Tax morale : theory and empirical analysis of tax compliance

Tax morale is puzzling in our society. Observations show that tax compliance cannot be satisfactorily explained by the level of enforcement. Other factors may well be relevant. This paper contains a short survey of important theoretical and empirical findings in the tax morale literature, focussing on personal income tax morale. The following three key topics are discussed: moral sentiments, fairness and the relationship between taxpayer and government. The survey stresses the relevance of incorporating tax morale for a better understanding of tax compliance. A significant body of research has been accumulated concerning tax morale and tax compliance. This paper takes a stroll through the experimental findings, focusing on personal income. After briefly discussing the traditional topic of deterrence the main focus is on the social and institutional factors which until now have received only limited attention. Taxpayers have different possibilities to express their attitudes towards a tax system. While tax compliance literature has mostly focused on the illegal strategy of tax evasion, another possibility would be to avoid taxes. The intention of this survey paper is to show the relevance of tax avoidance and thus to analyse the related topics as complexity and tax knowledge. Furthermore, tax practitioners, key players in the tax avoidance strategy, are analysed. Discussions about tax evasion often assume that tax evasion is not desirable. Thus, this paper analyses people’s value regarding tax evasion using the World Values Surveys. Our data analysis shows that tax morale did not fall significantly in the OECD and developing countries. On the other hand, there is a decline in tax morale for the former Soviet Union and Central and Eastern European countries. Furthermore, we find a significant negative correlation between tax morale and the size of shadow economy. Finally, we focus on constitutions, showing the importance of a legitimated political process. This paper outlines the relevance of rules to understand tax morale. It tries to find explanations why taxpayers obey, rather than simply evade taxes. The development of a typology of taxpayers shows that the same tax rules can have different compliance effects. Furthermore, the paper provides evidence with two data sets, the World Values Survey and the Taxpayers Opinion Survey that trust in public officials and the legal system have a significant positive effect on tax morale. This paper analyses the impact of direct democracy, trust in government, the court and the legal system, and federalism on tax morale. In the tax compliance literature it is novel to analyse tax morale as dependent variable and to systematically analyse the effects of formal and informal institutions in Switzerland, a country where participation rights and the degree of federalism vary across different cantons. We used two different data sets at the individual level (World Values Survey and International Social Survey Programme). The findings suggest that direct democratic rights, local autonomy, and trust in government, the court and the legal system have a significantly positive effect on tax morale. The intention of this paper is to analyse how direct democracy rights affect tax morale. Empirical studies in the tax compliance literature did rarely systematically analyse tax morale as dependent variable and the effects of institutional variables as direct democracy. Therefore, data from the United States in 1995 are analysed, based on the World Values Survey. The findings suggest that direct democratic rights increase tax morale. Many taxpayers truthfully declare their income to the tax administration. Why? In this paper we have found a significant correlation between tax morale and tax evasion, controlling a variety of factors. Furthermore we have analysed tax morale as dependent variable and studied the determinants that shape it using the Taxpayer Opinion Survey 1987. The results indicate that there are a variety of other variables beside coercion that significantly improve tax morale. This paper tries to reduce the lack of tax compliance research analysing tax morale in transition countries. The empirical analysis using tax morale as dependent variable working with World Values Survey data indicates that there is a significantly higher tax morale in Central/Eastern European economies than in Former Soviet Union countries. This difference has increased during the transition process. Furthermore, the paper shows that factors as trust in the legal system and the government have a significant positive effect on tax morale in transition economies. In the tax compliance literature, we observe a lack of empirical evidence on the degree of tax morale in developing countries. Thus, our paper as a novelty focuses on Latin America, analysing tax morale as dependent variable and searching for factors that systematically affect tax morale, working with the two data sets Latinobarómetro and World Values Survey. Our findings indicate that there is a significant correlation between tax morale and the size of shadow economy. Furthermore, people who said they knew/have heard about practised tax avoidance have a significantly lower tax morale than others. Looking at individuals’ perception of reasons for tax evasion we found that the tax burden, lacking honesty, and corruption are seen as the main factors. We observed a significantly lower tax morale in South America/Mexico than in the Central America/Caribbean area. Furthermore, trust in the president and the officials, the belief that other individuals obey the law, and a pro democratic attitude have a significant positive effect on tax morale. This paper analyses tax morale in several Asian countries. The descriptive analysis indicates that tax morale is very low in the Philippines and relatively high in Japan, China, and Bangladesh. In general Asia has a higher tax morale than OECD countries, which might indicate cultural differences. The paper also analyses tax morale as dependent variable and thus gives answers to what shapes tax morale. Pooling the Asian countries indicates, e.g., that trust in government and the legal system have a positive effect on tax morale. These results remain robust for the two countries India and Japan in a time series analysis. Tax evasion seems to be a growing problem in almost all countries. The paper analyses possibilities and limitations of game theoretical aspects to analyse tax evasion. However, empirical findings indicate that most people pay more taxes than the traditional economic approach would predict. Thus, it might be important to go a step back and analyse tax morale, the intrinsic motivation to pay taxes, as endogenous variable. With data from the World Values Survey, choosing Canada, strong evidence has been found that trust in government, pride, and religiosity have a systematic positive influence on tax morale. This effect tends to persist even after controlling for age, income, education, gender, marital status, and employment status. This paper provides a comparison of tax morale between inhabitants of East and West Germany after its post-reunification period, using World Values Survey data between 1990 and 1997. The setting of the German reunification is particularly interesting for the analysis of tax morale as it is close to a natural experiment. For the years 1990 and 1997 our findings show a higher tax morale in East Germany than in West Germany. However, tax morale in the East seems to erode over time. Around three quarters of the East-West differential disappeared in just seven years. Adherence to social norms as practised in the GDR provides a key explanation of why tax morale is higher in the East. Tax compliance literature rarely analyses tax morale systematically. This paper provides a comparison of tax morale in different culture regions in Europe using World Values Survey data. The empirical findings using tax morale as a dependent variable indicate that there is a small significant difference between North and South Europe. Furthermore, culture differences in Switzerland, Belgium and Spain are analysed. According to the findings cultural background seems not to have always an effect on tax morale. Tax morale and tax compliance seem to be quite a complex phenomenon. Our experiment does not focus on traditional topics as the audit rate or the audit probability but on exchange equity. We used event history models to analyse temporal dynamics of processes. The effect of exchange inequity is not so clear. The tendency is that (negative) positive actions are intended to (reduce) increase taxpayers’ commitment to tax-payments. There is little empirical evidence in the tax compliance literature about the effects of social norms on tax compliance. We are going to analyse tax morale and tax compliance behaviour with field data and data derived from laboratory experiments in order to evaluate the effects of internal and external social norms. A central point of this paper is the analysis of tax morale and tax compliance behaviour in Costa Rica and Switzerland, two countries in two different continents with different tax culture backgrounds. The results indicate that internal and external social norms have a significant effect on tax morale and tax compliance. The intention of this paper is to analyse religiosity as a potential factor that affects tax morale. For this purpose, a bivariate analysis has been made in more than 40 countries, and a multivariate analysis for the United States, West Germany, Canada and Great Britain with data from the World Values Surveys has been done. The analyses suggest that religiosity raises tax morale. This paper analyses in a controlled field experiment in Switzerland the effects of moral suasion on the timely paying and filling out of the tax form 2001, and the honesty regarding the declaration of domestic income from capital gains, lottery winnings, and certain insurance benefits. Comparisons of different tax filling years and multiple regression estimations have been done using these three factors as dependent variables to check if there is a significant difference between the control group and the treatment group, controlling for additional factors that might influence compliance behaviour. In February 2002 the treatment group received a letter signed by the commune fiscal commissioner containing normative appeals. Results indicate that moral suasion has hardly any effect on taxpayers’ compliance behaviour. The strongest positive effect can be observed for the variable “timely paying the taxes”. Tax compliance experiments have been conducted with students and have focused on the effects of deterrence on tax compliance. However, important insights can be gained looking at alternative instruments. A main purpose of this paper is to conduct an experiment in Costa Rica not with students (exclusively) but with taxpayers, holding traditional factors, such as the probability of penalty and the fine rate, constant and thus analysing to which extent other factors as fiscal exchange, moral suasion, and positive rewards systematically influence tax compliance. Our findings indicate that these factors increase the compliance rate. In many countries thinking about a (new) tax amnesty is currently in vogue. However, crossnational experience shows that the financial success of such a tax amnesty is not granted. Furthermore, it is debated whether in the long run tax amnesties undermine tax compliance. We show in a laboratory experiment that if taxpayers have the opportunity to vote on a tax amnesty, they refuse such an offer even in the case of a public discussion prior to ballots. But interestingly, tax compliance raises significantly after the vote indicating that on the one hand the voting procedure induces a kind of civic duty, as taxpayers become aware of the importance to contribute to the provision of public goods. On the other hand, the amnesty proposal sends a signal to taxpayers that the government wants to fight tax evasion, inducing voters to comply afterwards in order to reduce the likelihood of stricter enforcement efforts. Furthermore, an amnesty appears to be more effective in generating tax compliance when combined with an increase in the enforcement parameters than an amnesty without changes in the enforcement factors. Finally, the positive effects of a tax amnesty are reduced if people count on future acts of grace. Tax compliance literature lacks empirical evidence regarding the effects of a tax amnesty on tax compliance. To measure the long run effects of an amnesty on compliance, experiments in Switzerland and Costa Rica were conducted. The results suggest that tax compliance raises significantly when people get the opportunity to vote for or against a tax amnesty, independently from whether a tax amnesty is rejected or not. The strongest effect can be achieved when voting is coupled with pre-voting discussion. Furthermore, the anticipation of further tax amnesties reduces positive effects on tax compliance. All these findings are robust across the different cultures. Interestingly, our results indicate that tax compliance is significantly higher in Costa Rica than to Switzerland.