Tax morality theories are inextricably linked to issues of public services and commodities provision. Due to the presence of countless usually anonymously operating entities, the taxation issue differs from conventional public good providing circumstances. In case public supervision is expensive, determining appropriate audit rates and punishment systems becomes a significant challenge. Therefore, tax morale theory is based on the innate incentive to pay taxes and comply with the system.
Cologne school of tax psychology was the first to establish the term tax morale in the 1960s. However, the term garnered minimal interest among tax academics. At the beginning of the 1990s, tax morale drew widespread interest and has since become a fundamental problem in the scholarly investigation of tax compliance. As a result, tax morale was defined as the sum of all non-monetary reasons and causes for tax reporting that lie beyond the predicted value maximization. This intrinsic incentive to pay income tax is said to be predominantly the outcome of interactions between official and unofficial entities.
After the establishment of tax morale theory, a lot of researches were set. Among them was the Allingham and Sandmo early model. This model characterized tax avoidance of people as a gamble. Given a certain inspection likelihood and a punishment equal to the avoided tax, a question of what percentage of the earnings do cautious citizens declare once they have purely self-interested priorities were set. Further research has revealed that the overall likelihood of investigations and the punishment rate are incapable of explaining why individuals in some nations contribute such a significant amount of income taxes based on the presumption of self-interested motives.
Later, it became vital to recognize that individual qualities have a role in determining a person’s tax morale and behavior. Researches have found that some people, called “honest taxpayers,” do not try to circumvent taxes as they are just “predisposed not to evade”. The other extremity is represented by “tax evaders,” who mainly have poor tax morale and act rationally when weighing the advantages of avoiding taxes rather than the rewards of cooperating. Moreover, some people may prefer evading taxes and perceive it as a competition in which they are battling with the government.
However, one crucial assumption in the tax morale theory is its duality that is defined by recognizing personal interests and creating suitable policy reactions. While tax morale is usually referred to as one idea, it would be more appropriately defined as a collection of fundamental incentives for tax compliance. Recognizing personal interests and creating suitable policy reactions require locating the routes via which tax morale works. As a result, five widely characterized possible pathways for tax morale have been identified, emphasizing that these systems are not necessarily exclusive and are likely to overlap and interact with one another. The determination of these key pathways played a significant role in later studies.
The first mechanism is a motivational factor of a state’s taxpayer. The motivational factor may be considered an extra component in the utility function that increases the amount of taxes that the person chooses to pay. The second mechanism is congruence, wherein an additional utility term for paying income tax is dependent on the person’s connection to the government in a specific form. Another mechanism is emotions, peer influences, and social factors, wherein the added utility term for paying taxes is influenced by the attitudes or activities of other people. Long-run cultural variables are amongst the processes, as they may influence tax compliance. The last mechanism is inaccurate data and deviations from value maximization.
Therefore, the history of tax morale theory is relatively new, starting its existence in the early 60s in the Cologne school of tax psychology. While not gaining interest and acknowledgment of economic scholars immediately, the theory became widely spread later. As a result of many studies, tax morale theory expanded, now constituting a collection of fundamental incentives for tax compliance and specific characteristics of tax compliance behavior.
Tax Morality
According to many studies of tax morality, the term “tax morale” refers to the willingness of the individual to comply with the tax system. Tax morality is bound to measure the taxpayer’s perceptions and attitudes towards tax compliance and tax avoidance. Therefore, tax morality focuses on the behavior of a person and their relationship with the community and authorities. The main objectives include the research of integrity, influences, and other characteristics of community members.
Taxes create, symbolize, and sustain community connections between specific entities. These relationships bind a single citizen to the government while also uniting the citizens who comply with the taxation process. The tax system does not create an equal tax ratio and, in this regard, no congruent ties among taxpayer and internal revenue services. Instead, it involves obligations that assist the broader public through asymmetrical reciprocity. Furthermore, the concept of “vertical and horizontal fiscal justice” assists in organizing the entire tax-paying population as a society based on the cooperative concept. Thus, there are specific relationships and interactions which define tax morality.
Such types of interactions are interconnected and ethically valued. These values present themselves in concepts such as faith, accountability, and integrity, which are constantly and inevitably noted in tax-related discussions. While related, the systems of interactions are nevertheless viewed as independent, resulting in a split in the latter ethical concepts. For example, a lack of tax integrity is considered a crime against the government and robbery of compatriots. The government, over all else, represents an anonymous partner of the taxpayer, consisting of a hidden world of reinforced “administrative and executive institutions at the local, state, and federal levels”. Meanwhile, the taxpayer is a group of affected individuals emerging in the shape of a cooperative matter.
Many areas indicate the level of tax morality in various societies. For example, tax morale is often stronger in countries with tax-heavy economies. Although there is considerable variance across nations, the natural trend is that countries with the highest tax-to-GDP ratios have better tax morale. This factor might be indicative of a vicious loop between successful state functioning, improved tax compliance, along with tax morale; alternatively, it could be indicative of a “fiscal contract between taxpayers and the state,” with citizens eager to pay tax in exchange for efficient social services5. This dynamic will be investigated using regional-level data in further paragraphs.
Moreover, age, educational background, gender, and faith in the state tend to impact tax morale, according to updated information from public opinion polls. When the current worldwide research is compared to the prior scientific assessment from eight years ago, it is clear that many of the same characteristics seem to impact tax morale. People who are “older, more educated, or religious,” as well as women for that matter, have notably higher levels of tax morale at the world scale. Those who have a higher level of faith in the administration also have a higher level of tax morale. These findings are replicated in national analyses, particularly in Latin America, with minor outliers in Africa.
While females have better tax morale than males on a worldwide scale, they have lower tax morale in Africa. The grounds for this are unknown, and the results underscore the need for additional study on gender and taxes, particularly how “unpaid care is addressed in the tax system” and tax discrepancies between female- and male-dominated industries5. Nowadays, such a study is impeded by a shortage of related information. Additional thorough statistics, which is presently only accessible for Africa, suggest that the relative value of the tax system is a significant factor of tax morale. According to research findings, the acknowledged validity of the tax authorities is the most important factor of tax morale in Africa.
Statistics from Africa show a favorable association between tax morale and government service provision, but statistics from Latin America offer a less inherent connection. Africa demonstrated higher tax morale, which was connected to satisfaction with governmental services, thereby suggesting the presence of the economic relationship. In Latin America, where faith in the administration was crucial, this association was less clear, although better satisfaction with healthcare was connected with lower tax morale. Additionally, this contradicts prior results, implying that the economical compact may be poorer than previously thought, particularly in fields such as healthcare, where the government’s role is shifting, and people make significant monetary contributions.
Hence, tax morality is the willingness of the individual to comply with the tax system. Meanwhile, tax morality also covers the behavioral patterns of taxpayers and the connections of an individual to the community and the authorities. Additionally, there are many factors that contribute to the tax morality and are therefore its determinants. As a result, the factors later influence the economies and behaviors of taxpayers of various counties.
Factors Affecting the Morality
As it has been mentioned before, tax morality involves the ability and determination to pay one’s dues, such as taxes. Tax morality is one of the integral parts of the economy in both developing and developed countries. Therefore, while being a determinant of economic health, there are many factors that determine tax morality and drive individuals to comply with the established tax system of the state.
The first factor that determines the level of tax morality among citizens is the country’s gross domestic product. Governments with higher tax rates as a proportion of GDP seem to have better tax morale. Therefore, there is a significant relationship between a government’s tax morale and its tax-to-GDP ratio. This statement might certainly illustrate the regional differences, as OECD nations and Latin America have larger tax-to-GDP ratios than other areas. Thus, such a ratio determines the tax compliance of citizens and is a significant factor of morality.
There are many assumptions of why the GDP ratio has a heavy influence on various countries. One explanation is that the association suggests a vicious loop of public service delivery, optional taxpayer compliance, and economic sustainability difficulties, all of which are difficult to manage across many emerging economies. Further correlations, including the influence of casualness on tax morale, might be of importance, but resource restrictions prevent this sort of exercise for the time being.
Another factor of tax morality is highly tied to structural and socioeconomic issues. Tax morale is affected by more faith in government, age, and educational background. The worldwide study result emphasizes the importance of socioeconomic conditions in explaining people’s tax morale. Therefore, people who have a better educational experience tend to have a positive attitude toward tax payments. Another result is that women outperform males in terms of tax morale.
A further condition is intertwined with elderly individuals who are less prone than youths to rationalize tax evasion. Moreover, individuals of the nation in which they live have more excellent tax morale than non-citizens. The last socioeconomic condition is “a faith or religious identity” since religious people are more likely to pay their taxes. Therefore, such socioeconomic factors dictate the tax compliance of people.
According to structural factors, organizational factors and effectiveness are also likely to have a substantial influence on tax morale. People who think that they live in a political system with meritocracy have much higher tax morale. Individuals who trust their political system are more likely to pay their taxes than those who do not. Moreover, those who believe that economic equalization is vital, such as taxing the wealthy to fund benefits for the poor, have greater tax morale. The last structural condition involves people who believe that democracy is the ideal type of government for their nation, which makes them more likely to believe that tax evasion is unacceptable. Thus, the perceptions of equality and inequality, actions of administrations, and the idea of meritocracy in the state contribute to tax compliance behavior.
As a result, the given factors have one common element: government effectiveness and sensitivity to communities’ demands generate tax morale. Trust in the system is determined by how efficient the authority is at keeping its commitments. In contrast, recognized meritocracy depends on administrations assisting in creating a culture in which hard effort leads to prosperity and possibilities are open to everybody.
Studies Related to Tax Morale
There are many studies covering the essence and significance of tax morale. In many types of research, tax morality refers to the moral responsibility to pay taxes or the conviction that tax payment is a way of contributing to the community. Previous studies indicate that tax morality plays a significant role in understanding taxpayer actions and that a great level of tax compliance may be described by tax morale. Other researchers have also discovered that an improvement in tax morale has a considerable favorable influence on individuals’ tax filing and cooperation.
In many studies, tax evasions and tax morale are connected and therefore researched together. Tax morale was examined in Lago-Penas’s study as well as Frey and Weck-Hannemann’s research. In order to investigate the influence of changing trends separately, Simonovits used tax morale as a starting point. They established a value function that accounted for the benefit obtained from the act of disclosing as well as the utility based on the personal expenditure. Earnings redistribution and the delivery of public services are both financed by taxation. The ideal report strikes a compromise between increased consumption as a result of the reduced report and increased ethical value as a result of the greater report. The work concludes that increased tax morale leads to more redistribution of income and gross taxation, hence funding a higher level of government spending.
Traxler developed a more detailed version in which the ethical value from disclosing is directly linked to the number of violators. Traxler also used Allingham and Sandmo’s inspecting and sanctioning module. Allingham and Sandmo’s theory states that taxpayers’ compliance depends on the probability of detection. The presence of equilibrium has now become a complicated matter, and the probability of it cannot be eliminated.
Another segment of the research, such as Bloomquist or SzabĂł’s, adapted the cognitive method to taxation difficulties. Such approaches are commonly referred to as agent-based models. By far, the most prominent notable example is Hokamp and Pickhardt’s. This example employs four kinds of actors: rational agents, which are the equivalents of conventional egoistic utility maximizers; moralists, who pay their debts; erratics, who make poor decisions, enabling earnings overreporting; and emulators, who mimic the behavior patterns of their neighbors and friends within the community. Antunes, Frey and Torgler, and Prinz offer comparable variants. Therefore, these models all have one common trait; they don’t make any assumptions about people’s norms.
Hence, there are many studies that cover tax morality and explain the importance of researching and integrating tax compliance behavior and taxpayers’ relationships. While many studies concentrate on various divisions of tax morality, all of them have mutual characteristics, such as improvements of tax morale, indicators of tax morality, and reasons for tax evasion. The given examples of studies indicate models of taxpayers and the connection between exemption and tax evasion.
Comparison of Tax Morality between Countries
Tax collections provide authorities with the finances they require to employ in growth, alleviate inequality, provide social programs, and construct the infrastructure necessary for long-term prosperity. Many emerging countries, meanwhile, encounter difficulties in raising their taxes from internal sources. These difficulties include a tiny tax foundation, a vast unorganized economy, inadequate management and administrative ability, low rates of income per capita, internal spending and investment, and perhaps tax evasion by the rich.
Despite the fact that there is a significant association between a government’s degree of development and its tax collections, there are substantial variations across nations at equivalent phases of development. Some nations’ citizens are content to pay their dues, for example, all Ghanaians, while others are not, for example, the majority of Serbians. Therefore, citizens in nations with low tax morale regard tax evasion as reasonable. They may watch everyone else in their community evading taxes and thus believe it is fair and ethical for them to do so as well. The more people who escape examination in a community, the lesser the risk of investigation.
Lago-Peas and Lago-Peas provide a brief summary of the elements discovered in earlier studies as influencing tax morale. They demonstrate that “age, religion, financial stress, and agreement with government decisions” enhance tax morale, but academic achievement and self-employment status decrease tax morale. Fewer shadow economies are also related to higher tax morale. Torgler discovers that Central and Eastern European nations have greater tax morale than former Soviet Union countries involved. Cummings concludes, based on field research in Botswana and South Africa, as well as a study of African countries, that higher tax morale leads to greater tax compliance.
Data Collected from three different national public polls by OECD – Afrobarometer, AsiaBarometer, and Latinobarómetro – reflects national patterns. Countries in Africa have the tax agency that has the authority to compel citizens to obey the tax system at any time. This demonstrates, at least theoretically, reasonably strong support for tax enforcement throughout Africa, with more than two-thirds of participants in the comprehensive study agreeing with the claim, albeit there is substantial variance among nations. The Latinobarometro poses the same question, allowing for a comparative evaluation of the topic of tax morale.
Tax morale is typically high throughout Latin America and the Caribbean, with major variations between nations. The AsiaBarometer study expressly associates public spending with taxation. Respondents in the research were questioned whether they wanted more or less public spending, with the understanding that increased spending may necessitate a tax raise. Citizens generally prefer more public spending, yet there is substantial diversity between nations in Asia, like in other areas. The national statistics reveal a number of additional characteristics that impact tax morale, including satisfaction with public services and budgets, faith in government, and views of wrongdoing.
Satisfaction with government spending and operations may be used to measure how successfully countries transform revenues into expenditures. Tax morale is influenced by contentment with areas such as healthcare, education, water, and sanitation. Education may thus yield a twofold profit, both in terms of inherent advantages and happiness with its supply. The unsatisfied customer engagement is the converse of this, in which more unhappiness with government services is connected with lower tax morale. Efforts to raise people’s knowledge of the connection between tax income and government spending may aid in improving tax morale. Therefore, a lot of results depend on the actions of the government.
If individuals regard their state to be reliable, they are more inclined to view tax burdens favorably. Trust in the system, for example, is connected with a need for more expenditure in Asia. A greater level of commitment and tax morale is connected with a state that is perceived to be making excellent use of tax income, amongst other variables. As previously said, this demonstrates how highlighting the advantages of taxes and spending may boost compliance.
Conclusion
Hence, tax morale in counties varies, with some countries having high levels of tax compliance and other countries dealing with tax evasions and dishonesty. According to the literature, the desire and motivation to pay income tax is the direct result of an interaction between two entities, official and unofficial. This interaction, therefore, predicts tax morale in different countries. Thus, the results of the research show that individuals are more eager to pay taxes if personal interests are involved, and there is a stable policy regarding this topic.
Additionally, some parameters that influence the integrity of citizens and their desire to cooperate with the tax system were identified. The literature used in this paper shows that countries that provide people with proper healthcare, education, and public services tend to have higher tax morale. Meanwhile, countries with lower GDP, education, and healthcare system have a lower level of tax compliance among citizens. Thus, the overall level of contentment of communities plays an integral part in tax morale establishment. As a result, a lack of strong policy and a feeling of impunity play a crucial role in tax morale.
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