Crime, Law & Social Change 31: 91–104, 1999.

91
© 1999 Kluwer Academic Publishers. Printed in the Netherlands.

More tax evasion research required in new millennium

JOHN HASSELDINE & ZHUHONG LI

Fraud Research Centre, University of Nottingham Business School, Nottingham, NG7 2RD,
UK (e-mail: john.hasseldine@nottingham.ac.uk)

Abstract. Scholarly communication across disciplines is much harder than within disciplines.
This article highlights the pervasive phenomenon of tax evasion and discusses the different
theoretical models and research approaches that have been used to study the problem in the
last two decades. Much of this research has been conducted in the U.S. Policy approaches
suggested by this research may therefore have limited applicability in other countries. With
theoretical models from a variety of disciplines available to use, and many unanswered ques-
tions remaining, international comparisons and multi-method approaches should be useful to
the many policymakers and academic researchers interested in understanding the puzzle of tax
compliance.

Introduction

Tax non-compliance is a substantive problem that transcends cultural and

political boundaries. For instance, the 1993 gross income “tax gap” in the
U.S. was estimated at $170 billion (Guttman, 1994). In Belgium, it has been
estimated that 20% of total Belgian income taxes were being evaded (Geeroms
and Wilmots, 1985). Surveys of taxpayers in countries such as Australia, the
Netherlands, Sweden and the U.S. show that about one quarter of respond-
ents actually admit to deliberately underreporting income on their tax returns
(Hasseldine, 1993).
Over the last two decades, many studies of taxpayer compliance have been
completed, originating from a variety of disciplines which range from eco-
nomics, accounting, decision sciences, criminal justice, psychology, political
sciences to sociology. Much of this research has originated in the U.S. With
a few notable exceptions (see especially Roth et al., 1989a, 1989b; Slemrod,
1992), most prior work has not appeared in an interdisciplinary forum.
The purpose of this article is to provide an interdisciplinary primer on tax
evasion research as it stands at the end of the twentieth century. The next sec-
tion outlines the tax compliance environment, some definitions of compliance
and the relevant main parties. The third section briefly discusses the origins of
the main theoretical models of tax evasion behaviour. Section four examines
92 JOHN HASSELDINE AND ZHUHONG LI

the research methods used to empirically investigate tax evasion issues, and
some concluding remarks are made in the fifth section.

The tax compliance environment

Definitions

One definition of tax compliance used by the U.S. Internal Revenue Service
(IRS) states that compliance with reporting requirements means that the tax-
payer files all required tax returns at the proper time and that the returns
accurately report tax liability in accordance with the Internal Revenue Code,
regulations, and court decisions applicable at the time the return is filed. Note
that this definition makes no assumption about taxpayers’ motivation regard-
ing tax compliance. Kinsey (1984) defines non-compliance with tax laws as
the “failure, intentional or unintentional, of taxpayers to meet their tax oblig-
ation.” Weigel et al. (1987) specify that “tax cheating” or “tax evasion” refers
to deliberate acts of non-compliance by paying less taxes than are actually
owed.
Roth et al. (1989a, p. 2) categorise three major groups of non-compliant
behaviours – failing to file the return, failing to report tax liability accurately
on the return, and failing to remit taxes owed. They suggest the following non-
compliance patterns: first, taxpayer non-compliance is widespread; second,
non-compliance includes (according to percentage of occurrence from high
to low): unreported income, overstated subtractions, non-filing and arithmetic
errors; third, not all non-compliance is in the taxpayer’s favour: there exists
over-report of income and under-subtractions; fourth, most non-compliance
involves fairly small amounts.
So although non-compliance might result from deliberate choices, it can
also occur because of carelessness, omissions, and misinterpretations of re-
quirements. This is because tax compliance itself is often a complicated pro-
cedure that requires detailed knowledge and effort. The relationships between
tax complexity, compliance costs and tax compliance are difficult to predict
and test due to the complex environmental background of the taxation system
where different parties play their respective roles.

Main parties relevant to compliance

The main parties relevant to tax administration, enforcement and compliance

and the difficulties in striking a balance between their respective interests
have been described elsewhere (see Gammie and Shipwright, 1996). Accord-
ingly, this section only briefly describes the respective roles played in the tax
compliance environment.
 MORE TAX EVASION RESEARCH REQUIRED IN NEW MILLENNIUM 93

Governments play a central role in compliance – from the design of the

tax system through to legislation and enforcement of collection. Roth et al.
(1989a) suggest that to improve tax compliance from a government perspect-
ive requires the proposed tax system to be: first, economical to ensure that
the initial outlay for establishing the machinery for collecting will not out-
balance the periodical revenue yield; second, practicable or within the powers
of the administration for assessment and collection; third, not opening to
evasion and inducing dishonesty; fourth, not having the tendency of drying
up the source of the tax; fifth, not raising political difficulties at home and
provoking unrest; lastly, not raising international difficulties or conflicting
with other taxing jurisdictions.
Tax administrations also play a pivotal role by translating the tax sys-
tem into practice and enforcing collections. Tax agencies have four basic
strategies to improve tax compliance. First, they can apply resources to detect
non-compliance or design the taxpaying process to make non-compliance
easier to detect. Second, they can make compliance easier by decreasing
the taxpayer’s cost of compliance. Third, they can encourage normative sup-
port for compliance by encouraging taxpayers to reframe their compliance
decisions in a more positive light (e.g. by personalising the process or by re-
minding taxpayers of social commitments). Finally, they can encourage com-
pliance less directly through tax practitioners, who interact with many taxpay-
ers (Roth et al. 1989a, p. 4). Of course, these strategies are oversimplified,
as limited resources act as a constraint and the pursuit of one strategy may
hinder the success of another (i.e. some policies are two-edged swords that
may encourage compliance by some taxpayers but stimulate non-compliance
by others).
Tax practitioners assist taxpayers to interpret the complicated tax law and
help them to apply the law to their own returns. In addition, practitioners
may be seen to have a duty to the tax system to prepare accurate returns
that are supported by the tax law. The U.S. Treasury Department has even
contended that the prevailing obligation of preparers is to the tax system
(Shapiro, 1987). To ensure that tax professionals comply with this duty, U.S.
Congress has provided the IRS with powers to impose various penalties on tax
return preparers. Although the penalty under Section 6694(a) of the Internal
Revenue Code is only $250, further and far more serious consequences that
the penalty may trigger include the costs of being sued by a disgruntled client
and the possibility of the practitioner losing his or her professional licence to
practice as a certified public accountant or as an attorney (Pratt and Kulsrud,
1996).
Practitioners are cast in an interesting position and can play a dual role
(Klepper et al., 1991). With their unique knowledge of the tax law, preparers
94 JOHN HASSELDINE AND ZHUHONG LI

can be both “exploiters” and “enforcers.” Preparers are enforcers in that they
insure compliance in unambiguous situations. In ambiguous situations, how-
ever, Schisler (1994) observes that preparers are exploiters by avoiding tax
without inducing penalties for non-compliance. As McBarnet (1992) notes,
compliance may also pose a problem for tax agencies. If practitioners comply
with the letter of the law (as opposed to the spirit of the law) in promoting
tax avoidance schemes, then large downward effects on tax revenue yields
become very possible. Another finding which may reflect the views of a
different group of taxpayers is the survey evidence indicating that taxpayers
want preparers to assume an enforcer role (Hite and McGill, 1992).
Finally, taxpayers are significant as they decide how they will comply (or
not comply) with the tax laws. Many theories of evasion and empirical studies
have focused on individual taxpayers. These are now discussed in turn.

Theories of tax evasion

There are two broad approaches which researchers have used to explain eva-
sion behaviour, i.e. economic deterrence and fiscal psychology models. How-
ever, Milliron and Toy (1988) note that the separation of factors into economic
deterrence and fiscal psychology categories is “more a matter of degree of
emphasis than an absolute dichotomy.”

Economic deterrence models

Economic deterrence models draw upon deterrence theory and expected util-
ity theory to predict that a rational taxpayer will evade tax as long as the
pay-off from evading is greater than the expected cost of being caught and
punished. Early economic deterrence models (e.g. Allingham and Sandmo,
1972) treat taxpayers as perfectly amoral, risk-neutral or risk-averse decision-
makers who maximise utility. Within this framework, factors that determine
the monetary cost of compliance, like the tax rate, detection probability, level
of income and penalty structure, drive compliance behaviour.
Milliron and Toy (1988) point out that more recent extensions to these
models have been achieved by “relaxing assumptions, focusing on specific
issues, and utilising more sophisticated techniques.” For example, Falkinger
(1988) models the taxpayer and government exchange relationship within an
evasion setting. By examining how a rational tax offender is affected by the
benefits from public expenditures, he finds that evasion decreases when a
taxpayer is aware of the benefits received in return for tax payments. This
relates to a fundamental principle of taxation – equity. As to whether inequity
is a cause of tax evasion or a rationalisation of past behaviour, Falkinger
 MORE TAX EVASION RESEARCH REQUIRED IN NEW MILLENNIUM 95

maintains there is some theoretical support for the latter. He believes that
inequity as a rational causal factor of evasion becomes more credible at a
local tax level, where mutual imitation of evasion behaviour is more likely in
the face of unsatisfied public needs.
Other researchers have extended early economic models to include 1) the
taxpayer’s incentive to purchase tax advisory services (Beck et al., 1996), 2)
the effect of practitioners on tax evasion (Klepper et al., 1991; Scotchmer,
1989), and 3) the effect of the tax administration (Scotchmer and Slemrod,
1989).
There is no unambiguous empirical evidence to support the predictions of
economic deterrence models as a whole. Roth et al. (1989a, p. 6), summarise
research on the effect of factors that determine the monetary cost of com-
pliance including the tax rate, detection probability, the level of income and
penalty structure, and suggest for all of them, that existing empirical evidence
provides no firm conclusions.

Limitations of economic deterrence models

Weigel et al. (1987) argue that the absence of motivational concepts suggests
the inadequacy of expected utility theory in this context, as economic de-
terrence models tend to assume motivation as given and behaviour as primar-
ily responsive to consequent costs and benefits. They point out that the plaus-
ibility of this assumption is questioned by the lack of empirical support and
the criticism it has provoked. In a related commentary, Alm (1991) con-
cludes that compliance decisions depend on many factors, and although we
may continue to have some success in explaining changes in reporting be-
haviour, to explain the level of tax reporting behaviour, will require a shift
beyond classical expected utility theory into theories of behaviour suggested
by psychologists, sociologists and anthropologists.

Fiscal psychology models

During the last two decades, policymakers and social scientists have recog-
nised that tax evasion is a behavioural problem. Webley et al. (1991) cat-
egorise behavioural theories into two types. The first are integrative mod-
els or frameworks of the taxpaying process, within which data about tax
(non)compliance can be organised. Examples of this kind include Lewis
(1982), Groenland and Van Veldhoven (1983), and Smith and Kinsey (1987).
These models are conceptual maps and can not always be empirically tested.
The second category are more straightforward applications of a social-psych-
ological theory to tax evasion. An issue with these models is that they usually
only address part of the problem. Again, it should be noted that the dis-
96 JOHN HASSELDINE AND ZHUHONG LI

tinction between the two categories is not clear-cut, but rather a reasonable
characterisation of the theories that are encountered.

Conceptual frameworks
An example of a conceptual map is Lewis (1982) who brings together the con-
cerns of the individual and the tax agency, and then focuses on the relationship
between tax attitudes and tax behaviour. Three factors are seen as important to
a tax agency: the government’s fiscal policy, the tax enforcement policy, and
policymakers’ assumptions about taxpayers. These three factors interact and
affect each other. Three factors are important to the individual taxpayer. These
are fiscal attitudes and perceptions (which include the individual’s support
for government policies, perceptions of the tax system and burden, feelings
of alienation and inequity), perceptions of enforcement and opportunity, and
characteristics of the taxpayers (demographics and personality traits). These
all interact to play important roles in the tax compliance decision.
Psychologists note that tax attitudes and perceptions are partly results
of actual government policies and enforcement structures which affects per-
ceived opportunities for evasion. Obviously over time, the attitudes and per-
ceptions and behaviour of taxpayers will influences future enforcement pol-
icies.
Smith and Kinsey (1987) highlight the issue of tax compliance costs and
the importance of social context in influencing taxpayers’ behaviour, thus
challenging the assumption of prior research that non-compliance is the result
of a conscious and deliberate decision by taxpayers. In this context, Sandford
(1995) finds that tax compliance costs are so large, and consume so many
resources, that they may generate particular resentment, adversely affecting
voluntary compliance. This is especially true for the self-employed and small
businesses due to the fact that tax compliance costs often fall disproportion-
ately on small businesses and more heavily on the self-employed, than on
employees.

Social-psychological theories
Two examples of social-psychological theories are Ajzen and Fishbein’s
(1980) theory of reasoned action and Kahneman and Tversky’s (1979) pro-
spect theory. Lewis (1982) has adapted the theory of reasoned action which
predicts that attitudes are unbiased indicators of actual behaviour. Factors
that influence attitudinal and normative components include demographic
variables, attitudes towards the “targets” of invasion (e.g. the government,
tax inspectors), and personality traits. The descriptive validity of the theory
of reasoned action in a tax compliance setting is mixed (Hessing et al., 1988;
Hanno and Violette, 1996). So even if there are links between tax attitudes,
behavioural intentions and actual compliance decisions, the theory is silent
 MORE TAX EVASION RESEARCH REQUIRED IN NEW MILLENNIUM 97

on how tax attitudes are formed or influenced in the first place (Eagly and
Chaiken, 1993).
Prospect theory was developed by Kahneman and Tversky (1979) using
the psychological principles that govern the perception of decision problems
and the evaluation of options. A descriptive theory of choice under uncer-
tainty, it is viewed as an alternative to expected utility theory. In their original
article, Kahneman and Tversky illustrate the concept of “framing” with the
example of an unexpected tax withdrawal from a monthly pay check, which
is perceived as a loss, and not as a reduced gain. A review of experimental tax
compliance research, drawing upon prospect theory, suggests that individuals
are more compliant when their withholding position at the time of preparing
their tax return is a tax refund position, than when individuals have tax to pay
(Hasseldine, 1998).

Model comparisons

Social scientists from several disciplines have sought to discover the reasons
behind tax non-compliance through theoretical and empirical research. Eco-
nomic deterrence models suggest that taxpayers are amoral, utility-maximisers
and present sanction structures may be too lenient to deter rational, economic
individuals. Milliron and Toy (1988) predicted in an empirical study that
if subjects support an economic deterrence perspective, they should favour
increasing the probability of audit, withholding and information reporting,
taxpayer penalties, preparer penalties, tax rates, and deductions permitted. If
a fiscal psychology approach is adopted toward the tax compliance problem,
Milliron and Toy (1988) predict that lower tax rates, fewer deductions, and a
maintenance or a decrease in the level of sanctions imposed would be recom-
mended. The perceptions of the professional accountants used as subjects by
Milliron and Toy were consistent with the fiscal psychology paradigm and
support the position of those who contend that tax system reform is the key
to improving compliance.
In practice, it would appear that both models are of use (Cuccia, 1994).
Economic deterrence models provide a number of testable predictions, which
social scientists may then empirically test. The conclusions of Lewis (1982)
over fifteen years ago, concerning economic and psychological models of tax
compliance, are still of interest. He maintains there are four broad considera-
tions that overlap one another in explaining compliance. First are the deterrent
effects of tax authorities, including the probability of detection, size of sub-
sequent fine etc. Second, are economic factors and factors associated with
fiscal policy and fiscal structure (e.g. inflation, growth of public expenditure,
fiscal exchange, ratio of “direct” to “indirect” taxes). Third is the structure of
government and constitution, which includes the presence or absence of fiscal
98 JOHN HASSELDINE AND ZHUHONG LI

referenda, the role of pressure groups and elite, the responsiveness of policy-
making to public opinion, centralisation and corporate-technocratic linkages
and the nature of political-economic cycles. Fourth is the perceptions and
attitudes of taxpayers towards about the probability of detection by the rev-
enue authorities and the opportunities for evasion, attitudes towards taxation
and public spending, fairness and inequity, implicit economic theories and
economic well-being, dissatisfaction with government and attitudes towards
tax authorities, ideological collectivism or individualism and feelings of ali-
enation, impotence and coercion. Also included in this fourth category are
important personal characteristics of taxpayers, including their fiscal know-
ledge, social class, economic well-being, risk aversion, deference to authority,
familiarity with and knowledge of tax offenders, income, occupation and
personal tax compliance costs.

Methods of tax evasion research

The research methods employed and inherent trade-offs in empirical studies

of tax evasion will have consequences for the validity and robustness of the
results. This section discusses issues of measurement and types of research
methods employed in empirical tax evasion research.

Measurement

Long and Swingen (1991) note the inadequacy of tax compliance data, as
available data simply does not allow researchers to answer the increasingly
sophisticated questions compliance theories are designed to address. Measur-
ing compliance behaviour is currently an important challenge facing research-
ers in this field.1 Two problems are essential to be addressed: the first is the
twin concerns of the reliability and validity of these measures; the second is
the problem of “coverage”.
As a result, different measurement approaches to tax compliance can pro-
duce quite different results. Elffers et al. (1992) classify three basic approaches
for assessing tax compliance status and these are grouped into two categories:
taxpayer oriented and return oriented. In the first category are self-report
and experimental methods. Self-report is the most popular method, where
taxpayers are asked to self disclose their filing behaviours. Obviously this has
the limitation that the researcher does not know whether the respondent has
given a truthful response. Experimental methods are becoming more popular
where subjects make compliance decisions in experimental settings (e.g. Alm
et al., 1992). In the return oriented approach, taxpayers’ behaviour is assessed
by tax officers as non-compliance or evasion. An example of an audit based
 MORE TAX EVASION RESEARCH REQUIRED IN NEW MILLENNIUM 99

approach is the U.S. Taxpayer Compliance Measurement Program (TCMP),

which involves samples of approximately 50,000 individual tax returns at
intervals of two to four years since 1963 (Webley et al., 1991). Obviously,
the perspective of the auditor has a critical impact on what is recorded as
non-compliance. Elffers et al. (1992) observe that although the distortion of
selfreports is noted in the literature, seeking self-reports is still a dominant
strategy in research. The difficulty independent researchers have in obtaining
tax inspectors’ judgements accounts for this situation to some extent, and
there are often legal obstacles on confidentiality of the data.
Elffers et al. (1992) report an empirical study in which the three meas-
ures they outlined were used on the same sample of taxpayers in an effort
to establish the correlation between the three measures. The result is that not
only was the lack of association between self-reported behaviour and officers’
classifications replicated as prior literature had reported, but also, evasion in
the experiment did not correlate with either of these. The conclusion is that
tax evasion consists of at least three conceptually independent aspects that
need to be assessed by three independent measures.
Kinsey (1990) noted these insignificant correlations cannot be explained
by measurement bias, but are consistent with taxpayers and tax officials hav-
ing different definitional interpretations of non-compliance. Long and Swin-
gen (1991, p. 661) reinforced the view that taxpayers and tax officials have
different vantage points in the tax system, and stated that “the majority of
audited taxpayers, either do not understand, or do not agree with, IRS auditor
findings.”

Research methods

Jackson and Milliron (1986) observe that surveys have been used to study be-
liefs, opinions, attitudes, motivations, and behaviour by selecting a sample of
people either to learn the status quo, or to discover interrelationships among
variables of interest. Popular methods to obtain survey information include
personal interviews, mail questionnaires, panel discussion groups, and tele-
phone interviews, each of which has their own advantages and disadvantages
(Groves, 1989).
Survey results should be interpreted cautiously. Defining the population of
interest and representative sampling are critical to survey research, as is ob-
taining a high response rate. Westat (1980) found personal interviews yielded
the highest response rate (80%) versus a 40% response when subjects were
called in advance for an appointment, and a 60% response when they were
contacted by telephone. This suggests that one-to-one contact, for experi-
mental as well as survey settings, may involve the subjects to a greater degree
and yield more valid results. Finally, whether honest answers to questions can
100 JOHN HASSELDINE AND ZHUHONG LI

be obtained may be influenced by the technique used to solicit responses and

the manner in which the question is framed. This is especially important due
to the sensitive nature of tax compliance.
Experimental research is used to discover relationships, to test the pre-
dictions derived from economic models, to refine theories and hypotheses,
and to help build theoretical models. The strength of this approach is its
ability to control and manipulate the variables of interest, which may also be
a weakness, i.e. the experiment may not reflect an actual taxpaying situation
and there may be a number of validity concerns, e.g. construct validity. The
parameters studied in experimental research have included both those used in
economic deterrence models and variables drawn from social-psychological
theories. Experiments may range from a simple experiment where only one
or two variables are manipulated between cells, (for a classic tax compliance
and social psychology experiment, see Schwartz and Orleans, 1967), to an
experimental economics experiment in a computer laboratory. A tax evasion
experiment may involve a controlled setting, where conditions are set up to
mirror the tax reporting situation and this may even extend to subjects receiv-
ing an income and then deciding how much to report. Taxes are then paid
on reported income only, but underreported income may be discovered with a
certain probability of audit, in which case the subject must pay specified fines.
At the conclusion of the experiment, subjects usually receive a reward for
their participation, conditional on their performance (e.g. Alm et al., 1992).
Econometric studies of evasion behaviour are most prevalent in the U.S.,
due to the availability of TCMP data. For example, Beron et al. (1992) were
able to measure the deterrence effect of tax-audits, but found them to be more
effective for accurate reporting of deductions than for income. Dubin et al.
(1990) used more recent TCMP data to suggest that self-reported taxes would
have been $15.6 billion higher in 1986 had audit rates remained constant at
their 1977 level (U.S. tax audit rates in 1986 were approx. one-third of their
1977 levels). Long and Burnham (1990) disagreed. They believe that given
an audit programme was in place, it is hard to determine what the effects
of varying detection probabilities are, due to changes in other enforcement
resources.

Concluding remarks

It is obviously not a simple task to effect social change and improve volun-
tary compliance with taxation laws. There is no prescribed “best practice.”
Lewis (1982) recommended two major policy initiatives: increasing the de-
terrence of tax authorities, and seeking an improvement in taxpayers’ atti-
tudes and perceptions vis-à-vis the state and tax authorities. To some extent
 MORE TAX EVASION RESEARCH REQUIRED IN NEW MILLENNIUM 101

Lewis’ recommendation appear to have been validated by tax administra-

tions. For example, Slemrod (1992, p. 7) documents the trend by tax agencies
away from deterring non-compliance, towards the use of positive strategies
(i.e. emphasising the carrot, rather than the stick – Hite, 1989) and other
“customer-focused” approaches (e.g. Vehorn and Brondolo, 1999).
Another major factor in the response of governments to tax evasion has
been through tax reform. Milliron and Toy (1988) concluded from their study
that tax system reform is the key to improving compliance, and tax reform
has been a notable feature of goverment policy in many countries recently
(Sandford, 1993, 1998). Although the motives have often been to reduce
tax distortions, there have been other motives. These include simplifying tax
systems and, by simplification and reducing marginal tax rates, curbing tax
evasion. Common features of recent tax reform include cutting marginal tax
rates, eliminating many tax expenditures, introducing self-assessment and
redistributing the tax burden downward. For specific examples of response
options used by the Australian and New Zealand governments to combat
evasion, readers can refer Hasseldine and Bebbington (1991), Prebble (1996)
and Wallschutzky (1993).
Although much of the early compliance research focused on what factors
contributed to tax evasion, as researchers and policymakers sometimes en-
counter quite high voluntary compliance rates, there has been a shift in focus
to why do people comply? Prior research during the last two decades has
certainly advanced our understanding, but many questions still remain. For
example, these include, but are not limited to: Do positive incentives and
tax agency contacts with taxpayers encourage compliance? Does withholding
status at year-end affect compliance? Do alternative sanction mechanisms
work? Do tax amnesties increase (or harm) long run voluntary compliance?
To answer these and other questions is a challenging task. Roth et al.
(1989a, p. 14) suggest that “the understanding of taxpayer compliance can
best be advanced through the involvement of an intellectually exciting com-
munity of researchers that extends across the tax professions and social sci-
ences.” It seems likely that research efforts in the new millennium that span
both the borders of different academic disciplines and international boundar-
ies will yield the greatest contribution to the ongoing quest by academics and
policymakers keen to learn more about tax compliance.

Note

1. This section only addresses direct measures of compliance behaviour. Readers interested
in measuring the quantum of tax non-compliance indirectly, using macroeconomic data,
can consult Webley et al. (1991).
102 JOHN HASSELDINE AND ZHUHONG LI

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