siahaan 2012, p.196). If hypothesis 1

holds true, fairness should show a negative sign, i.e. the fairer the respondent sees the tax

system, the less he/ she would see tax evasion as being justifiable. For waste of tax money

and trust in the government, positive signs are expected. A high value in F003 would mean

that respondents think that taxes are wasted more often, whereas a high number in F008

would mean that respondents do not trust the government.

Table 2: Results for Justification of Tax Evasion (model 6.1)

Model 6.1 Justifiability of Evasion

Fairness -0.228**

(-2.08)

TaxWaste 0.364**

(2.36)

Trust 0.717***

(4.60)

Age -0.0265***

(-3.89)

Gender -0.326*

(-1.75)

cut1 Constant 1.545**

cut2 Constant 3.220***


Observations 604

Pseudo R2 0.079

AIC 949.9

BIC 985.1

Log likelihood -466.9

LR chi2(5) 79.8

Prob > chi2 0.0 t statistics in parentheses * p < 0.10, ** p < 0.05, *** p < 0.01

Constant is significant in all four cuts

As Table 2 shows, all variables are significant and have the expected sign. The results

suggest that people are more likely to accept justifications for tax evasion if they perceive the

tax system as less fair, think that tax are wasted more often and mistrusted the government.

With respect to the controls, Table 2 especially shows a negative significance for age. This is

in line with previous results, like, for example Roberts and Hite (1994, p. 41), using the years

as a taxpayer. The reported significance of gender during further analysis will turn out not to

be stable. The explanatory power of this model is, however, limited. This limitation could be

explained by the finding of question F004_01 that not everybody accepts an unfair tax system

as a justification. To improve the model, a differentiation between respondents who consider

unfairness as justification and those who do not is needed.




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For this purpose, an interaction variable between perceived fairness (A001) and a dummy

indicating the acceptance of unfairness as an excuse for tax evasion were introduced. There

were two possibilities to create this dummy. The first one would be to use the numbers from

F001_01 (Which justification would you most likely accept?) differentiating between

respondents who selected unfair tax system from those who chose something else.

Alternatively, a binary recode of F004_01 (Does an unfair tax system justifies illegal tax

evasion?) could be used. Testing both variants revealed that the second was more adequate

according to any model selection criteria. Because of that, only the results based on this

approach will be presented.11 A possible reason for F004_01 being more adequate is the

already discussed issue that the participants used F001 to express their most accepted excuse

given that they would accept any. Next to this new part, measures for perceived tax waste,

trust in the government and the controls gender and age were included. Additionally, the

number of chosen items in F001 was included as a predictor. The idea was that the more

justifications a participant accepts, the more likely he/she is going to be willing to see evasion

as justifiable. The new estimation equation would thus look as follows:

𝐹007 = 𝛽1 ∗ 𝐴001 + 𝛽2 ∗ 𝐼𝑛𝑡𝑒𝑟𝑎𝑐𝑡𝑖𝑜𝑛 + 𝛽3 ∗ 𝑓00401 + 𝛽𝑖 ∑ 𝑜𝑡ℎ𝑒𝑟,48 𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑠 (6.2)

Table 3 shows the estimation results. With the fairness measure (A001) being

insignificant but the interaction term being significant and negative, a significant effect of

fairness could only be shown for those participants who argued that they see an unfair tax

system as a justification. The fairer the system, the less those participants see evasion as being

justified. That the effect of fairness would be higher for these people was rather predictable.

What is interesting about it is that it totally drives out the overall effect. This implies a high

accuracy of the self-evaluation.

Table 3: Results for Model 6.2, Introduction of Interaction Term

Model 6.2 Justifiability of

Evasion

Fairness -0.0548

(-0.44)

Interaction -0.551***

(-3.68)

Unfair Jusitfy 1.841***

(9.79)

TaxWaste 0.168

(0.93)

Trust 0.297*

(1.68)

No. Excuses 0.206**

(2.35)

Age -0.0167**

(-2.21)

11 Results for the first variant are available upon request.




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Gender -0.157

(-0.76)




Observations 587

Pseudo R2 0.247

AIC 768.3

BIC 816.4

Log likelihood -373.1

LR chi2(5) 245.0

Prob > chi2 0.0 t statistics in parentheses * p < 0.10, ** p < 0.05, *** p < 0.01

The positive significance for Unfair_Justify (F004_01) needs to interpret carefully, given

the relation between the answer and the perceived fairness itself in question A001. In the full

sample, 14% perceive the German tax system as very unfair. Restricting the sample with the

condition F004_01 = 4 (agree strongly that unfairness is a justification) increase the share of

very unfair answers to 67%. The share of answers that indicate unfairness (A001 = 1 or 2)

increases from 55% to 87% when the sample is restricted according to this condition. One

could also argue the other way around, when the sample is restricted with the condition A001

= 1 (German tax system is very unfair), the share of respondents who agree or strongly agree

with unfairness being a justification for tax evasion increases from 16% to 37%. Keeping this

in mind, the positive significance of F004_01 should be interpreted as a support for the

negative relation between fairness and evasion justification. The fairer people perceive the tax

system to be, the less likely it is that evasion is seen as being justified. Yet, since those

respondents who argue for fairness being a justification tend to perceive the system as being

unfairer, they are more likely to see evasion as being justified.

When it comes to the other important variables, in Table 3, the measure for trust in the

government (F008) stays weakly significant whereas the measure for perceived tax waste

(F003) loses its significance. The reason why a more carefully implemented measure of

fairness reduces the significance of the tax waste variable can be seen in its close relationship

to fairness. A waste of tax money is likely to be seen as a violation of fairness according to

the benefit principle which claims that there should be an exchange relation between payed

taxes and received public (financed) goods (Liebig and Mau 2005, p. 469-470). According to

this principle, the individual tax burden should reflect received benefits from governmental

spending (Slemrod 1996, p. 2). A more general idea of this principle moves the focus away

from the individual level and argues that a tax system can only be (perceived as) fair if there

is coherence between tax burdens and public goods provision (Bird et. al 2006). If tax money

is spent for purposes approved by the taxpayers, the benefit principle can be fulfilled as well

(Rothstein 1998). Wasting taxes is obviously not an approved kind of spending. Therefore,




1136


tax waste can be seen as a part of fairness considerations and a clear measure for fairness

covers the effect already. While tax waste seems to be a clear constituent of fairness

evaluations the role of trust is more complex. One the one hand the weakened effect of trust

could also be explained by the relation between fairness and trust since a trustful climate is

the basis for voluntarily cooperation (Muehlbacher et al., 2011), yet even though trust

influences fairness, it is a not a constitutional part of it. On the other hand, there is evidence

that trust is not a constituent but a transmission channel for the effects of fairness on evasion

(Siahaan 2012, p.196). The reduced but still significant impact could suggest that both

theoretical effects of trust have some truth. The role of trust should be investigated more in

further research. The newly included variable F001, i.e. the number of accepted justifications,

is ‒ as expected ‒ positively significant. The overall willingness to evade increases with the

number of excuses that are excepted.

The role of fairness might, however, be more complex. When restricting the sample to

those respondents who selected fairness as an issue, the share of very unfair and unfair

answers for Question A001 (How fair is the German tax system?) increases from 55% to

63%. Respondents who have fewer concerns about the fairness of the system seem to be less

likely to regard fairness as a justification. The effect is even stronger for F004_01 as

discussed above with respect to the positive significance of this question in model 6.2.

5. Concluding Remarks

The first step on the way to tax evasion is the willingness to evade (Elffers 2000, p. 186).

One central expression of this willingness might be that taxpayers perceive it as being

justified to evade. Note that perceiving evasion as justified does not indicate any actual

attempts to evade. The aim of this paper was to discuss several possible roots of this

justification. The main finding is that fairness considerations play a very important role in the

justification of tax evasion. Hypothesis 1 was confirmed: a tax system that is perceived as fair

reduces the probability to regard evasion as justified. From that it could be concluded that a

fair tax system reduces the acceptance of tax evasion within a society and therefore increases

the social costs (Niesiobedzka 2014, p. 2).

Hypothesis 2 addressed a debate that has been going on for some time whether or not tax

evasion and tax avoidance should be analysed together because their effect on the state budget

is the same (Cross and Shaw 1982) or separately because citizens perceive them differently

(Etzioni 1988). The survey presented in this chapter asked about the role of fairness to justify

tax evasion as well as tax avoidance. The hypothesis was that both concepts are not only

perceived as different from each other but also that fairness should play a much higher role

for tax avoidance. This was confirmed by descriptive findings.




1137


As mentioned above, the role of fairness might still be more complex. The analysis has shown

that for those who see fairness as a justification, tax system that is perceived as beings

unfairer increases the likelihood of seeing evasion as being generally justified. Furthermore,

there were hints at the phenomenon that the fairness perception is correlated with the thought

about fairness considerations as possible justifications. Bringing both findings together, a self-

enforcing process evolves. Respondents who perceive the German tax system as being unfair

are more likely to accept unfairness as an excuse. Accepting this excuse, however, leads them

to regarding evasion as being justified in general. In the next step, a more widespread

acceptance of tax evasion becomes a threat to fairness and tax morale themselves. It becomes

a threat to the former by possibly increasing the number of perceived evaders (Bordignon

1993) and to the latter by undermining social norms regarding compliance (Sheffrin and

Triest 1992, pp. 194f.). A shift in the expectations of the society (injunctive norms) will

change the personal norms as well (Bobek et al. 2013, p.465). This problem adds to the

complexity of this attitudinal relation and shows the need for more research about the causes.

The purpose of this study was to follow the idea that we need to disentangle the different

steps of the path towards tax evasion and apply specific measures for our empirical

investigations. Since tax fairness should be reviewed as an influence factor for the willingness

step the measure justifiable of tax evasion was applied as an approximation for the

willingness to evade. The results add empirical support to the theoretically established

relation between tax fairness and tax evasion and underline the importance of specialized

measures. Furthermore, the importance to have a cooperative tax climate and a tax system

that is perceived as fair should be seen as an important police task. For more on the question

what constitutes a fair tax system see Spiegel and Kloss 2018?

Appendix

A. Tables

Table A 1: Overview of Demographic Features

Variable Category N

Age – Student Survey <25 107

25-29 104

30-34 24

35-39 8

40+ 20

Age – Sosci Panel Survey <25 51

25-34 165

35-44 78

45-54 97

55-64 70




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65+ 35

Gender Male 414

Female 375

Children – Sosci Panel Survey Yes 231

No 291

B. Question overview

A001: As how fair do you consider the German tax system to be

F001: Please choose up to three options from the following that would justify tax evasion.

F002: In how far do you think the scale of public services influences the frequency of tax

evasion?

F003: Do you think there are taxes wasted in Germany?

F004_1: An unfair tax system justifies illegal tax evasion.

F004_2: An unfair tax system justifies legal tax avoidance.

F004_3: A high individual tax burden heightens the probability of tax evasion.

F007: How often is Tax evasion justified?

F008: In how far do you trust the German federal government?

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