Applying Global Standards at the Local Level: Social and Environmental Certification Systems

1
Turning Resistance into Compliance Evidence from
a longitudinal study of tax scheme investors
Tina Murphy Centre for Tax System Integrity 6th
June 2005
2
Todays talk

• The dispute between the ATO and tax scheme
  investors
• Can apply the lessons learned here to taxpayers
  caught or prosecuted for serious non-compliance
• 2002 and 2004 survey tracked changes in
  attitudes over time

3
Case Study Mass marketed schemes

• In 1996, ATO noticed increase in number of
  taxpayers involved in schemes
• Increase in being claimed
• 54m in 93/94 to 1b in 97/98

4
Problem with schemes

• When ATO analysed the arrangements
• Commercial nature may have been OK
• But were concerned with the way they were
  structured and financed
• Investments largely funded through tax deductions
• Little private capital at risk
• In 1998, took action against 42000 investors
• Saw it as a way of discouraging future marketing
  and investment in schemes
• ATO went back 6 years and penalised those who
  invested as early as 1992

5
Investor reaction

• Investors argued their accountants / financial
  planners sold schemes as legitimate investments
• Resented the implication they were tax cheats
• Disappointed with the lack of consultation
• In 1998/99 thousands of complaints made to the
  Ombudsman
• Fighting funds set up
• Majority refused to pay up more than 50 still
  had not paid in 2002 (despite interest
  accumulating on debts)
• Matter referred to a Parliamentary Senate
  Committee in 2000

6

• Without a doubt some of the investors would have
  been sophisticated taxpayers who knew what they
  were doing (but majority blindly followed advice
  of the marketers)
• More than likely a lot of myths and propaganda
  about the ATO were being developed by the power
  players involved in schemes
• This led to the ATO being put on the defensive
  about the approach they took

7
Our past research

• Conducted Interviews and 2002 Survey
• Investors more resistant than general population
• Measured through Val Braithwaites Motivational
  Posture of Resistance
• 55 of taxpayers in general population score high
  on measure of resistance
• 87 of investors in 2002 survey were found to be
  resisters (coupled with refusal to pay their tax
  debts makes them a difficult group to manage)

8
(No Transcript)
9
What characterises a Resister?

• According to Braithwaite (2003), Resisters
• Actively resist the self-regulatory system
• Likely to view ATO with antagonism
• See ATO as trying to catch taxpayers out rather
  than trying to help them
• Believe people should take a stand against the
  ATO (may involve avoiding their tax obligations
  or being uncooperative)
• So in some respects, this posture highlights
  taxpayers who may be a challenge for the ATO to
  manage (but good news is that this group can be
  turned aroundunlike those who disengage from the
  system)

10
Why were so many Resistant?

• Was it just the fact that they had tax debts they
  didnt want to pay?
• Was it more than just the money?
• Was it something about the type of person they
  were?
• Was it to do with the ATOs approach to handling
  the matter?

11
2001 Interview Study

• In initial exploratory interviews
• 30 investors interviewed
• Kept referring to how they felt they had been
  treated by the ATO
• Felt poorly treated by ATO
• Letters rude and legalistic
• Felt the ATOs handling of schemes was unfair
• Felt the ATO initially saw them all as tax cheats
• Upset they hadnt been consulted
• Disliked the idea that interest was charged going
  back 6 years
• Felt the wealthy got away with investing in these
  schemes earlier
• Led me to procedural justice literature

12
Procedural Justice

• Concerns the perceived fairness of the
  procedures involved in decision-making and the
  perceived treatment one receives from the
  decision maker (Tyler, 1990)
• Peoples reactions to experiences with
  authorities have been found to be rooted in their
  evaluations of the fairness of procedures used
• If procedures seen to be fair, will be more
  likely to trust that authority, will see
  authority status as more legitimate, and be more
  inclined to accept decisions (even if outcomes
  are unfavourable)
• People found to challenge authority if they
  believe the procedures are unfair
• This pattern of results found in many different
  regulatory contexts (policing, workplaces, court
  system, tax, environment, etc)

13
Important point to note

• Procedural justice theory does NOT suggest that
  punishment should not be used!
• In fact, it suggests that punishment should be
  used if appropriate
• Some people have also misinterpreted CTSIs work
  in saying that we dont believe in punishment.
  This is NOT true
• It is the way in which this punishment is
  implemented that is important to consider

14
2002 National Survey Study

• 2001 interview study suggested that procedural
  justice was an important element in investors
  reactions to ATO (Murphy, 2003).
• But study conducted on investors in Kalgoorlie
  perhaps a particularly resistant group??
• In 2002, conducted a national survey on 6,000
  scheme investors (2,292 responded)
• Those who were more resistant were more likely to
  feel they were treated in a procedurally unfair
  way
• Also less likely to trust the ATO and more likely
  to question ATOs legitimacy (Murphy, 2004)

15
Present Study

• Shortly after collecting survey data in 2002, ATO
  announced settlement offer to scheme investors
• I had attitudinal measures from before settlement
  offer (gave me opportunity to study changes in
  attitudes after offer made)
• Conducted follow-up survey in 2004 (contacted
  1250 investors, 659 participated)

16
Findings

• Interested in
• Investors who were resisters in 2002 and 2004
  (resister group) N289 44 continued to
  resist
• Investors who were resisters in 2002 but NOT in
  2004 (non-resister group) N125 19 had
  change of heart
• Why was it that some people continued to hold
  resistant views while others became less
  resistant over time?
• Compared the 2 groups on a number of measures

17
Demographics
18
Compliance Behaviour

• Investors asked whether they thought their
  scheme-related experience had affected their
  taxpaying behaviour in a negative way
• Resisters affected significantly more so

19
Compliance Behaviour contd

• Taxpayers asked to expand how it was affected
• I now try to avoid paying tax as much as possible
• I no longer declare all my income
• I now use the tax system in a negative way to
  recoup my losses
• I am now more defiant towards the ATO
• I now look for ways to purposefully cheat the tax
  system
• I now look for many ways to recoup my losses
• Resisters Mean 2.20 vs Non-resisters Mean
  1.80 over 6 items (scores out of 5 higher number
  means more non-compliance)

20
Compliance Behaviour contd

• 2002 evasion behaviour assessed and 2004 evasion
  behaviour assessed (eg. a) did they fail to lodge
  tax return b) did they not declare cash income
  c) did they make illegitimate deductions d) did
  they refuse to pay back scheme tax debt)
• Resisters and Non-resisters did not differ at
  Time 1 (2002)
• But did differ at Time 2 (2004) resisters more
  non-compliant
• 99 of cash income was declared by Non-resisters,
  only 65 declared by Resisters in 2004 (N 19
  and 62, respectively)

21
Changes in Attitudes

• Explored changes over time for the following
  attitudes
• Perceptions of procedural justice
• Trust in the ATO
• Perceived legitimacy of the ATO
• Obligation to obey the ATO

22
Attitude changes - 2002 to 2004

• Proc. justice

• Trust

23
Attitude changes - 2002 to 2004

• Legitimacy

• Obligation to obey

24
Views on Settlement Offer

• Outcome fairness

• Procedural fairness

25
Views on Settlement Offer

• Satisfaction ratings

• Alleviated original concerns

26
Views on Settlement Offer

• Offer allowed me to put matter behind me

• Respect for ATO as a result

27
Summary of Findings

• Those investors who became less resistant towards
  ATO after settlement offer
• Were more likely to be compliant in 2004
  (resisters were more non-compliant)
• Were more trusting of the ATO in 2004
• Saw the ATO as more legitimate in 2004
• Were more likely to feel settlement offer was
  handled in a procedurally fair manner

28
Implications of findings

• Two points
• 1. Findings demonstrate that peoples
  motivational postures are fluid and changeable
  over time (one group who continued to be
  resistant (44), other group resistant in 2002
  but not 2004 (19))
• 2. Way regulator handles a case can have serious
  ramifications for the way people view the
  regulator, as well as for their subsequent
  compliance behaviour.
• These have implications for how the ATO
  interprets and uses the Compliance Model

29

• Some tempted to pigeon hole non-compliers as
  always having resistant or disengaged postures
  and treat them according to this view (i.e. hit
  them hard)
• Reasoning behind this is that it will bring them
  into compliance and deter them from engaging in
  non-compliance in the future

30

• True that this strategy may deter
• However, our research suggests that such a
  strategy can on occasion produce reactance and
  widespread resistance. Also, in such situations,
  an argument can be made for procedural unfairness
  (eg. Aggressive tone to letters, too long to make
  decision, no consultation, etc)
• Which can lead to further non-compliance
  defiance towards authorities
• More costly in the long term

31

• Ayres Braithwaite (1992) suggest that the
  perception of fairness is important for nurturing
  voluntary compliance
• Start initial encounters with persuasion and
  explanation (educate them about why what they did
  was wrong and keep them informed about decision
  processes)
• Tylers (1990) work in context of policing and
  justice systems finds that people can handle
  negative outcomes if they believe the procedures
  used were fair and respectful.

32
Conclusion

• Deterrence is important and the law is important.
• Eg. Important to prosecute people who deserve to
  be prosecuted.
• Without deterrence and the possibility of
  punishment, non-compliance may get out of hand.
• However, the manner in which the law is
  administered, and perceived by the public, is
  just as important.

33
Conclusion contd

• For a regulatory system to work effectively,
  regulators need to manage both the application of
  law and punishment, as well as how the public may
  react to it.
• Be proactive beforehand rather than reactive
  after the event in developing an effective, fair
  and respectful enforcement strategy
• This applies to people who may have made an
  innocent mistake on their tax returns all the way
  up to those who have committed a serious form of
  non-compliance and need to be prosecuted.
• If regulators do both of these things well, they
  will be able to turn some resisters into
  long-term compliers.

34

• Thank you