EU-funded project tests Italians and Swedes on tax compliance
With recently renewed political and public interest in the fight against tax evasion, one EU-funded project has timely published research exploring the levels of tax compliance in two EU Member States.
Policy making and guidelines
The WILLINGTOPAY? project, coordinated at the European University Institute in Florence, Italy, is broadly focused on the interactive relationships between policy choices, institutions and ideas. This is at the core of the project’s research and in simple terms, it is interested in exploring and explaining the multiple paths and different choices made in various democratic welfare states. One of the primary policy areas that the project is focusing on to explore these issues is taxation.
Social scientists have evidence that differences in social norms and culture help to explain why some people are more willing to cheat with regards to their taxes. The project decided to test their central theory on whether such cultural differences are indeed a strong indicator for tax evasion and chose two EU Member States that arguably lie at opposite ends of the taxation spectrum – Sweden and Italy.
In a survey testing Europeans’ perceptions on honesty, 28 % chose Sweden as the most honest country in the EU. In contrast, Italians are viewed by other Europeans (and often by Italians themselves) as being notorious tax evaders. In a 2010 book (‘L’Evasione Fiscale’) by Italian intellectual Alessandro Santoro, it is estimated that Italy’s underground economy amounts to some EUR 250 billion.
Conducting the experiments
The WILLINGTOPAY? researchers then tested 638 participants (311 in Italy; 327 in Sweden) to test whether popular perceptions of each country with regards to tax evasion were broadly accurate. First, the researchers allowed participants to earn ‘real’ money for performing a simple clerical task. Then they were asked to declare their income for tax purposes, with them being free to declare whatever amount they wanted. However, they were told in advance that there was a 5 % chance that they would be audited. If they were caught cheating, they would have to pay a fine equal to twice the taxes due. Importantly, the results from all audits were only revealed at the end of the experiment, to avoid the possibility that being audited in one round would affect participant behaviour in subsequent rounds.
In total nine rounds were conducted and in seven of them, participants received a part of their tax contribution back as a form of redistribution. In each round, the researchers made a few changes to their methodology. For example, in the first three rounds they set a 30 % tax rate, but they varied the amount of money that was redistributed to the participant.
The overall results of the experiment were surprising – the researchers found no significant difference between the propensity of Swedes and Italians to engage in tax evasion. However, when they further examined their data, they did find important differences in what kind of dishonesty is seen across the two countries. In short, people might be completely honest (paying all of their taxes), completely dishonest (paying none of them) or they might be partially dishonest, paying more than nothing but less than what they actually owe (called ‘fudging’).
Swedish participants are more likely to be either completely dishonest or completely honest, whilst Italians are more likely to ‘fudge’ and engage in moderately dishonest behaviour. Participants who fudged were also more likely to be dishonest with themselves about their behaviour. 18 % of fudgers indicated that they reported their full income, whilst none of those who were completely dishonest said that they reported their full income.
Whilst the WILLINGTOPAY? results indicate that prevailing national stereotypes are less than accurate (with Italians and Swedes having around the same average level of tax compliance), the researchers indicate that those participants who chose fudging strategies do so to maintain a positive moral reputation and self-image. Such moral ambiguity gives individuals ample room to cheat a little, as well as to tolerate moderate wrongdoing.
Overall, the research indicates the dangers of many individuals choosing to adopt fudging strategies when declaring their taxes. The project team poignantly warn that relatively small acts of dishonesty, when undertaken by large numbers of both businesses and individuals, can cause serious harm to societies through lower tax revenues and poorer public services.
The WILLINGTOPAY? project is due to finish in August 2017 and has received nearly EUR 2 500 000 in EU funding.