Your Taxes: OECD studies ‘tax morale’

The analysis is based on answers to the question “Do you justify cheating on taxes if you have the chance?”

Approximately 170,000 Americans live in Israel. In total, more than one million U.S. citizens and green card holders – who both live overseas and own more than 10% of a foreign corporation – faced the prospect of paying the tax. (photo credit: REUTERS)
Approximately 170,000 Americans live in Israel. In total, more than one million U.S. citizens and green card holders – who both live overseas and own more than 10% of a foreign corporation – faced the prospect of paying the tax.
(photo credit: REUTERS)
We all know that the Boston Tea Party-goers believed they should not be subject to 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 organization reveals why people pay their taxes – other than because of 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 people responded in 55 countries, including the USA and the UK, not Israel. Other questions were also asked.
Findings
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.
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• More educated individuals have more positive attitudes towards paying taxes.
• Part-time workers and the self-employed have lower tax morale than full-time workers.
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 their economies and societies, and full-time employees are more likely to have income tax deducted by their employer.
Implications
The OECD says this basic information can help in developing taxpayer profiles in order 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, might 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 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 to which they are not entitled. 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 of the world suggest 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 taxpayers 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 it did not participate in this OECD analysis. Nevertheless, with a general election approaching, some may feel that transparency could be improved. And many might feel 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 that are not always really due. For example, the Israeli Tax Authority regularly asks for higher tax payments on account, and it imposes automatic delay penalties even if tax returns were filed on time, and so forth. So tax morale is relevant in Israel, too.
As always, consult experienced tax advisers in each country at an early stage in specific cases. The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. Leon@h2cat.co.