The Effect of Outcome Favorability and Fairness on Tax Compliance

Abstract

The purpose of this paper is to study the role of outcome favorability on influencing the association between fairness and taxpayer compliance. Outcome favorability is whether taxpayers have a balance owing or refundable. We develop a model of tax compliance based on an integration of fairness heuristic theory (Lind 2001) with Rutte & Messick’s (1995) Model of Perceived Unfairness. Based on our model, we posit that taxpayers in a favorable tax payment position are more likely to comply with tax authorities than those in an unfavorable tax payment position, and perceptions of distributive and procedural fairness jointly moderate taxpayer compliance. Distributive fairness is whether taxpayers have paid their fair share of taxes, and procedural fairness is the even-handedness in procedures used to collect taxes. We conduct an experiment on 228 taxpayers. We find significant support for outcome favorability: compliance is significantly higher in favorable as compared to unfavorable tax positions. We also find that compliance is significantly higher under procedural fairness. Unexpectedly, we find that distributive fairness increases compliance only when outcomes are favorable. Implications for practice and research are discussed.