The Economics of Tax Behavior: The Absence of a Reflexive Ethical-Economic Agent

Abstract

In this article I do four things. First, I set out and critique mainstream economic theory of tax evasion and its lack of a reflexive ethical-economic agent. Second, I set out more innovative work on “tax morale.” Third, I establish that insofar as work on tax morale draws on behavioral economics it has more continuity with previous work on evasion than one might expect, given that the implications of tax morale for an economic agent seem different. Fourth, drawing on concepts of deliberation, moral economy, and positional objectivity, I provide brief discussion of alternatives that encourage and respect a reflexive ethical-economic agent.

Keywords:

• tax evasion
• tax morale
• moral economy
• positional objectivity

JEL Classification Codes:

• B40
• B52
• K34
• L29
• A11
• A12
• A13

Disclosure Statement

No potential conflict of interest was reported by the author.

Notes

1 Note a similar case could have been made using the contemporaneous work by J. A. Mirrlees (1971), which might similarly claim to be formative. One might also take a step backwards and begin from Gary Becker’s more general economic theory of crime (Becker 1968).

2 In the context, of course, of information processing capabilities and information availability.

3 Note, “emergence” is a philosophical concept. In simplest form it refers to the idea that the organization of a set of parts results in an entity whose constitution and powers do not reduce to those of any of its parts, that those powers cannot be necessarily predicted or anticipated from those of its parts, and that the emergent entity or state of affairs constrains, enables, or influences what parts now do or can do. The claim is that society and subsets of society are emergent—society and its subsets do not reduce merely to the existence of individuals or of individuals that occupy positions within society. The general term, however, does not in itself tell us how aspects of society arise historically or what constitutes those aspects in particular—and there is a great deal of discussion regarding such matters in social theory. For discussion of the concept see, for example, Dave Elder-Vass and Jamie Morgan (2022, 218–222). See also later references to theory of trust.

4 The point is neutral on whether, in fact, the role of tax in society is commonly misunderstood as MMT advocates assert, since what matters here is public perception for the purposes of reproduction of society. See Richard Murphy (2019).

5 Note, the community charge was a new universal flat rate tax on every adult (hence poll tax—a “head tax”) in a local authority area, introduced by central government, first in Scotland and then in England and Wales in 1990. It was controversial for many reasons, not least because it sought to replace (and thus transfer payment from) the previous system of funding local authorities from the ratable value of housing and was thought to be punitive for the poor. Dogged persistence with the tax despite its unpopularity helped to bring down the Thatcher government. It was replaced by the Council Tax in 1993.

6 As one referee noted, there is an additional line of reasoning one can pursue here. If one drops the implicit assumption in standard economic theory that people will not take criminal action in the pursuit of pure rationality, then incentive structures in capitalism often encourage heinous behavior. For example, George Akerlof and Paul Romer (1993).

7 One might also note that if one applied similar modelling approaches to tax avoidance one normalizes subversion and exploitation of law—and this tendency ought to be immediately familiar to readers from the kind of responses to criticism of the kind of tax strategies and defenses corporations deploy (we pay all legally required taxes—a statement that omits that the corporation lobbies to shape their own environment and chooses to adopt aggressive avoidance strategies). See, e.g., Ylönen and Teivainen (2018); Morgan (2017 and 2016); Morgan and Sun (2017); Zucman (2015).

8 They do state “This is a very simple theory, and it may perhaps be criticized for giving too little attention to nonpecuniary factors in the taxpayer’s decision on whether or not to evade taxes” (Allingham and Sandmo 1972).

9 Again, this ought also to be familiar in the case of tax avoidance behavior. Note also that lobbying to capture the law is subtly different than dissent, public disobedience, and mobilization—tax avoiders tend to shun debate regarding whether the tax they pay or want to pay is just or fair. The whole is shifted into a context of legality and “economic efficiencies,” since from the point of view of reputation management responding that it is entirely just that a corporation pays little or no tax is unlikely to have the desired effect. One might say then that tax avoidance involves normalizing “anti-social” behavior, since avoidance is not criminal (and even if sanctioned for strategies that fall foul of the law, this is likely to be non-criminal areas of law).

10 To be clear, the standard economic agent has unlimited calculative capacity and all possible information—they are unbounded; so, this is different than whether in fact a real person fitted to this utility function could deal with the limited context of any given situation where payment of tax was required. Still, a weaker version of the claim would still be that no realistic economic agent would make decisions according to the strictures of the utility function even if they could. Agents are not just bounded they are diversely constituted, so even the weaker version rejects the utility function approach.

11 For HMRC visit GOV.UK 2012 (www.gov.uk/government/statistics/measuring-tax-gaps/measuring-tax-gaps-2021-edition-tax-gap-estimates-for-2019-to-2020). See also Murphy (2014). This was one-off sponsored research, but the general principles are often referred to on his blog site (Murphy n.d.): www.taxresearch.org.uk/Blog/.

12 For critique over the decades making this point see the work of Prem Sikka, Sol Picciotto, Nick Shaxson, John Christensen, Richard Murphy, Ronen Palan, Jeremy Sharman, and many others. It should be noted though that various expert activists have had some limited influence at the OECD, including Christensen and Murphy.

13 More recently the OECD conducted a series of regional surveys published as regional “roundtables” on tax morale between 2020 and 2021: www.oecd.org/tax/tax-global/tax-morale-roundtables.htm. This followed the report, “Tax Morale: What Drives People and Business to Pay Tax?” September 2019. www.oecd.org/ctp/tax-morale-f3d8ea10-en.htm.

14 According to Google Scholar, as of September 2023, Torgler had been cited over 28,000 times. His monograph Tax Compliance and Tax Morale (Torgler 2007) had been cited 1242 times; the text incorporates several of his early influential papers. In general, citations of these and subsequent papers vary from around 300 to over 1,000 in addition to the figure for the monograph. Note, Torgler traces the history of “behavioral taxation” to the 1950s (Torgler 2022). This is somewhat more complicated than the simpler tale of recent accommodation by the mainstream to behavioral economics and the rise of tax morale.

15 Visit https://rwer.wordpress.com/2021/07/23/weekend-read-is-human-probability-intuition-actually-biased/(Fix 2021) and https://evonomics.com/please-not-another-bias-the-problem-with-behavioral-economics/(Collins 2016).

16 For example, in Journal of Business Ethics, Mickiewicz, Rebmann, and Sauka state “Paying taxes is a social obligation towards the state. Citizens pay taxes to support the state in order to receive benefits: the state, however, is expected to act in a trustworthy and fair manner.” The obligation is expressed as “conditional cooperation” where “paying taxes in full” is a “strategic choice” influenced by the “authority” and “legitimacy” of the intermediary (the state) which spends into the community (Mickiewicz, Rebmann, and Sauka 2019, 79). They then formulate five hypotheses to test using a dataset of 279 phone interviews (with some use of Likert scores) conducted in 2010 with owner/managers, and apply an OLS regression to each (Mickiewicz, Rebmann, and Sauka 2019, 80, 81, 82). Hypothesis 1 provides a flavor of the whole: Business owner/managers who express confidence in the government have higher tax morale. All hypotheses are confirmed by the test at varying strength and degrees of confidence and the whole is an interesting, if limited, exercise in stating the obvious.

17 On the subject of performativity and the “non-benign” consequences of use of economic methods drawing on Bourdieu, see, also, Powell (2021).

18 I should stress deliberative concerns are not incompatible with raising tax morale, but are different than much of tax morale method and foci insofar as these follow trends in behavioral economics—the problem is one of emphasis, use of resources and omission.

19 And there is work published in Journal of Economic Issues on tax and inequality, progressive tax reform and a wealth tax—notably predating Piketty’s work by some years (e.g., Dugger 1990).

20 For a case study example of tax practices and ethics—focused on private equity finance—see Morgan (2022).

Additional information

Notes on contributors

Jamie Morgan

Jamie Morgan is in the School of Economics, Analytics, and International Business at Leeds Beckett University Business School.