The willingness of individuals and businesses to voluntarily pay tax can be improved through better understanding of the complex interlinkages between enforcement, trust in government and the ease of compliance, according to a new report from the OECD.
Tax Morale: What Drives People and Businesses to Pay Tax? assesses the various drivers behind voluntary compliance with tax obligations, particularly in developing countries where issues of governance are more acute. The report, released last week at the International Fiscal Association annual Congress in London, demonstrates that compliance is not solely determined by tax rates or the threat of penalties, but rather by a wide range of socio-economic and institutional factors that vary across regions and populations.
Better understanding tax morale and boosting the willingness of businesses and individuals to pay tax will be critical as governments seek to improve compliance, raise revenues and ensure that taxpayers are better served by tax systems. Better tax morale can also contribute to ongoing efforts to overhaul the international tax rules and improve compliance by multinational enterprises, through the OECD/G20 Base Erosion and Profit Shifting initiative. It can also improve efforts to crack down on banking secrecy and tax evasion by individuals led by the Global Forum on Tax Transparency and Exchange of Information for Tax Purposes.
The OECD report shows that age, gender, education levels and religiosity of taxpayers all have an influence on tax morale. The data also shows that links between public service performance and tax morale are more complex than assumed. In particular, perceived levels of corruption and meritocracy, as well as the level of trust in the government all have an influence. Tax morale goes up in some regions of the world – such as Africa – when taxpayers see improvements in public services, but the relationship is less clear in other regions, such as Latin America.
The report focuses attention on tax morale in developing countries, which face a range of challenges to increasing domestic revenues and funding actions to meet the UN Sustainable Development Goals. These challenges are well-known – small tax bases, large informal sectors, weak governance and administrative capacity, low per capita income, low levels of domestic savings and investment, and tax avoidance and evasion by firms and individuals – and are complicated by low tax morale.
“There remains much to do in building a sustainable tax-paying culture, particularly in developing countries,” said Grace Perez-Navarro, deputy director of the OECD Centre for Tax Policy and Administration. “It won’t be enough to crack down on aggressive tax planning or eliminate tax incentives. Taxpayers and authorities need to build a stronger and more dynamic relationship of trust, facilitation and enforcement.”
“Increasing tax morale offers an important contribution to achieve sustainable growth in tax revenues in developing countries,” added Federico Bonaglia, Deputy Director of the OECD Development Centre. “It can help mobilise the funds governments need to deliver public services and build the physical and social infrastructure for long-term development.”
Tax morale of businesses is difficult to measure, and there is little research, especially for developing countries. The report uses tax certainty data as a proxy to examine tax morale of multinational enterprises. The data highlights a number of key concerns for MNEs, including a desire for consistent application of international standards, and effective VAT and withholding tax systems.
The report is the first element of a new OECD workstream on tax morale in developing countries, with further work on taxpayer education, and on how tax officials perceive MNE behaviour planned for the next year.
On the blog
Increasing Tax Compliance in India, by Suranjali Tandon (8 March 2019)
Trust and Power-Based Regulatory Strategies as Pathways Towards Corporate Tax Compliance, by Maarten Siglé, Sjoerd Goslinga, Roland Speklé, Lisette van der Hel – van Dijk and Robbert Veldhuizen (18 December 2018)
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