Willing To Pay? Why People Don’t Pay Tax

Written by Ellen Halliday on . Posted in Current features, Features

Professor Sven Steinmo is a professor at the Robert Schuman Centre for Advanced Studies and Director of Willing to Pay?  He is also a Senior Visiting Research Fellow at Nuffield College, Oxford University and an Honorary Professor at the University of Southern Denmark, Odense, Denmark. John D’Attoma is a Post-doctoral Research Fellow at the European University Institute. He received his PhD in August 2015 from the University of Missouri-Saint Louis.

Professor Sven Steinmo was walking along a Florentine street when a car pulled up and stopped next to a bin in front of him. There are three kids in the back, with the mother and father in the front. The father wound down the window, leant out and dumped a rubbish bag on the street, rather than inside the bin. ‘I’ve lived in a lot of places,’ Steinmo told EUI Times. ‘I’ve lived in the USA, Japan and Sweden. Let me tell you, this would never happen in Sweden.’

Academic inspiration comes in many forms. Professor Steinmo’s motivation for the Willing to Pay? project, which comes to an end this summer, was an everyday observation. He noticed that socially irresponsible behaviour was far more common in some countries than in others, despite identical laws. The explanation that ‘it’s just culture’ didn’t appease the professor’s curiosity, so he decided to design a set of experiments to test what this ‘culture’ really meant. ‘Answering small questions is boring. It’s never been my forte,’ he laughed.

Professor Sven Steinmo

The ERC-funded Willing to Pay? project tested how tax compliance varied across Sweden, Romania, Italy, US and the UK. ‘If there is such a thing as culture, people from different countries would behave differently in the same circumstances,’ Steinmo reasoned. The tendency not to comply with tax obligations would be inherent and would endure across different contexts. By testing individuals from different countries with the same laboratory conditions, Steinmo hoped to understand whether culture was a factor.

The experiment involved clerical tasks, where subjects were asked to copy lines of gibberish onto a computer screen. For every line they correctly transcribed, the subjects received currency units, which would be converted to real money at the end of the experiment. They were then asked to declare their earnings, with varying tax rates and risks of being audited (and punished for dishonesty) in different episodes. The experiment also tested for altruism.

In the real world, ‘there is a perception that southern Europeans are less tax compliant than northern Europeans,’ John D’Attoma told EUI Times. Yet the experiment revealed that ‘in fact, Italians are just as compliant as Swedes if you give them the same scenarios,’ he said.

The project also highlighted a number of other trends. ‘Rich people cheat more than poor people,’ Steinmo told EUI Times. ‘Those who typed fast in the test were more likely than those who typed slowly,’ he explained. Political ideology also had some bearing on tax compliance. ‘Those who self-declare as right-wing cheat more than the left-wing,’ he explained. Except for one anomaly: ‘on a ten point scale, those on the extreme left also contribute less,’ he said.

However two results are, for Steinmo, the most interesting. First, ‘women are substantially more honest than man, in all countries, in all conditions.’ ‘The largest predictor of tax compliance in every country is gender,’ D’Attoma confirmed. ‘We didn’t really test for it, it was just one thing which emerged every time.’ The team do not yet have a scientific explanation for this but encourage further research on the subject. ‘It’s also a good argument for bringing women into the labour market. They are more compliant so they will bring in more revenue,’ explained D’Attoma.

Second, when tested with the same conditions, ‘British people are the most dishonest,’ Steinmo revealed. In a test for altruism, British people were also the least willing to share with others. Professor Steinmo has a hunch to explain the anomaly. They are ‘Thatcher’s children,’ he said. ‘The legacy of Margaret Thatcher’s policies, and also those of Tony Blair, are turning Britain from being fairly collectivist society into a hyper-individualist society – more even than America,’ he told EUI Times. However, in the real world, Italians are less likely to pay their taxes than the Brits. Besides the numerous experiments, Willing To Pay? also uses a historical explanation to account for actual rates of tax compliance. ‘In a society where you have built efficient, reliable institutions, people are more likely to put in,’ Steinmo said.

John D’Attoma

Institutions vary between states, and the quality of an institution affects overall tax compliance. Good institutions build norms for tax compliance. Bad institutions lead to non-compliance. In Sweden, those who put into institutions are also likely to get something out. In Italy, the institutions are far less reliable. As a result, ‘there is a lot less trust in the institutions of southern Europe,’ said D’Attoma. ‘Nobody likes [tax avoidance], but when everybody does it, that’s how culture develops,’ said Steinmo.

This feeds into a cycle of non-compliance. ‘We are also social creatures. People have a ‘cognitive need’ to act like those around them’, Steinmo said. In the laboratory D’Attoma observed this same phenomenon. ‘Whether you believed someone else to be honest or dishonest was an important predictor of tax compliance. In the experiment, if I felt like my neighbour was cheating, I was also more likely to cheat,’ he said. Depressingly, ‘people are conditioned by their experiences in life and in the lab,’ D’Attoma suggested. ‘There’s not a whole lot of literature out there about this, but experienced subjects are far less compliant and less likely to contribute to a public good.’

Finally, values also feed non-compliance, according to Professor Steinmo. The young Italian father who chose to dump his rubbish bag ‘was teaching his children in the back that it was OK to cheat,’ he said.

All these results emerged at the end of a demanding research project. Over 3500 individuals have taken experiments, in seventeen laboratories, in five countries. For the most part, Steinmo has supervised the experiments himself. He admits he has racked up 100 000 air-miles to conduct the work. ‘It is important for scientific legitimacy – it requires someone with experience to monitor protocol. Experiments are a wonderful thing but if they are not done precisely the same, they are invalid.’

The team found it difficult to maintain neutral lab conditions at times. ‘Some literature would even suggest that you shouldn’t use the word ‘tax’!’ said D’Attoma. ‘We could not avoid that, but in one experiment the tester used the word ‘fees’, and this made the experiment invalid. There was an ongoing debate about university fees in the UK at the time. All these external things can have effects on what happens inside the laboratory,’ he said.

Yet Steinmo is content with the project’s potential legacy. The work will result in two books: one historical and one explaining the experiments. The Leap of Faith and Willing to Pay? will be published by Oxford University Press in 2018. Thanks to funding from the ERC, they will be available in Open Access. Steinmo hopes that governments from Zimbabwe to Chile might wonder how Sweden came to be so successful, and turn to his book for answers. ‘The last chapter of The Leap of Faith is written directly to policy-makers,’ Steinmo said. ‘This work should have implications for citizens,’ he said.

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