Tax Equity and its Association with Fiscal Morale

ABSTRACT:

Although tax morale is a field that has spawned significant interest since the 1970s, the study of its determinants is a matter that is far from finished. Indeed, research on contextual factors is required in order to establish how tax equity affects tax morale and hence tax compliance, which would be useful for governments and tax administrations to plan strategies to increase tax revenue. Consequently, this paper analyzes the implications of both horizontal and vertical equity for fiscal morale through the use of pooled cross-sectional data, which is based on the integrated World Value Survey as the principal database. It is found inter alia that the aforementioned tax features, captured through the Atkinson-Plotnick and Reynolds-Smolensky indices, are the most important determinants of tax morale.

Acknowledgments

I would like to thank anonymous referees and Editor Steve Kelman for their helpful comments, which allowed me to improve the manuscript. I recognize also the assistance provided by Stanley Simon Malinowitz, professor at Universidad Nacional de Colombia, for reviewing previous versions of this paper.

SUPPLEMENTAL MATERIAL

Supplemental data for this article can be accessed at https://doi.org/10.1080/10967494.2019.1671926.

Notes

1 Finocchiaro and Rizzo (2014) use an experimental design while Doerrenberg and Peichl (2013) prefer survey data on individual perceptions and therefore consider the 2005 WVS.

2 Commodity taxation refers to a regime in which the consumption of goods is taxed (e.g., value added and excise taxes).

3 This is done since tax evasion is difficult to measure separately from other tax reduction options, especially in a country by country comparison. This is due, among other reasons, to the coexistence of many approaches for estimating evasion.

4 Likewise, the Laffer curve is related to work reduction from higher taxes.

5 Taking the Atkinson-Plotnick index additionally avoids having to determine similar taxpayer groups to measure horizontal tax inequity, while the Kakwani index allows us to capture vertical tax equity when the revenue from income taxes is low, as is the case in developing countries.

6 For Guatemala, for example, the WVS (Wave 5) was applied in 2004 while the respective tax equity indices were calculated for 2006.

7 This picks up the after-tax income concentration but ordering the taxpayers according to their pre-tax incomes.

8 It is clear that we calculate tax morale as the result of subtracting the respective response from 10.

9 Only some predictors lost significance, which is the case of Trust, Education and Married.

10 This was done taking into account that one failure of the literature is focusing on developed countries.

Additional information

Notes on contributors

Víctor Mauricio Castañeda

Víctor Mauricio Castañeda ([email protected]) is a professor of taxation at the School of Management and Accounting of the Universidad Nacional de Colombia. He received his PhD in economics at the School of Economics, Universidad Nacional de Colombia. His current research analyses effects of many socio-economic and political variables (for example, political stability and institutional development) on tax revenues and taxpayers’ decisions regarding tax compliance. In addition, he is interested in studying how some public financial reforms (e.g., IPSAS adoption) would foster accountability and transparency in public sector.