Key findings

Australians have a strong commitment to the principles of taxation. An overwhelming majority believe it is their responsibility to pay tax and that tax enables the government to do worthwhile things that make life better for everyone.

Australians question the reasonableness and fairness of the system, however. They see some people as having more opportunity and a greater willingness to get out of paying tax than others, and while Australians readily admit that this is wrong, they seem to think that a lot of people are getting away with it.

The distortions introduced by legitimate, illegitimate and indeterminate strategies to reduce the tax paid to government is likely to influence Australians' impressions of fairness in the system. Interestingly Australians seem to be able to tolerate a considerable amount of unfairness before retaliating. When unfairness does `kick-in', however, community response can be vociferous and resistance can be enduring. This was particularly the case when taxpayers felt that they had been treated badly as individuals - that they had been treated disrespectfully or deceived or taken advantage of in some way. The Centre's work has consistently supported the importance of The Taxpayers' Charter as a code of practice for tax administration.

There was very little evidence over a range of studies of simple relationships between attitudes and cheating on tax. The factors that cause us to cheat are many and varied, and we suspect that context, intermediaries and the amount of control we personally exercise over our tax affairs plays a central role in how likely we are to evade or avoid tax.

Our mindset about tax does play a small part in explaining why some of us pay our tax while others do not. The first mindset might be called tax obligation and describes the view that we should pay tax, we will be caught and penalized if we don't pay tax, and overall, the tax system works pretty well for all of us. Within this mindset, there was confidence in the integrity in the system and tax is paid with good will.

The second mindset is called victimisation, and describes feelings of being treated unfairly by the Tax Office in terms of how much tax is paid. Being victimised also means feeling excluded and distrustful of the Tax Office. Those who feel victimized resist paying tax or pay reluctantly.

The third mindset is freedom from Tax Office constraint. This mindset brings confidence that there is a way of beating the taxman through gaming the law.

These three mindsets are all present in the Australian population and can be held by any of us depending on circumstances. They work together and combine with other factors to determine our responses to tax regimes.

Val Braithwaite,
Director, CTSI

Staff's views on their most important findings

• Michael Wenzel
  Taxation involves a fascinating array of fairness issues. Justice researchers could have a field day; administrators and policy makers could be excused for despairing in the face of the complexity. Taxpayers may be concerned about the distributive unfairness of tax burdens, tax-funded benefits, and tax minimization opportunities; the procedural unfairness of lack of consultation, lack of transparency in decision-making, disrespectful treatment and so on; and retributive unfairness of penalties for tax evaders or tax amnesties. And people judge these issues not only as they affect them personally, but also - and this is often neglected - their social groups and the community as a whole. The policy implications are challenging for tax authorities in that they highlight the responsibility of tax administrators to manage the public's willingness to cooperate through engaging in dialogue and debate about tax issues.

   

• John Braithwaite
  Aggressive tax planning is a cyclical phenomenon in both Australia and the United States. Cycles end with an enforcement crackdown by the tax authority and strengthened resolve by the courts to interpret the law more purposively. They restart as a response to perceived drift in this enforcement resolve. The upswing in aggressive tax planning is initially gradual and supply driven (by promoters). This gradual growth passes a tipping point at which the upswing becomes demand driven. When some taxpayers get the idea that "everyone is doing it", a stampede into a new peak in aggressive tax planning occurs. Targeting enforcement on promoters and aggressive advisers is the main policy implication of understanding this phenomenon. Most demand is for "honest, low fuss" advisors; counter-cyclical enforcement policy reinforces this on the demand side.

   

• Greg Rawlings
  The globalisation of financial markets has opened up new opportunities for multinational corporations and high-wealth individuals to take advantage of world-wide tax planning through offshore finance centres (popularly known as tax havens) to drastically reduce the amount they have to pay in taxes. This has been possible because of loopholes in the regulation of global business and competition for tax dollars between states. Individuals and businesses (both large and small) which aren't a part of the global scene end up paying a disproportionately higher share of taxation. This has resulted in growing differences between citizens, with some people able to reduce their taxes by taking full advantage of the opportunities presented by globalisation and its accompanying tax benefits, while others are unable to. The policy implications involve issues of fairness in the tax system within the nation, but increasingly encompass global questions of fairness and economic sustainability across the rich and poor countries of the world.

   

• Jenny Job
  People generally believe that trust is rationally created. Putnam's social capital work highlighted that trust in strangers is the result of civic engagement, especially volunteering. Unfortunately, this theory did not stand the test in New South Wales and Victoria. Instead, theories that trust is developed early in life in the family and in one's personal circle held true. So Putnam is right that the basis of trust in strangers is relational, it just starts earlier in life. Similarly, the creation of trust in government and its organisations is generally theorised as being based on rational factors, for example, community perceptions about the extent of corruption, wise government spending, and how powerless they feel. But relational factors such as trust in strangers, people's sense of reciprocity and duty to the collective, and their satisfaction with life are also important. Surprisingly, even if government and its organisations behave badly, we will still trust them.

   

• Eliza Ahmed
  The legitimacy of the tax system and the legitimacy of higher education policy are inter-connected. Dissatisfaction with university courses undermines a sense of obligation to repay HECS (Higher Education Contribution Scheme) debt, which in turn impedes tax morale and triggers tax evasion. For policy makers, this is an important finding. If government does not succeed in winning over the hearts and minds of the people in relation to a particular policy, those most affected will find a way of registering their sense of unfairness. And they do so through another branch of government, the tax system. This is why policy needs to be not only economically sound, but emotionally intelligent.

   

• Tina Murphy
  The ATO has the responsibility of regulating over 8 million taxpayers each year to ensure they pay their fair share of tax. This responsibility sometimes involves punishing taxpayers who have failed to meet their obligations. However, when regulators such as the ATO punish non-compliers in ways that are seen to be harsh and insensitive, this sometimes results in widespread resistance to their decisions and rules. This is particularly the case when taxpayers may have inadvertently violated tax laws (either through ignorance or an innocent mistake). This is because deterrence-based policies that place an emphasis on punitive penalties can be seen to be procedurally unfair. Our research has shown that when decisions are seen to be procedurally unfair taxpayers question the legitimacy of the ATO's authority. If left unchecked, this can result in decreased levels of trust, resistance and subsequent non-compliance in the future. These findings suggest that regulators need to be responsive in the way they administer their enforcement practices.

   

• Vivienne Waller
  Responsive regulation requires that the regulatory agency is able to detect non-compliance. In the context of taxation in Australia, the ATO's ability to ensure voluntary compliance with both the letter and spirit of taxation law rests not only on taxpayer understandings of and commitment to the taxation system, but also on ATO ability to detect non-compliance. In order that trust and confidence in the ATO is not undermined, it is critical that integrity underpins all ATO efforts to detect non-compliance. The implications of this extend beyond treating taxpayers as honest unless their actions indicate otherwise. At a grass-roots level, integrity also involves transparency in ATO field officer's everyday dealings with taxpayers.

   

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