The Impact of Tax Knowledge on the Perceptions of

Tax Fairness andAttitudes Towards Compliance

Lin Mei Tan

Massey University
and
Carrol Chin-Fatt
Massey University

Abstract
Positive attitudes towards factors such as the perceived fairness of the
tax system are considered to play an important role in the level of tax
compliance within a country (Strumpel, 1968). The tax literature indicates
that not only knowledge but an understanding of the tax system may
have an effect on taxpayers' perceptions of fairness and attitudes towards
compliance. This study examines the linkages between an increase in tax
knowledge on perceptions of fairness and tax compliance attitudes by
using students enrolled in an introductory taxation course in a New
Zealand tertiary institution. Contrary to prior research, the results
indicated that an increase in tax knowledge did not have a significant
impact on perceptions of fairness and tax compliance attitudes.

We wish to thank Duncan Hedderley of the Statistics Research and Consulting Centre, Massey
University for his assistance with the SAS program and the statistical analysis. We also wish to thank
Reg Mathews, Stuart Tooley and Grant Richardson for their comments on earlier versions of this
paper.

44
 The Impact of Tax Knowledge on the Perceptions of Tax Fairness
and Attitudes Towards Compliance

Introduction
Tax non compliance has emerged as an area of worldwide concern particularly
during the last decade. The New Zealand Inland Revenue Department (IRD)
annual report for the year ending 30 June 1996 showed that NZ$43 8 million in
non compliance was detected. Although tax evasion was estimated to be about
3.5% of GDP ($3.2 billion) in 1995 (Caragata, 1997), the actual amount of non
compliance remains unknown. In any case, non compliance is a significant and
growing problem for both tax policy makers and administrators.

In an attempt to encourage voluntary compliance and to deter taxpayers from

non compliance with the tax regulations, the government recently revamped
and introduced a more stringent tax penalty regime. The imposition of more
sanctions, is based on the premise that people will be deterred from unacceptable
behaviour as the costs of "flagging" the rules would outweigh the benefits.
Undoubtedly, changes in tax law will affect taxpayer behaviour. However, the
intentions of the changes may not work up to the policy makers' expectations
as numerous factors may come into play in taxpayers' compliance behaviour.

The extant tax literature on non compliance indicated that not only economic
factors affect taxpayer behaviour, but non economic factors can also have a
significant impact. Amongst others, positive attitudes towards factors such as
the perceived fairness of the tax system is considered by many social scientists
to play an important role in the level oftax compliance within a country (Strumpel,
1968). Prior studies have indicated a positive correlation between perceptions
of fiscal inequities and tax evasion (see Strumpel, 1968; Spicer and Lundstedt,
1976; and Song and Yarbrough, 1978). Accordingly, other strategies apart from
sanctions should also be examined by policy makers to enhance tax compliance.

Balch (1980), a researcher in political psychology, identified information strategy

(apart from regulation, facilitation and incentive strategy) as one method which
government can use to change people's behaviour. He argued that people often
fail to use a new product or service or behave unexpectedly because they are
not aware of it, or are uncertain about its consequences. He asserted that, "if
the lack of information is the main gap between the potential and the new
behavior, information is what must be provided" (p.44). From a tax perspective,
Lewis (1982) reinforces this view by asserting that:

When myths and misperceptions are replaced by knowledge, we expect

a change in attitudes towards taxation even if the subjects' basic ideology
and values remain unchanged and the tax law is unchanged.
Misperception probably plays a major role shaping fairness evaluations
(p. 71).

White, Curatola and Samson (1990) also emphasised the importance of tax

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 Asian Review of Accounting, Volume 8. Number I, 2000

knowledge. They assert that if the public does not understand the intent of the
tax provisions, it is likely that they will perceive the income tax as unfair.

As not much research of this nature has been conducted in New Zealand, this
study attempts to explore the effect of an increase in tax knowledge on the
perceptions of fairness and compliance attitudes towards the New Zealand tax
system. The paper is organised as follows. The second section provides a
literature review of the concept of fairness, the relation between fairness attitudes
and tax compliance, and the effects of knowledge on perceptions of fairness
and attitudes towards compliance. Section 3 discusses the research method
used for this study. The results are provided in Section 4, which is followed by
a final section covering the summary and conclusion of the study.

Fairness, Tax Compliance Attitudes and Tax Knowledge

Unequivocal-0.4u Tc( o) ths
 The Impact of Tax Knowledge on the Perceptions of Tax Fairness
and Attitudes Towards Compliance

mentioned above and tax compliance behaviour. However the findings have
varied. Some researchers (such as Vogel, 1974; Spicer and Lundstedt, 1976;
Spicer and Becker, 1980) suggest that dissatisfaction with the tax system is
related to admitted evasion. Spicer and Becker (1980) found their subjects,
when faced with hypothetical tax evasion decisions, significantly evaded more
tax when they perceived themselves to be victims of fiscal inequity. Conversely
they evaded less tax when they perceived themselves to be the beneficiaries of
fiscal inequity. On the contrary, other researchers (such as Mason and Calvin,
1978; Mason and Lowry, 1981) reported no significant relationship between
perception of fairness and tax compliance.

Despite the lack of conclusive evidence as to the effect of the perceptions of

fairness on tax evasion, it is still an important factor that cannot be ignored. The
concept of fairness has continuously been recognised as one of the criteria of a
good tax system. Tax reforms, in New Zealand for instance, were usually made
with the objective (among others) of increasing the fairness of the tax system.
Therefore, tax policy makers should also be adopting different strategies to
enhance the public's perceptions of tax fairness as well as their attitudes towards
tax compliance.

Four strategies have been identified by Balch (1980) which governments could
use to change people's behavioural patterns. They are: facilitation strategies,
regulation strategies, incentive strategies and information strategies. Facilitation
strategies focus on "making it easier" for people to adopt new behaviour, products
or services. According to Balch (1980, p.56), "the government can make it
easier for people to change their behaviour by providing facilities of various
sorts which may be too costly in time, money or effort for individuals to provide
themselves" (p.56). Therefore, to facilitate tax compliance, the government
could look at ways of reducing taxpayers' time and the costs of complying with
their tax obligations. Regulatory strategies, on the other hand, use threats such
as fines and imprisonment when individuals fail to perform as required. It is
based on the premise that the desired behaviour will be performed only under
threat or imposition of sanctions for non performance. This strategy is the most
widely used in taxation where penalties are usually imposed on taxpayers who
fail to comply with their tax obligations. In contrast to the other types of strategies,
incentive strategies are a more indirect form of intervention where users and
producers are given maximum discretion to capitalise on the available incentives.
It attempts to make people change their behaviours by raising the relative
attractiveness of the desired behaviours. The New Zealand government has, at
different times, provided different tax incentives to encourage or assist various
types of taxpayers or business activities. Lastly, information strategies are used
to signal benefits not previously linked by users to a product, service or behaviour.
They can also be used to motivate change. Amongst the four strategies,
information strategy is perhaps the most appropriate one to enhance the
perceptions of fairness. From a normative perspective, an increase in tax

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 Asian Review of Accounting, Volume 8, Number 1, 2000

knowledge should improve the attitudes of taxpayers in relation to their

perceptions of tax fairness, as it reduces taxpayers' uncertainty and
misconceptions of the tax system.

Reviewing European taxation studies concerning the general degree of fiscal

knowledge, Lewis (1982) concluded that general fiscal ignorance is a major
contributor to negative feelings toward taxation, since the less educated tend to
view taxation only in terms of its burden, and ignore the benefits and services
provided from the revenue. Similar views were echoed in some earlier studies.
A survey of taxpayers across the United States conducted by Westat Inc. (1980),
for instance, indicated that 35% of the statements participants made involved
misconceptions about the tax law or tax system.

Vogel (1974), in his survey of public opinion on the tax system in Sweden,
where he found positive relationships between taxpayer's knowledge of the tax
system and perceptions of fairness and compliance, concluded that:

... the data indicate the importance of education and information in the
process of opinion formation. A deeper understanding of the benefits
supported by taxes and of the technical reasons for tax laws and
regulations are necessary preconditions to both positive attitudes about
the tax system and appropriate fiscal behaviour. Education correlates
negatively with dissatisfaction with the benefits paid for taxes and the
distribution of tax burden (p.512).

There is also some empirical evidence of the linkage between an increase in

tax knowledge and perceptions of fairness. White et al., (1990) for instance,
investigated whether a formal income tax course affects a person's perception
of fairness of the Federal income tax system. As a taxpayer's belief may be
based on myths, they hypothesised that better knowledge of the tax law would
increase taxpayer awareness and appreciation of fiscal policy goals. This in
turn would increase perceived fairness. Their results indicated that the individual's
attitudes are affected by an increase in understanding of both the mechanics of
tax law provisions and study of tax policy underlying the enactment of the
provisions. Interestingly, the experiment by Song and Yarbrough (1978) indicated
a positive impact of increased fiscal knowledge on tax ethics scores. Roberts'
research (1994) provided some indication that an increase in tax knowledge via
the television could be effective in improving attitudes towards fairness and
compliance. In another study, Eriksen and Fallan (1996) showed that their
respondents' perceptions of fairness increased with improved tax knowledge.
Their study further suggested that specific tax knowledge improved their
respondents' tax ethics scores. In general, these results supported the hypothesis
that an increase in tax knowledge enhanced taxpayers' perceptions of fairness
of the tax system and compliance attitudes.

48
 The Impact of Tax Knowledge on the Perceptions of Tax Fairness
and Attitudes Towards Compliance

However, there are also other studies which do not have such distinct results.
Jackson and Jaouen (1989), for instance, investigated the effect of an appeal to
conscience and the effect of a threat of punishment on jurors' attitude to tax
compliance. Their results indicated that tax knowledge which were provided in
the written form, did not have any significant effect on tax compliance. Hasseldine
and Kaplan (1991) in their study on the effect of communicating three types of
sanctions (economic, informal and positive conscience appeal) to taxpayers in
New Zealand also found no significant differences in the respondents' perception
of fairness. Only conscience appeal appeared to have an impact on the morality
of tax evasion.

To enhance compliance, a number of strategies have been used by the New

Zealand IRD over the years. Recently, for example, the IRD has been providing
information to taxpayers to help them comply with the tax requirements. A
great deal of information in the form of IRD booklets, technical information
bulletins, newsletters, and pamphlets are continuously made available to
taxpayers free of charge. However, such information, though very helpful, is
aimed at facilitating taxpayer compliance with the tax system rather than to
assist taxpayers to have a better appreciation of the tax law. The results of
prior studies which focused on the impact of tax knowledge on perceptions of
fairness and attitudes towards tax compliance are indeed interesting and
intriguing. As no research of this nature has been conducted in New Zealand,
this study explores the impact of an increase in tax knowledge on taxpayers'
perceptions of fairness of the income tax system as well as their attitudes towards
tax compliance.

Research Method
Experimental Design
An experiment was carried out using pre-testing and post-testing of the
perceptions of the fairness of the New Zealand tax system of second year
accountancy major students who were taking the compulsory introductory
taxation2 paper.

Questionnaires were distributed to and collected from students who were present
at the beginning of the course (pre-test) as well as at the end of the course
(post-test). The aim was to test whether an increase in knowledge of the
principles of taxation had any influence on the students' perceptions of fairness
of the tax system and their attitudes towards tax compliance. It was expected
that by going through the tax course, students at the end of the course should
not only have increased their tax knowledge but would also have acquired a
better understanding of the principles of New Zealand income tax law.

The pre-test included 113 students and the post-test included 83 students. The
fall in number was inevitable as there are usually some students who will

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 Asian Review of Accounting, Volume 8, Number 1, 2000

withdraw from a course or drop out of a course for various reasons. In addition,
the number of students present at each lecture was unlikely to remain constant
as attendance at lectures was not compulsory.

Instrument
The first part of the questionnaire covered the demographics of respondents.
The second part of the questionnaire covered tax knowledge and included
questions relating to principles of taxation and some specific knowledge of the
tax law. The third part of the questionnaire related to perceptions of fairness
and tax compliance attitudes. As discussed earlier, fairness cannot be defined
explicitly as it is a multidimensional concept. However, the literature has indicated
that many tend to perceive fairness in terms of how different levels of income
earners are taxed, how the tax rate is structured, and how they personally
perceive the general fairness of the tax system. Thus, the questions asked in
this third part were based on the fairness dimensions used in the study conducted
by McKee and Michael (1991) as they incorporated all the above three factors.
The other factor, that is "exchange with the government", which the literature
has identified as a possible fairness dimension was excluded from this study as
it was felt that students, particularly those who are not working, may not be in
a position to gauge the last factor appropriately. Accordingly, various questions
that were indicators of the three factors only were included. Respondents were
then asked to indicate their perception using a 5-point Likert scale (from very
fair to very unfair for some questions and from strongly disagree to strongly
agree for others).3

This part of the questionnaire also posed the question about their attitudes towards
tax compliance. Their views concerning the acceptability of noncompliant
reporting for certain transactions were used to gauge their tax compliance
attitudes. Therefore, questions were asked how seriously they thought the crime
was (from a scale of 1 no crime ... 4 extremely serious crime) if they
underdeclared their income or overclaimed deductions, or if they made a barter
payment to their tradesman. Higher scores therefore represented more serious
crime. The purpose of asking these questions was to examine whether an increase
in tax knowledge had any impact on their perception of the extent of illegality of
such reporting behaviour.

As some questions could be considered sensitive, respondents were assured of

the anonymity of their responses. As a result, it was not possible to match the
response of a particular student from the pre-test to the post-test stage. Instead,
group results from pre-test and post-test were treated as independent samples.
Tax knowledge was measured in the pre and post-test using a score calculated
from 20 questions concerning tax theory, fringe benefit tax, income tax,
deductions and tax obligations.4 A score system was devised for the responses
to each of the questions as follows: correct answer =3, do not know = 2 and
wrong answer = 1.

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 The Impact of Tax Knowledge on the Perceptions of Tax Fairness
and Attitudes Towards Compliance

Table 1
Respondent Demographics

Age No. %
Under 18 0 0.00
18-30 104 92.00
31-40 8 7.00
41-50 1 1.00
over 50 0 0.00
113 100%
Sex
Male 48 42.50
Female 65 57.50
113 100%
Filed Tax Return before
Yes 60 53.1
No 53 46.9
113 100%
Working
Yes 30 26.5
No 83 73.5
113 100%
Type of student
Local 60 53.1
International 53 46.9
113 100%

Results
Profile of sample
Table 1 contains the demographic data for the respondents at the pre-test stage.
As most of the respondents were students, it was not surprising to find that a
majority fell within the age bracket of 18-30 years. There were slightly more
females than males. About 53% of the respondents had filed a tax return before.
Only international students had not filed a return. The majority were full time
students with about 27% either working part time or full time. Therefore the
respondents in this sample had similar academic background and age, and there
was a good mix of males and females as well as those who had or had not filed
a return before.

Factor analysis
Principal component analysis (using a varimax rotation)5 was applied to the 21
perception questions on fairness to test their construct validity. A summary of
the results are shown in Table 2. By looking at the scree plot6 and eigenvalues,
factor analysis of the responses to all the 21 questions produced three main
factors. These factors accounted for 54% of the variation. The three factors
were labelled as "personal fairness", "tax rate fairness" and "income level
fairness." Those questions (seven of them) that did not load highly (significantly
below 0.50) were dropped from the analysis. The Cronbach's alpha for the
three factors indicated reasonable validity.

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 Asian Review of Accounting, Volume 8, Number 1, 2000

Table 2
Results from factor analysis and Cronbach's alpha

No. of items Cronbach's % of variance Eigenvalues

alpha explained

Factor 1 - personal fairness 6 0.59 25% 3.077

Factor 2 - tax rate fairness 4 0.63 17% 2.289
Factor 3 - income level fairness 4 0.81 12% 2.157

The three questions concerning attitudes towards compliance were also factor
analysed by using a varimax rotation. The analysis produced two main factors
and they accounted for 81% of the variation. The first factor related to the
illegality of under-declaring income and over-claiming tax deduction (labelled
"IncDed") and the second factor related to the illegality of a barter-type
transaction (labelled "Barter").

Pre-test to post-test analysis

It was expected that the respondents who had undergone the introductory
taxation course would have better tax knowledge of taxation at the end of the
course than at the beginning. The results shown in Appendix 1 confirmed this
hypothesis. The means score on tax knowledge was higher for post-test (mean
= 50.52) as compared to that of the pre-test (mean = 46.01). The t-test results
(see Table 3) indicated a significant difference between the two scores (t=9.44,
p<0.0001).

To examine the impact of an increase in tax knowledge on perception of fairness,

further analysis was conducted, using the scores from the factor analysis, to
compare the changes in perception of fairness from the beginning (pre-test) to
the end (post-test) of the course.

Although as shown in Table 3, the respondents improved their tax knowledge

significantly, there was no significant change in their perception of fairness (see
Appendix 1 for mean scores and standard deviation for each of the questions).

Table 3
Pre and post-test scores - changes in tax knowledge, perception of
fairness, and compliance attitudes
Knowledge 'Personal 'Tax rate 'Income Compliance attitudes
fairness' fairness' level 'IncDed' 'Barter'
fairness'
t- 9.44* 0.51 -1.78 0.50 0.41 0.40
value
df 194 185 185 185 188 188

*p<0.0001

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 The Impact of Tax Knowledge on the Perceptions of Tax Fairness
and Attitudes Towards Compliance

This result appeared inconsistent with some of the results of prior studies
conducted overseas. However, it appeared to be consistent with the results
obtained by Hasseldine and Kaplan (1991) which indicated that knowledge
about different types of sanctions did not significantly affect taxpayers' beliefs
about the fairness of the tax system.

In the case of attitudes towards compliance, the means score for seriousness
of crime if income was underdeclared at the post-test and pre-test stage was
2.79 and 2.68 respectively. The means score for seriousness of crime if an
overdeduction was claimed at the post-test and pre-test stage was 2.78 and
2.76 respectively (see Appendix 1). Therefore, there was a slight increase in
perception of seriousness of crime if tax evasion was committed. However, the
difference between these at the pre and post-test, as shown in Table 3, was not
significant. This indicated that an increase in tax knowledge also has no
significant effect on the respondent's tax compliance attitudes. Again, the results
appeared consistent with the findings of Hasseldine and Kaplan (1992) which
indicated that knowledge provided about sanctions (other than the "conscience"
appeal) did not increase beliefs about the immorality of evasion behaviour. It is,
however, inconsistent with some prior research findings which suggest that
increased tax knowledge improved respondents' attitude towards the seriousness
of crime. It is worth noting that prior studies have also indicated that small
amounts of tax evasion are usually perceived as more acceptable than large
amounts of evasion (Lewis, 1979). The questions posed in this study did not
specify the magnitude of evasion and therefore the response received may be
affected by how each respondent made assumptions about the materiality of
the amount of evasion.

A chi-square test was also carried out to test whether there were any significant
differences between different age groups, sex, type of student, working status
and prior filing of a tax return. The results indicated there were no significant
differences.

Summary and Conclusion

The purpose of this study was to examine the linkages between increase in tax
knowledge and perceptions of fairness and tax compliance attitudes. However,
unlike the results of some prior studies, the results obtained from this study
indicate that an increase in tax knowledge did not have a significant impact on
perception of fairness and tax compliance attitudes. This result is inconsistent
with the findings of other researchers who found a positive linkage.

One of the possible reasons for the inconsistent results could be due to the type
of questions posed to the respondents about fairness. White et al. (1990) used
questions which concentrated on perceptions of fairness of different types of

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 Asian Review of Accounting, Volume 8, Number I, 2000

tax expenditures and tax changes. Their participants were asked to rate the
fairness of the deductibility of the expenditure items and the includibility of
different items of employee benefits at the pre-test and post-test stage. In
contrast, the questions in this study relate more to the perceptions of fairness of
the tax system in general, the tax treatment of different income groups and the
tax rate structure. More specific questions, particularly on areas where there is
a general tendency for the public to misconceive the intentions of the tax system,
may provide a clearer indication of whether an increase in tax knowledge has
any effect on the results.

Further, prior studies tend to assume that taxpayers have a misconception of

unfairness and therefore that an increase in tax knowledge will enhance their
perceptions of fairness. An increase in tax knowledge such as an understanding
of the rationale of the tax law and tax system would certainly enable the public
to make a better assessment of the existing law and system. Such knowledge
should increase perception of fairness if the public indeed have any initial
misconception. However, if there is no misconception, a better knowledge may
not have any significant effect at all. This study indicates that the respondents
perceived the tax system in general to be fair at the pre-test stage. Perhaps this
explains the insignificant effect of tax knowledge at the post-test stage.

The results need to be interpreted with caution due to the several limitations of
this study. The sample was not randomly selected and therefore the results
cannot be easily generalised. The implication from Roberts' study (1994, p.79)
is that students generally have less negative fairness attitude, but are more
tolerant of rationales for cheating. The lack of a control group further makes it
difficult to assess whether the post-test results reflect the influence of the
knowledge alone or whether it is due to some other factors. The reduction in
the number of students participating at the post-test may also have affected the
internal validity of the study. Students who drop out of courses or did not attend
classes may be students who are less motivated or less conscientious students.
Therefore, the results may be biased towards more conscientious and motivated
students.

As this study is only exploratory, future research could perhaps extend this
study to a wider population. Other ways of increasing or disseminating tax
knowledge, apart from using a formal classroom environment, could also be
investigated. Roberts' (1994) suggestion of using mass media, such as television,
may be an effective method for improving public perceptions about tax fairness
and attitudes towards compliance and could be explored. A more direct approach
of providing tax knowledge such as explaining the rationale behind the
introduction of a specific tax provision may also be more effective in changing
the public's perception of fairness and tax attitudes.

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 The Impact of Tax Knowledge on the Perceptions of Tax Fairness
and Attitudes Towards Compliance

References
Balch, G 1,1980, The Stick, the Carrot and other Strategies -A Theoretical Analysis of
Government Intervention in Policy Implementation Penalties or Incentives?, eds
Brigham K and Brown D W, London: Sage Publications.

Caragata, P J, 1997, The Economic and Compliance Consequences of Taxation: A

Report on the Health of the Tax System in New Zealand, a draft paper presented to the
Policy Adviser of Inland Revenue.

Eriksen, K, and Fallan, L, 1996, Tax Knowledge and Attitudes Towards Taxation: A
Report on a Quasi-experiment, Journal of Economic Psychology, 17:387-402.

Hasseldine, J, and Kaplan, S E, 1991, The Effect of Different Sanction Communications

on Hypothetical Taxpayer Compliance: Policy Implications from New Zealand, Public
Finance, 47,1:45 - 60.

Inland Revenue Department Annual Report. 1996, Wellington.

Jackson, B R, and Jaouen, P R, 1989, Influencing Taxpayer Compliance through Sanction

Threat or Appeals to Conscience, Advances in Taxation,!: 131-147.

LaTour, M, Champagne, P J, Rhiel, G S, and Behlling, R, 1990, Are Students a Viable

Source of Data for Conducting Survey Research on Organisation and their
Environments?, Review of Business and Economic Research, 26,1:68-82.

Lewis, A, 1979, An Empirical Assessment ofTax Mentality, Public Finance, 43,2:244-

257.

Lewis, A, 1982, The Psychology of Taxation, Oxford: Martin Robertson.

Mason, R, and Calvin, L D, 1978, A Study of Admitted Income Tax Evasion, Law and
Society, 13:73-89.

Mason, R, and Lowry, H, 1981, An Estimate of Income Tax Evasion in Oregon, Corvallis,
OR: Survey Research Center, Oregon State University.

McKee, T M, and Michael, S, 1991, Taxpayer Perceptions of the Fairness of the Tax
Reform Act of 1986: Do Tax Preparers and the IRS Need to Segment their Market?,
Journal of Professional Services Marketing, 8,1:201-221.

Porcano, TM, and Price, C E, 1992, Some Evidence on the Association between Judgment
Criteria and Fairness Perceptions, Advances in Taxation, 4:183-210.

Roberts, M L, 1994, An Experimental Approach to Changing Taxpayers'Attitudes Towards

Fairness and Compliance via Television, The Journal of the American Taxation
Association, 16,1:67-86.

Smith, A, 1776, The Wealth ofNations, Volume 2, London: Methuen.

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Song, Y, and Yarbrough, T E, 1978, Tax Ethics and Taxpayer Attitudes: A Survey, Public
Administration Review, 38:442-457.

Spicer, M \V, and Becker, LA, 1980, Fiscal Inequity and Tax Evasion: An Experimental
Approach. National Tax Journal, 33,2,171-175.

Spicer, M W, and Lundstedt, S B, 1976, Understanding Tax Evasion, Public Finance,

31,295-305.

Strumpel, B, 1968, Contribution of Survey Research in Quantitative Analysis in Public

Finance, ed Peacock, A, New York: Praeger Publ.

Vogel, J, 1974, Taxation and Public Opinion in Sweden: An Interpretation of Recent

Survey Data, National Tax Journal, 27,4:499-513.

Wartick, M L, 1994, Legislative Justification and the Perceived Fairness of Tax Law
Changes: a Referent Cognition's Theory Approach, Journal of American Taxation
Association, 16,2,106-123.

Westat Inc., 1980, Executive Summary, Individual Income Tax Compliance Factors
Study, Study for the Internal Revenue Service, Rockville, Md: Westat Inc.

White, R A, Curatola, A P, and Samson, W D, 1990, A Behavioral Study Investigating the

Effect of Knowledge of Income Tax Laws and Tax Policy on Individual Perceptions of
Federal Income Tax Fairness, Advances in Taxation, 3:165-185.

Endnotes
1
The principle ofhorizontal equity is upheld iftaxpayers who are in similar circumstances
pay the same amount of tax. On the other hand, a tax system is considered vertically
equitable if taxpayers with greater ability to pay bear more tax than those with a lesser
ability to pay.
2
The aim of the course is to provide a basic understanding of the taxation system in
New Zealand, specifically its rationale and its practical expression in terms of taxes
payable.
3
In the factor analysis, responses to six of the questions were reversed so that lower
scores signified fairness.
4
Appendix 2 provides a summary of the questions asked. Question 1 which comprised
3 sub-parts was counted as three questions.
5
Varimax rotation was used to maintain independence between factors as well as to
provide clearer indications of interrelation of various perceptions. (LaTour et al.,
1990.)
6
A scree plot was used to ascertain the number of factors. It provides information
about whether factors consist of common variance or error variance (which should be
ignored). Other information such as the factor loadings and size of eigenvalues are
also used to ascertain how many factors to retain. The appropriate number of factors
to use was discussed with a statistician.

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 The Impact of Tax Knowledge on the Perceptions of Tax Fairness
and Attitudes Towards Compliance

Appendix 1
Mean (and standard deviation) for Perception of fairness, tax knowledge and
tax compliance attitudes

Pre lest Post test

Tax knowledge 46(3.61) 50.5(3.05)

Factor 1 - Personal fairness

Questions (Scale: Very fair 1...5 very unfair)
1 To the average taxpayer, I think the income tax system is 2.6(0.79) 2.7(2.28)
2 To me personally, I believe the income tax system is 2.7 (0.98) 2.8 (0.94)
3 Generally, I believe the manner in which the income tax burden is 2.8 (0.9) 2.8 (0.83)
distributed across taxpayers is

Questions (Scale: Strongly disagree I...5 Strongly agree)

4 Generally, I feel that income tax is a fair tax 3.3(0.8) 3.3(0.75)
5 On the whole, the burden of income taxes is unfairly distributed 3.1 (0.8) 3.1 (0.86)
6 Current tax laws require me to pay more than my fair share of income 2.9 (0.8) 3.05(0.88)
taxes
Factor 2 • Tax rate fairness
Questions (Scale: Strongly disagree 1...5 Strongly agree)
7 High income earners have a greater ability to pay income taxes so it is 3.4(1.13) 3.5(0.98)
fair that they should pay a higher rate of tax than low income earners.
8 A fair tax rate should be the same for everyone regardless of their 2.7(1.14) 2.4(1.12)
income e.g. if one person pays 15% tax rate, everyone should pay 15%
tax rate whether they are wealthy or poor.

9 It is fair that high income earners pay proportionally more tax than low 2.9 (1.12) 3.0 (0.98)
income earners.

10 The share of total income taxes paid by high income earners is much 2.9 (0.76) 2.9 (0.78)
too high

Factor 3 - Income level fairness

Questions (Scale: Strongly disagree 1...5 Strongly agree)
Qll Middle income earners pay more than a fair share of the income tax 3.2(0.78) 3.3(0.73)
burden.

Q12 The share of total income taxes paid by low income earners is much too 3.0 (0.88) 3.2 (0.83)
high.

Q13 The share of total income taxes paid by middle income earners is much 3.2 (0.68) 3.2 (0.67)
too high.

Q14 Compared to the amount paid by more wealthy taxpayers, I pay more 3.1(0.75) 3.1(0.76)
than my fair share of income taxes.

Tax compliance attitudes

Questions (Scale: No serious crime 1...4 Extremely serious crime)
Not Declaring an extra source of income in your tax return 2.7 (0.64) 2.8 (0.67)
Claiming a non-existent deduction in your tax return 2.8 (0.67) 2.8 (0.71)
Making a barter payment to your tradesman 1.8(0.84) 1.7(0.81)

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 Asian Review of Accounting, Volume 8, Number 1, 2000

Appendix 2
Tax Knowledge
This part of the questionnaire is designed to gauge the level of tax knowledge
you have about certain principles and imposition of the New Zealand tax system.
For each of the following questions, please indicate whether you think they are
correct (yes), incorrect (no) or you do not know by ticking ( ) the appropriate
columns.

Yes I No I Do Not
Know
Tax Theory
1. The three main reasons governments impose taxes on their
citizens are:
a. to provide public goods and services
b. to redistribute wealth
c. to manipulate the economy
2. New Zealand's personal income tax rate is progressive in
nature.
3. New Zealand adopts a direct tax system only to raise
revenue.

Fringe Benefit Tax (FBT)

4. FBT is a tax levied on all benefits provided by employers to
employees for employees* personal use.
5. FBT is a tax in lieu of income tax.
6. The tax rate applicable to FBT is 49 %.

Yes I No I Do Not
Know
Income
7. Income tax is generally levied on any receipt of a regular
nature.
8. Income tax is generally levied on any receipt of cash only.
9. Income tax is generally levied on any receipt of gains or
profits.
10. For the 1997 income year there are three tiers to the
personal income tax rates.
11. The profits made by a share trader is liable for income tax.

Deductions
12. An expenditure necessarily incurred but for which no
income has arisen is deductible in the year it is incurred.
13. Provision for doubtful debts is deductible for tax purposes.
14. A taxpayer can claim expenses for the business use of a
taxpayer's house.
15. Contingent liabilities constitute deductible expenses.
16. Taxpayers are entitled but not obligated to deduct
depreciation against business income.

Tax Obligations
17. Business taxpayers with losses are not required to furnish
tax returns in the year of loss.
18. Taxpayers generally have a right to appeal against their tax
assessments. | | |

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