Accounting faculty research examine risky tax decisions by those owing income taxes
Accounting professors Chelsea Rae Austin, Donna Bobek Schmitt and Scott Jackson find in their research that the aggravation taxpayers feel from owing income taxes, versus receiving a refund, makes it easier for them to morally justify cheating behavior. This moral justification explains prior research that finds those in a tax-due position engage in more dishonest tax reporting than those in a tax-refund position.
“Does prospect theory explain ethical decision making? Evidence from tax compliance” — Accounting, Organizations and Society, October 2021.
Why it matters:
- Austin, Schmitt and Jackson find individuals are more likely to take riskier positions on their tax return when they owe additional money compared to when they are expecting to receive a refund. Further, they find owing additional money is perceived as a loss, which leads to aggravated feelings that provide a catalyst to justify their immoral actions. On the other hand, those who expect a refund perceive their situation as a gain, which causes them to feel pleased, and thus they are risk-averse to protect their perceived gain.
- Theoretically, they identify an important link to the process by showing that a willingness to make risky choices alone does not explain why individuals in a tax-due position commit more tax evasion (e.g., not reporting income or overstating deductions). Instead the aggravated feelings that arise in a loss state provide a catalyst that allows individuals to morally disengage, leading to more evasion. In their final experiment, they show that an intervention that is designed to prevent individuals from being able to morally rationalize cheating on their taxes reduces tax evasion when individuals are in a tax-due position.
- They used multiple experiments to establish the theoretical process behind the pervasive finding that individuals are less compliant when in a tax-due, versus tax-refund position, upon filing their tax return.
- They rely on prospect theory, a theory about risky choice, and moral disengagement theory, a theory about how individuals morally rationalize immoral behavior, to understand the “why” behind this phenomenon.
- They also create an intervention, a simple graphical tutorial showing that taxes in the U.S. tend to be less compared to other countries and making it clear that “fudging on taxes” is illegal.
About Chelsea Rae Austin:
- Austin joined the Moore School in 2014 and is an assistant professor of accounting.
- Her research focuses on taxation, specifically determinants and consequences of tax-avoidance decisions.
- Austin teaches graduate tax classes.
- She earned her bachelor's degree in business administration and master’s in taxation from the University of Central Florida and her Ph.D. in accounting from the University of Iowa.
About Scott Jackson:
- Jackson arrived at the Moore School in 2002 and is a professor of accounting and the faculty coordinator for the accounting Ph.D. program; he is also a Cramer Research Fellow and Moore School Fellow.
- His research focuses on financial and managerial accounting, auditing and taxation.
- Jackson teaches undergraduate and graduate financial and managerial accounting.
- He earned his bachelor's and master’s degrees in accounting from San Diego State University and his Ph.D. in accounting from the University of Nebraska.
About Donna Bobek Schmitt:
- Schmitt joined the Moore School in 2014 and is a professor of accounting.
- Her research focuses on tax policy, judgment and decision-making of taxpayers and accounting professionals, and ethical decision-making.
- Schmitt teaches graduate tax courses and mentors Ph.D. students.
- She earned her bachelor's degree in accounting from the University of Miami and her Ph.D. in accounting from the University of Florida.
- Schmitt was previously a professor at the University of Central Florida.
Austin and Schmitt are also working on a paper that focuses on whether the type of retirement plan individuals use for their savings, i.e., a Roth plan versus a tax-deferred “regular” individual retirement account, influences their willingness to spend money in retirement.