An Opportunity to Bolster Development Through Tax Collection

Paying taxes is one of the most basic things people can do to support the economic and social development of their countries. Tax revenue allows governments to provide the services and public goods their citizens need, reducing dependence on foreign aid and encouraging political stability while providing a lever for leaders’ accountability. Yet people whose governments serve them well don’t always return the favor by paying their fair share. Why not?

When people are asked this question, typical answers center around where the money goes: They worry it will be spent on mistaken priorities or stolen by corrupt officials. And indeed, there is a strong relationship between the quality of governance in a country and amount of tax-dodging that goes on. This can be seen in a simple plot of the share of the economy that is “shadow” or untaxed versus an index of the governance of each country.

In the graph, the x-axis is a simple average of three metrics that the World Bank compiled from surveys for its World Governance Indicators: voice and accountability, government effectiveness, and control of corruption.  The y-axis is an estimate of the share of a country’s economy that is deliberately concealed from public authorities, by Friedrich Schneider of the Johannes Kepler University of Linz and his colleagues.

Each point plotted on the graph represents the quality of governance and the size of the shadow economy for a different country.  The relationship between the two measures is very strong, but some countries—those marked in red—have bigger shadow economies than one would expect given the quality of their governance. These outliers span the globe, from Georgia to Panama, Tanzania to Thailand. They are mainly middle-income countries, with a few lower-income ones thrown in as well. Their governments may be unfairly perceived as more corrupt and ineffective than they really are, or—especially among the lower-income countries—they may simply lack the wherewithal to collect taxes.

But there may be something else going on, too, that has to do with the many other reasons why people don’t pay their taxes. Researchers, including Benno Torgler of the University of California at Berkeley and Ernesto Stein of the Inter-American Development Bank, have found that people also fault tax systems for being unfair, too complex to comply with, ineffective at enforcement, or too burdensome for people who don’t have a stake in society. And then there are the people who don’t pay because they don’t see their neighbors paying or because not paying makes them feel clever.

Clearly, in some areas the problem is a lack of information; people don’t know how the government really uses their money. In others, the problem is a lack of commitment to collective action; people don’t pay because of the attitudes of their peer groups. In both of these areas, we believe there is room for progress.

Usually, the push for transparency about the use of tax revenue comes from groups of concerned citizens. But several countries hoping that better information will improve compliance have actually launched campaigns to tell taxpayers how their money is being spent. In Argentina, for example, television ads show photos of the schools and hospitals the government is paying to build. Other countries, such as Italy, have tried to frame tax compliance as the patriotic duty of honorable citizens.

Both of these channels are less expensive than increased enforcement, but their usefulness has been difficult to prove. We believe that other mechanisms can do more, with cost-effective and rapid results.

When behaviors like tax evasion become entrenched as cultural norms, it can take more than public service announcements and others ways of raising awareness to change them. Shifting behaviors at a regional or national level requires a participatory movement. The growth of such movements in the past decade has offered many lessons, including how technology can scale up the results quickly. In general, four components underlie any effective movement for social change:

1. Social validation: seeing others act, both peers and community leaders
2. A credible theory of change: understanding why acting yourself is important and contributes to goals you support
3. A commitment curve: easy entry-points to participation that open the door to more involved forms of action and greater commitment over time
4. An effective platform: organizations, structures, processes, and tools to support and encourage action.

Government and non-government actors alike have had success shifting behavior when these components have been present. The environmental movement, to take one example, has successfully shifted behavioral norms around disposing of everyday waste that, in decades past, was routinely left strewn around public places and thrown from car windows. In countries where components necessary for the movement have not been established, many of these behaviors continue today.

Using technology, 21st century movements for social change can ramp up participation and action at much greater speeds than ever before with much more modest resources. For example, earlier this year, a group of social entrepreneurs founded AllOut.org, a movement aiming to protect the human rights of gay and lesbian people worldwide. It used an innovative online community organizing platform and strategy to build a membership base of over 600,000 within months. For comparison, it took Amnesty International, founded in the early 1960s, 25 years to reach a comparable scale.

How could these movement-building approaches apply to tax compliance? First, the participation of friends, family, and community leaders would need to be highly visible. Innovative online and mobile phone-mediated mechanisms can create simple and fun entry points relevant to middle-income population segments. Incentives can encourage people to spread the movement to peers via text messages, email, and existing social media platforms. All the while, the communications strategy deployed through the platform can highlight key, simple messages: Your taxes support important initiatives that the community is proud of; your friends and family are paying their fair share.

Around the world, scores of governments are democratizing, winning the fight against corruption, and deepening their capacity to serve their constituents. One would hope that increased taxpaying would follow this progress naturally. In places where it doesn’t, there are many positive, creative, and inexpensive ways to give taxpayers a little push.

Read more stories by Daniel Altman & James Slezak.