Education and tax morale

Highlights

• We analyse two channels through which education shapes tax morale.

• Tax morale of net receivers of welfare state benefits increases with education.

• Tax morale of net contributors to the welfare state decreases with education.

• A fairer tax system and better institutions raise tax morale of the highly educated.

Abstract

While the determinants of tax morale have been widely studied in the literature, surprisingly, the fundamental influence of education on tax morale has yet to be investigated. Given the insights from the psychological and political science literature about the role of education in the formation of social values, in this paper, we analyze two channels through which education shapes tax morale. We find that education has a positive impact on tax morale for those individuals that are net beneficiaries of the welfare state, and a negative impact for those that are net contributors. Furthermore, our results indicate that the more highly educated because of their better knowledge on public affairs exhibit higher levels of tax morale in countries that have better quality public services, a fairer tax system and higher quality institutions.

Introduction

After the financial crisis in 2008 and the following sovereign debt crisis, many countries have experienced a substantial fall in their tax revenues and have been obliged to reduce the size of the public sector and to cut welfare benefits. In such a context, reducing tax evasion and increasing the tax morale of citizens has become a major objective of public fiscal policy. In a report for the European Parliament, Murphy (2012) estimates that in 2009 the tax revenue loss due to tax evasion in the European Union (EU) exceeded €860 billion. This quantity is similar to total healthcare expenditure in the EU. Unsurprisingly, the fight against tax evasion has become one of the EU’s principle concerns (European Commission, 2016).

The literature agrees that tax evasion is a complex phenomenon which, beyond the traditional cost-benefit analysis, is influenced by several other factors that together make up so-called tax morale and which consists of personal values, social norms and attitudes towards public institutions. While the relationship between an individual’s tax morale and some of its determinants is already well understood (e.g., tax behavior of the individual’s reference groups, age, gender, religion), the fundamental influence of education on tax morale has to date been ignored. This is all the more surprising as the psychology and political sciences literature tells us that education is an important factor in channeling individual behavior regarding social values, political attitudes and the general assessment of public affairs. On the basis of these insights, in this article we use data from the European Values Study (EVS) to explore the role of education as an indirect channel in shaping individuals’ tax morale.

The results in the aforementioned literature indicate that there are two main reasons why educational level should influence tax morale. First, it is an indicator of the higher cognitive abilities that are necessary to understand the relationship between tax payments and many of the indirect benefits obtained individually in modern welfare states. Therefore, we expect individuals who are the main beneficiaries of welfare state benefits to exhibit higher tax morale. Moreover, this effect should be more pronounced among the more highly educated because they are more aware of the connection between tax payments and the benefits received from the state. Indeed, our result indicate that for unemployed and retired individuals tax morale and the educational level are positively related. By contrast, for the self-employed, who obtain comparatively lower benefits in exchange for their tax payments, tax morale and the educational level are negatively related. The second reason why we expect education to have an influence on tax morale is that more highly educated citizens are better informed and enabled to process information from the media. This affects their relationship with public institutions and, consequently, their tax morale. Our results confirm this conjecture. We find that the more highly educated exhibit higher levels of tax morale in countries that have better services, a fairer tax system and higher quality institutions.

The remainder of this paper is organized as follows. Section 2 relates our study to the literature. In Section 3 we put forward two hypotheses regarding the role of education in determining tax morale. Section 4 describes the data and the empirical model. In Section 5 we discuss the results of our empirical model and provide some robustness checks. Section 6 concludes.