The reason most people pay their taxes has more to do with social norms than the law, suggests new research. But when the public deems enforcement measures unfair, it can have long-lasting effects on evasion.
A protestor holds up a poster in front of riot police during the Poll Tax Riots on March 31, 1990 in London. The demonstration was against the unpopular Community Charge. Photo: Shutterstock
“It’s a kind of peer pressure. We want to pay our taxes to conform to some kind of societal notion of what it means to be a good citizen,” says CIFAR Gluskin-Granovsky Fellow Timothy Besley (London School of Economics & Political Science).
Along with CIFAR Senior Fellow Torsten Persson (Stockholm University) of the Institutions, Organizations & Growth program, and another colleague at LSE, Besley studied how social norms influence tax evasion.
The chances of being caught for small-scale tax evasion are low, and the fines are relatively small. Nevertheless, most people comply because of social norms. For example, Besley says, consider the social reaction you might face for refusing to pay taxes this season.
“Do you then go down and meet your friends and boast about the fact that you’re not going to pay taxes because you think they’ll think of you as heroic?”
If social norms support the notion that good citizens are law-abiding taxpayers, then probably not.
However, when tax enforcement tips the scales of what the public considers their reasonable duty, as it did when former British Prime Minister Margaret Thatcher’s government introduced a detested tax reform in 1990, it can cause a damaging change of public sentiment.
Thatcher’s government switched from a system where the lowest level of government Tax Evasion - Figure 1 collected property taxes based on property values to one commonly known as the poll tax, a fixed amount that everyone of voting age had to pay. The result was a spike in local tax evasion, a series of riots in several British towns, and finally, the abolishment of the tax two years later.
Not only did tax compliance drop, but the researchers found that rates of tax evasion didn’t return to pre-1990 levels until a decade after the return to the old tax system. The researchers also studied enforcement by local governments in the years that followed, exploiting that some local governments started enforcing tax claims more vigourously after switches in political majorities.
“The response was not sufficient to restore the tax compliance back to the levels that we had seen beforehand, especially in those local government that had the highest evasion during the poll tax,” Besley says.
“That goes very much with the idea that when norms are driving things they’re slow-moving, they’re very hard for governments to manipulate and therefore you can’t immediately get back to where you were.”
Besley says the case study illustrates the larger issue of how social norms can help or hinder the development of effective economies and institutions.
“You can change the rules. You can tell people you’ve got to do this rather than that. But what really matters as much as the formal rules is the informal rules by which people conduct their lives.”