Inter-American Center of Tax Administrations – CIAT
45TH CIAT GENERAL ASSEMBLY
“TAX MORALE AS DETERMINING FACTOR IN IMPROVING THE EFFECTIVENESS OF THE TAX ADMINISTRATION”
April 4-7, 2011
Main Theme: “TAX MORALE AS DETERMINING FACTOR IN IMPROVING THE EFFECTIVENESS OF THE TAX ADMINISTRATION" To ensure they meet their major objectives, Tax Administrations require that the set of beliefs, values and norms that determine taxpayer actions are in line with their own (moral and ethical) standards as well as those established by society. Based on this definition, tax morale implies making explicit the set of values that determine "right citizen behavior" vis-à-vis their obligations with the State. It is the correct exercise and compliance with taxpayers’ rights and duties which secure the necessary resources that enable States to create better co-existence and welfare conditions. Therefore, building “high” tax morale is a determining factor in improving the effectiveness of Tax Administrations and, to that end, it is necessary to define which principles and values shall motivate the actions both of governments and citizens so that taxation is deemed fair. Klaus Tipke (2002) proposes three spheres of action in this building process: the tax system, the tax administration and the taxpayer. The technical program of CIAT’s 45th General Assembly shall focus mainly on the spheres of Tax Administration and taxpayer morale. Although the notion of tax morale is not new and many countries have for many years enshrined it implicitly in their Constitutions, emphasis is placed on the perspective of citizens’ obligations rather than on their rights. However, the term tax morale becomes stronger if one understands that it is not the Tax Administration which should pursue taxpayers to meet their obligations but rather taxpayers themselves, who shall review their behavior to determine the right actions vis-à-vis their tax obligations. Having tax morale shall lead them to meet their obligations voluntarily and demand their rights. In line with Tipke’s vision, indicators on tax administrations’ morale may be proposed based on different questions: Does the Tax Administration: o Serve as guarantor in the due enforcement of tax laws for all subjects? o Guarantee taxpayer rights? Demand tax payment from all taxpayers? o Exert all its legal powers? o Act efficiently? (tax relevance of the case study) On the other hand, for taxpayers morale is determined by the attitude taken vis-à-vis compliance with their duties and the conditions under which they show said attitudes. In any case, taxpayers’ tax morale is closely related to the Tax Administration’s own actions.
Good tax behavior indicates “high” tax morale and, thus, implies higher levels of effectiveness of the Tax Administration. Tax Administrations should therefore propose actions aimed at influencing taxpayers’ awareness about the importance of meeting their obligations. Taking action with a view to building tax morale in these terms reduces overall control efforts and allows TAs to use new instruments to either focus on groups of “low” morale or the improvement of processes and services that promote voluntary compliance. The foregoing requires that the Administration analyses and understands which groups show good tax behaviors and which do not with the purpose of directing its actions toward the latter. A repressive view may be insufficient, and actions taken should also consider sociological aspects which enable the identification of causes and conditions that give rise to “inappropriate” behaviors in order to establish corrective actions. Tax Administrations play an essential role in building “tax citizenry” as an institute which merges “political citizens” and “tax citizens” by creating voluntary compliance and awareness by individuals for the correct and ethical exercise of their tax rights and obligations. In this sense “tax morale” is evidence of said tax citizenry through which individuals in society commit to taxation and the ensuing obligation to pay taxes, thus turning the perception of compulsory payment into a “contribution to common good and evidence of distributive justice”. The Assembly program contemplates the development of the main theme according to three lines: defining the term tax morale, its determinants and influence on legitimizing modern tax systems; defining the players in this process; and finally, its right-sizing and consideration as a strategy to enhance voluntary compliance in Tax Administrations. The topics seek to look into the experiences of the different countries in terms of actions aimed at increasing tax morale in their environment, beginning by its inclusion in institutional strategic plans, all the way to measuring tax morale rates both within tax administrations and with regard to taxpayers. Furthermore, the intent is to share the design and implementation of control plans which take into consideration the different taxpayer behaviors to orient taxpayer service and the strategies aimed at promoting enhanced corporate responsibility by holding a social dialog with strategic groups. Finally, we shall seek to lay the groundwork for enhanced citizen tax awareness, not only through the future taxpayer-centered tax education programs, but also by improving assistance to present taxpayers in order to facilitate and simplify compliance with their obligations, understanding that in so doing it is vital to promote transparency in all the tax administration undertakings and build trust based on effective internal control and accountability programs.
1. Definition, scope and objectives of the tax morale concept “Modern tax systems: from a definition of tax morale to its determinants” Traditional theory defines tax non-compliance as a decision whose benefit is confronted to the risk of being sanctioned. However, it has been proven that there are explanatory variables different from maximizing expected profits and that there are non-economic determinants which account for non-compliance. In the non-traditional view, taxpayers’ tax behavior is also determined by the level of compliance by the States with the “social covenant”. Understanding why there are citizen groups with better tax behavior than others with similar features is a question that might be answered by looking into factors such as, inter alia: social rules and moral feelings, perceived equity and justice, State actions (as a credible, democratic and participatory authority), the factors of the economic juncture. All of these bear relation to the “risk perception” and the “benefit perception” associated to the “social covenant”. If the social covenant is perceived as unfulfilled, tax non-compliance becomes a way of redressing “unfairness”. The first Assembly topic seeks to define the notion of tax morale as an element that promotes voluntary compliance by taxpayers as well as to identify how some tax administrations have addressed this topic even at constitutional level. In addition, even if the notion of morale is not raised to constitutional level, it is necessary to be aware of the different countries’ experiences relative to promoting strategic actions as part of their internal decisions (strategic plans), especially those aimed at taxpayer service as one of the important steps in embracing the notion within their undertakings. In order to elaborate on the main theme, speakers shall explain the notion of tax morale and its legal, administrative or sociological framework of reference; the scope and objectives pursued by applying the notion; whether it is embodied in institutional strategic plans; and the future steps to advance it. 1.1
The Strategic plans and tax morale
Tax Administrations include the notion of tax morale in their strategic plans. However, it is necessary to have a clear definition of this issue and set forth explicitly the principles and values to be promoted which should rule relationships with taxpayers.
This topic shall elaborate on three aspects:
The definition of tax morale as a contribution to taxpayers’ voluntary compliance; Acknowledgement of how the proceedings of Tax Administrations as guarantors of the enforcement of tax laws and taxpayer rights as well as the demand of tax payment exercising all their legal powers influence taxpayer behavior; and, Identification of the actions undertaken to respond to questions such as: o Does the institutional strategic plan contemplate the notion of tax morale specifically? o What led the Tax Administration to include strategies focusing on tax morale? o What propositions and specific objectives does it use in so doing? o How does it show in strategic plans? o Are strategic plans evaluated through specific indicators focused on higher levels of tax morale? Methodologies for measuring tax morale within the tax administrations
Tax morale materializes in specific actions subject to quantification. CIAT has developed a toolkit for self-assessing the level of efficacy of organizations in promoting ethics. The self-assessment questionnaire enables the analysis of 8 key aspects to establish the efficacy of actions carried out by the administration in promoting ethics. This is one of the measuring methodologies currently used by some TAs. Notwithstanding, other methodologies exist with similar objectives and it is interesting to learn about them from the pertinent case-study, in which presentation the following aspects should be considered: 1.3
Brief description of the methodology Application process Coverage and scope (quantity and nature of the sample) Application period Results obtained Results monitoring and support Subsequent reviews and adjustments Methodologies for measuring the tax morale of taxpayers and the results achieved
Currently, tax administrations are interested in learning about taxpayers' perception of the organization as well as their willingness to meet their obligations as subjects that contribute to the State. This is external tax morale. 5
Perception surveys provide information about the “high” or “low” tax morale of a country's taxpayers, who express their commitment towards the tax administration by duly fulfilling their obligations or by their flagrant noncompliance therewith. The results of applying these measurement instruments serve as relevant feedback for the TAs, since they refer to key performance topics. The following aspects should be considered in presenting the case study: 2.
Brief description of the methodology Application process Coverage and scope (quantity and nature of the sample) Application period Results obtained Results monitoring and support Subsequent reviews and adjustments Tax morale and the taxpayer´s behavior
“Building tax morale. Who should participate in this process? The role of the public and private sectors” Taxation is a nation’s mirror. It reflects the set of goals, purposes, values, attitudes, behaviors and priorities of the community, its power relations and social structure. Notwithstanding, tax affairs reach beyond those controlled by the Tax Administration. Ideas regarding the use of public spending, the legitimacy of the tax system, the “fairness” of tax legislation and the perception that sanctions are imposed on those who do not comply are important triggers of different behaviors vis-à-vis compliance. Robert McGee (2006) states that tax compliance is influenced by the perception a society has of taxation. This author describes two kinds of behavior: first, societies whose perception of the social covenant is deeply engrained and which consider tax non-compliance as unethical behavior; and second, societies where tax non-compliance is justified and even becomes socially acceptable behavior. For the former, “high” tax morale creates a feeling of remorse or guilt vis-à-vis non-compliance and will more likely be inclined to pay taxes. For the latter, there is a feeling of compensation for the social unfairness or account settlement before a flawed social covenant, which becomes visible in systemic non-compliance and “low” tax morale. Building a society with “high” tax morale is a process every politically organized community should promote; a commitment which should be made by all players in society. The State has a primary role but it is also essential to promote citizen involvement in political decision-making, since consideration by the State of society’s 6
preferences will build lasting relations that lead to commitment to compliance, solidarity and reciprocity toward tax duties. The notion of State-Citizen collaboration shows an actual concern for social needs and the credible commitment that they shall be met. Conversely, if laws encourage the practices of free riding or hinder that which is socially fair, civic virtues diminish. Tax Administrations are called upon to identify their role and develop strategies to come as close as possible to achieving voluntary tax compliance. To reach this goal they need to be well informed about the progress of the national economy, the distribution of wealth, new activities and uses, habits, behaviors, needs, goals and aspirations of their citizens. Taxpayers’ attitude toward the Tax Administrations and, specifically, the way in which they meet their obligations should determine the TAs actions with a view not only to exert appropriate control in line with such behaviors but also to provide the necessary support to facilitate voluntary compliance. Taxpayers feature various different behaviors depending on their degree of tax knowledge or culture, of the greater or lesser assistance that the TA delivers and the greater or lesser risk it generates. In this regard, it is important to categorize the agents and their tax behavior, design control plans which build “high” tax morale and establish broader channels for the building process through, for example, corporate social responsibility as a vehicle in the relationship between the Tax Administration and Taxpayers. 2.1
Taxpayer attitudes vis-à-vis the tax Administration: differentiate and classify taxpayer behaviors
Taxpayers’ attitudes may be classified in different ways. One alternative may be to use a risk criterion or the compliance pyramid whereas another may be to consider the level of taxpayers’ tax culture. Either of these reflects the knowledge of the tax system and the taxpayer’s capabilities in designing their tax planning in a different way. The important thing about any classification adopted lies in the attitude the taxpayer takes vis-à-vis compliance with their tax obligations and the tax administration’s actions on the different segments identified. The case study shall present the actions taken by the Administration to identify and classify these attitudes, the programs developed in each case and the results obtained. 2.2
Design and implementation of control plans according to specific behaviors
Categorizing the different taxpayer attitudes from the perspective of morale allows the Administration to adjust its control programs with the purpose of promoting voluntary compliance, as well as implementing more equitable programs and increasing their effectiveness. 7
The case study shall present the considerations and conditions taken into account at the time of designing and implementing control plans based on taxpayers’ attitudes in terms of compliance with obligations -that is to say, the level of morale-, the results obtained, the adjustments made and the hurdles encountered in their design and implementation, as well as the application and operation period for such programs. Likewise, it shall state whether special areas were created for their execution. 2.3 Creating taxpayer awareness: Corporate social responsibility and the forums for taxpayer- tax administration dialogue The business forums where the Tax Administration and taxpayers present the importance of tax commitment and agree, under corporate social responsibility, the due compliance with obligations, have proved effective mechanisms in raising tax morale at the corporate level. The discussion agenda between the Tax Administration and corporations should be grounded on a collaborative model, where the administration seeks to recognize the importance of assisting, guiding and facilitating tax compliance and corporations promote not only their own tax compliance but also that of their stakeholders. The case study shall outline said forums, their process of design and implementation, the results obtained, the main hurdles encountered and their future outlook. 3.
Tax morale as determining factor in promoting tax compliance
“Tax morale as a tool for promoting voluntary compliance. Success stories in the Tax Administrations” Living in a society implies feeling it is natural to make an equitable contribution to support the community. As the responsible citizen position is strengthened, each person should be more inclined to contribute part of their effort in exchange for the achievement of common goals. The State’s ideal is for its citizens to meet their tax obligations spontaneously. To that end, the general perception should be that tax monies will be used appropriately. Conversely, positive or negative tax awareness regarding tax actions is not natural; it is a social product arising from education and transparency in the different agents’ actions. The ethical values of justice, solidarity and cooperation are a result of social processes where people have become persuaded that it is more useful and efficient to embrace them as part of their behavior. The contribution made by each member of society by way of taxes may be achieved with “actual persuasion” exerted by Tax Administration powers, but there are other means of “Symbolic persuasion” which may not only be
more efficient but also less costly. An educational strategy, defined with such purpose, should consider that there is a variety of target populations to be addressed. In this area, it is important to acknowledge the Administrations’ initiatives in promoting tax morale, the follow-up mechanisms and successful practices to prompt voluntary compliance, the difficulties which arose along the way and the strategies used to overcome them; and, in particular, whether norms or legal instruments exist to define the working policies on the issue of morale. How should tax morale be promoted? How are results measured? Is it necessary to make adjustments to administrations’ processes and their structures? 3.1 The development and strengthening of the tax citizenship concept: the tax education programs In recent years, tax administrations, in particular those of Latin America, have been working on tax education and tax culture programs as a means to build the notion of tax responsibility and thus educate taxpayers who know, advise and oversee tax affairs. Such programs have proven an interesting approach which involves not only the tax administration but also other State entities such as education ministries. When presenting the case study, it is important to consider the program description, its scope (levels of elementary, middle or higher education), the time required to implement it and how long it has been in operation, the results obtained and impact measurement, the trends and the future of these projects as well as the role that other State departments have played therein and the importance of this factor for the program’s success. 3.2
The design and implementation of taxpayer assistance programs in keeping with his behavior
It is probably unfair to treat all taxpayers equally without regard for their degree of tax morale. Taxpayers themselves frequently complain about inequality in the treatment they receive from the administration, which ignores their level of compliance and subjects them to frequent onsite audits or requests for information. Thus, taxpayer assistance plans for the most efficient taxpayers should consider these factors. The case study shall comment on the programs designed and implemented according to taxpayers’ levels of tax morale, the factors contemplated in their design, the results obtained and how these have been measured.
Generating taxpayer trust: accountability and internal control systems
Citizensâ€™ trust in the Tax Administration is largely hinged upon the degree of transparency and integrity with which it performs. Administrations should work on clearly and explicitly communicating the actions they undertake, the processes they follow and promote the means for public control of their actions. The case study shall present the internal control and accountability systems designed and implemented, their operation, the results obtained, the areas involved, highlighting whether there are systems of complaints and claims, how to pursue them and the consequences for the taxpayer as well as for the administration - that is to say, whether it may warrant the review of decisions or procedures or give way to disciplinary measures within the organization-. It is also important to set forth the existence of taxpayers' ombudsman offices and, if this is the case, their scope and role as well as their degree of independence and decision-making power.