Determinants of Tax Evasion Behavior: Empirical Evidence from Survey Data

[a] Department of Public Finance， Eskisehir Osmangazi University， Turkey.

*Corresponding author.

Received 17 March 2013； accepted 5 May 2013

Abstract

Tax revenues are major and important income sources for governments in most countries. Sufficient tax revenues make many government projects possible and help elected officials and politicians to remain in office longer if the government implements programs and projects demanded by the public. In today’s globalizing economic environments， there is increasing demand for a variety of public services and programs. However， the rate of increase in the tax revenues to finance these public services and programs falls short of the necessary public spending. The potential tax revenue of a country based on its legal or tax law is much larger than the tax revenues that are actually collected. Due to the lack of full tax compliance， government budgets are rarely balanced in most countries， and the gap between revenue and spending is increasing. The main question is why taxpayers evade taxes. To understand tax evasion， one can examine what factors cause taxpayers to evade taxes. If factors that affect tax evasion are identified， policies can be developed to prevent tax evasion.

The purpose of this study is to investigate factors related to tax evasion behavior using survey data collected in Turkey. Factor analysis and multiple regression techniques are employed. The results show that taxational and fiscal factors， economic factors， demographic factors， administrative factors， and other factors have statistically significant effects on tax evasion behavior.

Key words： Tax evasion； Tax compliance； Individual behavior； Factor analysis

INTRODUCTION

Tax revenues are major and important income sources for governments in most countries. Sufficient tax revenues make many government projects possible and help elected officials and politicians to remain in office longer if the government implements programs and projects demanded by the public. Additionally， the collection of appropriate tax revenues can help to stabilize the economy by ensuring less dependency on government borrowing. In today’s globalizing economic environments， there is increasing demand for a variety of public services and programs. However， the rate of increase in the tax revenues to finance these public services and programs falls short of the necessary public spending. The potential tax revenue of a country based on its legal or tax law is much larger than the tax revenues that are actually collected. A number of factors may contribute to the difference between potential and actual tax revenues. Tax collecting agencies may demonstrate institutional inefficiencies， inadequate tax collection capabilities， and personal management issues. Among taxpayers， many factors may lead to incomplete tax compliance. Due to the lack of full tax compliance， government budgets were rarely balanced in most countries from 2002 to 2010， as shown in Table 1. France， Greece， Japan， Portugal， the United Kingdom， and the United States face large budget deficits that were more than 5 percent of their respective GDPs in 2009 and 2010. A large budget deficit may not be attributable only to tax collection， but this may be an important factor.

One indicator of insufficient tax collection may be government debt stock. Many countries have government debt stocks that are more than 60 percent of their GDPs. Table 2 reports central government debt stocks as a percentage of GDP for selected countries. Greece， Italy， and Japan have debt stocks greater than 100 percent of their respective GDPs. Furthermore， France， Portugal， the United Kingdom， and the United States have debt stocks greater than 50 percent of their GDPs.

A higher government debt burden limits the government’s ability to provide various public goods. To avoid this limitation， tax administrations attempt to fully collect due taxes. The subject of this study， Turkey’s tax share of its general government budget from 1990 to 2011， is shown in Table 3. The average share of tax revenue to general government spending is approximately 82 percent for the most recent 22-year period in Turkey. On average， there is a tax revenue gap of 18 percent from a balanced budget.

Thus， it is clear that one of the most important reasons for this gap is tax evasion. Tax evasion is a gamble that pays off in lower taxes or， due to the probability of detection， ends in sanctions （Torgler， 2003）. In other words， tax evasion is a process that reduces taxpayers’ tax liability to zero （if possible） by acting against the related tax law. From the standpoint of the tax authority， it is important to identify tax evasion behavior by taxpayers. Knowledge of this information can help the tax authority to develop policies to prevent tax evasion and collect sufficient tax revenues.

To understand tax evasion， one can examine the factors that cause taxpayers to evade taxes； based on this information， policies can be developed to prevent tax evasion. This study uses data from a survey conducted in Turkey to answer the question of which factors contribute to tax evasion. The rest of this paper is organized as follows： section 2 reviews the relevant literature， section 3 describes the method and data， section 4 describes the research results， and section 5 provides conclusions.

1. BRIEF LITERATURE REVIEW

Many factors have been studied in the literature to explain the tax evasion behavior of taxpayers. Previous studies include those by Allingham and Sandmo （1972）， Spicer and Becker （1980）， Clotfelter （1983）， Feinstein （1991）， Kirchler（1997）， Frey and Feld （2002）， Torgler （2003）， and Feld， Torgler， and Dong （2008）. Some common factors examined in these studies include tax rates， the tax burden， income level， source of income， tax audits， tax penalties， public expenditures， public services， tax mentality， tax morale， age， gender， marital status， education， the tax system， the tax administration， bureaucracy， and democracy.

Since the pioneering work of Allingham and Sandmo（1972）， the literature on tax evasion has been significantly expanded. Allingham and Sandmo （1972） identified both static and dynamic aspects of tax evasion. They emphasized the relationship between incentives to avoid taxes and incentives to supply work effort. Additionally， they showed that the declared income level depends on actual income， the tax rate， the penalty rate， and the audit rate. They explained their finding as follows： “When actual income varies， the fraction declared increases， stays constant or decreases according as relative risk aversion is an increasing， constant or decreasing function of income”（Allingham Sandmo， 1972）. They concluded that the substitution effect was negative because an increase in the tax rate makes it more profitable to evade taxes on the margin， whereas the income effect is positive because an increased tax rate makes the taxpayer less wealthy. Their study showed that an increase in the penalty rate will always increase the fraction of actual income to be declared， and an increase in the probability of detection will always lead to a larger income being declared.

Some papers have stressed that an increase in the tax rate will result in an increase in the propensity for tax evasion （Clotfelter， 1983； Crane Nourzad， 1990； Alm， Jackson Mc Kee， 1992； Pommerehne Weck-Hannemann， 1996； Saracoglu， 2008）. A positive relationship has been identified in the literature between income level and tax evasion： as individuals’ income levels increase， their tax evasion behavior also increases（Crane Nourzad， 1990； Becker， Büchner Sleeking， 1987）. However， Dubin， Graetz， and Wilde （1990） conclude that “there is strong direct relationship between real income per capita and reported taxes per return”， and the empirical results of Alm， Jackson， and McKee （1992） indicate that “higher income leads to higher compliance”. Johns and Slemrod （2008） find that “the ratio of underreported tax to true tax highest for lower-income taxpayers”. In other words， lower-income taxpayers have lower compliance. This finding implies that lowincome earners are likely to hide their income. However， Feinsten （1991） finds no significant relationship between income and tax evasion. Richardson （2006） finds that tax evasion is much lower when the source of income is from wages and salaries. Spicer and Lundstedt （1976） do not find a significant relationship among tax evasion， tax penalties， and the probability of detection. Similarly， Alm， Jackson， and McKee （1992） do not capture a significant relationship between the penalty rate and tax evasion. Bagdigen and Erdogan （2010） emphasize that an increase in tax penalties leads to a decrease in tax-evading behavior by taxpayers.

From the perspective of tax auditing， it is clear that an increase in tax audits leads to a decrease in tax evasion（Alm， Jackson and McKee， 1992； Alm， McClelland and Schulze， 1992）. Gemmell and Ratto （2012） investigate the relationship between random audits and taxpayers’responses by comparing randomly selected audited and non-audited taxpayers. These authors conclude that audited taxpayers have reduced subsequent compliance. In their study， Snow and Warren Jr. （2005） conclude that an increase in tax audits and tax penalties leads to an increase in tax evasion. Becker， Büchner， and Sleeking （1987） show that an increase in the percentage of public transfer expenditures leads to a decrease in tax evasion.

Buehn and Schneider （2012） developed a time series of the tax evasion for 38 OECD countries between 1999 and 2010. In their study， these authors consider indirect taxation and self-employment as the driving forces of tax evasion. They find that the average level of tax evasion for 38 OECD countries in 2010 was 2.8 percent. The highest tax evasion level was found in Mexico （6.8 percent） over the 1999-2010 period， followed by Turkey （6.7 percent）， Romania （6.0 percent）， and Bulgaria （5.7 percent）. The United States had the lowest tax evasion level （0.5 percent）.

Tax mentality， tax morale， civic duty， and law-abiding citizens affect levels of tax evasion. For example， Kirchler（1997） and Feld， Torgler， and Dong （2008） stressed that a positive tax mentality and tax morale have a negative effect on tax evasion.

Dell’Anno （2009） reports that tax morale is dependent on taxpayers’ intrinsic attitudes toward honesty and social stigma. Social stigma represents the reputational cost. A decrease in reputational cost tends to increase tax evasion. Dulleck et al. （2012） conduct an experiment using heart rate signals to analyze the relationship between psychic cost （for instance， feelings of guilt） and tax compliance. They find a positive relationship between psychic cost and tax compliance. Bayrakli， Saruc， and Sagbas （2004） show that when tax-evading behavior is known by other people， the resulting embarrassment cost tends to decrease tax evasion.

2. METHOD AND DATA In this section， we introduce our data and perform the necessary tests. Then， we use factor analysis and run multiple regressions.

To study the tax evasion behavior of taxpayers in Turkey， we conducted a survey in the province of Eskisehir. The survey sample consisted of 500 randomly selected taxpayers. Surveys were distributed in the summer of 2010. Of the 500 surveys distributed， 420 were returned， for a response rate of 84 percent. The sample comprised small， medium and large corporations， workers who received wages from these companies， public institutions， offices owned by selfemployed persons， and small traders. The survey included two sections and 37 questions. The first section consisted of questions about the demographic characteristics of the taxpayers， and the second section included statements related to the tax evasion behavior of taxpayers. Thirty statements were presented in the second section， and respondents were asked to rate the importance of each statement using a five-point Likert scale （1 = least important； 5 = most important）.

The demographic characteristics are reported in Table 5. Of the total sample in the study， most of the respondents were male （70.53 percent）. Approximately half of the subjects were in the 40- to 50-year-old age range （56.6 percent）， 21 percent were younger than 30 years old， and 22.5 percent were between 51 and 71+ years old.

Orthogonal rotation （varimax） was chosen for the exploratory factor analysis. As Hair， Anderson， Tatham， and Black （1995） note， orthogonal extraction with varimax rotation is appropriate for the research purposes and the need to reduce a large number of variables to a small set of uncorrelated variables. The purpose of varimax rotation is to minimize the number of variables that have high loadings on a factor， which enhances the interpretability of the factors （Kim Mueller， 1978）.

According to the principal component analysis， eight factors had an eigenvalue equal to or greater than 1.0， explaining a total of 56.761 percent of the variance， as shown in Table 8.

3. RESULTS

Our regression results are presented in Table 10. Our results show that economic， demographic， administrative， and additional factors are statistically significant. There is a positive relationship between tax evasion and taxational and fiscal factors. This result indicates that increases in the tax rate and in the tax burden increase tax evasion. This result supports the studies by Clotfelter （1983）， Crane and Nourzad （1990）， Alm， Jackson， and McKee（1992）， Pommereehne and Weck-Hannemann （1996）， and Saracoglu （2008）. We find a positive relationship between administrative factors and tax evasion， which is in accordance with the findings by Snow and Warren Jr.（2005）. Economic factors have negative and statistically significant effects on tax evasion.

Education also has a negative effect on tax evasion. This finding can be interpreted as indicating that those taxpayers who have less education tend to evade taxes more often than higher-educated taxpayers. With regard to income level， there is a negative effect on tax evasion. As income increases， taxpayers show tax compliance behavior rather than showing tax-evading behavior. As Alm， Jackson， and McKee （1992） note， “Higher income leads to higher compliance”.

CONCLUSIONS

In many countries， there is an enormous gap between the amount of taxes legally owed and the amount of taxes that taxpayers report and pay. One of the reasons for this gap may be different tendencies in the tax evasion behavior of taxpayers. The results of this study show that taxational and fiscal factors， economic factors， demographic factors， administrative factors， and additional factors are statistically significant for individuals’ tax-evasion behavior. These findings may be useful to policy makers and researchers. Specifically， tax authorities should design policies to help increase the income level of taxpayers rather than increasing administrative measures toward taxpayers. This may lead to higher tax compliance in the long run. Our findings contribute to the literature by providing additional evidence on the factors related to tax evasion. However， the data used in this study were collected in only one city. Further studies may be conducted to obtain more supportive evidence by using a multi-city analysis.

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