Abstract
The topic of tax behavior always stirs attention among scholars, professionals, national and international authorities, organizations, and citizens alike since it is a complex matter. There are four types of tax behavior acknowledged in the literature, namely voluntary tax compliance, enforced tax compliance, tax avoidance, tax evasion. The complexity of tax behavior stems from the fact that there are a manifold of factors influencing it, from economic to psychological ones. The chapter surveys relevant sources on tax behavior in the quest for eliciting the impact of ethnic diversity on tax compliance. At the same time, the difference between countries are also addressed.
Top1. Introduction
Tax Behavior: A General Overview
Tax behavior is a topic that constantly raises interest among researchers, practitioners, authorities, international organizations and the general public due to the role it plays in human societies. Consequently, as any subject of interest, it triggers very different opinions. For that matter, when talking about taxation and tax behavior, Oliver Wendell Holmes – a US Supreme Court Justice in the 1930s – used to state that “I like to pay taxes. With them, I buy civilization”. On the same topic, the French economist Pierre Paul Leroy-Beaulieu said that “taxes are simply contributions demanded of citizens as their share of the expenses of government”. Arthur Godfrey (an American entertainer and TV host) once declared that: “I am proud to be paying taxes in the United States. The only thing is I could be just as proud for half the money”. In addition, the renowned scientist, inventor and statesman Benjamin Franklin famously asserted the following: “In this world nothing can be said to be certain, except death and taxes”.
No matter the perspective one has on taxation, be it positive, neutral, witty or gloomy, taxation is one of the fundamental ingredients in modern societies. Moreover, one look into the historical sources will reveal that taxation has always been important for human societies, ever since the ancient times (Adams, 2001; Blankson, 2007; Valk & Soto Marín, 2021).
Taxes are the main financial resources used by public authorities to provide a system of goods and services to their citizens in most countries. Hence, tax levies finance public goods such as: child benefit, compulsory education, healthcare, law enforcement, maternity leave, national defense, pension, public infrastructure, rule of law, social security, unemployment, etc. Interestingly enough, in recent years because of low crude oil prices, mitigation of oil reserves and even the current pandemic, countries that have traditionally based their national budgets on revenues from oil production have been contemplating introducing the income tax and the value added tax (e.g., Bahrain, Oman, Saudi Arabia, United Arab Emirates).
When it comes to taxation, an important question arises: What are the types of tax behavior? As reported in the literature (Alm et al., 2010, 2019; Andreoni, Erard & Feinstein, 1998; Kirchler, Hoelzl & Wahl, 2008; Kirchler et al., 2010; Marino & Zizza, 2012; Richardson, 2006; Torgler, 2003), the two main types of tax behavior are compliance and non-compliance. A tax compliance behavior has the following sine qua non characteristics (Franzoni, 2000): 1) reporting of all taxable income; 2) correct computation of tax liabilities; 3) on-time filling of tax return; 4) on-time payment of taxes. If at least one of the characteristics is not fulfilled, the behavior is categorized as non-compliance.
For that matter, the difference between compliance and non-compliance was clearly and simply expressed since ancient times. With respect to this issue, the Ancient Greek philosopher Plato noted that “when there is income tax, the just man will pay more and the unjust less on the same amount of income”.
Key Terms in this Chapter
Enforced Tax Compliance: The act of paying taxes mainly out of fear on the ground that audit rates are high, tax penalties are high, sanctions for tax evasion are harsh, tax authorities detect non-compliant citizens, etc.
Voluntary Tax Compliance: The act of paying taxes mainly out of will on the ground that it is necessary, useful, moral, ethical, a civil duty, the right thing to do, etc. in order to support the public goods system; it represents the ideal behavior for any modern society.
Slippery-Slope Framework of Tax Compliance: A tax compliance model well-known in the tax behavior literature, introduced by Kirchler, Hoelzl and Wahl (2008) and constantly applied on individual and corporate taxpayers from various countries around the world; it comprises economic and psychological determinants of tax behavior, it describes tax compliance along its dimensions of trust in authorities and power of authorities and disentangles between voluntary tax compliance and enforced tax compliance.
Ethnicity: Identification of a social group of people that share common attributes (e.g., art, culture, language, religion, styles, values), which distinguish it from other social groups.
Deterrent Strategies: Strategies enacted by tax authorities that are based on authorities’ power of monitoring tax systems (i.e., high numbers of tax officers employed, frequent and detailed tax audits, high fines and penalties for non-compliance, whistleblower programs, blacklisting tax evaders), they aim to increase the general level of tax compliance, especially in the short run; in the long run, public outlays associated with deterrent strategies are high.
Tax Evasion: The act of not paying tax levies at all with respect to ones’ income, wealth, capital and consumption by deliberately disregarding the tax law; it is illegal, immoral and unethical.
Tax Avoidance: The act of reducing tax levies corresponding to income, wealth, capital and consumption by using the loopholes and breaches into the tax code; although legal, it is immoral and unethical. As a general rule, tax planning strategies that facilitate tax avoidance have been flourishing because certain loopholes and breaches are very hard to eliminate. Because of increased tax law complexity, ever-changing legal precepts and tax codes spread on thousands of pages, even if some loopholes are closed, new ones open.
Tax Compliance: The act of paying taxes corresponding to income, wealth, capital and consumption in accordance with the tax law; it should be the norm behavior for any modern society, since it finances the system of public goods provided by the state (e.g., child benefit, compulsory education, healthcare, law enforcement, maternity leave, national defense, pension, public infrastructure, rule of law, social security, unemployment).
Benefit Fraud: The act of falsely claiming public benefits (e.g., child support, food stamps, housing tax reductions, housing benefits, landlord benefit, incapacity benefit, income support, jobseeker’s allowance, welfare) from a tax system by using forged information or by not reporting changes in personal and/or financial circumstances; it is both illegal and unethical.