We all know that the Boston tea partygoers believed they should not pay taxation without representation. But now that democracy has arrived in the USA and most other countries, what (if anything) motivates us to pay taxes?
The OECD refers to this motivation to pay tax as “tax morale”. A recently published analysis by the OECD reveals why people pay their taxes – other than their legal obligation to do so.
The “World Values Survey” provides data to help build a global picture of tax morale.
The analysis is based on answers to the question “do you justify cheating on taxes if you have the chance?”, a question to which 55 countries responded including the USA and UK, not Israel. Other questions were also asked.
The OECD found that understanding socioeconomic factors and institutional factors matters in explaining people’s tax morale:
- Those who claim a faith or religious identity have more positive attitudes towards paying taxes;
- Women exhibit higher levels of tax morale than men;
- Older people are less likely to justify cheating on taxes than younger people;
- More educated individuals have more positive attitudes towards paying taxes;
- Part-time workers and the self-employed have lower tax morale than full-time employees;
These results are perhaps expected as people with higher education and formal employment are more likely to have a deeper understanding of the role of taxation in the economy and society. Full-time employees are more likely to have income tax deducted by their employer.
The OECD says this basic information can help to develop taxpayer profiles to strengthen efforts to increase compliance. However, the findings from the institutional factor analysis show that public support for the government, its institutions and transparency, may help to achieve greater tax compliance than enforcement alone:
- Citizens who perceive democracy to be the best system of government for their country tend to think that cheating on taxes is unjustifiable.
- Individuals who express trust in their national government display higher tax morale than those who do not.
- Citizens who identify fiscal redistribution to be an essential characteristic of democracy, i.e. who think that governments should tax the rich to subsidize the poor, also show higher tax morale than those who do not.
- There is a strong correlation between individuals with high tax morale and those who frown upon
claiming benefits they are not entitled to. This correlation underscores the close relationship between paying taxes, and the expectations people have about the eventual use of taxes.
OECD tax policy recommendations:
The OECD says the similarity of findings across different regions in the world suggests that opportunities for sharing experiences could be mutually beneficial.
The OECD identified the following potential areas where civil society, businesses and the international development community could support the efforts of governments to improve tax morale and tax compliance:
- Strengthen and clarify the links between revenue and expenditure. For example, Ghana directs its VAT revenue to health services;
- Increase the transparency of tax policy making and modernize tax administration procedures: these measures would reduce opportunities for corruption and improve the “taxpayer experience”.
- Align efforts in different areas to avoid negative interactions among the drivers of compliance: For example, taxpayer perceptions that the revenue authority’s approach is overly controlling can cause them to not feel trusted by the revenue authority. This in turn may call into question their trust of the revenue authority itself, which may then reduce compliance
What about Israel?
Israel is an OECD member but did not participate in this OECD analysis. Nevertheless, with a general election approaching, some may feel that transparency could be improved. And many may fee that the Israeli Tax Authority can be heavy-handed and over-controlling, for instance in its extensive use of bank freezes (“Ikulim“) to obtain tax payments not always really due….For example, the Israeli Tax Authority regularly asks for higher tax payments on account, imposes automatic delay penalties even if tax returns were filed in time, and so forth. So tax morale is relevant in Israel too.
As always, consult experienced tax advisors in each country at an early stage in specific cases.