Tax enforcement,tax compliance and tax morale in transition economies: A theoretical model

The focus of this paper is the analysis of the relationship between tax enforcement, tax compliance and tax morale within countries characterised by rapid introduction of market institutions and slow evolution of political regimes, such as transition economies. The paper investigates a coordination game in which the government is ex-ante committed to tax enforcement and can observe the proportion of tax-compliant agents in the economy. In turn, two groups of agents (third-party reporting and self-reported income) are keen to evade taxes unlawfully but have limited information on how many others evade taxes; their tax morale is therefore an endogenous function of agents' perception on tax compliance. The model predicts that the lower the quality of political institutions and the weaker tax morale, the less tax compliance can be achieved. The third-party reporting group will also be bearing higher tax burden than the self-reported income group. The model entails that having political institutions of good quality is not a sufficient condition to conduce to tax enforcement or tax compliance. Due to the endogenous role of tax morale, the government could be pushed ex-post towards poor or no tax enforcement. If good political institutions are not accompanied by good information about the enforcement of tax collection, there is scope for co-existence of poor tax enforcement, low tax compliance and weak tax morale. As such, this model well describes the tax evasion behaviour observed since the outset of transition from planned to market economy.     

Tax evasion and tax morale: A social network analysis

We study the effects of tax morale and social norms on tax evasion when individuals interact in a network. We present a model that incorporates incentives for tax compliance in the form of punishment and fines, tax morale, and reputation for social behaviour. We assume that individuals adjust their tax morale by observing the neighbours' tax morale. We simulate the model for different values of the parameters and show that the steady-state share of taxpayers as opposed to tax-evaders is affected by the probability of finding like-minded peers in the reference group (network integration), the weight that individuals attribute to reputation, and the share of individuals who update their tax morale. Last, we consider the possibility of a fiscal authority using the knowledge of the network structure and targeting ‘central’ individuals. We show that by positively affecting the tax morale of individuals whose influence within the network is high, a fiscal authority can increase tax compliance.     

How does petty corruption affect tax morale in Sub-Saharan Africa?

Revenues from taxation gain in importance to finance economic development in Sub-Saharan Africa. One obstacle to enhancing the willingness to remit taxes can be the extortion of bribes by public officials. Using micro-level data from the Afrobarometer, we show that petty corruption erodes tax morale. The effect on tax morale is more severe in countries and regions where fewer people are affected by petty corruption and becomes insignificant if extortion of bribes is particularly prevalent. Differing levels of civic participation and potential access to tax funded services are also found to induce heterogeneous reactions to corruption experience. Applying a mediation analysis, we demonstrate that petty corruption not only has a direct effect on tax morale but also diminishes confidence in tax authorities and therefore affects tax morale indirectly. The harmful effects of corruption experience, however, operate mainly through a generally lowered inclination to uphold high levels of tax morale.     

Can government improve tax compliance by adopting advanced information technology? Evidence from the Golden Tax Project III in China

This paper explores the tax compliance effects of adopting advanced information technology by tax bureau. Although many governments adopt advanced information technology in tax collection, little is known about the effect on tax compliance. Using difference-in-differences method, we exploit a staggered reform in which tax authorities adopt a comprehensive information reporting system in China, the Golden Tax Project III. Employing listed firm level data from 2010 to 2017, using book-tax difference and its remaining component which cannot be explained by earnings management as proxy measures of tax sheltering, we find that the adoption of GTP III decreases tax sheltering levels by a 1.88 percentage point. The effect is stronger for companies with higher tax rate. By exploring channels, our results suggest that the effect works by enhancing third-party reporting and by improving tax enforcement capacity in provinces that lack tax inspectors.     

Kleptocracy and tax evasion under resource abundance

Evidence has shown that petroleum wealth is associated with less transparency and at the same time less tax collection. In this paper, we find that the two issues are linked through the citizens’ tax evasion behavior. We develop a model to explain this link and conduct extensive empirical tests of its validity. The explanation is that officials tradeoff greater transparency to improve tax compliance against less transparency to increase gains from corruption. Oil windfalls diminish tax revenue needs, causing officials to optimize on less transparency. Seeing this, citizens optimize on a lower level of tax compliance. At equilibrium, both decline with a positive oil shock. We also study the alternative channel in which tax compliance responds to enforcement. Transparency is found to be the more robust channel. Ignoring citizens’ strategic behavior would lead to predicting suboptimal investment in state capacity for tax enforcement. Using giant oil discoveries data combined with oil price data, we develop a dynamic composite instrument and estimate the model with a dynamic panel system generalized method of moments. We find robust support for our explanation and the model's deep structure for 130+ countries and the 1980–2010 period.     

Fairness in tax compliance: A political competition model

This paper analyzes the political economy of income redistribution when voters are concerned about fairness in tax compliance. We consider a two‐stage model where there is a two‐party competition over the tax rate and over the intensity of the tax enforcement policy in the first stage, and voters decide about their level of tax compliance in the second stage. We find that if the concern about fairness in tax compliance is high enough, a liberal middle‐income majority of voters may block any income redistribution policy. Alternatively, we find an equilibrium in which the preferences of the median voter are ignored in favor of a coalition formed by a group of relatively poor voters and the richest voters. In this equilibrium income redistribution prevails with no tax enforcement.     

Tax morale,fiscal capacity,and war

This paper studies the effects of mobilization for war on the development of fiscal capacity and the values of tax compliance (tax morale). We propose a dynamic setting where governments may invest resources to improve the efficiency of the fiscal apparatus and the citizens' tax morality in order to raise the necessary revenues for the defense against a threat (external or internal), and parents optimally choose to transmit their preferences of tax compliance to children. Despite fiscal capacity and tax morale are initially substitutes, we show how a dynamic complementarity may arise in equilibrium from a more efficient transmission of the values of tax compliance in countries with high fiscal capacity, and this may explain why they tend to move together over time. Under reasonable conditions, we obtain that the effect of a higher threat of war on the steady-state level of the culture of tax compliance is negative when fiscal capacity is relatively low, and positive when the latter is large. We show cross-country evidence based on war frequency, fiscal capacity, and tax morale that is consistent with the results of our theory.     

(In)Effective tax enforcement and demand for cash

Cash holdings have increased worldwide in recent years. It is well known that a higher tax burden is typically an important factor in explaining an increase in cash holdings. However, the role of tax enforcement is less known. To explore the effect of tax enforcement on cash holdings, we study fiscal reform carried out in a large, developing country. In mid-2013, Mexico tried to raise tax revenues by enrolling more taxpayers and introducing electronic invoices to counter a secondary market in illegal invoices. Based on a transaction-based model of money demand, we find an ambiguous effect of tougher tax enforcement on money holdings. If institutions are ineffective, the model predicts an increase in cash holdings after tougher enforcement. To test this issue empirically, we propose a vector error correction (VEC) specification for money demand. The results suggest that a tax enforcement policy implemented under a weak institutional framework can exacerbate cash holdings.     

Tax noncompliance: The role of tax morale in smokers' behavior

Measuring and predicting compliance with tax obligations is an important but challenging task. Survey data from California smokers show that several forms of tax avoidance and evasion were common. The analysis shows that 43% of smokers avoided taxes by purchasing cigarettes from out-of-state sources in the past year, 15% admitted to evading taxes through cross-border purchases, and 26% reported purchasing likely or certainly untaxed cigarettes in the state in the past month. Attitudinal factors related to tax morale explain much more of the variance in compliance rates than demographic or law-and-economics factors. The implications for policy are discussed.     

Tax morale affects tax compliance: Evidence from surveys and an artefactual field experiment

Our working hypothesis is that cross-cultural differences in tax compliance behavior have foundations in the institutions of tax administration and citizen assessment of the quality of governance. Tax compliance being a complex behavioral issue, its investigation requires use of a variety of methods and data sources. Results from artefactual field experiments conducted in countries with substantially different political histories and records of governance quality demonstrate that observed differences in tax compliance levels persist over alternative levels of enforcement. The experimental results are shown to be robust by replicating them for the same countries using survey response measures of tax compliance.     

Tax Morale in Transition Countries

This article tries to reduce the lack of tax compliance research analysing tax morale in transition countries. The empirical analysis using tax morale as a dependent variable working with World Values Survey data indicates that there is a significantly higher tax morale in Central and Eastern European than in former Soviet Union countries. This difference has increased during the transition process. Furthermore, the article shows that factors such as trust in the legal system and the government have a significant positive effect on tax morale in transition economies.     

Social norms and economic growth in a model with labor and capital income tax evasion

Empirical evidence suggests that low-income countries are characterized by high levels of labor and capital income tax evasion while the opposite is true for high-income countries. This paper proposes a model to study the relationship between economic growth and both types of income tax evasion. We show that the existence of a social norm towards tax compliance generates a complementarity between capital and labor income tax evasion which explains the decline of both the share of evaders in the population and the amount of tax evasion when countries accumulate capital. The model predicts that the level of tax morale is positively correlated with both types of income tax evasion and the level of income per capita, consistent with recent empirical evidence. Finally, a higher tax rate increases the share of evaders in the population and aggregate tax evasion.     

The determinants of tax morale in comparative perspective: Evidence from European countries

Applying a multilevel model, we argue that tax morale is a function of individual- and contextual-level variables. Evidence presented in this article, based on the 2004–2005 European Social Survey and information on institutional settings, shows that tax morale in European countries varies systematically with socio-demographic characteristics, personal financial experiences, political attitudes, on the one hand, and regional GDP and tax arrangements on the other hand. Moreover, cross-national differences in tax morale are also related to ethnic and linguistic fractionalizations.     

Corporate tax evasion: The case for specialists

We analyze the role of accounting specialists who help corporations evade/avoid taxes in a game of incomplete information played by a tax authority, corporate taxpayers, and an accounting specialist. In addition to a full equilibrium characterization, we establish that (i) marginal changes in enforcement are not effective when evasion/avoidance is pervasive; (ii) fines on firms as opposed to specialists are more effective in such situations; (iii) reducing auditing costs and increasing “creative accounting” costs are effective in curbing evasion when tax compliance is relatively high.     

Tax evasion,social norms,and economic growth

We propose a theoretical model to account for the negative relationship between tax evasion and economic development. More precisely, we integrate tax morale into a dynamic OLG model of tax evasion. Tax morale is modeled as a social norm for tax compliance. We show that accounting for such nonpecuniary costs of evasion may explain (a) why the share of evaded taxes over GDP decreases when countries grow and (b) that tax morale is positively correlated with the level of GDP per capita. Finally, a higher tax rate increases aggregate evasion and the number of evaders when taxpayers decisions are interdependent.     

Effects of supervision on tax compliance: Evidence from a field experiment in Austria

We conduct a field experiment on tax compliance, focusing on newly founded firms. As a novelty the effect of tax authorities’ supervision on timely tax payments is examined. Interestingly, results show no positive overall effect of close supervision on tax compliance.     

Tax morale and tax evasion reports

The study proposes a new measure of tax morale for Italy based on voluntary tax evasion reports. Using this measure, I detected a positive relationship between tax morale and social capital, political participation, and immigration, but a negative relationship between tax morale and the dissatisfaction with public services and unemployment.     

Tax evasion in a behaviorally heterogeneous society: An evolutionary analysis

We focus on the tax evasion dynamics emerging from repeated interaction of three types of taxpayers: cheaters, honest citizens and punishers. By assuming that cultural evolution is driven by material payoffs only, we show that a long overlooked behavioral attitude towards taxation such as tax morale is important to dynamically induce higher levels of tax compliance within a large-scale population. The results of our evolutionary analysis reveal that the presence of taxpayers who both act honestly in the first place and are willing to costly sanction cheaters plays an important role for the long-run success of the social battle against tax evasion.     

Private law enforcement,fine sharing,and tax collection: Theory and historical evidence

This paper contributes to the literature on private law enforcement by proposing a novel solution to the problem of underenforcement by monopolistic enforcers. Monopolistic enforcers underinvest in enforcement because they ignore the social benefits of deterrence. We show that this problem can be partially resolved by combining law enforcement with tax collection because a joint enforcer-collector will have an interest in reducing the crime rate in order to maximize his tax income. In support of the theory, we discuss two historical examples of this practice: decentralized law enforcement under European feudalism, and centralized law enforcement in the Ottoman Empire.