ECONOMIC ANALYSIS & POLICY, VOL. 38 NO. 1, MARCH 2008
Tax Culture: A Basic Concept for Tax Politics*
Birger Nerré **
German Technical Cooperation (GTZ)
Dag-Hammarskjöld-Weg 1-5, D-65726 Eschborn, Germany
(email: [email protected])
Abstract:
I have suggested not to limit tax-cultural considerations to the side of taxpayers, but to
widen its understanding by using an embeddedness approach considering the history
of taxation and by that means explicating national tax-cultural diversity (e.g. Nerré
2001b, 2002b, 2006a). In the course of continuing globalization two different kinds
of disturbances of tax culture have been identified: tax culture shocks and tax culture
lags. Both are due to ignorant and/or ethnocentric policy measures. While lags are
caused almost inevitably during any transformation or reform process, shocks should
be prevented by implementing appropriate tax political measures on an international
(and national!) level in a tax-cultural conform way.
I. INTRODUCTORY REMARKS
Fundamental changes of existing tax systems, i.e. tax reforms, have been a political challenge
since ancient times. In the 20th century, so-called tax missions, i.e. expert commissions mainly
staffed by foreign tax experts, became very fashionable. Their performance – measured by
a successful enforcement and the continuity of implemented changes – was on average very
poor. The first documented tax mission of the 20th century was led by the Columbia professors
Shoup and Seligman to Cuba in 1931. It could not be labeled as a success at all, as the Cuban
government had all the Spanish drafted copies of the report of the tax mission burnt publicly
shortly after its publication (Tanzi 1987, p. 225). Somehow, the American way of taxation had
not been compatible with the Cuban reality of taxation, i.e. with the Cuban tax culture.
In view of the clash of different cultures and divergent tax systems caused by today’s
progressive globalization, one would think national ‘tax culture’ to be a very fashionable topic of
economics and public finance (particularly of taxation). Surprisingly this is (still) not the case at
all: The late Mark Perlman (Pittsburgh, PA) remarked on the occasion of the Annual Meeting of
the German Association for the History of Economics in Hamburg, Germany, May 10-11, 2001,
that ‘tax culture is a very interesting and important topic, especially in America – but nobody
writes about it!’ In the meantime, though, most of the international aid organizations, like the
World Bank and the IMF, have rediscovered the importance of the topic (Nerré 2004).
*
**
The views expressed in this paper are those of the author and do not necessarily represent those of GTZ or
GTZ policy.
I am indebted to Christian Scheer and Richard Bird for valuable comments on an earlier draft.
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The topic of ‘tax culture’ is located at the intersection of economics, sociology and history.
As one might expect, the term ‘tax culture’ is rarely found in economic literature, only in Latin
America where the ‘cultura tributaria’, i.e. ‘tax culture’, is part of the academic discussion.
That discussion, however, focuses on voluntary compliance and on public methods to increase
the propensity to be honest in the taxation process (Cortázar Velarde 2000).
For sound tax politics disturbances of tax culture are of crucial importance and should be
taken into consideration, since the outcome of tax reform packages depends on the tax-cultural
conformity of the proposed measures.
The paper is structured as follows: After a definition of ‘tax culture’, possible disturbances
are described and country-specific examples are presented. Concluding lessons are then
deducted.
II. DEFINING TAX CULTURE
The ‘classical’ understanding of a country’s ‘tax culture’ (e.g. Schumpeter 1929) was almost
entirely restricted to the creators of the tax system. Taxpayers were not considered to be part of
the ‘tax culture’. More recent interpretations of the term ‘tax culture’, though, place emphasis
at the center of their argumentation either exclusively on the taxpayers (Camdessus 1997) or
the communication between the latter and the tax authorities (Martinez-Vazquez and McNab
2000, p. 293, Martinez-Vazquez and Wallace 2000, p. 11, Alm and Martinez-Vazquez 2001,
p. 34). Their interpretation – as well as that of most transformation economists – seems to
aim at Schmölders’ (1970) ‘tax mentality’. However, the exclusive and limited look at the
interface of those two (groups of) actors seems too restricted, as does the consideration of
taxpayers only, because the evolutionary process of the tax system as well as the national
culture remain unconsidered. The concept of tax culture presented here can best be explained
from its conceptual dismantling in the individual terms ‘tax’ and ‘culture’.
From the viewpoint of ‘taxes’ not only the tax system and the actual tax practice form part
of a country’s ‘tax culture’, but also the unique relationship between the tax authorities and the
taxpayers accounts of its uniqueness (Frey and Holler 1998). With regard to tax authorities,
the structure of the individual levels’ competencies must be taken into account – how are the
tax revenues to be distributed between local and central bodies? How explicit and precise is
the tax law in this respect and how consequently are violations sanctioned? Which (rival)
interest groups do exist? This (incomplete) list of questions is a particularly important part
of national tax culture (Berkowitz and Li 1999, Blanchard and Shleifer 2000, Shleifer and
Treisman 2000, Treisman 2000a, 2000b).
However, the ‘culture’ component is far more important than the ‘tax’ component. In
the course of this work, the term ‘culture’ refers to national culture1 exclusively. In the style
1
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A more detailed explication of the ‘national’ culture might possibly require a closer look at the different local
subcultures and their inclusion into the analysis, cf. Nerré (2001a, chapter 4). For the idea of ‘tax culture’,
this would be of importance if local differences in taxation were supposed to be explained and/or analyzed
e.g. in a federal state, such as the USA. Concerning these problems Cnossen (1990, p. 475) remarks: ‘Actual
tax practices (...) show that subnational tax systems can differ widely one from another. (...) A substantial
degree of economic integration seems perfectly compatible with a high degree of tax diversity’. Jairab and
Harriss-White (2006) analyze the subnational tax culture of one of the 28 Indian states (Tamil Nadu) in a
recent piloting study.
BIRGER NERRÉ
of the ‘Shared Mental Models’ à la Denzau and North (1994, p. 4), ‘culture’ defined as ‘the
internal presentations that individual cognitive systems create to interpret the environment’
should be understood as ‘the collective programming of the mind’ (Hofstede 1983, 1991). The
evolutionary character of ‘culture’ cannot be overemphasized: Cultural factors are continuously
in an ongoing modification process stimulated by external and internal inputs, as frequently
explored in the field of evolutionary game theory. Jones (1995, p. 274 f.) points out that
‘cultures [...] may persist in their current form only while there is no challenge’.Similarly,
Granovetter (1985, p. 486) notes that ‘culture is not a once-for-all influence but an ongoing
process’.Consequently, culture itself is a dynamic phenomenon of interaction, not a fixed
equipment of various actors.
The synthesis of the two terms ‘tax’ and ‘culture’ succeeds via the just mentioned evolutionary
process: history is the linking or embedding variable. Namely, both subject areas are embedded in
the national historical events (in the sense of Granovetter’s 1985, p. 486 ‘historical embeddedness’,
see also Zukin and DiMaggio 1990, p. 14 et sqq., Smelser and Swedberg 1994, and Nerré 2001a,
p. 107 et sqq.). In this regard, Schumpeter (1929, p. 383) found earlier that ‘every tax ideal has
got its historical, economic and sociological boundaries’. Similarly, in the context of taxation
guidelines, Scheer (1996, p. 156) points out unmistakably that:
‘One surely cannot expect that the guidelines for a ‘right’ taxation are independent of time
and location’ (translation BN).
In this way, the existence or creation of a universal and ‘objectively good’ system of taxation
becomes implicitly impossible. Thus, a ‘tax culture’ specific to a particular country emerges
– coined by the tradition of taxation (e.g. an accentuation of [in-]direct taxes) on the one hand,
and by the interaction of the actors and the cultural values like ‘honesty’, ‘justice’ or also a
‘sense of duty’ on the other hand.
The latter resembles the tax mentality, in its narrowest of definitions, that consists of the
two components of tax morale and tax discipline and solely aims at the relationship between
the taxpayer and the tax state. Above all, Guenter Schmölders of the Cologne School and his
students treated this subject comprehensively during the fifties and the sixties. A passable
overview in this regard is given by Tretter (1974), who gives the following definition:
‘Tax mentality includes all attitudes and also all patterns of behavior which the tax-paying
citizens hold against (or with?) the tax and the state’ (Tretter 1974, p. 39).
In general tax morale is used as a term connected with a certain ‘willingness-to-pay taxes’, a
feeling of obligation to the state (according to the benefit principle) or to the general public
or community (according to the ability-to-pay principle), respectively. Tax discipline then
reflects the attitudes of the taxpayer in his or her actions.
Definition: Tax Culture
Acountry-specific tax culture is the entirety of all relevant formal and informal institutions
connected with the national tax system and its practical execution, which are historically
embedded within the country’s culture, including the dependencies and ties caused by their
ongoing interaction.
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TAX CULTURE: A BASIC CONCEPT FOR TAX POLITICS
Accordingly, tax culture contains even more than ‘culture of taxation’ and ‘tax-paying
culture’. A simplified overview – which could easily be enhanced by more details – is presented
in Figure 1. It shows the embeddedness of the actors in the national culture with its subset of tax
culture. Cultural norms and historically developed institutions both determine the tax code. The
latter sets the environment and the constraints, i.e. the rules for the tax game. Players include
(among others) taxpayers, politicians, tax officials, experts (e.g. tax advisors), and academics.
The arrows indicate interaction between the different groups of players as well as between
the members of one and the same group (e.g. academics meet at academic conferences). By
the ongoing interaction, social ties and dependencies are developed over time (Nerré 2003).
Thus, as Buchanan (1995, p. 195) states appropriately, ‘differences in cultural history must
exert behavioral consequences’.
Therefore, institutional conflicts are inevitable during the attempted transfer of a particular
tax system into a different ‘tax culture’.
Figure 1: The Embeddedness of Tax Culture
III. DISTURBANCES OF TAX CULTURE
What tax culture is about is often only realized when changes to the tax system cause more or
less serious problems. During transformation processes, for instance, any country’s political
culture is subject to more or less dramatic changes. Being a part of political culture (Strümpel
1969, p. 28), the tax culture suffers from certain problems, as well. The most crucial part is
often played by foreign advisers who might not be tax-culturally conditioned in the same way
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as the advised country’s society. Therefore, institutional conflicts are inevitable during the
attempted transfer of a particular tax system into a different tax culture following a ‘big-bang’
approach. In such cases so-called ‘tax culture shocks’ (e.g. Nerré 2001b, 2006a, 2006b) are
unavoidably caused. With smoother ‘gradualist approaches’, serious shocks might be avoided.
Nevertheless, phenomena might be observed due to adaptation processes which I have named
‘tax culture lags’.
1. Tax Culture Shocks
The term ‘culture shock’ was coined almost 50 years ago by the anthropologist Kalervo Oberg
(1960), who published the results of observations of American expatriates. Following Oberg,
other authors placed their emphasis on ‘language shock’ (Smalley 1963) or ‘role shock’
(Byrnes 1966), but in principle they described only facets of the same phenomenon indicating
the negative reactions of individuals to (unexpected) patterns of behavior in a foreign culture,
which result in a feeling of insecurity, lack of understanding or uneasiness.
Shocks in the field of tax culture can emerge during an encounter with an unknown or
foreign tax culture. A distinction should be made, though: shocks may be observed on the
individual or micro level, or on the collective or macro level.
Above all, individual tax culture shocks have become more and more common in the course
of today’s globalization process: They are part of the overall ‘culture shock’ if taxes are to be
paid in another country (host country). In the case of a certain ‘strangeness’ of the prevailing
local tax culture, where the values reflected possibly differ from those of one’s own inherent
tax culture, this may well lead to a feeling of unfair processing, helplessness in view of the
prevailing tax practice, insecurity etc. In the case of a shock at the micro level, there are two
possible solutions: The individual either returns to his home country (Hirschman‘s 1970 ‘costs
of exit’ in that case must be lower than the costs of remaining in the foreign tax culture), or
undergoes a process of adaptation, which (hopefully) leads to a better understanding of the
host country’s (tax) culture. The duration and the inconveniences of this process depend on
different factors, e.g. on the degree of difference between the tax culture of the host country
and the individual’s home country, on the individual’s cultural adaptability etc.
Collective tax culture shocks are observed more rarely. They are characterized by the
fact that both the taxpayers (in their entirety) and the tax administration suffer considerably
from them. While the first aspect might be quite obvious (in the sense of massively occurring
individual shocks), the second aspect perhaps needs a further explanation. A perfect example
for a shock at the macro level occurs if changes in the national tax system are made against the
will of the voters (and without democratic legitimization). The tax administration sees itself
confronted with new, obscure and above all unwanted changes in the system of taxation and
taxation practice. Moreover, the administration is possibly put under pressure by the controlling
forces that would like to observe the intended ‘success’ as soon as possible. In connection
with this, one scenario might be imagined: the violent occupation of one country by another
one in the course of belligerent activities.
A tax culture shock at the macro level – as well as one at the micro level – causes a feeling
of insecurity concerning the new rules of taxation, of dissatisfaction, of being insulted and
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similar feelings, equally found with the mass of the taxpayers as well as the tax administration.
Furthermore, the tax morale and the tax discipline in the country are expected to decline, the
tax resistance on behalf of the taxpayers, on the contrary, to rise. Also, on the part of the tax
administration, a decline in working morale will occur because the tax officials see themselves
as being confronted with new tax laws and an external pressure for success. The course of
the shock and its long-term effects depend on the methods chosen (in the case of a hostile
occupation a big-leap approach has to be expected) as well as on the duration and the degree
of strictness of the (enforced) patronage. Should the latter be of a continuous nature and of a
high level, a laborious and painful adaptation process will be triggered which most likely lead
to a slow modification of the prevailing tax culture of the patronized country. In the case of a
short-termed patronage of relatively lax character, soon re-reforms and/or adaptations to the
prevalent tax culture might be expected. This could be observed e.g. in Japan after World War
II (e.g. Nerré 2006b), and resembles the situation in evolutionary game theory, where a mutant
(here: the occupier) enters a (foreign) population and plays a formerly unknown strategy. If
the mutant leaves the population again after a certain time (either exit or death), the continued
existence of his strategy (here: the ‘strange’ tax system) depends on the question, whether its
fitness outperforms that of the old-established players’ strategies or not.
Japan’s tax reforms after World War II offer significant insights into how and why collective
tax culture shocks can occur.
The Extraordinary Tax Program in Japan after World War II
After World War II, the US had two subsequent tax missions sent to Japan. The first mission
was led by Leo M. Cherne, the co-founder of the Tax Research Institute of America (Smith
2002, p. 23). In the course of the so-called ‘extraordinary tax program’ and the accompanying
measures the Japanese tax system was turned inside out completely from September, 1946,
to March, 1947.
One subject of reform was the personal income tax. It was redesigned with higher and
more progressive rates from 20 to 85 per cent (Shavall 1948a, p. 135), and a shift to a ‘pay-asyou-go’ basis with timely self-assessment (which meant a break with the traditional Japanese
practice of government assessment) and few tax exemptions (therefore with a broad coverage
even capital gains were made taxable).
The newly designed income tax was a complete failure, though: it swamped the Japanese tax
administration with work and, in addition, demoralized it. Contrary to the former discretionary
leeway of tax officials, who could determine the tax debt on an ad hoc basis, taxes were now
collected according to a ‘goal system’, which meant that every revenue office was assigned
a certain quota (Shoup 1989, p. 2). Because of the pressure on the revenue offices to fulfill
their quotas, the culturally inherent harmony (wa) between taxpayers and tax authorities was
severely disturbed (Bronfenbrenner 1989, p. 8). The latter were under the pressure to fulfill the
prescribed quotas and thus had to act against their (Japanese) convictions to keep up harmony
between themselves and assigned taxpayers. In addition, the self assessment introduced in 1947
was very irritating for the Japanese taxpayers who had been accustomed to being (arbitrarily)
assessed by tax officials (Aoki 1985, p. 435, Beyer 1992, p. 395, 1994, p. 145). Furthermore,
the self assessment forced every individual taxpayer to hand in a tax declaration (Sundelson
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1950, p. 109 f.). Previously it had been common to have one declaration for every household
(ie), which represented a value deeply embedded in Japanese culture which prevails even
today.
As a result of the vicious circle of tax evasion and subsequent rises in the rates (Weinstein
2002), tax rates were oppressively high (up to 85 per cent). A heavy tax-cultural distortion
occurred, because the determinants of tax morale as well as those of tax officials’ working
morale were shifted significantly. As a result, both tax and working morale decreased
considerably. The Cherne system was publicly attacked by the Japanese opposition parties
as ‘evil taxes’ (akuzei) and ‘tax-exploitation’ (zei-shudatsu), see Bronfenbrenner and Kogiku
(1957b, p. 346). Obviously a collective tax culture shock took place. Subsequently, more
tax-cultural distortions were triggered. One of them was caused by the proposal to introduce
a value-added tax (VAT).
The Failure of the VAT in Japan after World War II
The second tax mission to Japan was led by Carl Shoup, who had seven distinguished US tax
experts of the after-war time at his disposal.
The attempted introduction of a VAT (fuka-katchi-zei) provoked heavy opposition in
Japan’s economic circles. This was due to the specific structure of the Japanese economy
on the one hand, and the (at that time) revolutionary design of the tax on the other hand (the
Japanese VAT was in fact intended to be designed as a local tax). Shoup (1989a, p. 221) himself
remarked: ‘This prospective newcomer evoked uneasiness if not fear’. The Shoup Mission
had proposed a tax basis consisting of the overall gross revenues less charges for purchases
of primary products. Thus, wages and dividends payable to other firms were not deductible
and fully included in the tax base. As a result, firms employing a large number of workers
would have been discriminated against, even ‘punished’. In this context, the expectation of a
tax culture shock can be made out noticeably: on the one hand, the anticipated disadvantages
on the side of taxpayers and on the other hand the resistance of tax authorities. The latter
were well-informed about the Japanese industrial and economic structure, and could easily
anticipate the negative effects of an introduction of a VAT (in the proposed design). It was
argued that upon the introduction of a VAT, the small satellite firms of the zaibatsu (i.e. large
family-controlled dominant vertical monopolies which still existed despite their formal breakup, and were re-named keiretsu, i.e. industrial conglomerates, after the war; see Schneidewind
1991, Katayama 2000) could not pass on the tax burden and thus would have to bear it all by
themselves. The tax would even have to be paid if its payment would have led to a real loss.
This possibility in itself already induced a higher tax resistance and lower tax morale. Thus
both tax resistance and tax morale were mainly affected by perceived violations of fairness.
As a logical consequence of the different social structure and the different tax culture in Japan,
the Western VAT proposal was frequently postponed (Ito 1952, p. 602), and finally turned
down once and for all in 1954 (Beyer 1992, p. 397 and Bronfenbrenner and Kogiku 1957a,
p. 245). Thus, a shock on that behalf was successfully avoided. The fear of such a tax which
had occurred back at that time lived on for decades. While the VAT had long been successfully
introduced in Europe, South-East Asia, and Middle and South America, it was not until 1989
that Japan finally introduced VAT. After ratification of a VAT law in November 1987 (Homma
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1992, p. 80), value-added taxation was finally enacted in Japan in April 1989 (Ishi 1998, p.
14 and Dabner 2001, p. 99). It did not resemble the form proposed by the Shoup Mission, but
was designed in the form of a consumption tax with a rate of three per cent (Homma 1992, p.
80 and Vogelsang 1999, p. 15). Again, consistent with the Japanese tax culture, nation-wide
protests and demonstrations arose (Rädler 1987, p. 1761).
From the Japanese examples it becomes evident that two common elements of Western
taxation systems might in some countries not be feasible policy options. Due to specific
tax-cultural settings self assessment or a value-added tax might even turn out to be
counterproductive.
2. Tax Culture Lags
Even if – by using a gradualist approach to tax reform – severe tax culture shocks can (and
should!) be avoided, troubles in the sphere of taxation are inevitable in the majority of tax
reform projects. One has to keep in mind that a tax reform means to change one part of a
nation’s tax culture first: namely, the tax code, i.e. the formal institution of law. The remaining
parts of the tax culture stay unchanged for the time being and lag behind in the tax culture’s
evolution. Thus, a phenomenon might occur which I have previously named ‘tax culture lag2’.
It has been borrowed from the concept of culture lag which was developed by the economist
Thorstein Veblen (1899) and the American sociologist William F. Ogburn (1922)3.
Ogburn offers the following definition for culture lag phenomena:
‘A cultural lag occurs when one of two parts of culture which are correlated changes before
or in greater degree than the other part does, thereby causing less adjustment between the
two parts then existed previously’ (Ogburn 1957[1964], p. 167[86]).
The 1922 definition in his ‘Social Change’ is even more comprehensive – especially for the
transfer of the concept to the field of tax culture:
‘[T]he various parts of modern culture are not changing at the same rate, some parts
are changing much more rapidly than others; and that since there is a correlation and
interdependence of parts, a rapid change in one part of our culture requires readjustments
through other changes in the various correlated parts of culture [...] Where one part of
culture changes first, through some discovery or invention [...] there frequently is a delay
in the changes occasioned in the dependent part of culture. The extent of this lag will
vary according to the nature of the cultural material, but may exist for a considerable
number of years, during which time there may be said to be a maladjustment’ (Ogburn
1922, p. 200).
2
3
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Sociologists use the expressions ‘culture lag’ and ‘cultural lag’ synonymously. In earlier contributions I have
used the term ‘tax-cultural lag’, but to relate the lag phenomena more closely and more obviously to the
concept of tax culture shocks I have decided to use the expression ‘tax culture lag’ from now on.
While Veblen published his ‘Theory of the Leisure Class’ already in 1899, Ogburn coined the expression of
‘cultural lag’ only in 1914, when holding a chair in economics and sociology at Reed College. In 1915 the
theory was improved until in 1922 his ‘Social Change’ was published. The accusation of stealing the theory
from Veblen is strictly rejected by Ogburn (1957 [1964], p. 168 [87]): ‘I have been accused of taking the
theory from Thorstein Veblen [...but] I am quite sure (...) I had never read him on this point’.
BIRGER NERRÉ
Ogburn (1957 [1964], p. 167-174 [86-95]) explains culture lag with the maladjustment
between the development of the automobile and the highways in America: While in 1910
both parts were functioning properly together (cars were slow, highways were narrow) the
development of stronger motors enabled speeds of 60, 70 and even 80 mph – but only in
theory. In reality the narrow and curvy streets did simply not allow to go at that speed – they
lagged behind and slowed down traffic’s development (in the truest sense of the word!). It
took the government some time to adjust the quality of highways to the new innovations in
the automobile sector and thus to enable car owners to extract a maximum of utility from their
cars (in terms of speed).
The time of ‘maladjustment’ or imbalance within a culture is marked by social unrest
and adjustment problems in society. This is exactly what can be observed in the sphere of tax
culture during transformation or reform processes:
‘Reforming a tax code is a difficult and complex procedure, and it requires support and
compatibility with other laws and institutions in the system’ (Martinez-Vazquez and
Wallace 2000, p. 12).
In section two of this paper the different elements of a national tax culture – like the effective
tax code, the tax authorities, tax experts, or the taxpayers – have already been identified. Tax
culture lags may occur – similar to cultural lag effects – when the different elements of a
nation’s tax culture develop at different speeds, i.e. if for some reason the relationship between
some parts is no longer in cultural/evolutionary equilibrium.
This might be due to, e.g., a democratically legitimized tax reform. First, tax authorities
will have to cope with the new guide lines and tax laws. Then, it is taxpayers who have to
adjust their behavior to the latest changes in the tax law. During this period of multi-level
adjustment tax-cultural distortions are inevitable – especially in the case of a prevailing (tax)
cultural conservatism or inertia. A decrease in working morale of tax officials might be expected,
followed by a decrease in tax morale on the part of the taxpayers.
In Western societies most tax reforms consist of marginal changes to the tax system only,
e.g. broadening a tax base, changing some tax rate by a percentage point, and so forth. In those
cases, tax culture lags are neither very obvious nor serious, even though they still appear. E.g.,
the introduction of the possibility to deduct some sort of expenses from personal income tax
liability will change taxpayers’ behaviour in the medium term. Getting used to it takes some
time of adjustment, as well with taxpayers as with taxmen.
More serious are tax culture lags in the case of far reaching tax reform measures as can
be observed in many transformation economies. Oftentimes grave tax culture lags occurred.
People had to get accustomed to the reality of democracy and the fact that democracy does not
merely contain democratic rights, but obligations too. The most important one is – especially
in the case of scarcity in public funds – paying taxes to finance the democratic institutions and
keep the state in a position to fulfil its task of supplying certain (public) goods to its citizens
appropriately. Thus, the gains from democratization and transformation can only be achieved
in the long run if people obey and comply with the tax law. But, in fact, the majority of the
people were of the opinion that they had never paid taxes before (due to hidden methods of
taxation e.g. in socialist countries). Changing the ‘programming of the mind’ in transformation
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economies will take strong educational efforts (Cortázar Velarde 2000) and – above all – a long
time. During the time of adjustment to the new (tax) reality the tax systems in these countries
will generally not yield the necessary amount of revenue.
Russia might serve as an example for a so-called ‘tax developing country’ (Nerré 2001c,
2002c), where the above-metioned phenomena connected with a tax culture lag occurred in
the transformation process.
4. Tax Culture Lags in Russia During the Transformation Period
In 1996, 1997, and 1998, the IMF was only willing to provide further funds if Russian tax
revenues would increase significantly in the nearest future (thus, in this example there is no
direct patronage concerning the tax system; compare Franklin 1997, p. 137, and Shleifer and
Treisman 2000, p. 148, 176). The IMF demand led to very brutal methods of tax collection in
Russia (by elite soldiers), which were not very stimulating for Russia’s emerging tax culture.
As Boos (1999) put it,
‘you would rather pay a little more taxes than live in fear of a face-off with the tax
police’.
On the other hand, the Ministry of Taxation of the Russian Federation came up with methods to
develop an educational agenda for potential taxpayers. As part of a tax modernization project in
Russia a pilot office was established in the city of Volzhsky (Nerré 2001c). By heavy regional
advertising through mass media (e.g. the newspaper ‘Gorod i Nalogi’/‘Town and Taxes’, news
bulletins, brochures, the TV programs ‘Nalogovosti’/‘Tax News’ and ‘Pravoporyadok’/‘Law
and Order’, radio spots, and a local painter contest in 1999) the Ministry aimed at the removal
of the general public’s ‘tax illiteracy’. Accordingly, tax culture began to be taught in schools.
Furthermore, a project to develop tax morale among pre-school age children was launched.
By the questions of the children who were educated in taxation issues by specific stage plays
like ‘New Adventures of Pinocchio’ the parents should be forced to discuss taxation issues at
home. There is still no empirical evidence of the results of these somehow strange methods,
yet. In any case, taxpayer education is a sluggish process – moreover it is undermined by
counterproductive behavior of the tax authorities as described above.
Another very special discussion arose around the introduction of taxpayer identification
numbers (Ebrill and Havrylyshyn 1999). To enhance both the transparency (especially to
the administration) and the effectiveness of the tax administration, foreign and Russian tax
experts had univocally demanded the introduction of a unique taxpayer identification number
[UTIN]. Special emphasis was put on the uniqueness of the number, because in some parts of
Russia different systems had used different numbers which had been coexisting at that time.
Unexpected objection came from a conservative fraction of the Russian Orthodox Church
(Nerré 2006b). The argument went as follows: The Holy Scriptures say that in times to come
the devil will emboss the people all over the world with a certain sign (e.g. three sixes in a
row). By accepting a UTIN, the individual would – according to this fraction of the Church
– make the first step to carrying the apocalyptic ‘seal of the beast’, the devil’s sign. The Church
proclaimed that in a second step people would have all personal information and identification
saved on a biochemical chip implemented under their skin. Accordingly, the introduction of a
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UTIN was rejected publicly, due to the fact that the Church’s influence was at this time already
considerably larger than in Soviet times. Accordingly, many religious taxpayers were deeply
concerned about the UTIN. As a consequence the introduction of UTINs – even though finally
enacted by law – took far longer than expected to be put into practice, the Russian tax culture
lagged behind the changes in the regulations.
This lag became even more obvious at the regional level (Nerré 2006b). Reportedly the
tax regulations in the county of St. Petersburg were subject to a record number of changes
of over 50 per month (!) in the 1990ies. Even tax administrators at that time did mostly not
know which decree was legally enforced or not. Accordingly they could not give accurate
information to the taxpayers at all times. Informal bargaining processes were initiated between
tax officials and taxpayers – the de facto tax code differed significantly from the de jure
tax code. Of course, taxpayers often felt being treated improperly and humiliated, because
even pointing out written proof to officials like press articles describing the new regulation
(possibly including lower rates or higher exemptions) most of the time was not sufficient to
ensure being taxed according to the tax laws. Clearly one part of the Russian tax culture (here:
tax administration) was lagging behind the legal changes to tax regulations. This created a
hostile tax environment for taxpayers. This was obviously not conducive for the development
of voluntary tax compliance in the St. Petersburg region.
Of course, far reaching tax reforms take place in Western societies as well, but the majority
of reforms are gradual ones. Therefore, the gravity of tax culture lags does not appear as openly
as in the example described above.
This leads to the conclusion that changing a tax code without taking into consideration its
embeddedness in the national tax culture might cause serious revenue problems and frustration
of the actors, which in turn might initiate a vicious circle of non-compliance. The economic
and political situation may not put the government of a transition country into a position to
fulfill its tasks satisfactorily. Taxpayers perceiving this failure of the state do therefore not feel
the moral obligation to fulfill their part of the institutional contract between the state and its
citizens. Accordingly, as taxpayers receive public assistance only on an insignificant level (one
of the rare positive examples of adequate assistance could be observed in Eastern Germany
after the Reunification; Nerré and Pallas 2005), they find it legitimate to delay payments or
entirely evade taxes.
It has to be emphasized that it might be hard to distinguish the negative effects of a tax
culture lag from those caused by a tax culture shock. It is of importance to note, though, that lags
can hardly be avoided, even if a gradualist approach has been chosen as method of reform.
IV. CONCLUDING REMARKS
The concept of a country-specific national tax culture has been disregarded by both economic
scientists and politicians for a long time. Only recently, international aid organizations like the
World Bank and the IMF have rediscovered the importance of tax culture for a successful tax
reform attempt. Still, when using the expression in public discussion, a useful and common
definition has not been strived for. Thus it is proposed that a national tax culture should
comprehensively be defined as the entirety of all interacting formal and informal institutions
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connected with the national tax system and its practical execution, which are historically
embedded within the country’s culture, including the dependencies and ties caused by their
ongoing interaction. From this definition it becomes evident that understanding a specific
country’s tax culture requires extensive research, as a vast number of actors and institutions
have to be studied as well as the procedures and processes of their interaction.
Good policy advice should not disregard the national tax-cultural constraints. Thus, the
prevention of collective tax culture shocks should become a normative criterion for ‘good’
international and sound national tax policies. Furthermore, one should be aware that during
transformation processes the appearance of tax culture lags is almost inevitable. But still,
the degree of negative effects caused by lag effects will vary with the extent of tax-cultural
conformity of new and reformed tax measures.
Thus a simple transfer of major tax elements from one country to another will in most
cases not be a sensible solution. As becomes evident from the Japanese example, common
elements of Western taxation systems might in some countries not be feasible policy options.
Due to specific tax-cultural settings, self assessment or a value-added tax can do more harm
than good to the tax state and society.
Furthermore, the Russian transformation process has shown that revenue increases seldomly
turn out to be realistic and attainable short-term goals of tax policy. First, the relevant formal
and informal institutions have to be changed. Taxpayer education as an instrument to alter
the informal institution of tax morale can have a long-term impact only. Changing formal
institutions like a tax code can also be a long-term process (Zafar 2007). In lieu thereof, tax
politics should preferably take into account an appropriate time horizon.
Hopefully, the theory of tax culture will be able to belittle the gap between pure theoretical
economic fiction and cultural reality, particularly in the sphere of taxation. Furthermore, sound
tax political recommendations can be derived from the concept of tax culture, which in the
long run lead to higher and more sustainable tax revenues and a more legitimate tax state.
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