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.     

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.     

The effect of tax enforcement on tax morale

In this paper we argue that tax enforcement is an additional contextual factor affecting tax morale, one of the most important determinants of tax compliance. By using a unique dataset that merges a representative sample of Italian households with administrative data on tax enforcement, we first find that tax morale is positively correlated with tax enforcement. Second, to deal with possible endogeneity of tax enforcement, we show that results are confirmed in an IV specification using the change in the tax gap at the provincial level as an instrument for tax enforcement. Finally, we provide evidence that the impact of tax enforcement and social environment is stronger at low quantiles of tax morale. Our results show that besides that of lowering the expected value of tax evasion, tax enforcement has an additional and indirect effect on tax compliance through its effect on tax morale.     

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 incentives in fiscal federalism: an integrated perspective

Abstract Models of fiscal federalism rarely account for the efficiency implications of intergovernmental fiscal ties for federal tax policy. This paper shows that fiscal institutions such that federal tax deductibility, vertical revenue‐sharing, and fiscal equalization (being common features of existing federations) encourage local taxation, but may discourage federal taxation. Furthermore, the structure of public spending is skewed towards local spending. We also show that, when considering Leviathan governments, fiscal institutions reduce confiscatory taxation by the federal government. The result is contrary to the Cartelization Hypothesis ( Brennan and Buchanan 1980 ). Finally, we characterize the efficient design of intergovernmental fiscal ties.     

Dynamic scoring of tax reforms in a small open economy model

We examine dynamic revenue effects of a permanent tax cut on labor and capital income using a small open two-sector dynamic general equilibrium model. We use a dynamic scoring technique to calculate long-run as well as transitional effects on fiscal revenue when a tax cut is financed by either a lump-sum tax or consumption tax. We show that the revenue loss from an income tax cut becomes substantially smaller when agents can use international financial markets compared to the case of the closed economy. Responses of tradable and nontradable sectors to the capital income tax cut display a stark contrast in both long-run equilibrium and transitional dynamics due to different factor intensities. Capital income tax cut in the tradable sector is the most efficient policy instrument in terms of minimizing fiscal revenue loss. These simulation results suggest that fiscal sustainability issue when implementing a tax cut could be overstated.     

Attitudes Towards Paying Taxes in Austria: An Empirical Analysis

People mostly pay their taxes although there is a low probability of getting caught and being penalized. Thus, new attempts in the tax compliance literature try to go beyond standard economic theory. This paper examines citizens attitudes toward paying taxes – what is sometimes termed their tax morale, or the intrinsic motivation to pay taxes. Tax morale may be a key determinant to explain why people are honest. However, there are very few papers that explore the concept of tax morale theoretically and empirically. This study, based on the World Values Survey and the European Values Survey, therefore attempts to fill this gap in the literature, focusing on tax morale in Austria. Societal variables such as trust or pride have been identified as key determinants that shape tax morale in Austria. Furthermore, a lower perceived compliance leads to a decrease of tax morale, which indicates that social comparisons are relevant. The results also show a decrease of tax morale between 1990 and 1999, although Austrias taxpayers still have a very high tax morale compared to other European countries.     

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.     

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.     

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.     

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.     

Public budget composition,fiscal (de)centralization,and welfare

Abstract We study the optimal degree of fiscal decentralization in a dynamic federal economy where governments decide on budget size and its allocation between public education and infrastructure spending. We find that full centralization of tax and expenditure policies is optimal when infrastructure productivity is similar across regions. When differences are not too large, partial centralization is optimal. With strong differences, full decentralization becomes optimal. National steady‐state output tends to be highest under full decentralization. We provide a justification for the mixed evidence regarding the Oates conjecture by showing that full dominates partial decentralization, despite being inferior to complete decentralization.     

Striking a balance: Optimal tax policy with labor market duality

We develop a dynamic general equilibrium model where employers may avoid making social security contributions by offering some workers “secondary contracts.” When calibrated using aggregate tax revenue data, the model delivers estimates of secondary “off the books” employment that are consistent with survey evidence for the EU14 and United States. We investigate the fiscal and welfare effects of varying the avoidable and unavoidable shares of labor income tax while keeping the total wedge constant, and find that increasing the employer component raises hours worked, output, and welfare. Partial labor tax evasion makes tax revenues more elastic, but full tax compliance need not be a welfare enhancing policy mix.     

Pollution Abatement Investment When Environmental Regulation Is Uncertain

In a dynamic model of a risk-neutral competitive firm that can lower its pollution emissions per unit of output by building up abatement capital stock, we examine the effect of a higher pollution tax rate on abatement investment both under full certainty and when the timing or the size of the tax increase is uncertain. We show that a higher pollution tax encourages abatement investment if it does not exceed a certain threshold rate. However, akin to the Diamond-Mirrlees tax anomaly, it is possible that a higher pollution tax rate results in more pollution. The magnitude uncertainty discourages abatement investment, but at the time of the actual tax increase the abatement investment path may shift either upward or downward. On the other hand, when the timing is uncertain, the abatement investment path always jumps upward, thus suggesting that the effect of magnitude uncertainty on the optimal investment path may be more pronounced than that of timing uncertainty. Further, we show that the ad hoc practice of raising the discount rate to account for the uncertainty leads to underinvestment in abatement capital. We show how the size of this underinvestment bias varies with the future tax increase. Finally, we show that a credible threat to accelerate the tax increase can induce more abatement investment.     

Tax Morale, Rule-Governed Behaviour and Trust

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.     

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.     

Oligarchy, democracy, and state capacity

We develop a dynamic political economy model in which investment in the state capacity to levy taxes and deter crime is a policy variable, and we study the evolution of state capacity when policy is chosen by an elite. We show that democratization in the sense of expansion of the elite leads to an increased investment in state capacity and to a reduction in illegal activities and has nonmonotonic effects on tax rates as it reduces the willingness of the elite to engage in particularistic spending but enhances its willingness to provide public goods. Depending on initial conditions, consensual political changes may lead either to democratization or to the entrenchment of an immovable elite.     

PRIVATE INTERGENERATIONAL TRANSFERS AND THEIR ABILITY TO OFFSET THE FISCAL BURDEN OF AGEING

The ratio of retirees to workers in developed countries is expected to increase sharply in the next few decades. In the presence of unfunded income support policies, this increase in old age dependency is expected to increase the future fiscal burden of ageing, which is seen as a threat to living standards. Private intergenerational transfers in the form of bequests are also expected to increase in ageing societies, which may offset the adverse effects of the fiscal burden of population ageing on future living standards. This paper quantifies the ability of these private intergenerational transfers to offset the future fiscal burden of ageing in Australia. This is done through developing a dynamic overlapping generations simulation model with realistic demographics. Calculations based on steady-state simulations (with a pay-as-you-go tax rate equal to 3.3% of GDP) suggest that a bequest to GDP ratio of 1% offsets approximately one-third of the fiscal burden over the lifecycle when measured as a proportion of simple labour income and one-eleventh of the fiscal burden when measured as a proportion of full income (labour income plus leisure). The model is calibrated for Australia under a small open economy assumption such that the optimal solution mimics important cross-sectional and time-series fundamentals of the Australian economy. For the non-steady-state, intergenerational accounting suggests that the empirically plausible intergenerational transfers are strong enough to offset most of the tax burden (80–90%) when measured as a percentage of simple labour income and up to one-quarter of the burden when fiscal burden is measured as a percentage of full income.     

Globalization, Asymmetric Tax Competition, and Fiscal Equalization

Trade integration and the increasing mobility of firms have raised the need for international coordination in corporate tax. In this paper, we study the ability of fiscal equalization to avoid the misallocation of capital across asymmetric countries arising from tax competition. Such a reform respects the principle according to which the tax decision is entirely left up to the nation and links nations engaged in strategic tax policy by transfers. We use a model of trade and location where firms produce under imperfect competition. Our analysis suggests that falling trade costs increase the distortion created by tax competition in the international allocation of production. However, we show that fiscal equalization based on differences in tax revenues or tax base can implement a more efficient tax wedge and spatial allocation of the tax base.