Table of Contents
Literature Review and Research Question
Case Study Selection
Bibliography and List of Figures
In this short paper I will develop a conceptual proposal to explore the relationship between public social spending (PSS) and tax morale. The latter has experienced more and more interest among scholars in the past several decades in order to clarify the “puzzle of tax compliance”, which is to explain, why tax compliance turns out to be substantially higher than the neo-classical model would estimate. Since research has provided empirical evidence for the impact of tax morale on tax compliance, scientists are faced with the challenge to come up with determinants of tax morale. This paper suggests public social spending as a determinant. On the basis of the existing research literature, I set up a research hypothesis, which shall to be tested in the context of three selected countries. A research concept is described while possible limitations are taken into account. These considerations as well as potential promises of the concept are summed up in the conclusion.
Literature Review and Research Question
In order to gain an overview on the existing research, a literature review has been conducted in the time period 11/2016 and 12/2016. For this purpose, I mainly relied on the data basis of the University Library of Potsdam, Web of Knowledge as well as some open sources such as Library Genesis and Sci Hub, using the search items tax morale, tax compliance, tax fraud, welfare state, redistribution, public goods, public spending and the according equivalents in German language. Basing on the literature, I formulated the following research question: Is there a relation between the scope of public social spending and individual tax morale?
"When there is an income tax, the just will pay more and the unjust less." – Plato
The problem of tax evasion is as old as the idea of taxation itself and such has been commented on already by the ancient scholar Plato:
At the same time, it is a well-known fact that the standard economy model after Allingham and Sandmo (1972) describes the phenomenon of tax evasion only insufficiently. The paradigm of a rational individual, maximizing his benefits as a homo oeconomicus, forms the basis of this model. The individual is expected to balance the advantage of successful tax evasion against the risk of detection and potential penalties. The existing tax compliance though has to be estimated much higher than expected by neoclassical theory (see Long and Swinger 1991, Frey 1999); in contrast, many studies even hypothesize that high audit rates have a negative effect on tax compliance through a “crowding-out” effect on intrinsic motivation (Alm, McClelland and Schulze 1999). As a consequence of that, much academic work of the past decades tried to develop alternative approaches towards tax compliance.
Since the late 1990s, social factors of tax behavior have been stressed in the academic literature in order to explain tax payers’ conformity. During that, tax morale has gained particular emphasis. Erard and Feinstein (1994), Cummings et al. (2009) and further scholars were able to provide evidence for a significant relationship between tax compliance and tax morale. In his review, Torgler (2011) describes various theoretical approaches to explain tax payers’ behavior: at first, he refers to the altruistic perspective, after which tax payers not only focus on their own benefit but also take into consideration the benefit of society as a whole – and the available resources for social spending, depending on aggregated tax behavior. Secondly, he describes the moral approach following the Categorical Imperative of Immanuel Kant: if individual tax liabilities are perceived to be fair, the entire tax system is perceived to be fair for others as well. Nonconformity would lead to “guilt or a reduction in the taxpayers’ self-image” (ibid, p. 6). The approach mentioned in the third place could be labeled with the term of reputation costs. High tax moral also increases these costs in case of dishonest behavior. There is much to suggest that social factors play a role here as well, as I will elaborate later. So far, the impact of tax morale on tax compliance can be seen confirmed at this state of research. The role of influencing parameters of tax morale, however, shows a mixed image and is left up for further research.
An overview on studies exploring the determinants of tax morale can be found again in Torgler (2011). Socio-demographic factors are a basic variable to be mentioned in the first place: elderly people and women seem to show generally a higher tax morale. This effect is as simple as it is robust over a large scale of countries such as Russia (Alm et al. 2006), Latin America (Torgler 2005), Asia (Torgler 2004) and western-industrialized countries (Slemrod 2003, Alm and Torgler 2006, Frey and Torgler 2007). Tittle (1980) explains the effect through a higher sensitivity of the elderly towards social sanctions and a historical, rather conform-behaving role of women compared to men. Another factor that was found in many studies is the relationship between tax payers and the state. The results suggest that trust, accountability and efficiency in and towards the tax system are likely to increase tax morale: if people can assume that their tax money is managed well, they are more willing to pay it. This effect as well has been found in various country studies (see e.g. Alm and Gomez 2008; Barone and Mocetti 2009). In addition to that, Feld and Frey (2002) found out that if tax authorities of Swiss cantons treat tax payers more fair and respectfully, tax morale increases as well. This is, as Feld and Frey assume, because tax payers feel less suspected to report too low income. Furthermore, religion is another factor. Hull (2000) and Torgler (2006) focused in their studies on this effect and found significant results for religious beliefs and church attendance. Konrad and Qari (2009) and Torgler (2005) confirmed the results in other countries. Anderson and Tollesen (1994) explain the effect through a role of the church as a “supernatural police” (ibid). Social norms and the behavior of other tax payers have also shown strong impact on tax morale. The willingness to pay taxes seems to be higher if other tax payers are perceived to act honest and reversely, the impression of widespread tax fraud impacts tax morale negatively. Frey and Torgler (2006) examined the relationship between perceived tax evasion and tax morale in several Eastern and Western European countries and found a substantial effect. In the last place, there seems to be an impact on tax morale if tax payers take part in the decision on what their money is spend on. Feld and Frey (2002) and Torgler (2005) demonstrate a significant positive effect of direct participation rights on tax morale. Moreover, some studies show that voting on tax issues might affect tax compliance positively (Alm, McClelland and Schulze 1999; Feld and Tyran 2002).
This paper suggests to investigate the impact of public social spending on tax morale. Alm, McClelland and Schulze (1999) and Alm, Jackson and McKee (1999) yet were able to demonstrate within laboratory experiments, that tax compliance increases if the participant expects a share in tax expenditures afterwards. This applies to the principle of exchange equity (Dt: Äquivalenzprinzip) of taxation: that citizens contribute to the compensation of costs for the services provided by the state. Also, Bordignon (1993) formulates a model to describe the relation between available public goods and tax evasion. Similar studies referring to tax morale, especially using field data, cannot yet be found in the academic field. Therefore, the question of distribution, how it is solved and what the consequences are for tax morale – these relations are still part of the academic void that also Torgler (2011) points out to be promising to shed light on through future research. Nevertheless, the framework described above is neither trivial nor unambiguous. Fong (2001) emphasizes his clear finding, that attitudes towards redistribution cannot be predicted by individual benefit from such measures. This recalls that the relationship assumed between public social spending and tax morale anew is an assumption based on a benefit-maximizing idea of individuals, which doesn’t apply for instance to altruistic behavior. Kirchler and Maciejovsky (2002) also refer to empirical evidence indicating that tax payers tend to show rather irrational behavior. According to the authors, a common attitude was for instance to be in favor of tax reductions, but against a cut on state-provided social services. Schmölders (1975) and Tyszka (1994) derive similar findings from their experiments with students in Poland and in Germany. In a nutshell, the relationship assumed in my concept could therefore only apply to a very certain group of tax payers; in every case, the outcomes of the suggested research concept aren’t clear-cut at all.
The contribution to the current state of research made by this paper is therefore twofold: on one hand, this concept could make a contribution on clarifying the mixed expectations towards the relation between public social spending and tax morale as well as tax payers behavior in general. If the suggested relation should be confirmed, it could contribute on the other hand to a scientific triangulation of this field. Regarding practical implications, the relevance of my proposal is obvious: examining tax morale more deeply could provide political decision-makers a tool to influence the extent of tax evasion indirectly – through tax morale.
In the following part, I want to develop a concept for future research on tax morale. Thus, it is certainly important to define my basic terms and notions in the first step.
My proposal will be based on the two dimensions of public social spending and tax morale. From these dimensions of my research question, I derive the following hypothesis: the greater the scope of public social spending, the higher is the tax morale of tax payers within a country. Subsequent to former academic work, I use for tax morale a common definition as “the intrinsic motivation to pay taxes which arises from the moral obligation to pay taxes as a contribution to society” (see Feld and Frey 2007, Alm and Gomez 2008, Cummings et al. 2009, Doerrenberg and Peichl 2010). In the sense of this narrow definition, tax morale is a part of tax compliance, which can be distinguished from the former as a general attitude or belief towards taxes and taxation (Schmölders 1960:70). On the other hand, social spending is usually specified and measured by the social expenditure ratio, which illustrates the share of state expenditure compared to a countries’ gross-domestic product (GDP) that is spent on social purposes. In a later part of this text, I will take a further look on the operationalization of this variable.
Case Study Selection
Following my research hypothesis, a broad cross-country analysis would unfold the greatest explanatory power for this concept. Former academic work sought to conduct studies in multiple countries and on various continents to avoid that the resulting differences can be attributed to regional differences. Due to the target length of this concept, however, I will set a limit by focusing on a certain scope of selected countries. The selection follows a typology by Esping-Andersen (1990), which is well-known throughout political science and welfare state research. The author here identified three types of social states: The Anglo-Saxon liberal state (USA, UK, Canada), the corporatist-conservative state (Germany, France, Austria) and the Scandinavian social-democratic state (Denmark, Sweden, Norway). This appears to be a promising model since the differences across countries derived from it seem to match the cross-country differences that were found in regard to tax morale (Fig. 1; see Kirchler 2007, although the US were assigned a higher tax morale in this case than I would expect from my concept). Among latest research, scholars added to this model several other types of welfare state like the Southern European type or the post-socialist state. Both are left out in this paper due to the aforementioned reasons. With a small-scale cross-country analysis in mind, I suggest to focus on the United Kingdom, Germany and Sweden as case studies.
This selection also makes sense for another reason: for the data collection on tax morale, I recommend to draw in data from the World Value Survey (WVS) as I will describe later. This data pool has been used frequently in former analysis on this topic although it has shown to be reliable only in homogenous democratic governmental systems. Under autocratic regimes, a risk of falsified survey data might occur (Torgler 2010:10, Frey and Torgler 2007). This fact will be therefore taken into consideration by the selection of my case studies.
As it has become clear above, I propose for this research a quantitative study. Much academic work has been conducted and replicated yet in this field. There are existing theories and models which are to be validated and enhanced at this state of research. Quantitative research allows to make reasonable generalizations on basis of potential findings of my study.
„Please tell me for each of the following statements whether you think it can always be justified, never be justified, or something in between:
(…) Cheating on tax if you have the chance.”
Tax morale, as the dependent variable in this case, has been captured in most similar studies on the basis of survey data such as the Afrobarometer (Cummings et al. 2006), Latinobarómetro (Torgler 2005a) or the European Values Study (EVS; see Alm and Torgler 2005, Frey and Torgler 2007, Halla 2010). This research concept so will be based on the instrument of survey data as well. The World Values Study (WVS), which relies in parts on EVS data and has been conducted in six waves beginning in 1981, provides data for all three of the selected countries. The WVS dataset contains a pool of basic values and beliefs of people in almost 100 countries which cover 90 percent of the worlds’ population. In order to assess tax morale, participants have been asked the following question:
The answer to this question is measured in a ten-point scale, reaching from “Never justified” to “Always justified”. For this as well as further research, the WVS hence provides an enormous pool of data over time.
Data collection for public social spending, on the other hand, appears to be more difficult. A common instrument is the OECD Social Expenditure Database (SOCX) which provides reliable data on the social expenditure ratio (the share of state expenditure compared to a countries’ GDP that is spent on social purposes) across 35 OECD countries in a time period from 1980 to 2016. Yet, Adema et al. (2001), Adema and Ladaique (2005) as well as Schmidt et al. (2007) point out several shortcomings of gross public spending which may allow, once taken into consideration, a slightly different cross-country perspective. Gross public spending does neither capture direct taxes on social benefits nor the impact of indirect taxation. Politically driven tax reliefs and obligatory private investment are further important factors that are left out as well and which lead the authors to recommend net total social expenditure instead. This indicator has been established in welfare state research since. The Social Protection Statistics by Eurostat gathered data on net total social expenditure among all EU and EFTA states as well as Serbia in 2012 and calculated them on since then. The short time period of data collection makes up a substantial disadvantage for the purpose of this study though. It might be therefore worthwhile taking a step back: the SOCX data between 2001 and 2013 has been recalculated on the basis of a method by Adema and Ladaique (2005) in order to generate net social expenditures of each country. Following this scheme, the rest of the OECD data could be reassessed for the research concept suggested here – or the vagueness of gross public spending has to be accepted while measuring the social spending dimension.
The form of data collection proposed here is of course not free of bias. Also in research literature various concerns have been already articulated towards the use of WVS data. Torgler (2011) notes that tax morale is a multidimensional construct that cannot be measured adequately with a single question. Previous surveys recoded the ten-point scale to dichotomous values 0 and 1 for “Never justified” and “Always justified”, since many participants replied to tax evasion with “Never justified” (see Doerrenberg and Peichl 2010:12). Kirchler (1999) as well as Barone and Mocetti (2009) used multi-item question instead to measure tax morale. A comparable access to data among the countries discussed here is not yet available though. Two further limitations are regularly pointed out: first, participants tend to overrate their morality or downplay their information on tax evasion in surveys (Elffers et al. 1987; Andreoni et al. 1998). Yet, this bias of socially accepted answering (Dt. “soziale Erwünschtheit”) is expected to be less salient when respondents are questioned on tax morale (Frey and Torgler 2007).
Secondly, respondents could find tax evasion legitimate if their tax money is spent on unethical purposes like, for instance, to finance an autocratic regime (ibid). In line with previous studies, I therefore suggest to compare relatively homogenous governmental systems in order to reduce this effect.
Regarding my operationalization of public social spending, some limitations have been mentioned already earlier in this text. Briefly resumed, this was altruistic and irrational behavior which could restrict the proposed research concept. From a more general point of view one could add that this concept compares macro and micro level data at the same time. It would be certainly an advantage to examine the direct effect of the expected relationship through measuring the independent variable on the micro level as well. One could use survey data again to assess the perceived share of benefit on state provided social security or public goods. Without any doubt, this would ask a considerable amount of additional costs and effort and go beyond the given scope of this work.
Finally, I want to add some comments with a broader regard to suggested concept. I assume, that the extent of public social spending has an impact on individual tax morale. This relation is formulated as a “The greater (…) the more“ – hypotheses. However, the relation does not necessarily need to be linear but could be also imagined in form of an inverted U (compared to the well-known case of the Laffer curve, for example). Country level factors might furthermore play a role and very certainly interfere with an impact on tax morale in the selected cases. This problem cannot be solved within one single study though. There is merely one solution to that shortcoming: more academic research will be necessary until one can reasonably generalize possible findings of the concept unfolded here.
This paper describes a proposal to explore the role of public social spending as a determinant of tax morale. Data from welfare state systems as different as Sweden, the United Kingdom and Germany shall be used to examine this relationship. The proposed form of data collection is based on previous research, so that its limitations have yet been described and made aware among researchers. A study such as the one I illustrated could contribute to explain why tax payers generally behave much more compliant than standard economic theory would expect.
Bibliography and List of Figures
Fig. 1: Degree of Tax Morale and the Size of Shadow Economy. Alm and Torgler 2006, p. 243. In: Kirchler 2007, p. 101
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- Torgler, Benno (2006): The importance of faith: Tax morale and religiosity. Journal of Economic Behavior & Organization 61 (1), 81 – 109.
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- World Survey Data (WVS): http://www.worldvaluessurvey.org/WVSContents.jsp
Last access on December 6th 2016
Social Expenditure Database (SOCX): https://www.oecd.org/social/expenditure.htm Last access on December 7th 2016
Eurostat Social Protection Statistics: http://ec.europa.eu/eurostat/statistics-explained/index.php/Social_protection_statistics_-_net_expenditure_on_benefits#Data_sources_and_availability Last access on December 7th 2016
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- Tax Morale Public Social Spending Political Science Quantitative Science