RESEARCH BRIEF
A series of summaries of influential research studies
conducted by CIFAR program members.
Institutions, Organizations & Growth
June, 2015
Shifting Social Norms
Can InfluenceTax Evasion
The reason most people pay their taxes has more to do with social norms than the
law. When the public views tax rates and enforcement measures as unfair, it can
have long-lasting effects on evasion.
Focus of Study
This study examines the persistence of social motives in tax
evasion and the interaction between these motives and
traditional individual motives tied to enforcement. It uses
a unique natural experiment in fiscal history: the
widespread tax evasion that resulted from a poll tax
imposed by the Thatcher government in 1990-1993 in the
United Kingdom.
Background
To support high levels of government spending, most
advanced economies require a strong ability to generate
revenue. This fiscal capacity depends not only on the
ability of government institutions to detect and punish tax
evasion, but also on the intrinsic motives that curb
individual desires to cheat the government. These motives
have been described as “individual morality,” feelings of
“guilt and shame,” and “tax morale.”
Individual taxpayers also care about their reputation:
how other people view whether they pay their taxes. Thus
social interactions and motives can play a powerful role in
shaping norms of tax compliance. 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.
Even though this idea has been widely discussed, it
remains poorly understood, both theoretically and
empirically. That is partly because existing empirical
literature on norms and tax compliance mostly relies on
attitudinal data from surveys.
Two important questions are:
• Can “shocks” erode social tax compliance norms and
how do norms persist over time?
• Do individual and social motives to comply with taxes
weaken or reinforce each other?
In exploring these questions, this study takes a different
approach. It looks at the dynamics of tax evasion in a
The perception that the poll tax was unfair caused a shift in the intrinsic
motives to pay tax, and these shifts spilled over into social norms.
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natural experiment: the response to a set of specific
identifiable shocks associated with the introduction of the
U.K. poll tax in 1990 and its abolition in 1993. The tax
undermined individuals’ intrinsic motives to comply
because many people thought it was unfair. Unlike
previous local government (council) taxes based on
property values, there was no link between the flat tax and
an individual’s ability to pay.
Findings
The level of tax evasion spiked during the poll tax years:
Average tax evasion reached between 10 and 15 per cent in
the poll tax years (1990-1993), a jump from an average of
3 per cent before 1990. In some areas, it spiked as high as
30 per cent. The perception that the poll tax was unfair
caused a shift in the intrinsic motives to pay tax, and these
shifts spilled over into social norms. This meant that
evading taxes became less socially taboo. The more people
did it, the less others felt compelled to pay.
The effect of the poll tax on tax evasion was long lasting
because it shifted social norms: After the poll tax was
withdrawn in 1993, it took a decade for rates of tax
evasion to decline to pre-1990 levels. Thus the shift in
social norms exerted a significant but declining effect on
CIFAR Program:
Institutions,
Organizations & Growth
Tax Evasion 1980-2009
15
1990-1992 Poll Tax Base
10
Percent
5
0
1980
1985
1990
1995
tax evasion. Evasion fell more slowly in this decade in
councils that had experienced high poll tax evasion than
those with lower evasion.
After the poll tax was withdrawn, tax enforcement was
less effective: Some local councils started enforcing tax
claims more vigorously after 1993, in particular after
switches in political majorities. Despite the return to
property value based taxes, this stricter enforcement was
less effective, particularly in areas that had had high levels
of poll tax evasion.
Local governments lost a substantial amount of revenue:
The poll tax experiment resulted in an estimated loss of
revenue for local councils of around £5 billion.
2000
2005
Year
The mix of factors that influences the wealth of
any given country is unique and complex. To
decode this complexity, program members study
the effects on economic growth of political
institutions, legal systems, social organizations,
and community values. Their work contributes to
a new understanding that institutions and
organizations are not static entities, but dynamic
forces with the power to affect citizens, communities and global development.
For more information, please see www.cifar.ca/
Figure 1: When the UK instituted a poll tax that was widely felt to be unfair, tax
evasion rates spiked, and did not return to normal levels until well after the poll
tax had been rescinded.
institutions-organizations-and-growth
Methodology
The researchers created a simple but dynamic theoretical
model in which individuals can evade taxes. The incentives depend on (i) public tax enforcement, both detection
and fines; (ii) the intrinsic motives of individuals; and (iii)
how not paying taxes affects people’s reputations. The
third factor creates a role for social interactions and yields
a microfoundation for social norms in tax compliance.
This model was then used to study the equilibrium
dynamics of norms and tax evasion in two kinds of
natural experiments in the United Kingdom. It analyzed
responses to:
• the temporary shocks to intrinsic motives to pay taxes
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when a poll tax perceived as unfair was introduced in
1990; and
• the permanent shocks to tax enforcement triggered by
more vigorous enforcement when close election
outcomes gave a single political party majority control
of a local council after the poll tax was abolished.
The researchers examined data on tax evasion, enforcement and political majorities from 1980 to 2009 for the
346 councils of England and Wales. Since individual data
on compliance were not available, the focus was on the
average level of compliance at the council level.
They constructed a consistent measure of tax evasion
Social norms can help or hinder
the development of effective
economies and institutions.
Powerful social norms can make
it difficult for governments to
manipulate public responses.
across three regimes: the (property- based) domestic rates
from 1980 to 1989, the (person-based) poll tax from
1990 to 1992, and the (property-based) council tax from
1993 to 2009.
Implications
The study’s empirical results are the first to show explicit
evidence for strong interactions between individual and
social motives in tax compliance. They also demonstrate
how shocks can erode social tax compliance norms over a
long period of time. The research illustrates the larger
issue of how social norms can help or hinder the development of effective economies and institutions. The
informal rules by which people conduct their lives are as
important as the formal rules and can have a deep and
lasting impact. Governments may find it difficult to
manipulate public responses through changing the laws
when entrenched social norms are in play.
Researchers:
London School of Economics: Timothy Besley (CIFAR
Gluskin-Granovsky Fellow), Anders Jensen.
Stockholm University: Torsten Perrson (CIFAR Senior
Fellow).
Reference:
Besley, T. “Norms, Enforcement, and Tax Evasion.”
London, Centre for Economic Policy Research (2015).
CIFAR brings together outstanding researchers to work in global networks that address some of the most
important questions our world faces today: how to improve human health, transform technology, build strong
societies and sustain the Earth. Established in 1982, CIFAR is a Canadian-based, global organization, comprising
nearly 350 fellows, scholars and advisors from more than 100 institutions in 16 countries.
For more information, please contact:
Amy Cook
Director, Knowledge Outreach
(416) 971-4885
[email protected]
www.cifar.ca
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