Enhancing Tax Compliance through Coercive and Legitimate Power of Tax Authorities by Concurrently Diminishing or Facilitating Trust in Tax Authorities

• Published date: 01 July 2014
• Author: Erich Kirchler,Eva Hofmann,Katharina Gangl,Jennifer Stark
• Date: 01 July 2014
• DOI: http://doi.org/10.1111/lapo.12021

Enhancing Tax Compliance through Coercive

and Legitimate Power of Tax Authorities by

Concurrently Diminishing or Facilitating Trust

in Tax Authorities

EVA HOFMANN, KATHARINA GANGL, ERICH KIRCHLER, and

JENNIFER STARK

Both coercion, such as strict auditing and the use of fines, and legitimate

procedures, such as assistance by tax authorities, are often discussed as

means of enhancing tax compliance. However, the psychological mechanisms

that determine the effectiveness of each strategy are not clear. Although

highly relevant, there is rare empirical literature examining the effects of both

strategies applied in combination. It is assumed that coercion decreases implicit

trust in tax authorities, leading to the perception of a hostile antagonistic tax

climate and enforced tax compliance. Conversely, it is suggested that legitimate

power increases reason-based trust in the tax authorities, leading to the percep-

tion of a service climate and eventually to voluntary cooperation. The combi-

nation of both strategies is assumed to cause greater levels of intended

compliance than each strategy alone. We conducted two experimental studies

with convenience samples of 261 taxpayers overall. The studies describe tax

authorities as having low or high coercive power (e.g., imposing lenient or

severe sanctions) and/or low or high legitimate power (e.g., having nontrans-

parent or transparent procedures). Data analyses provide supportive evidence

for the assumptions regarding the impact on intended tax compliance. Coercive

power did not reduce implicit trust in tax authorities; however, it had an effect

on reason-based trust, interaction climate, and intended tax compliance if

applied solely. When wielded in combination with legitimate power, it had no

effect.

We thank Christine Bock, Anne Bruns, Felix Deichmann, Kristina Dick, Mascha Diebowski,

Valerie Franke, Sebastian Fürstenberger, Beatrice Harbich, Pia Marliany, Samuel Müller,

Lorenz Pfau, Ronald Pitlik, Max Sperger, and Elisabeth Taubinger for their assistance with data

collection, and Sharynne Hamilton for her help with editing. This research was financed by a

grant (no. P24863-G16) from the Austrian Science Fund (FWF).

Address correspondence to Eva Hofmann, University of Vienna, Department of Applied

Psychology: Work, Education, Economy, Universitaetsstrasse 7, 1010 Vienna, Austria. Tele-

phone: +43 1 4277 47336; Fax: +43 1 4277 47339; E-mail: eva.hofmann@univie.ac.at.

bs_bs_banner

LAW & POLICY, Vol. 36, No. 3, July 2014 ISSN 0265–8240

© 2014 The Authors

Law & Policy published by University of Denver/Colorado Seminary and Wiley Periodicals, Inc.

This is an open access article under the terms of the Creative Commons Attribution License,

which permits use, distribution and reproduction in any medium, provided the original work is

properly cited.

doi: 10.1111/lapo.12021

I. INTRODUCTION

Tax collection is an important endeavor for tax authorities. Essential strat-

egies for increasing tax compliance include deterrence and assistance through

legitimated procedures (Gangl et al. 2012; Alm and Torgler 2011;

Braithwaite 2003). Taxpayers’ trust in authorities, as well as in fellow citi-

zens, fosters honest tax contributions as well (Gangl et al. 2012; Alm and

Torgler 2011; Braithwaite 2003). Coercion is based on tax audits and fines if

tax evasion is detected (Allingham and Sandmo 1972). Legitimacy is based

on transparency, fairness, and participation of tax authorities (Alm et al.

2010; Feld and Frey 2007; Wenzel 2002). Trust is based on social norms

(Coleman 2007; Wenzel 2004) or moral suasion (Ariel 2012; Alm and Torgler

2011; Torgler 2004). Existing research indicates that coercion and legitimacy

should be applied simultaneously in order to increase tax compliance among

citizens (Alm and Torgler 2011; Braithwaite 2003). The combination of these

different measures may be more efficient in influencing tax compliance than

either measure alone (Gangl et al. 2013). However, whether or not underly-

ing psychological processes, such as the level of trust a taxpayer has in tax

authorities provide an explanation for the effectiveness of a combination of

strategies has not been explored. Shedding light on these underlying mecha-

nisms is essential to tax researchers and practitioners in order to understand

how measures to increase tax compliance work and can be applied most

effectively.

The slippery slope framework (Kirchler, Hoelzl, and Wahl 2008) explores

the mechanisms used by authorities to influence taxpayer decision making

and assure tax compliance. Previous research suggests that trust in tax

authorities is influenced by whether power is coercive or legitimate creating

different climates and motivations to comply (Gangl et al. 2012). They

undertook laboratory experiments that manipulated tax authorities’ power

and trustworthiness. The studies confirm the assumptions of the slippery

slope framework (Kogler et al. 2013; Wahl, Kastlunger, and Kirchler 2010)

and offer a more nuanced picture of the mechanisms that affect tax

compliance. We find that the combination of high power and high trustwor-

thiness leads to overall higher tax compliance than power or trustworthiness

alone. This may be because when power is combined with trustworthiness it

is perceived as legitimate expert power that motivates compliance. Thus, how

power is implemented may be a key determinant of tax compliance.

This article explores the impact of coercive power and legitimate power on

psychological processes and subsequent tax compliance. In the three experi-

ments we conducted, coercive power and legitimate power were manipulated

independently and in combination by applying scenarios of fictitious tax

authorities. In Study 1, we separately examine (1) the effect of coercive power

on trust in authorities and (2) the effect of legitimate power on trust in

authorities. The study also examines the climate between tax authorities and

taxpayers, and its effect on motivation for taxpayers to comply with the

Hofmann et al. ENHANCING TAX COMPLIANCE 291

© 2014 The Authors

Law & Policy published by University of Denver/Colorado Seminary and Wiley Periodicals, Inc.