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Tax Fairness: Conceptual Foundations and Empirical Measurement

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Abstract

Prior research shows taxpayers’ perceptions of fairness leads to greater cooperation and compliance with tax authorities. Yet our understanding of tax fairness has been hampered by its general reliance upon models and measures of fairness developed by organizational fairness research, even though fairness is a perception subject to contextual influences. Accordingly, we attempt to gain insight into the influence of contextual factors on fairness through the development of a theoretically based and empirically derived model of tax fairness, grounded in organizational literature, but empirically tested in the tax context. Our analysis shows the extent to which items and dimensions found in the organizational fairness literature reflect taxpayers’ perceptions of tax fairness. Most importantly, our findings contribute to fairness research by identifying the role of relevant comparison groups in affecting perceptions of fairness, and thereby extends our understanding of the role of context in affecting fairness perceptions. Furthermore, by identifying the dimensions and items incorporated in perceptions of tax fairness, our study provides a foundation for tax researchers and policy makers to determine how best to promote voluntary taxpayers’ compliance and in so doing, mitigate tax avoidance and tax evasion.

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Notes

  1. Throughout the manuscript, we specifically refer to “tax compliance” to encompass the range of outcomes, from positive to negative, that can be associated with tax fairness (i.e., tax compliance) and a lack of tax fairness (i.e., tax avoidance and tax evasion).

  2. Fairness and justice are terms that often are used interchangeably (Colquitt 2005, p. 4). In this paper, we use the terms interchangeably, and use the term fairness to include fairness perceptions.

  3. For example, some researchers consider tax fairness to be a singular overarching perception of general fairness (Etzioni 1986; Mason and Calvin 1978; Spicer and Lundstedt 1976), while others consider it to have multiple facets. Further, in the case of the latter, there does not appear to be agreement about the facets that apply. For instance, Christensen et al. (1994), Gerbing (1988), Maroney et al. (2002), Trivedi et al. (2003), and Hartner-Tiefenthaler et al. (2012) all consider general and distributive fairness while Eichfelder and Kegels (2014) as well as Van Dijke and Verboon (2010) consider procedural and informational fairness.

  4. More specifically in the tax context, exchange equity reflects the extent to which taxpayers’ tax dollars are effectively used by the government.

  5. “Preferred tax rate structure” encompasses two concepts—namely, that taxpayers with similar incomes should be taxed at the same rate while taxpayers with higher incomes should be taxed at higher rates than those at lower incomes because of their greater ability to pay.

  6. The organizational fairness papers included Avery and Quinones (2004), Colquitt (2001), De Boer et al. (2002), De Cremer and Tyler (2007), Fondacaro et al. (2002), Magner and Johnson (1995), and Moorman (1991).

  7. The IRS is the Internal Revenue Service, the United States’ tax authority.

  8. 44 of 50 states were represented in the sample.

  9. Our use of 7-point scales is consistent with prior research (see Diefenbach et al. 1993).

  10. The Tax Policy Center (2015) reports that 17.3% of tax units (i.e., households) pay no taxes because they have no income/earnings. Given the reported strong positive relationship between education and income, it is likely that individuals who are not well-educated make up the majority of this reported 17.3% of households.

  11. We also asked subjects to answer two yes/no questions for which it is not possible to gauge representativeness with the U.S. population: (1) Have you ever contacted the IRS? and (2) Has the IRS ever contacted you? Of the sample, 43.7% (41.1%) answered “yes” to the first (second) question.

  12. Our use of EFA is predicated on three assumptions. First, EFA is appropriate, in cases like ours, where researchers wish to identify a set of latent constructs that underlie a set of measured variables (Fabrigar et al. 1999). Second, our sample size of 501 is sufficiently large to conduct EFA (Fabrigar et al. 1999; Field 2009). And, third, our data pass all validity metrics for use of EFA. For instance, we check for reliability of the items that comprise the initial fairness factors (Fabrigar et al. 1999) and find that all have Cronbach alphas more than 0.7, which indicates acceptable reliability (Nunnally 1978). Further, the KMO (Kaiser–Meyer–Olkin) statistic is 0.94, which indicates that patterns of correlations are compact, and the factor analysis should yield distinct and reliable factors (Field 2009). Finally, Bartlett’s test of sphericity is significant (p < 0.001), indicating that the factors are correlated, and therefore factor analysis is appropriately conducted (Field 2009).

  13. Hair et al. (1998) recommend a scree test to determine the number of factors (i.e., plotting the eigenvalues against the number of possible factors, and examining the shape of the resulting curve). The point at which the curve begins to flatten indicates the maximum number of factors to extract. Our data show a drastic flattening after the fourth data point, which also suggests a three-factor solution (Costello and Osborne 2005).

  14. Given these results, the exploratory factor analysis has implicitly culled 16 of the original 30 items we started with, as these 16 items did not load on the three primary factors. Of the 16 items, five relate to general fairness, three relate to horizontal equity, one was a negatively worded item about exchange equity, and the remaining seven were originally used to capture something related to procedural, interpersonal, and/or informational fairness.

  15. Oblique rotation allows for the possibility of correlated factors and is appropriate when the goal of the factor analysis is to obtain several theoretically meaningful factors (Conway and Huffcutt 2003). Factor loadings of 0.4 are considered important, and factor loadings of 0.5 or higher are practically significant. Most importantly however, in a sample size of at least 250, a factor loading must be at least 0.35 to have a statistical significance at the 0.05 level (Hair et al. 1998).

  16. According to Byrne (2009) GFI, AGFI, and CFI should be at least 0.90, while RMSEA should not exceed 0.08.

  17. As sensitivity analysis, we examined the correlations between the dimensions and demographic items. For any significant correlation with any dimension and any demographic item (age, work experience, gender, tax preparer, and self-employment income), we checked to see if the underlying factor structure changed. The factor structure was identical, regardless whether taxpayers had no self-employment income or some self-employment income; whether they were male or female; and whether they prepared their own tax return or whether someone else did. As well, we conducted a similar analysis using a median split for both age and work experience, and found that the factor structure was identical.

  18. We measure intentional non-compliance, which is tax evasion. In particular, the focus of this research is on intentional non-compliance where taxpayers have opportunities to be non-compliant with minimal risk of detection (i.e., the underground economy).

  19. It may also explain the lack of taxpayers’ consideration of “off shore taxation policies” in their perceptions of tax fairness, as this group fails to be a relevant comparison group for individual taxpayers. Future research is needed to investigate this possibility.

  20. Bolded statements are items included in Table 2; [bracketed] designations at the end of the bolded statements correspond to the labels in Table 2 and Fig. 1.

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Acknowledgements

The authors gratefully acknowledge financial support from the Dolan School of Business at Fairfield University.

Author information

Authors and Affiliations

  1. Ted Rogers School of Management, Ryerson University, Toronto, ON, Canada

    Jonathan Farrar

  2. Dolan School of Business, Fairfield University, Fairfield, CT, USA

    Dawn W. Massey

  3. Schulich School of Business, York University, Toronto, ON, Canada

    Errol Osecki & Linda Thorne

Authors
  1. Jonathan Farrar
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  2. Dawn W. Massey
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  3. Errol Osecki
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  4. Linda Thorne
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Correspondence to Dawn W. Massey.

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Ethical Approval

All procedures performed in this study, which involved human participants, were in accordance with the ethical standards of the institutional research committees of the authors’ institutions.

Appendix: Survey Instrument

Appendix: Survey Instrument

The following survey asks for your opinion about the fairness of income taxes paid by individual taxpayers and Internal Revenue Service (IRS) practices. Your opinion is important to developing a better understanding of the fairness of the United States’ tax system. Please remember your responses, which should not take more than about 15–20 min, will be kept entirely confidential.

Part I

Please read the following statements and indicate your level of agreement by clicking on the appropriate response, where 1 = strongly agree, and 7 = strongly disagree.Footnote 20

  1. 1.

    It is fair that taxpayers earning the same income pay a similar share of income tax.

  2. 2.

    It is fair for taxpayers with similar amounts of income to pay a similar amount of income tax.

  3. 3.

    Two taxpayers who earn the same income should pay the same amount of tax.

  4. 4.

    It is fair that high-income earners are subject to a higher tax rate than middle-income earners. [VE1]

  5. 5.

    It is fair that middle-income earners are taxed at a lower rate than high-income earners. [VE2]

  6. 6.

    High-income earners should pay a greater share of income tax than low-income earners. [VE3]

  7. 7.

    When compared to the taxes paid, taxpayers receive too few public services.

  8. 8.

    The amount taxpayers pay in income tax is equal to the amount they receive in government services. [EE1]

  9. 9.

    Taxpayers receive social services equivalent to the income taxes they pay. [EE2]

  10. 10.

    The IRS offers taxpayers ways to express their grievances and complaints. [PF1].

  11. 11.

    At the IRS, taxpayers’ complaints are taken seriously. [PF2]

  12. 12.

    IRS procedures are based on accurate information provided by taxpayers

  13. 13.

    The IRS treats all taxpayers similarly.

  14. 14.

    The IRS processes all taxpayers’ returns the same way. [PF3]

  15. 15.

    The IRS correctly uses the information provided by taxpayers in calculating taxes owed.

  16. 16.

    The IRS communicates in a timely manner. [INF1]

  17. 17.

    IRS correspondence is concise.

  18. 18.

    IRS correspondence is easy to understand. [INF2].

  19. 19.

    The IRS answers taxpayers’ questions carefully. [INF3]

  20. 20.

    The IRS is candid in its communication.

  21. 21.

    The IRS expresses regret for possible negative effects on taxpayers. [INT1]

  22. 22.

    The IRS treats taxpayers with courtesy. [INT2]

  23. 23.

    The IRS refrains from improper comments. [INT3]

  24. 24.

    The IRS treats taxpayers politely.

  25. 25.

    IRS correspondence is polite.

  26. 26.

    The IRS tries to be fair.

  27. 27.

    Overall, the IRS is fair.

  28. 28.

    The IRS is fair in all aspects of its operations.

  29. 29.

    The US tax system is fair.

  30. 30.

    Overall, the tax system in the US is fair.

[Compliance Questions]

  1. 1.

    Taxpayers will omit income from their tax returns if the party paying them does not report the income to the IRS.

  2. 2.

    Taxpayers will omit income from their tax returns if they receive it in cash.

  3. 3.

    Taxpayers will overstate their tax deductions if the amounts are paid in cash.

Part II

Please read the following statements and indicate your response.

figure a

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Farrar, J., Massey, D.W., Osecki, E. et al. Tax Fairness: Conceptual Foundations and Empirical Measurement. J Bus Ethics 162, 487–503 (2020). https://doi.org/10.1007/s10551-018-4001-4

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