Exploring Voluntary Tax Compliance Factors in Slovenia: Implications ...

Exploring Voluntary Tax Compliance Factors in Slovenia: Implications for Tax Administration and Policymakers

Lidija Hauptman, PhD, Associate Professor, Razlagova 20, 2000 Maribor, Slovenia. Phone: +386 2 22 90 120. Fax: +386 2 25 16 141. E-mail: [email protected]. University of Maribor, Faculty of Economics and Business.

Şevin Gürarda, PhD, Assistant Professor, Seyrek, 35665 Izmir, Turkey. Phone: +902323550000 – 2240, Fax: 90 (232) 355 00 51. E-mail: [email protected]. Gediz University.

Romana Korez-Vide, PhD, Assistant Professor, Razlagova 20, 2000 Maribor, Slovenia. Phone: +386 2 22 90 122. Fax: +386 2 25 16 141. E-mail: [email protected]. University of Maribor, Faculty of Economics and Business.

Abstract In this paper we test the significance of norms and trust in authorities for voluntary tax compliance in Slovenia. The empirical analysis has shown that national and social norms are significant factor of tax compliance, whilst trust in authorities (the Parliament and the European Union) was not proved as significantly related variables of tax compliance in Slovenia. We discuss possible policy responses to our findings. Since norms and trust in authorities are non-economic factors of tax-compliance the indirect control approach, which focuses on the development of a high trust and high commitment culture of taxpayers has been examined more thoroughly. Due to the generally valid recognition that both direct and indirect control measures need to be used together to tackle the shadow economy, we briefly introduce the responsive regulation approach and the slippery slope framework. Key words: norms, tax compliance, responsive regulation approach, slippery slope framework, Slovenia. JEL classification: M 41, M42, M48, F23 Panel topic: Responses to the current economic conditions and development of global and regional economies

Exploring Voluntary Tax Compliance Factors in Slovenia: Implications for Tax Administration and Policymakers

1

INTRODUCTION

The global crisis revealed fundamental weaknesses in the precrisis global financial architecture for preventing, managing, and resolving crisis in the global financial system (Schinasi & Truman, 2010). It has led to a substantial decline in government revenue relative to gross domestic product in many countries. Different, but interrelated factors caused government revenue to decline in relation to GDP (IMF, 2009). One factor that may significantly affect government revenue performance in a crisis, however, has received less attention: the possibility of changes in taxpayer compliance. Therefore, a rise in tax non-compliance or tax evasion, which is an indication of an individual's diesenchantment with or lack of commitment to the tax system (Devos, 2014, p. 2), presents a major challenge for tax administration especially during the times of economic slowdown. For deciding what is important in a tax compliance context and how major compliance risks will be addressed, tax revenue bodies need a systematic process. They should have strategies and structures in place to ensure that non-compliance with tax law is kept to a minimum. Visa Europe & Schneider (2013) report exposes that the share of shadow economy in Slovenia (2011: 24.1 %; 2012: 23.6 %; 2013: 23.1 %) is high in comparison to the EU-27 average (2011: 19.2 %; 2012: 18.9 %; 2013: 18.4 %). Since there is little known about general tendencies of tax compliance in Slovenia (Klun 2004; Klun & Blažić, 2005; Klun, 2009; Belak & Hauptman, 2011; Hauptman & Matajič, 2012; Lešnik et al., 2014; Čokelc & Križman, 2014; Hauptman et al., 2014), to fight against the shadow economy, policy makers have to recognize which factors influence tax morale and drives tax compliance. This paper contributes to the tax compliance literature, which still lacks empirical evidence for Slovenia. Furthermore, it investigate whether norms and perceived trust in tax authorities are important factors of tax compliance and therefore particularly relevant for policymakers to understand the taxpayers’ profile when endeavoring to strengthen tax compliance. According to Cummings and co-authors (2009, p. 447) designing effective policies for reducing tax evasion requires understanding the behavioral aspects of the tax compliance decision. Individual attitudes toward compliance have been shown to be a function of social norms (Elster, 1989; Naylor, 1989; cited upon Cummings et al., 2009, p. 447). Enhancing these norms, as through increasing overall trust in government, is therefore a desirable policy instrument, which could complement usual tax compliance enforcement options. The set hypotheses in our paper are therefore the following: H1: Norms (national and social) are related to the voluntary tax compliance. H2: Trust in authorities is related to the voluntary tax compliance. The purpose of this paper is to explore whether the norms and perceived trust in tax authorities are important factors of (voluntary) tax compliance in Slovenia. The results of the research are particularly relevant for policymakers to understand the taxpayers’ profile when endeavoring to strengthen tax compliance. The paper is structured as follows: The next section provides a review of factors of tax compliance. Section II presents methodology and results. Discussion is in Section III.

1.1 Theoretical background: a review of tax compliance factors A comprehensive review of the tax compliance literature was given by Jackson and Milliron (1986). Authors carried out and identified 14 key factors, which were categorized by Fischer and co-authors (Fischer et al., 1992) into four groups in their expanded model: demographic (e.g. age, gender, education); noncompliance opportunity (e.g. income level, income source, occupation); attitudes and perceptions (e.g. fairness of the tax system, peer influence); and tax system/structure (e.g. complexity of the tax system, probability of detection and penalties, tax rates). Chau & Leung (2009) suggested a partial refinement to Fischer model by incorporating another important factor – culture (social norms, ethical values). The slippery slope framework developed by Kirchler et al. (2008) integrates the idea that enforced and voluntary tax compliance are dependent on the power of authorities and the trust in authorities. The review of factors of tax compliance and the existing findings are presented in the next subsections. The division of the groups of tax compliance factors is based on the Rizal Palil’s (2010) classification. Economic factors The group of economic factors of tax compliance comprises tax rates, tax audit and perception of government spending. According to some studies the tax rate is an important factor in determining tax compliance behavior (Clotfelter, 1983), according to the others (Kirchler, 2007), the exact impact of this factor is still unclear and debatable. While some authors argue that raising marginal tax rates will be likely to encourage taxpayers to evade tax (Allingham & Sandmo, 1972; Ali et al., 2001; Torgler, 2007), on the opinion of the others (Trivedi et al., 2004; Kirchler, 2007; Papp & Takáts, 2008) the reduced tax rate does not necessarily increase compliance. . Kirchler et al. (2008) perceive that tax rates have a mixed impact on tax evasion, which depends on the degree of trust in tax authorities. Tax audits, audit rates and prior audit experience have been ambiguously discussed in relation to tax compliance (Dubin et al., 1990; Andreoni et al., 1998; Alm, 1995; Rizal Palil, 2010; Dubin, 2012). Empirical studies (Slemrod et al., 2001; Kirchler et al., 2008) have evidenced that tax audits play an important role in increasing voluntary compliance. According to Rizal Palil (2010) and Dubin and co-authors (1990) audits rates and the thoroughness of the audits could potentially encourage taxpayers to be more prudent in completing their tax returns. Studies on the relationship between the specifics of actual government spending and tax compliance, particularly on tax evasion, are very limited. However, the key message is that taxpayer’s perceptions on government’s spending are potentially important in determining their compliance behavior (see Rizal Palil, 2010). Institutional factors Institutional factors include taxpayers’ perceptions on the efficiency of the role of the tax authority, the simplicity of the tax returns, as well as the probability of being detected. According to some studies (e.g. Feld & Frey, 2002, 2002a) fiscal discipline increases by increasing the confidence of taxpayers in the legal system and government. Additionally,

unclear and complicated legislation may result in the unintentional handing of false tax information, which increases tax non-compliance (Torgler, 2002). The empirical findings on the relationship between tax compliance and the probability of detection are contradictory: some studies (e.g. Allingham & Sandmo, 1972) show that the probability of detection is a significant factor, the others (e.g. Cummings et al., 2005) found the fear of the sanctions as a negligible factor of tax compliance. Additionally, extreme penalties may backfire by creating a setting in which bribery and corruption are more prevalent with the end result being lower tax compliance and a general loss of trust in public institutions (Cummings et al., 2009). Social factors The social factors comprise ethics and attitudes (norms) towards tax compliance, perceptions of equity and fairness, tax knowledge and changes to current government policy. As suggested by previous studies (Jackson & Milliron, 1986; Orviska & Hudson, 2002; Trivedi et. al. 2004; Kirchler et. al., 2008; Belak et al., 2010; Belak & Hauptman, 2011; Hauptman, 2012; Hauptman & Matajič, 2012), attitudes towards tax compliance and ethics remain important in determining tax evasion behavior. In general, if the norms held by taxpayers favor tax compliance, voluntary tax compliance will result (Bărbuţămişu, 2011). When favorable national norms are established (Bărbuţămişu, 2011; Fjeldstad, 2004), trust in political leadership and administration will lead to voluntary tax compliance. As regards perceptions of equity and fairness OECD (2010) distinguishes three types of tax system fairness: distributive fairness (the perception that government acts as a wise spender of tax revenues); procedural fairness (the perception that the tax administration adheres to procedures that are fair in dealing with taxpayers); and retributive fairness (the perception that the tax administration is fair in applying punishments when the rules are broken). The procedural and retributive fairness can be influenced by tax administrations, whilst distributive fairness depends on policymakers. Eriksen & Fallan (1996) also reveal that providing more tax knowledge as to improve people’s perception of the fairness of the tax system is important for tax compliance. An increase in tax debate by the government (Hasseldine & Hite, 2003) is likely to increase taxpayers’ compliance. Also the government decision and changes to policies in accordance with the economic and political situation have a significant impact on tax compliance. Personal factors Personal factors of tax compliance comprise financial constraints, awareness of penalties and offences, moral reasoning, values, religious beliefs, peers influences etc. According to Barrand et al. (2004) decisions either to evade or not to evade taxes are heavily reliant on taxpayers’ personal judgment. Personal ethics based on religion or cultural norms may significantly affect tax compliance behavior (Steenbergen, McGraw & Scholz, 1992; cited upon Cummings et al., 2005; Alm & Torgler, 2006; Richardson, 2008). Other factors Tax compliance can be affected by various other factors, which are predominantly demographic (age, income level, level of education, and gender) (see Devos, 2005).

According to some studies age can have negative effect (i.e. Tittle, 1980; Wahlund, 1992), as well as positive effect on tax compliance (Jackson & Milliron, 1986; Clotfelter, 1983; Beron et al., 1992), however, some studies have found no relationship at all between age and tax compliance (Porcano, 1988). Previous theoretical model suggests that as income rises, tax evasions should increase over most ranges (Andreoni et al., 1998). Houston and Tran (2001) establish that the respondents in the lower income group tend to have a lower proportion of tax compliance by under-reporting income and by over-claiming expenses than their counterparts in the higher income group. The direct relationship between income level and tax compliance remains unclear (Jackson and Milliron, 1986; Roth et al., 1989). Two aspects of education have been distinguished and considered to be important for attitudes towards tax compliance (Chau & Leung, 2009): the general degree of fiscal knowledge and the degree of knowledge involving evasion opportunities (Groenland & Veldhoven, 1983). Longer education increases the knowledge in taxation (Kinsey & Grasmick, 1993) and is positively related to tax compliance (Kirchler et al., 2008). The impact of gender on tax compliance is inconsistent. Early research (Tittle, 1980; Jackson & Milliron, 1986) reports that females are more likely to be tax compliant. A study by Houston and Tran (2001) indicates a higher proportion of tax evasion committed by women than men while a study by Richardson (2008) continue to find no association between gender and tax compliance.

2 EMPIRICAL RESEARCH The goal of this paper is to explore the relevance of the perceived trust in authorities and the norms as the factors of (voluntary) tax compliance in Slovenia, since no studies exist in this regard. According to the theoretical background of this paper the perceived trust in authorities and the norms are important factors of tax compliance. Several authors suggest that trust in political leadership and administration will lead to voluntary tax compliance when favorable national norms are established (e.g. Fjeldstad, 2004). According to Bărbuţămişu (2011) national norms become cultural standards, often mirrored in the actual law. Thus, norms encompass both power and trust. According to Kogler et al. (2013) voluntary compliance is linked to the motivational posture commitment and describes taxpayers as feeling morally obliged to pay taxes and to act in the interest of their peers. Voluntary tax compliance is achieved without enforcement and perceived trust is found to be predictor of the disposition to corporate voluntarism in several studies (Muehlbacher et al., 2011). In this paper two hypotheses were tested: Norms (national and social) are related to the voluntary tax compliance (H1) and Trust in authorities is related to the voluntary tax compliance (H2). 2.1 Questionnaire The questionnaire in our research was developed and partially adapted from different studies (Murphy & Byng, 2002; Hofmann et al., 2008; Hartner et al., 2008; Gangl et al., 2013; Kirchler, 2007). The variables of interest — perceived trust in authorities, norms (national/social), voluntary and enforced compliance — were measured by five Likert-type scales. The participants were asked to indicate their degree of agreement with two or three statements in each scale (1 = ‘‘strongly agree’’ to 5 = ‘‘strongly disagree’’).

Perceived trust in authorities was measured by participants’ agreements with following statements on the trustworthiness of tax authorities: The Slovene Tax Office is reliable and trustworthy (T1); How much trust do you have in the Parliament (T2); and How much trust do you have in the European Union (EU) (T3). Norms were measured by participants’ agreements with following statements: “I feel a sense of pride in being a member of the Slovene community” (national norms, NN); and “People in my environment would strongly disapprove if I would not meet my tax obligations” (social norms, SN). Voluntary and enforced tax compliance were measured by participants’ agreements with following statements: “I pay my tax as a matter of course” (voluntary compliance, VC1); “I would also pay my tax if there were no controls” (voluntary compliance, VC2; “I pay tax because the risk of being checked is too high” (enforced compliance, EC1); “I feel that I am forced to pay tax” (enforced compliance, EC2). 2. 2 Sample The respondents were random selected and the questionnaire was applied by the face to face interview. The bases for the analysis presented in this paper were 332 taxpayers in Slovenia. The socio-demographical data collected were gender, age, level of education, income, employment activity/status, religion, and marital status. The participants’ educational degrees were categorized into five groups (no education, primary school or less, trade/secondary school, higher school/university or more, and unknown). Their gross income was split into five categories (less than 500 €, from 501-1.000 €, from 1.001-2.000 €, more than 2.001 €, I do not want to answer). Employment activity was categorized into five categories; religion into six groups (Christianity, Islam, Hinduism, Chinese folk religion, Buddhism, non-believer); and marital status into four groups (single, married, divorced, widowed). Demographic composition of the respondents is presented in the Table 1. Table 1: Sample Groups Age

Slovenia (n= 332) M

SD

33.38

12.57

n

%

Gender −

149

45%

− female Level of education − no education

male

183

55%

2

1%

−

10

3%

− trade/secondary school − higher school/university or more − unknown Income − less than 500 €

161 155 4

48% 47% 1%

46

14%

−

from 501-1.000 €

67

20%

−

from 1.001-2.000 €

50

15%

−

more than 2.001 €

77

23%

primary school or less

−

none

64

19%

−

I do not want to answer

28

8%

Employment activity/status −

insurance

2

1%

−

financial sector

2

1%

−

economy/business

81

24%

−

public sector

105

32%

−

none

142

43%

Religion −

Christianity

225

68%

−

Islam

5

2%

−

Hinduism

0

0%

−

Chinese folk religion

0

0%

−

Buddhism

80

24%

− Non-believer Marital status − single

4

1%

120

36%

−

married

110

33%

−

divorced

8

2%

−

partnership

92

28%

−

widowed

2

1%

Source: Own research

2. 3 Methodology The collected data were analyzed with the R Program. Agresti (2007) suggests M2 because for ordinal data using M2 is more proper than X2. With X2 and G2 chi-squared tests ignore some information when used to test independence between ordinal classifications. When rows and /or columns are ordered, more powerful tests usually exist (Agresti 2007, p. 86). A statistic for testing independence against the two-sided alternative of nonzero true correlation is: 𝑀2 = (𝑛 − 1)𝑟 2 Therefore, for the ordinal data, as suggested in Agresti (2007), another form of X2 test, M2 was performed. A null hypothesis of independence “Ho: ρ = 0 indicates there is no linear trend between variables, variables are independent” was tested. 2. 4 Results Voluntary compliance Analyses of joint distribution of answers for voluntary compliance and enforced compliance show that 19.6 % of taxpayers strongly agree on voluntary compliance questions (Table 2). Table 2: Joint Distribution – Voluntary Compliance Questions

VC1: I would also pay my tax if there were no controls.

1 2

VC2: I pay my tax as a matter of course. 1 2 3 4 5 19.6% 8.1% 5.1% 1.8% 0.6% 2.1% 9.3% 3.9% 4.5% 1.8%

3 4 5

1.5% 0.3% 0.3%

3.9% 16.0% 3.3% 0.9% 2.1% 3.0% 0.0% 1.5% 0.3%

3.6% 3.3% 3.0%


For the robustness of the data, the percentage by fixing the questions was identified. In the Table 4, the distribution of the answers of “I pay my tax as a matter of course (VC1)” for the other voluntary compliance question “I would also pay my tax if there were no control (VC2)” is reported. Table 4: Row Distribution of VC1 to VC2. VC2: I would also pay my tax if there were no controls Total 1 2 3 4 5 VC1: I pay my tax as a matter of course.

1 56% 2 10%

23%

15%

5%

2%

100%

43%

18%

21%

8%

100%

3 5% 4 3%

14%

56%

12%

13%

100%

9%

22%

31%

34%

100%

5 6%

0%

29%

6%

59%

100%


The row distribution shows that 56 % taxpayers who strongly agree on the VC1 also selected strongly agree on the VC2, 23 % of them select agree for the VC2. The highest percentage is observed on the option strongly disagree (Table 4). Table 5: Column Distribution of VC2 to VC1. Voluntary

VC2: I would also pay my tax if there were no controls 1 2 3 4 5

VC1: I pay my tax as a matter of course.

1

82%

37%

18%

14%

5%

2

9%

42%

14%

35%

15%

3

6%

18%

56%

26%

29%

4

1%

4%

7%

23%

27%

5

1%

0%

5%

2%

24%

Total 100% 100%

100% 100%

100%


82 % taxpayers who strongly agreed on the VC2 also select option strongly agree on the VC1 (Table 5). Enforced compliance Analyses of joint distribution of answers for enforced compliance show (Table 6) that 15.1 % of Slovene taxpayers strongly agree on two enforced compliance questions. Table 6: Joint Distribution – Enforced Compliance Questions EC2: I feel that I am forced to pay tax. EC1: I pay tax because the risk of being checked is too high.

1

1 15.1%

2 2.1%

3 2.1%

4 1.2%

5 1.8%

2 3 4 5

5.7% 5.1% 1.2% 1.5%

7.8% 8.1% 1.8% 1.2%

3.3% 14.2% 6.0% 2.4%

3.6% 4.8% 4.2% 1.8%

0.6% 0.3% 0.0% 3.9%


Table 7: Row Distribution of EC1 to EC2. EC2: I feel that I am forced to pay tax. 1 EC1: I pay tax because the risk of being checked is too high.

2

3

4

5

Total

1 68%

10%

10%

5%

8%

100%

2 27%

37%

16%

17%

3%

100%

3 16%

25%

44%

15%

1%

100%

4 9%

14%

46%

32%

0%

100%

5 14%

11%

22%

17%

36%

100%


In the Table 7, the distribution of the answers of “I pay tax because the risk of being checked is too high (EC1)” for the other enforced compliance question “I feel that I am forced to pay tax” (EC2)” is reported. 68 % taxpayers who strongly agree on the EC1 also selected strongly agree on the EC2. Table 8: Column Distribution of EC2 to EC1.

EC1: I pay tax because the risk of being checked is too high.

EC2: I feel that I am forced to pay tax. 1 2 3 4 1 53% 10% 8% 8% 2 20% 37% 12% 23% 3 18% 39% 51% 31% 4 4% 9% 22% 27% 5 5% 6% 9% 12% Total 100% 100% 100% 100%

5 27% 9% 5% 0% 59% 100%


53 % taxpayers who strongly agree on the EC2 also select strongly agree on the EC1 (Table 8). Norms and Voluntary Compliance For the relation of norms and voluntary compliance, two statements are selected. Those are: “People in my environment would strongly disapprove if I would not meet my tax obligations (SN)” and “I feel a sense of pride in being a member of Slovene community (NN)”. Table 9: Frequency Test for the Relationship of SN and VC1 / VC2

People in my environment would strongly disapprove if I would not meet my tax obligations.

VC1 I pay my tax as a matter of course 1 2 3 4 5 1 49% 14% 29% 5% 4% 2 21% 28% 26% 19% 6% 3 37% 19% 30% 11% 4% 4 26% 31% 30% 7% 7% 5 38% 21% 24% 9% 9%

VC2 I would also pay my tax if there were no controls 1 2 3 4 5 1 41% 19% 18% 10% 13% 2 17% 19% 42% 9% 13% 3 17% 27% 32% 15% 9% 4 16% 26% 28% 18% 12% 5 27% 15% 27% 9% 24%


As the M2 test for social norms on voluntary tax compliance shows 1.26 with p-value equals to 0.26; therefore the null hypothesis that states SN and VC1 are independent cannot be rejected at the conventional level. The null hypothesis variables are independent. The statement that measures social norm is also tested for VC2. M2 test founds as 5.09 with pvalue equals to 0.02, the null hypothesis that states SN and VC2 are independent can be rejected at least at the 5 percent significance level. The most of the data are concentrated on option 1 (strongly agree) reflecting the positive relationship. 41% of the sample with a strong agrees on SN also marks strongly agree for VC2 (Table 9). Another test was performed for national norms and voluntary tax compliance. Results are presented in the Table 10. Table 10: Frequency Test for the Relationship of NN and Voluntary VC1/VC2.

I feel a sense of pride in being a member of Slovene community.

VC1 I pay my tax as a matter of course. 1 2 3 4 5 1 45% 17% 21% 3% 14% 2 15% 34% 26% 16% 10% 3 22% 17% 37% 14% 9% 4 22% 24% 28% 14% 12% 5 35% 15% 12% 9% 29%

VC2 I would also pay my tax if there were no controls. 1 2 3 4 5 1 52% 24% 14% 7% 3% 2 37% 22% 28% 11% 3% 3 29% 26% 34% 8% 3% 4 37% 18% 28% 10% 8% 5 38% 12% 21% 15% 15%


The M2 test is found as 5.02 with p-value equals to 0.024; therefore the null hypothesis that states NN and VC1 can be rejected at the 5 percent significance level. Highest value as percentage is observed in strongly agrees. 45 % of the sample with a strong agree on NN also mark strongly agree for VC1. The M2 test is found as 1.72 with p-value equals to 0.18, so the null hypothesis that states NN and VC2 are independent cannot be rejected at the conventional level. Trust and Voluntary Compliance For the relationship of trust and voluntary compliance, we select three questions. The questions are: “The Slovene Tax Office is reliable and trustworthy.” (T1), “How much trust do you have in the Parliament” (T2) and “How much trust do you have in the European Union” (T3). Table 11: Frequency Test for the Relationship of T1 and Voluntary Q1/ Q2

The Slovene Tax Office is reliable and trustworthy




The M2 test is found as 2.15 with p-value equals to 0.000349; therefore the null hypothesis that states T1 and VC1 are independent could be rejected. The M2 test is found as 3.73 with

p-value equals to 0.000977, so the null hypothesis that states T1 and VC2 are independent should be rejected. Table 12: Frequency Test for the Relationship of T2 and Voluntary Q1/Q2.

How much trust do you have in the Parliament?




The trust measurement for parliament is calculated as Likert-type scales (1 = very high to 5= very low). The M2 test is found as 1.20 with p-value equals to 0.27 so the null hypothesis that states T2 and VC1are independent cannot be rejected at the conventional level. The M2 test is found as 0.55 with p-value equals to 0.45, so the null hypothesis that states T2 and VC2 are independent cannot be rejected. Table 13: Frequency Test for the Relationship of T3 and Voluntary Q1/Q2

How much trust do you have in the EU?




M2 test is found as 1.55 with p-value equals to 0.21, so the null hypothesis that states T3 and VC1 are independent could not be rejected. M2 test is found as 0.55 with p-value equals to 0.45, so the null hypothesis T3 and VC2 are independent cannot be rejected.

3 DISCUSSION The aim of this paper was to test the relation between norms (national and social), trust in authorities (Slovene Tax Office, the Parliament and the EU) and voluntary tax compliance. Overall, the results of the performed M2 tests indicate that national and social norms and voluntary tax compliance are found as statistically significant dependent variables with a positive linear trend, while for trust in authorities this could not be confirmed entirely. The findings of this study were partially consistent with the theoretical predictions concerning the relevance of norms for the deterring effects of legal sanctions against tax evasion. Norms indeed proved highly relevant for compliance processes, but the correlation was confirmed only for national norms. Like in many other studies on tax compliance behavior (Jackson and Milliron, 1986; Kinsey & Grasmick, 1993; Houston & Tran, 2001; James & Alley, 2002; Fjeldstad, 2004;

Kirchler et al., 2008; Richardson, 2008; Bărbuţămişu, 2011; Muehlbacher et al., 2011; Kogler et al., 2013) significant effects of social norms and trust in authorities on tax compliance throughout the analyses were not found. The important question in the context of our research is the relevancy of various possible approaches of tax administration and policymakers towards tackling tax noncompliance. The literature shows that there are two contrasting policy approaches: the direct control approach, which detects and punishes non-compliance and/or provides rewards for those engaging in compliant behavior, and the indirect control approach, which focuses on developing the psychological contract (Williams 2013, p. 16) between the state and its citizens by fostering a high trust high commitment culture. The problem with changing behavior using direct controls is the fact that the people are not always rational economic actors. They are limited in their ability to compute the costs and benefits, often misperceive or do not perceive the real costs of their actions and are influenced by social context (ibid., p. 19). Most importantly, they are not just motivated by self-interest and what is most profitable for them but by additional motives, including redistribution, fairness, reciprocity, social customs, norms and morality (Alm, 2011). Due to this fact and due to the explored factors of tax compliance in our research, the indirect control approach will be examined. Its intention (e.g. Weigel et al., 1987; Alm et al., 1995; Andreoni et al., 1998; Wenzel, 2002; Kirchler, 2007; Torgler, 2007) is to induce willing or voluntary commitment to compliant behavior rather than to force citizens to comply using threats and/or incentives. It is based on the fact that there exists an institutional incongruity between the laws, codes and regulations of formal institutions and the norms, beliefs and values of informal institutions. This means that economic activities are not aligned with the laws and regulations of formal institutions, but are within the boundaries of what informal institutions deem acceptable (Webb et al., 2014). When the discrepancy between these two types of institutions is large, tax morale is low and vice versa. According to the 2013 Eurobarometer survey on tax morale (European Commission, 2014) 79.7% of Slovenes deem undeclared work unacceptable. Therefore, as regards the size of the gap between formal and informal institutions in the field of tax non-compliance (tax morale) Slovenia is placed in the second half of 28 EU Member States, which is not very encouraging fact. The reduction of the institutional asymmetry can be achieved either by changing the informal institutions and/or the formal institutions. The first approach (changing the norms, values and beliefs of the population), called also a commitment approach, views taxpayers not as rational economic actors but as social actors ordinarily inclined to comply with the law because of their belief in the rule of law and understanding that it is in their self-interest (Murphy, 2008). As such, their cooperation rather than coercion is pursued by changing their attitudes towards compliance. This is achieved by improving tax knowledge, by running awareness-rising campaigns and by using normative appeals about the costs of undeclared work and benefits of declared work. As regards the tax knowledge, two types of education are required. Firstly, there is the need to educate citizens about what the current tax system requires of them by providing easily consumable information on their responsibilities (see Vossler et al., 2011), secondly, the citizens need to be educated about the value and benefits of paying taxes in order to become motivated to comply (see Saeed & Shah, 2011). There are some empirical evidences on the use of normative appeals as a measure to change the informal institutions towards greater tax compliance (Blumenthal et al., 2001; Chung & Trivedi, 2003). Their findings show that the effectiveness of this measure depends on the nature of the appeal made.

On the other hand, policy can also seek to change the formal institutions to align with the norms, values and beliefs of society. Two options exist in this regard. Firstly, this can involve internal process changes in the formal institutions to improve the perception that there is tax fairness (the extent to which people believe they are paying their fair share compared with others) (Wenzel, 2004), procedural justice (the degree to which people believe that the tax authority has treated them in a respectful, impartial and responsible manner) (Murphy, 2005; Taylor, 2005) and redistributive justice (the extent to which people believe that they received the goods and services they deserve given the taxes they pay (Richardson & Sawyer, 2001). Secondly, this can comprise changing the products of formal institutions by pursuing wider economic and social developments (see Vanderseypen et al., 2013). There is no consensus which specific policy measures in the direct and the indirect policy approach are most effective and what is the most effective way of putting these policy measures together in various combinations and sequences to engender compliance. However, in recent years two particular approaches have come to the fore in the literature that provide ways of combining these policy approaches in particular sequences, namely the responsive regulation approach and the slippery slope framework. Responsive regulation is about winning taxpayers’ “hearts and minds” so as to engender a culture of commitment to tax morality in order that people will regulate themselves rather than need to be regulated by external rules (Williams, 2014, p. 29). This approach can be illustrated by a pyramid, with various combinations of direct and indirect control measures that a tax authority can use to achieve compliance, sequenced from the least intrusive at the bottom to the most intrusive at the top. Since it was first proposed, responsive regulation has enjoyed widespread support from both many scholars (Grabosky, 2013; Abbott & Snidal, 2013) as well as tax administrations (see Job et al., 2007). According to slippery slope framework (Kirchler et al., 2008) the voluntary compliance of taxpayers occurs if they trust in authorities, the enforced compliance, however, occurs when authorities have power. To tackle undeclared work, therefore, one can either increase the power of authorities and/or trust in the authorities. Since the direct controls approach tends to put the emphasis on increasing the power of authorities, the indirect controls approach, however, put emphasis on increasing the trust in authorities, the tax authorities can use one or the other approach or combine both approaches in order to tackle the undeclared work. The combination of both approaches is argued to be the most effective way of tackling undeclared economy (see Muehlbaecher et al., 2011; Kastlunger et al., 2013). 4 CONCLUSION The established high share of shadow economy in Slovenia, in comparison to the average of the EU Member States and relatively low tax morale of Slovene taxpayers in comparison to the taxpayers in the other EU Member States, demands deliberate policy measures. Our empirical study has contributed to the understanding of the impacts of two important factors (norms and trust in authorities) on Slovene taxpayers’ compliance, which can represent a part of the basis for the formulation of relevant policy measures. There are also some limitations of our study which relies on self-reported measures of a topic, therefore respondents might be afraid of revealing their actual intention and behavior (see Kirchler, 2007; Kirchler et al., 2010) and generalization of the results. Further research should assess a larger number of Slovene taxpayers.

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