Journal of Economic Psychology 31 (2010) 400–404 Contents lists available at ScienceDirect Journal of Economic Psychology journal homepage: www.elsevier.com/locate/joep Perceptions and outcomes of a fiscal bonus: Framing effects on evaluations and usage intentions Edoardo Lozza *, Sonia Carrera, A. Claudio Bosio Department of Psychology, Università Cattolica del Sacro Cuore, Milan, Italy a r t i c l e i n f o Article history: Received 23 September 2009 Received in revised form 18 January 2010 Accepted 22 January 2010 Available online 28 January 2010 JEL classification: H24 PsycINFO classification: 2960 3040 Keywords: Framing Rebate Taxation a b s t r a c t Is presenting a fiscal bonus as an income increase (a gain) the same as presenting it as a tax rebate (a loss reduction)? This paper aims to answer this question with two studies. Study 1 is a survey carried out in Italy to explore citizens’ perceptions of a fiscal reform introduced in 2005. It shows both effects imputable to the methods used to describe the bonus and differences between respondents belonging to different occupational groups. But it does not allow disentangling these factors. Study 2 aims to investigate whether and how (1) the frame used to describe a fiscal bonus and (2) taxpayers’ occupational status, influence their evaluation of this tax reduction and the uses they intend to make of it. To this end, 252 participants belonging to different occupational groups were submitted to two between-subject framing conditions (the bonus being described as a reduced loss or as a gain). They were then asked to evaluate the bonus’ importance for their personal wealth and to state how they intended to use it. Results demonstrate that the frame, rather than the occupational status of the respondent, influences taxpayers’ responses to the bonus. Respondents attached a higher importance to the bonus and were keener to save it when it was described as a loss reduction, compared to it being presented as a gain. These results are interpreted with reference to Prospect Theory, producing new insights into the processes through which framing can affect fiscal policy evaluations. The study is also relevant from a pragmatic perspective, as it shows that the way fiscal policy is communicated can be decisive for the achievement of economic and political goals. Ó 2010 Elsevier B.V. All rights reserved. 1. Introduction Fiscal psychology has widely referred to Prospect Theory (Kahneman & Tversky, 1979) to investigate and explain taxpayers’ behaviour, especially concerning tax evasion. Prospect Theory explains subjects’ risk-aversion within the gain domain and risk seeking within the loss domain referring to the shape of the value function. This theory has been used to show the influence of framing effects on taxpayers’ (non-)compliance decisions (e.g. Chang, Nichols, & Schultz, 1987; Kirchler & Maciejovsky, 2001; Robben et al., 1990). However, recent studies (e.g. Epley & Gneezy, 2007; McCaffery & Baron, 2006) have shown how this theoretical framework could fruitfully be used to explore other aspects of taxpayers’ attitudes and behaviour, such as their reaction to fiscal policy reforms. Interest in this research area grew after the unexpected results achieved by the 2001 Tax Relief Act in the USA. This reform consisted of a tax rebate to citizens, with the goal of increasing consumer spending and stimulating the * Corresponding author. Address: Department of Psychology, Università Cattolica del Sacro Cuore, Largo Gemelli 1, 20123 Milan, Italy. Tel./fax: +39 02 7234 3975. E-mail address: edoardo.lozza@unicatt.it (E. Lozza). 0167-4870/$ - see front matter Ó 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.joep.2010.01.008 401 E. Lozza et al. / Journal of Economic Psychology 31 (2010) 400–404 Table 1 2005 Fiscal Bonus: estimation of monetary value, importance attached to and usage intentions. Sample: employees and self-employed individuals who stated they perceived the effects of the fiscal bonus. Employees (n = 197) Self-employed (n = 103) Sig. (t-test) Estimated bonus per month (mean) € 36 € 20 p < .05 % of respondents who consider the bonus very/rather important 16% 31% p < .05 Usage intentions of the bonus I will spend it on daily purchases I will save it Other Don’t know 44% 5% 11% 40% 18% 14% 11% 57% p < .05 p < .05 n.s. p < .05 n.s. = not significant. US economy. In spite of this aim, as shown by Shapiro and Slemrod (2003), only 22% of households planned to spend their rebate cheque while the vast majority of them intended to save it. This phenomenon was analysed from a psychological perspective by Epley, Mak, and Idson (2006) and Epley and Gneezy (2007). Through a series of experiments, the authors showed how subjects receiving an unexpected income were more willing to save it when it was described as the return of a loss from a previous wealth state (as a ‘‘rebate”) rather than as a gain from a current wealth state (as a ‘‘bonus”). Therefore they propose an explanation based on the following hypothesis: participants in the rebate condition might have been less likely to spend the income because a returned loss was subjectively perceived as being more valuable than an additional gain. However, the differences in the extent to which the amount of money was perceived as valuable in the two experimental conditions were not significant and this prediction could not be confirmed. Nevertheless, the authors suggest that further research is needed on this topic. The current paper follows this research line in order to study taxpayers’ perceptions and reactions to a fiscal bonus. Below we present the results of (a) a survey carried out in 2005 to explore Italian citizens’ evaluations and reactions to a fiscal reform introduced by the Italian government and (b) an experiment conducted to better understand the results of the previous survey. 2. Study 1 – The survey In 2005 the Italian government introduced a set of fiscal reforms (involving a reconfiguration in tax rates, deductions, and exemptions) presented as a fiscal bonus. A survey explored taxpayers’ acquaintance, perceptions and evaluations of this bonus. 2.1. Method The survey was conducted via CATI (Computer Assisted Telephone Interview) on a sample of 2000 respondents, representative of the Italian population aged 15 and more. The sample was controlled for the following indicators: gender (F: 52%), age (mean: 44), place of residence, education and occupation. Participants were randomly selected by telephone. Among taxpayers (n = 1176), those who benefited the fiscal bonus (n = 300) were asked to roughly rate the monetary value of this bonus, to evaluate the importance of its impact on their personal financial situation and to state how they intended to use the bonus. These questions were submitted to both employees and self-employed, but in two different formulations for each group (using two different frames consistent with the ways they actually pay taxes). To the employees the bonus was described as an increase in their monthly incomes, while the questions to self-employed referred to a reduction in the tax payment due at the end of the year (see Appendix A for the exact formulation of the items). 2.2. Results and discussion Results, based on respondents who noticed an increase in their monthly incomes (employees, n = 197) or who knew they would receive a tax rebate (self-employed, n = 103) due to the bonus, show significant differences between the groups involved (see Table 1). Employees estimated, on average, a bonus value of 36 € per month, and only a small number of them (16%) judged it as very/rather important. Among the self-employed, in contrast, the average monetary value attached to the bonus was much lower (20 € per month), but the rate of respondents considering it as very/rather important was noticeably higher (31%) than among employees. Furthermore, the two groups differed in their bonus usage intentions. The majority of employees stated a preference for spending it on daily purchases, whereas the self-employed were more inclined to save this money. Unfortunately, it is impossible to interpret these data in an unambiguous manner owing to the overlap between: (a) taxpayers’ occupational status (self-employed/employees) and (b) different frames used to describe the bonus to each group (Employees: gain/Self-employed: reduced loss). Therefore, an experimental study was carried out to disentangle the effects of framing and occupational status on bonus importance perceptions and usage intentions. 402 E. Lozza et al. / Journal of Economic Psychology 31 (2010) 400–404 Table 2 Importance attached to the bonus by frame and occupational status. Frame Occupational status Descriptives without inclusion of income covariate Loss reduction M SD n Gain M SD n Estimated marginal means after inclusion of income covariate Loss reduction M SE 95% CI Gain M SE 95% CI Employees Self-employed Students 6.53 2.58 42 5.41 2.97 42 6.68 2.48 42 5.05 2.29 42 4.14 2.4 42 5.5 2.08 42 6.74 0.37 6.01–7.47 6.27 0.43 5.43–7.11 5.35 0.52 4.33–6.37 5.24 0.38 4.49–5.98 5.23 0.48 4.29–6.17 4,3 0.48 3.35–5.25 Note: Bonus importance ranges from 0 (low) to 10 (high). Covariate was evaluated at income = 1072 €. 3. Study 2 – The experiment 3.1. Rationale and hypothesis Two hypothetical scenarios, presenting a fiscal bonus under two different frames (gain vs reduced loss), were submitted to three different groups of taxpayers (the self-employed, employees and students1). Two major hypotheses were formulated in relation to framing effects. (H1) The importance of the bonus was predicted to be greater if the bonus was described as a reduction in the tax burden rather than as an increase in income. This prediction is based on the application of Prospect Theory to riskless choices (Tversky and Kahnemann, 1991). (H2) With regard to the bonus usage intentions, taxpayers would show a higher propensity to save the money when the bonus is described in terms of a reduced loss rather than as a gain. This hypothesis can be supported empirically referring to results from both Shapiro and Slemrod (2003) and Study 1. A third hypothesis was formulated in relation to occupational status. (H3) Differences are predicted to exist in the personal importance attached to the bonus by self-employed, employees and students, because of the different ways these subjects approach fiscal issues. In fact, several studies (e.g. Ashby, Webley, & Haslam, 2009; Kirchler & Maciejovsky, 2001; Schmolders, 1970) highlight deep differences in taxpaying behaviour and attitudes between occupational groups. 3.2. Method To test these hypotheses, the study included (a) an experimental scenario presenting the bonus and (b) a questionnaire on taxpayers’ perceptions and usage intentions of this bonus. The research design included two independent between-subjects variables: (1) frame, i.e. the description of the bonus as an increase in income or as a reduction in the amount of tax due. The bonus was presented to respondents as follows (in italics the gain/loss frames in the two experimental conditions): ‘‘Suppose that a recent tax reform led to some changes in national tax policy. These changes include a fiscal bonus, which allows you to enjoy a 60 € increase in your monthly income/ a reduction in your tax burden of 60 € per month”2. (2) occupational status, i.e. respondents being employees, self-employed, or students. The main dependent variables investigated were: (a) perceptions of the bonus importance: answers to the question ‘‘How important do you evaluate it, for you and your family’s wealth?” using a 10-point scale, from 1 = very low relevance to 10 = very high relevance; and (b) bonus usage intentions: answers to multiple choice question ‘‘How would you use this money?” (nominal scale). 1 In addition to the two groups of workers, students were used as a control group. As students have little experience in tax-related issues, their inclusion in the sample allowed us to better understand whether possible framing effects were due to taxpayers’ previous fiscal experience or, on the contrary, to a common feature of decision-making processes. 2 The original Italian: ‘‘Immagini che una recente riforma fiscale abbia comportato alcune modifiche nell’imposizione fiscale cui i cittadini sono soggetti. Tra queste novità vi è un Bonus Fiscale che Le consentirà di ottenere un incremento delle Sue entrate pari a 60 euro al mese/usufruire di una riduzione delle tasse pari a 60 euro al mese” 403 E. Lozza et al. / Journal of Economic Psychology 31 (2010) 400–404 Table 3 Bonus usage intentions by framing conditions. I will use it for everyday purchases I will save it Bonus is not relevant enough to affect my consumption/savings * Loss reduct. (n = 126) Gain (n = 126) 38% 37%* 9% 56%* 24% 16%* Significance in positive differences between groups (p < .05) computed with t-test. A structured questionnaire was used to collect these data. The sample consisted of 252 subjects, systematically spread between the two experimental conditions and between the three occupational statuses (42 for each design condition). 3.3. Results A 2 X 3 ANOVA was performed, with frame and occupational status as independent variables and bonus importance perceptions as a dependent variable. To deal with the quasi-experimental nature of the study, respondents’ income was included as a covariate. The results for the covariate show a significant effect of this factor, F(1, 246) = 17.74, p < .001. This effect corresponds to a correlation of r = .304, p < .001, with respondents with a higher income attaching a lower value to the bonus. The main effect of frame was significant, F(1, 246) = 14.31, p < .001, whereas the main effect of occupational status was not, F(2, 246) = 2.65. The interaction between frame and occupational status was not significant, F(2, 246) = .24. Table 2 shows raw means from the original data and the estimated marginal means after inclusion of the covariate. Results are consistent with H1 (but not with H3), showing that respondents attached a higher importance to the bonus when it was described as a reduced loss; on the contrary, the inclusion of subjects into different occupational groups – at the same income level – does not significantly affect bonus relevance perceptions3. Descriptions of a bonus within the two different frames were also predicted to affect bonus usage intentions (H2). To verify this hypothesis, subjects’ rates of preferences for every option provided were compared between the two experimental conditions. There were significant framing effects: the ‘‘reduced loss” frame elicits a higher tendency to save the tax reduction, while the ‘‘gain” frame induces a higher willingness to spend the bonus on everyday purchases (see Table 3). It confirms the results observed in Study 1 (see again Table 1). 4. Conclusions This study concurs with Epley and Gneezy (2007) on the need to understand better how framing effects influence evaluations on windfalls. Our results, in fact, showed that the frame used to describe a fiscal bonus not only influences spending and saving intentions, but also impacts on the judgments regarding the policy value (what Epley and colleagues could not prove4). Framing effects led subjects to attach a higher importance to the bonus where described as the avoidance of a loss (‘‘a reduction in tax burden”), rather than as a gain (‘‘an increase in income”). In this regard, further research is advisable to explore further the relationship between the value attached to a fiscal bonus and the ways people intend to use it. Usage intentions, in fact, could be influenced both by a direct effect due to the framing, and by an indirect one, through the mediation of the bonus importance perception. Furthermore, from a pragmatic perspective, this study provides useful guidelines for policy makers, suggesting that communication can be an essential issue to make fiscal policies more effective. Results, in fact, show that presenting a fiscal bonus as a gain is more appropriate when the aim is to stimulate the economy and increase consumer spending. On the contrary, a description referring to the potential losses avoided by the bonus may increase political consensus among taxpayers, in terms of attaching greater value to the initiative. Appendix A. Survey’s. questions in Study 15 (1) ‘‘Have you noticed any increase in your income as a result of this fiscal bonus?”/‘‘do you know that, starting from your next income-tax return, you can benefit from a tax reduction due to this fiscal bonus” (answers: yes/no) (2) (if yes) ‘‘Can you estimate the value of your bonus per month?” (open answer) 3 Significant framing effects (p < .001) were reported for each group of respondents (including students). It shows that frames have an influence that is independent from their previous fiscal experiences and is possibly due to a common feature in the decision-making processes involved. 4 Although this result may appear to contradict the one of Epely and colleagues, the differences between the two studies may be due to the different operationalization of the variable ‘‘subjective value” of the bonus. Respondents in Epley et coll. (2006) were asked to esteem whether the bonus ‘‘seemed like a large or a small amount”, while in our studies respondents were asked to esteem the importance of the bonus for their personal wealth. 5 The original items (in Italian): (1) Ha notato un aumento delle Sue entrate legato all’effetto del bonus fiscale? /Lei è a conoscenza del fatto che, con la prossima dichiarazione dei redditi, Lei potrà usufruire di una diminuzione delle tasse legata al bonus fiscale?(risposte: sì/no). (2) Può stimare il valore di questo bonus per mese?(risposta aperta). (3) Quanto giudica rilevante questa somma per Lei e la Sua famiglia? (risposte: molto, abbastanza, poco, per nulla). (4) Come pensate di utilizzare questa somma? (risposta aperta) 404 E. Lozza et al. / Journal of Economic Psychology 31 (2010) 400–404 (3) ‘‘How much important do you evaluate this bonus, for you and your family’s wealth?” (answers: great/enough/a little/not at all) (4) ‘‘How will you use this bonus?” (open answer) References Ashby, J. S., Webley, P., & Haslam, A. S. (2009). The role of occupational taxpaying cultures in taxpaying behaviour and attitudes. Journal of Economic Psychology, 30(2), 216–227. Chang, O. H., Nichols, D. R., & Schultz, J. J. (1987). Taxpayer attitudes toward tax audit risk. Journal of Economic Psychology, 8(3), 299–309. Epley, N., & Gneezy, A. (2007). The framing of financial windfalls and implication for public policy. The Journal of Socio-Economics, 36(1), 36–47. Epley, N., Mak, D., & Idson, L. C. (2006). Bonus or Rebate? The impact of income framing on spending and saving. Journal of Behavioral Decision Making, 19(3), 213–227. Kahneman, D., & Tversky, A. (1979). Prospect Theory: an analysis of decision under risk. Econometrica, 47(2), 263–291. Kirchler, E., & Maciejovsky, B. (2001). Tax compliance within the context of gain and loss situation, expected and current asset position, and profession. Journal of Economic Psychology, 22(2), 173–194. McCaffery, E. J., & Baron, J. (2006). Thinking about tax. Psychology, Public Policy, and Law, 12(1), 106–135. Robben, H. S. J., Webley, P., Weigel, R. H., Wärneryd, K. E., Kinsey, K. A., Hessing, D. J., et al (1990). Decision frame and opportunity as determinants of tax cheating: an international experimental study. Journal of Economic Psychology, 11(3), 341–364. Schmolders, G. (1970). Survey Research in Public Finance: a behavioral approach to fiscal policy. Public Finance, 25(2), 300–306. Shapiro, M. D., & Slemrod, J. (2003). Consumer Response to tax Rebates. The American Economic Review, 93(1), 274–283. Tversky, A., & Kahnemann, D. (1991). Loss aversion in risk-less choice: a reference-dependent model. The Quarterly Journal of Economics, 106(4), 1039–1061.