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The Influence of Guilt Cognitions on Taxpayers’ Voluntary Disclosures

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Abstract

Guilt is a powerful emotion that is known to influence ethical decision-making. Nevertheless, the role of guilt cognitions in influencing restorative behaviour following an unethical action is not well understood. Guilt cognitions are interrelated beliefs about an individual’s role in a negative event. We experimentally investigate the joint impact of three guilt cognitions—responsibility for a decision, justification for a decision, and foreseeability of consequences—on a taxpayer’s decision to make a tax amnesty disclosure. Tax amnesties encourage delinquent taxpayers to self-correct to avoid severe penalties that would result if their tax evasion were discovered. Our findings suggest a three-way interaction effect such that taxpayers are likely to make tax amnesty disclosures when they foresee that they will be caught by the tax authority, unless they can diffuse responsibility for their evasion and justify their evasion. Implications for tax policy and tax professionals are discussed.

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Notes

  1. Guilt and shame are the two emotions most relevant to ethical decision-making (Tangney et al. 2007). Shame is a dejection-based emotion arising from public exposure (Ferguson and Stegge 1998) and is not relevant to the tax amnesty decision, since a taxpayer who makes an amnesty disclosure is known only to a tax authority and would not be publicly exposed.

  2. The other two aspects of guilt, in Kubany and Watson’s (2003) model, are distress and personal values. Distress is an affective state involving feelings of unhappiness, depression, and anxiety (Hardy et al., 2003) that can result in emotional exhaustion (Tepper et al. 2007). It is impossible for us to manipulate these emotional feelings in an experimental context, and so we controlled for distress in our experiment. The other guilt cognition is personal values. “A personal value system is viewed as a relatively permanent perceptual framework which shapes and influences the general nature of an individual’s behavior. Values are similar to attitudes but are ingrained, permanent, and stable in nature” (England 1967, p. 54). In a tax situation, personal values refer to beliefs about the ethics of tax evasion. Since there is variation in personal values (England 1967), it is not possible for us to operationalize these in our experiment, and so we also controlled for attitudes concerning the ethicality of tax evasion.

  3. We do not predict main effects because main effects should not be tested if there is a significant interaction effect (Maxwell and Delaney 2004, p. 331).

  4. For any variables, a VIF value greater than 10 may indicate multicollinearity (Field 2009). The highest VIF value in the model was 3.5, and all but two values were below 1.2.

  5. As with any experiment, the results should be interpreted with caution. While we expect directional differences across conditions to hold in a different setting, factors unique to our scenarios may result in different magnitudes of amnesty participation.

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Acknowledgments

This project was funded by the Centre for Accounting Ethics, University of Waterloo. We appreciate helpful comments received from Colin Boyd, Amy Hageman, Daryl Koehn, Ioana Moca, and the two anonymous reviewers.

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Authors and Affiliations

  1. Goodman School of Business, Brock University, St. Catharines, ON, Canada

    Paul Dunn

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

    Jonathan Farrar

  3. School of Business Administration, Portland State University, Portland, OR, USA

    Cass Hausserman

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  1. Paul Dunn
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  2. Jonathan Farrar
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  3. Cass Hausserman
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Correspondence to Cass Hausserman.

Appendix

Appendix

Scenario Screen with Manipulations

Mary is a taxpayer who lives in Ontario. Three years ago, she received a large inheritance and transferred the proceeds to a bank account in the Cayman Islands, but transferred them back to Canada this year. The CRA does not know about this bank account and these investments. The investments generated $83,400 annually. Her total annual income for each of the last 3 years was $97,500.

Responsibility Manipulation

  • High Mary researched this investment opportunity, discovered that she would not receive any tax reporting forms from the Cayman Islands, and realized that she could save a lot of money in taxes.

  • Low Mary researched this investment opportunity, learned from her tax advisor that she would not receive any tax reporting forms from the Cayman Islands, and was told by her tax advisor that she could save a lot of money in taxes.

Justification Manipulation

  • High Mary has never reported any of this investment income on her Canadian tax return because she used the cash she would have paid in taxes on this investment income to pay for experimental drugs for her 4-year-old daughter, who was diagnosed with a rare and aggressive form of cancer.

  • Low Mary has never reported any of this investment income on her Canadian tax return because she used the cash she would have paid in taxes for home renovations.

Foreseeability Manipulation

  • High Last week Mary saw a news broadcast about the importance of paying taxes. The broadcast also reported that the CRA is working on an information sharing agreement with her bank in the Cayman Islands so that the CRA could obtain the names of Canadian investors.

  • Low Last week Mary saw a news broadcast about the importance of paying taxes. The broadcast also reported that it would be virtually impossible for the CRA to obtain information about Canadians who had investments in the Cayman Islands.

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Dunn, P., Farrar, J. & Hausserman, C. The Influence of Guilt Cognitions on Taxpayers’ Voluntary Disclosures. J Bus Ethics 148, 689–701 (2018). https://doi.org/10.1007/s10551-016-3031-z

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