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OECD Studies Tax Morale: How Fragile Is Voluntary Compliance?

Posted on Sep. 17, 2019

How do people feel about paying taxes?

At first glance, it seems like a silly thing to ask because the answer is so obvious. But there’s more to the inquiry than one might suspect, as evidenced by a new study from the OECD Committee on Fiscal Affairs titled “Tax Morale: What Drives People and Businesses to Pay Tax?” When the ability to fund government largely depends on voluntary compliance, taxpayer attitudes matter quite a bit.

Some countries can boast impressive compliance figures because their citizens take pride in paying tax as a means of supporting desirable social programs. We tend to see this among Nordic countries, like Sweden and Norway.

The attitude is generally consistent with the famous remark by Supreme Court Justice Oliver Wendell Holmes Jr. that adorns the exterior of IRS headquarters in Washington: “Taxes are what we pay for a civilized society.” Still, the U.S. tax system has favorable compliance rates for reasons that have more to do with administrative tools — such as robust withholding and third-party reporting — than taxpayer morale. Few Americans actually enjoy paying taxes.

Other countries face sizable challenges when it comes to compliance. In some places, tax evasion is likened to the second most popular sport (after soccer, naturally). In a place where almost everybody else cheats on their taxes, an honest taxpayer may be left feeling like a chump. Nothing disrupts voluntary compliance like the awareness that your friends and neighbors are short-changing the public fisc and getting away with it.

It may be easy to ascribe these differences to “national culture,” but such labels aren’t constructive. They often raise more questions than they answer. The OECD has observed that statistically similar nations may have vastly different experiences. Jordan and Guatemala have comparable amounts of national wealth, as measured by per capita GDP. Yet Jordan collects tax revenues of 33 percent of GDP (close to the average for wealthier OECD member states), while Guatemala’s tax haul is a mere 13 percent of GDP. Surveys reflect that most of Ghana’s population is happy to pay tax, while almost nobody in Serbia feels that way. It’s worth noting here that Ghana goes out its way to earmark some taxes for popular spending programs: Revenue from the country’s VAT directly funds the country’s public health services.  

What are the best practices for favorably altering taxpayer perceptions? The question has significant consequences for developing economies in Africa, Asia, and Latin America, where national revenue bodies are resource-constrained and compliance is weak. For those countries, stable tax revenues reduce the need for foreign aid. Again, the OECD’s goal is to better understand the factors that affect taxpayer morale – which is conceptually distinct from compliance that results from the fear of getting caught.

Here are a few tidbits from the OECD report:

  1. Tax morale correlates favorably with education. The more formal education an individual possesses, the more likely he or she is to have a positive view about paying tax.

  2. Age also correlates favorably. Younger people are more likely to justify willful noncompliance than older people.

  3. Full-time workers display higher tax morale than part-time workers or the self-employed.

  4. Women generally have a higher tax morale than men.

  5. People who claim a faith-based or religious identity generally hold a more favorable view of paying taxes.

The report also considers institutional factors. Unsurprisingly, tax morale is weak among those who view tax officials as corrupt, or who otherwise lack trust in the government.

If there’s one takeaway from the OECD report it’s that citizens feel better about paying their tax when they perceive a clear link between revenue and expenditures. It’s the duty, then, of governments to continually bolster that perception by making their tax systems more transparent.

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