2011 Taxpayer Attitudinal Segmentation Research

Prepared for the:
Canada Revenue Agency
July 2011
Contract # 46558-112341-001-CY
POR 078-10
Contract Award Date: 2010-11-24
Cost of the research: $141,445.69


Prepared by:
Phoenix Strategic Perspectives Inc.

Media Enquiries:
Media Relations
Canada Revenue Agency
4th Floor 555 MacKenzie Avenue
Ottawa ON K1A 0L5
media.relations@cra-arc.gc.ca

Executive Summary

Phoenix SPI was commissioned by the Canada Revenue Agency (CRA) to conduct taxpayer attitudinal segmentation research. A random digit dialling (RDD) telephone survey was conducted with a regionally-disproportionate sample of Canadian residents, 18 years of age and older, who had lived in Canada for at least one year. In total, 3,884 interviews were conducted from January 29th to February 28th, 2011. Based on a sample of this size, the overall findings can be considered accurate to within ±1.9%, 19 times out of 20 (adjusted to take into account sample stratification [Footnote 1]). The CRA intends to use the research findings to help develop communications and marketing initiatives aimed at improving voluntary tax compliance.

Factor Analysis – The Starting Point

A factor analysis was conducted to support the segmentation work. This synthesis and reduction of the attitudinal survey data resulted in the identification of 11 factors, seven derived from tax-related measures and four from psychographic measures. The seven tax-related factors are:

1. Rationalization: This factor summarizes respondents’ views on various rationalizations included in the questionnaire on why some people might think it is acceptable to cheat on taxes.
2. No Big Deal: The variables included in this factor all suggest that tax cheating is not a big deal. The focus of these items is to determine the extent to which Canadians tend to minimize the importance or significance of tax cheating.
3. Consequences: The focus here is on different potential consequences of tax cheating, both on the respondent him-/herself and on others, including society.
4. Responsible Behaviour: This factor summarizes perceptions in the area of responsible citizenship as it relates to taxes.
5. Risky Business: This factor focuses on the likelihood of getting caught if one is cheating on their taxes.
6. Tax Fatigue: Here, the focus is on the level of taxation in Canada, in particular its perceived fairness.
7. The Others: The focus here is on a couple of other rationalizations regarding tax cheating, with a focus on ‘other’ people.

A regression analysis, which was conducted to identify the factors that drive the likelihood of engaging in tax-cheating behaviours, revealed that the two factors that serve as the best predictors are no big deal and consequences.

The four factors derived from the psychographic measures are: 1. Traditionalism (variables associated with traditional values); 2. Elite Perspective (variables associated with elitist attitudes and beliefs); 3. External Control (variables focused on control issues); and 4. Hedonism (variables focused on experimenting or pleasure).

Taxpayer Segmentation – Key Findings

A cluster analysis [Footnote 2] segmentation was performed on the survey data using the 11 factors derived from the factor analysis. As a result, six segments of the Canadian population were identified (their proportion of the population in brackets):

1. Law Abiders (31%)
2. Altruistic Compliers (18%)
3. Rationalizers (12%)
4. Underground Economists (12%)
5. Over-Taxed Opportunists (15%)
6. Outlaws (13%)

A two-part risk profile that looked at the likelihood of cheating on taxes in future underpinned this analysis:

• The first part of the risk profile is a composite index of three behaviours: 1. working for cash to avoid paying income tax; 2. knowingly not declaring income on one’s tax return; and 3. selling goods or services without reporting the income. In terms of the relative likelihood of doing any of these tax-cheating behaviours, taxpayers were much more likely to say they would work for cash to avoid paying income tax, followed by selling things they make or do without reporting the income. Relatively few said they were likely to knowingly not declare some income on their tax return.
• The second part focuses on paying cash to get a cheaper price by not paying tax. The analysis yielded a spectrum of risk in terms of the likelihood of tax cheating, one which runs from those who represent no risk at all, or very limited risk, right up to those who could be considered high risk, at least relative to other taxpayers. Almost everyone in the outlaws and over-taxed opportunists groups said they were at least somewhat likely to do this, although the former were significantly more likely to say that this was very likely. A majority of the underground economists also said that they were at least somewhat likely to do this. Very few in the other three segments acknowledged that this is something they are likely to do.

Key findings of the taxpayer segmentation include:

• The two largest segments – law abiders and altruistic compliers – represent almost half the population (49%) and are low-risk in terms of their propensity to cheat on their taxes.
• Only a relatively small proportion of the population (13%) is very likely to cheat on taxes. At the far end of the risk spectrum, outlaws are the most likely to cheat on taxes, including all types of taxes.
• The three middle segments, which make up 39% of the population, are likely of greatest interest to the CRA. Rationalizers, underground economists, and over-taxed opportunists are more of a risk to cheat on their taxes than the two voluntarily compliant groups, but are not as firm non-compliers as the outlaws. What distinguishes these segments from one another is the type of tax cheating they are more likely to engage in, and their perceptions or orientations regarding tax evasion.

The Six Taxpayer Segments – Summary Descriptions

Law Abiders

This segment comprises 31% of Canadians and is defined by its low-risk tax-cheating orientation and the fact that its members think it is risky to cheat on taxes.

Law abiders exhibit the lowest risk of cheating on taxes, both overall and with respect to paying cash to get a cheaper price by not paying tax. They are among the least likely to accept or use rationalizations about tax cheating, and are among the most likely to think that tax cheating is a big deal and that there are consequences that flow from tax cheating – to themselves, other individuals and to society.

Not surprisingly, members of this group are more likely than most to embrace responsible behaviour. And, more than anyone else, law abiders think it is risky to cheat on taxes – that people who do will get caught. This is a significant defining characteristic of this group, in part because they are also a little more likely than average to think that Canada’s taxation levels are too high. In short, they appear to be following the law, in part, because of the risk of getting caught and the consequences that would flow from this.

Demographically, members of the law abiders segment are more likely than average to be women, 65 years or older, less educated (high school or less), and retired, as well as to report pension income as their main source of income[Footnote 3]. In terms of their psychographic profile, law abiders are slightly more likely to lean towards traditional values and elite perspectives.

Altruistic Compliers

In total, 18% of taxpayers are members of this segment. The second lowest of the segments in terms of risk profile, they share many of the same characteristics as law abiders and are defined by the fact that they are the least likely of all to think that people who cheat on their taxes will get caught.

Altruistic compliers are among the least likely to accept rationalizations about tax cheating, and they are the most likely to view tax cheating as a big deal as well as to see consequences flowing from tax cheating. Members of this group, along with law abiders and underground economists, are also more likely than others to embrace responsible behaviour. What sets them apart from law abiders is that they are a somewhat greater risk of cheating on taxes, both overall and particularly in terms of paying cash to evade tax. As well, altruistic compliers are less likely than their low-risk colleagues, the law abiders, to think taxation in Canada is unfair.

The key defining characteristic of this group is that they are the least likely of all to think that people who cheat on their taxes will get caught, hence the ‘altruistic’ label. They don’t abide by the law because they fear getting caught, but rather because it is the right thing to do.

Demographically, members of this segment are more likely than average to be 45-64 years and older, married, working full-time, university educated, higher income earners (household incomes over $100,000), and to report paid employment as their main source of income. In terms of psychographic profile, altruistic compliers are slightly more likely to lean towards traditional values, but are less likely to express elite perspectives or hedonistic attitudes, or to feel that control is more with others than themselves.

Rationalizers

Rationalizers represent 12% of taxpayers and are defined by the fact that they embrace rationalizations about tax cheating more than any other group.

Rationalizers are considerably more likely to pursue tax-cheating behaviours than the two low-risk segments, and can be considered a low-to-moderate risk, both overall and with respect to paying cash to evade taxes. The defining characteristic of this segment is that, more than any other group, they embrace the various reasons why some might view tax cheating as acceptable.

As well, rationalizers are more likely than most to think that taxation in Canada is unfair, which likely contributes to their rationalizing perspective, and are the least likely of all to embrace views associated with responsible behaviour. Similarly, members of this group are the most likely to think that tax cheating is not a big deal – that a small amount is not so bad, that it is not a real crime, and that the money saved is worth the risk. Perhaps not surprisingly, they are among the least likely to think there are consequences that flow from tax cheating, and are less likely than average to think that tax cheaters will get caught.

Demographically, this segment is the oldest, least-educated, and lowest-income. In addition, members of this segment are more likely to be men, retired, widowed, living in Quebec, born in Canada, and to report pension income as their main source of income. In terms of psychographic profile, rationalizers are less likely to lean towards traditional values, and more likely than average to express elite perspectives and hedonistic attitudes, and to feel that control over their lives lies elsewhere.

Underground Economists

This segment comprises 12% of taxpayers. Underground economists don’t buy into the rationalizations, nor do they think taxes are too high or unfair. But, if they have the opportunity to pay cash to avoid tax, they are a moderate risk to do this.

Underground economists share with over-taxed opportunists a greater risk of paying cash for goods or services to evade taxes. They are much more of a risk to do this than any of the preceding segments, but are considerably less of a risk to do this than the over-taxed opportunists or outlaws. In terms of other types of tax evasion, they pose about the same level of risk as rationalizers, although their mindset suggests they should be seen as less of a risk. That is, it may well be that they do not think that paying cash to avoid taxes is anywhere near the same in terms of seriousness as other tax-cheating behaviors.

Underground economists share some of the same orientations as over-taxed opportunists. Members of both groups tend to view tax cheating as a serious issue, and to see consequences flowing from it. Neither group is very much into rationalizations to excuse tax cheating, and both are a little more likely than average to indicate that they engage in responsible behaviours. In addition, underground economists are less likely than average to think that tax cheating is risky behaviour. They are also the least likely of all the segments to think Canada’s taxation is unfair.

Demographically, members of this segment are more likely to be women, under 30 years old, single, students, Ontarians, born outside Canada, higher income earners (household incomes over $100,000), more educated (university degree), and to report paid employment as their main source of income. In terms of psychographic profile, underground economists are a little less likely to articulate attitudes related to any of the psychographic factors.

Over-Taxed Opportunists

This segment represents 15% of the population. As the name implies, over-taxed opportunists think they are over-taxed, look for opportunities to pay cash to evade taxes, and think that many others do as well. However, they are not a big risk in terms of adopting other behaviours to cheat on their taxes.

Over-taxed opportunists share some of the same orientations as underground economists. Members of both groups tend to view tax cheating as a serious issue, and to think it has consequences. Neither group is into rationalizations to excuse tax cheating (although they do resonate a bit more with this group), while both are a little more likely than average to report responsible behaviours.

However, over-taxed opportunists are much more likely than underground economists to think that Canadians in general, and themselves personally, are taxed too much. This is one of two big differences between these segments. The other is that over-taxed opportunists are much more likely to think that a lot of other people think it’s okay to cheat on taxes and that many people would hide income or overstate an expense to pay less tax. They are also more likely than average to think that there is risk of getting caught tax cheating. This is one of the reasons why they are not a big risk in terms of adopting other tax-cheating behaviours.

Demographically, members of this segment are more likely to be women, working full-time, Ontarians, and to report paid employment as their main source of income. In terms of psychographic profile, over-taxed opportunists are slightly more likely to lean towards traditional values and express hedonistic attitudes.

Outlaws

Comprising 13% of taxpayers, this is the highest-risk segment in terms of the likelihood of cheating on taxes. They represent a significant risk, both in terms of adopting a broader range of tax-cheating behaviours and, particularly, of paying cash for things to get a cheaper price by evading tax.

Along with rationalizers, outlaws are the most likely to think of tax evasion as not a big deal, to use or accept the various rationalizations put forward to excuse tax cheating, and to believe that a lot of other people think it’s okay to cheat on taxes and that many would hide income or overstate an expense to avoid tax. Both groups are also the least likely to report responsible behaviours.

In addition, outlaws are the least likely to see consequences flowing from tax cheating, and are among those least likely to be concerned about getting caught. And, with over-taxed opportunists, they are the most likely to think that Canadians are over-taxed, including themselves. In short, outlaws not only indicate that they are high risk in terms of adopting all forms of tax cheating, but have the rationalizing mindset to support this, have little concern about getting caught, see limited consequences flowing from their actions, and likely think it is justified because of the unfairly high levels of taxation to which they feel they are subjected.

Demographically, this segment tends to be the second least-educated and the second lowest-income group. In addition, members of this segment are more likely to be under 30 years of age, men, and self-employed. In terms of psychographic profile, the outlaws are the least likely to articulate traditional values and among the most likely to feel that control over their lives lies elsewhere.

Government Actions and Communications

The taxpayer segmentation presents clear opportunities for potential government actions and communications. In terms of government actions to reduce tax cheating, potential penalties tend to be rated as more effective by law abiders and altruistic compliers compared to others. The two segments that consistently judged these potential penalties as less effective were rationalizers and, in particular, outlaws, who offered the least positive assessments for all options. In short, a focus on penalties appears to be most effective with the groups that least need attitudinal and behaviour modification in terms of tax cheating, and least effective with the two segments most in need of modification.

The pattern was quite different for the non-penalty potential government actions: providing more information about what tax money is used for, educating people earlier about their tax obligations (e.g. students or newcomers to Canada), and encouraging people to report those they suspect of tax cheating. While law abiders consistently assessed the items more positively in terms of their effectiveness, over-taxed opportunists were often second in their assessments. The one area in which there was consistency was the potential action rated as the least effective – encouraging Canadians to report those they suspect of tax cheating. This was at the bottom of the list for all of the segments, even when these potential government actions are combined with the potential penalties.

Turning to communications, the research suggests that there is little need to target the compliant segments. Perhaps not surprisingly, the potential motivators tend to be most effective with law abiders and altruistic compliers. In addition, there may be no need to target the highest-risk group because their attitudes and behaviours suggest that they can be expected to be resistant to messaging designed to achieve attitudinal or behavioural change. With this in mind, the main target audiences for future communications in this area are likely the three ‘middle’ groups – rationalizers, underground economists, and over-taxed opportunists. The top potential motivators tend to be understanding their tax responsibilities, fear of penalties, and knowing how their tax dollars are spent. Fear of embarrassing others is the least effective potential motivator for all of the segments.

One might think that the degree of self-professed tax-evasion tendencies acknowledged by respondents is understated given the personal, exposing nature of the topic, not to mention the illegality of tax cheating itself. Social desirability (or political correctness) bias - the 'right' posture being to look like a good, honest, tax-paying citizen - may be at play. If so, the proportion of Canadians that are at a greater risk of tax cheating may be higher than that indicated by the data.

This also suggests that when reviewing the responses to specific questions for any of the sets of measures that are part of a particular theme (e.g. questions that combine as part of the ‘no big deal’ factor), the indicator that leans most towards tax cheating is likely the revealing indicator that might well warrant greater confidence. It might be seen as the "thin edge of the wedge" – the greater honesty on a sensitive subject that has politically correct answers that could serve as the default responses for some respondents.

One area where this might be particularly relevant is the type of tax cheating behaviour in which people are most likely to engage. It is clear that many Canadians are comfortable paying cash for a good or service to avoid paying taxes, but are considerably less so when it comes to the other tax-evasion behaviours. In terms of the likelihood of doing any of the three other behaviours, respondents were more likely to say they would work for cash to avoid paying income tax, followed by selling things they made or do without reporting the income, while relatively few said they were likely to knowingly not declare some income on their tax return (7% vs. 13-16% for the other two). However, the first two measures are essentially the same as the latter one – not declaring income on one’s tax return. This suggests that fraudulently filling out an income tax form is viewed as the more serious of the tax-cheating behaviours, and that many do not make the connection between that and the contributing actions of working or selling things for cash and not declaring it. Communications messaging might help Canadians make that connection.

The above notwithstanding, what is more important than the exact levels of agreement for the various indicators that get at tax cheating, is the types of groups or segments that exist among taxpayers, and the relative proportions they represent among the population.

Footnotes

[Footnote 1]

The sample was stratified by province; therefore, the overall margin of error needed to be adjusted to reflect this.

[Footnote 2]

Cluster analysis is a form of statistical data analysis that allows for identification of groups of survey respondents who share common characteristics.

[Footnote 3]

Here, and throughout the report, income refers to ‘household’ not ‘personal’ income (i.e., the total income of all persons in the household before taxes for 2010)

Date modified:

2011-09-15