On 10 April 2019 the OECD issued a call for comments on its work on tax morale. Tax morale is often defined as the intrinsic motivation to pay taxes. A first draft of its future publication on the subject was presented at a conference on the role of tax morale in developing countries in January 2019 and the OECD has now presented an updated consultation document entitled What is Driving Tax Morale? including input from that conference. Comments are invited by 10 May 2019.
The report is focused on developing countries as the size of their tax revenue and their tax to GDP ratio are an important element in achieving the sustainable development goals. Tax revenue is the main source of financing for development. Developing countries face issues such as a small tax base; a large informal sector, weak governance and tax administration resources; low domestic savings and investment; and tax avoidance and evasion by businesses and high wealth individuals. Around two thirds of developing countries are having problems achieving a tax to GDP ratio of 15%, the minimum seen as necessary to run an effective state.
The report highlights a number of factors that affect tax morale and these vary significantly between regions. More work will need to be done at the level of individual countries to enable strategies to be implemented for building tax morale. In relation to individual taxpayers the tax policy makers should aim to build taxpayer profiles; develop the capacity of the tax administration; gain a better understanding of the factors driving trust in government; clarify links between tax revenue and expenditure; and develop taxpayer education programs.
With regard to tax morale of businesses policies should aim to build tax administration capacity on international tax issues; develop an effective value added tax (VAT) and withholding taxes; and learn from the experience of other tax administrations to develop strategies for developing countries.
To benefit from increased tax compliance tax administration must understand the factors that motivate taxpayers to participate in the tax system. More research and data are needed in relation taxpayer motivation to help tax administrations to be more responsive to taxpayer needs as well as achieving improved compliance and higher tax revenues. A better understanding of the factors at work in increasing compliance can also help civil society groups to improve their communication on tax and allow development partners to optimise the effect of their development and capacity building assistance.
Although in developing countries most individuals pay indirect taxes there are relatively few registered taxpayers filing and paying direct taxes in most developing countries. Many developing countries have given tax incentives to encourage investment by businesses; and have given business opportunities for aggressive tax planning. So more work needs to be done to develop a culture of tax compliance; and the relevant research shows that there is a significant correlation between tax morale and tax compliance.
The document mentions the World Bank theory of change for tax compliance. This looks at the role of trust, facilitation, and enforcement in building up tax morale. A tax system that is characterized as fair, equitable, reciprocal and accountable can help to build trust. Strengthening tax compliance is therefore not just concerned with improving tax enforcement but with building trust and facilitating payments, backed up by fair and equitable system of enforcement. This could be represented by a more service-oriented approach from the tax administration rather than an enforcement approach.
