The Way We Voluntarily Pay Taxes

“Taxes are what you pay for a civilized society” stated US Supreme Court Justice Oliver Wendell Holmes in 1927. Time has shown that “civilized” means better lives and livelihoods for people where there is a solid tax base and collection–a necessary although insufficient condition for a society where people feel safe, heard, and participant in the decisions of the nation. A government that can efficiently collect taxes is a government with a solid administration and with legitimacy based on the fact that citizens pay their taxes by a combination of laws and a sense of duty and belonging.

World Bank Annual Meetings. (Photo: Simone D. McCourtie/World Bank)

Paying taxes involves legal and moral obligations. The standard economic model for tax compliance assumes a cost-benefit calculation where someone balances the cost of being caught cheating the tax systems versus the benefit keeping some money hidden to the tax authorities. Yet there are other important reasons why people pay taxes that are not captured by a purely rational calculation. 

This background paper provides a framework that channels tax morale via trust and fairness directly and three elements for each one indirectly; trustworthiness of the government, reciprocity, and transparency/accountability for trust and three types of justice for fairness: distributive, procedural and retributive. This paper also makes a special distinction to the issue of corruption and how it relates to the elements within this framework. This paper will discuss the evidence on voluntary tax compliance, trust, and fairness, and the set of policies and actions that affect different mechanisms. It will provide a new framework based on the literature about the drivers of trust and fairness, with particular attention to the issue of corruption and also provide historical examples where specific interventions have successfully strengthened the tax system. Finally, it will provide ideas on how to identify the best sequence of interventions for increased tax morale in a specific context.

[ Read the full background paper: The Way We Voluntarily Pay Taxes ]

This policy paper is part of the Pathfinders Grand Challenge on Inequality & Exclusion. More information about this initiative can be found here.


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May 18, 2021
Ricardo Fuentes-Nieva