Is Tax Morale Culturally Driven?

This post has been contributed by Dr Luca Andriani (Birkbeck) and originally appeared on:

It is the summary of JOIE article (Published 23 February 2021) by Luca Andriani, Department of Management, Birkbeck University, Randolph Bruno, School of Slavonic and East European Studies, University College London, Elodie Douarin, School of Slavonic and East European Studies, University College London and Paulina Stepien-Baig, School of Slavonic and East European Studies, University College London. The full article is available on the JOIE website.

Citizens’ tax compliance should not only respond to the quality of formal institutions such as law and tax collection procedures and enforcement. It might also be culturally driven. In this article we investigate whether tax morale, an individual’s intrinsic non-pecuniary motivation to comply with taxes, is associated with the cultural values (following Hofstede’s typology) held by this individual.

Bridging culture and institutions has been a recurrent theme within the institutional economic literature in recent years (Guiso et al 2016; Tabellini 2008; De Jong 2011). However, the inter-play between cultural and institutional aspects remain underexplored (Alesina and Giuliano 2015; Guiso et al 2006; Hodgson 2006), particularly regarding the role of culture on individuals’ attitudes towards rent-seeking behaviour and compliance with the law (Alm et al 2017; Hodgson and Jiang 2007). We argue that cultural values influence individual’s attitude towards institutional compliance. This is because culture shares with institutions the ability of influencing individuals as well as collective preferences and attitudes as they refer to beliefs and values through which individuals’ conjecture what is right and what is wrong (Greif 2006; Hodgson and Jiang 2007). 

Focusing on tax morale is ideal for our purpose since it narrows the attention on the individuals’ cognitive determinants of tax compliance, a moral duty and, hence, tax evasion – an improper behaviour (Frey and Torgler 2007). The focus on tax morale has two additional advantages. Firstly, it challenges mainstream economic theory by arguing that the probability of audits and the degree of punishment do not fully explain tax evasion (Filippin et al. 2013; Lago-Penas and Lago-Penas 2010). Secondly, it embraces the institutional economic view according to which social and economic exchanges do not occur outside the moral sphere (Traxler, 2010). Culture might, thus, be especially relevant since it influences individuals’ view about their own responsibility and role within their community as well as their view about the responsibility and the role of the public institutions (Hakhverdian and Mayne 2012). Accordingly, “norms of governance”, including those of tax compliance, rely not only upon institutional enforcement, but also on the individuals’ normative commitment and psychological temperament (Bowles 1998). We inevitably emphasise the central role of cultural values since they will condition and shape individuals’ commitments to norms of governance and attitudes towards compliance to formal institutions (Alesina and Giuliano 2015). 

We operationalise cultural value orientations by using the four cultural dimensions proposed by Hofstede (1980; 2001) namely individualism vs. collectivismpower distancefemininity vs. masculinity and uncertainty avoidance

Our analysis of tax morale exploits four waves of the European Value Survey (EVS 1981 to 2010) across a total of 48 countries, mostly Europeans with the addition of US and Canada.   

Our empirical evidence reveals that values of individualism and femininity are indeed positively associated with individual’s tax morale, while power distance and uncertainty avoidance are negatively associated with it. 

First, values of individualism promote self-determination as well as an in-depth sense of individual’s responsibility towards legal rules and institutional compliance. This might increase the level of tax morale among citizens whose attitudes are driven by such values.          

Second, unlike values of masculinity that emphasise personal achievement and material success, values of femininity reflect the importance of solidarity and cooperative behaviour for a more sustainable society and improvement in the overall human well-being (Hofstede, 2001). This might drive individuals to be more morally and ethically inclined towards tax compliance. 

Regarding power distance, this indicates the extent to which unequal distribution of power and hierarchical relations are accepted in a society without additional justification. Consistently, power distance values drive individual’s perception of public authority exploiting the use of power for the benefit of the elite, at the cost of a more unequal redistribution of public resources. This is likely to undermine individual’s civic conscience and moral attitude towards institutional and tax compliance, since tax collection is viewed as a system with redistributive goals (Hofstede 2001). 

Finally, values of uncertainty avoidance promote low individual’s tolerance towards ambiguity and drives individual’s preferences towards conditions of predictability and transparency (Hofstede 2001). In light of our results, we argue that the complexity of the tax system and the lack of transparency of the tax collection procedures might lower the moral cost of rent-seeking behaviour such as tax evasion (Torgler 2005). As a result, individual’s driven by values of uncertainty avoidance may be more inclined to tax evade as strongly averse to feelings of ambiguity and lack of clarity,and, hence, reluctant to engage with a complex tax system(Richardson 2008).        

We further demonstrate that these results are robust to the inclusion or exclusion of different contextual and attitudinal covariates including variables of institutional trust and prosocial behaviour, potential explanatory factors in the tax morale literature. This indicates that cultural values matter per se, rather than through mediation by other values expected to respond to them, such as institutional trust and pro-sociality.

What about the policy implications of our results?  

Compliance is equivalent to a cooperative solution to the collective action problem. Therefore, understanding the factors that help to sustain cooperation might help promote compliance. The Hobbesian solution to these problems lay on government coercion and, hence, deterrence. Individuals are legally bound to contribute to the public good if they do not want to incur punishment. However, monitoring the government represents the second-order collective action problem where government coercion is not a solution any longer. In other words, in Hobbes analysis the missing link is the role of the individuals and of the values driving their preferences and attitudes towards the contribution to the public good. Without neglecting the importance of the system-level institutional quality, compliance with rules, in this specific case with tax rules, is the ultimate results of individual’s preferences. According to mainstream economics, these preferences are mainly driven by a cost-benefit analysis, in agreement with the Hobbesian solution mechanism (Becker 1974). The institutional economic approach, stresses, instead, the fact that individuals’ preferences are subject to norms and values, as well as moral motivations (Frey and Torgler 2007; Hodgson 2006; Ostrom 2010). Cultural values, hence, matter. 

With respect to policy remarks, cultural differences suggest that the same policies might function more in some contexts than in others according to the dominant cultural values (Cline and Williamson 2017; Grimmelikhuijsen and Porumbescu 2013). This is indeed reflected already in the variability observed in terms of tax compliance within the same country and thus within populations exposed to the same tax system. In this respect, while policymakers might be constrained regarding the implementation of tax policies set at a country level, they might have more flexibility in implementing tax policies targeted for specific socio-economic groups or local areas.  


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