South Africa has recently hosted its 2017 tax indaba (ie. tax conference). While he was speaking at the event, the head of research at SARS lamented the lapsing levels of tax compliance. Tax morality is on the decline, and he wants stronger levels of enforcement.

Whenever I hear a tax authority representative call for the enforcement of better ‘tax morality’, I join the host of people who ask “But could you also enforce better fiscal-spending morality while you’re at it?” Generally speaking, tax morality does not decline because people suddenly become immoral. It declines because the social contract has broken down.

Although the head of research has neatly avoided the topic, by implying that it’s the economic environment that has led to growing tax immorality:

“There are people who shift their morality as the economic environment changes.”

Or, you know, when faced with constant revelations of state capture, nepotism, and parastatal bail-outs.

Tax Morality (or the lack thereof) as a form of social protest

In October 2015, Thomas Piketty came to lecture South Africa on its inequality and inefficient tax collection.

One of his arguments in favour of being a good taxpayer was, essentially: “You can’t keep complaining about government inefficiency – because, really, what other option is there?”

Well, that’s just plain ridiculous.

Because in some countries, avoiding tax is essentially a form of civil protest; and to me, that seems entirely appropriate. Here’s an example: if the Jews under the Nazi government decided to evade their taxes, would we have called called that “immoral”? Would we criticize their decision to not fund the institutions that were being primed for their genocide?

I think not.

The same goes for the taxpayers of Caracas, who are being subjected to cruel and unnecessary hyperinflation thanks to the delusions of their bus-driver-turned-military-dictator.

At the same time, you have to draw a line somewhere.

You can’t just decide that “I’m being discriminated against for being rich/privileged” and then absolve yourself of the social imperative to pay tax.

Tax Morality as social rent

Now I realise that some people will call almost any form of taxation “expropriation” and/or theft. But practically speaking, there are some public goods that people expect to be provided by the State.

Now we’re not going to change that overnight. So making statements like “I’m not paying tax because I never asked for street lighting to be provided” is a bit like saying “I’m not paying for all the channels that DSTV provides because I didn’t ask for the History Channel”. Sometimes, it’s just part of the package, and you can’t always pick and choose like that. So you can either keep the DSTV package (ie. citizenship), or you can go and find a television provider that suits you better (ie. emigrate to somewhere that’s a better fit).

And “taxes” then become your civic dues for living in a country with rules, regulations and public goods.

Some country comparisons

Here is a graph of tax collections (as a percentage of GDP) of the OECD countries going back to 1965:

This is total taxes collected as a percentage of GDP, going back to 1965, based on this data from the OECD

I specifically chose “Total Tax Collection as a % of GDP” because I don’t like datasets that talk about “highest marginal tax rates”. Speaking as an accountant, let me say that those numbers are meaningless. You can have a really high marginal tax rate (of, like “80%”), but generous allowable deductions can make the effective tax rate equal to, say, 20%. And that’s a lot nicer than a country with a tax rate of 25%, that is rigidly enforced without any permissible deductions.

So going back to the graph, some observations:

  1. The Scandinavian countries collect massive amounts of their annual GDP in tax (between 40% and 50% of GDP).
  2. The United States, comparatively, collects about 25% of GDP in taxes.
  3. Chile and Mexico are the OECD countries with the lowest tax collections.

If you want to have a look at the data for non-OECD countries, then have a look at this wikipedia page. Some observations from there:

  1. South Africa collects about 27% of GDP in taxes (higher than the US).
  2. The countries of the Arabian peninsula have some of the lowest tax collections in the world.
  3. Most of the low-tax collecting countries seem to be made up of the war-torn and the developing-extremely-slowly.

Incidentally, having high taxes collections doesn’t quite seem to impact economic activity in the way that we’d expect. Many of those top tax collectors are “model” economies.

So I guess the question is: are the Scandinavian countries just better at policing their tax policies? Because most of the OECD countries have gone through multiple different taxation regimes since 1965, and yet those Scandinavian countries just seem to be better at it.

Is it just better government-spending morality?

Some articles that are worth reading:

So two observations:

  1. There definitely seems to be a cultural aspect here, where the Scandinavians are more inclined to be communal than individualistic, which does make tax collection “for the people” a more viable sell.
  2. But more importantly, the Scandinavian governments just seem to do governing better.

Which actually brings me back to where I started.

One of the big reasons for tax evasion is simply poor governance. If you have a State that is supportive, reasonable and relatively well-managed – then your citizens are going to have less issue with paying their taxes.

But when the State is disjointed, inefficient, corrupt, and treats everyone as tax evaders until proven innocent, then you’re going to get more “civil protest”. Like in those war-torn economies.

And doesn’t that make sense though?

If your DSTV bundle has a lot of great channels, then you don’t mind paying a little more for it (even if there are a host of unwanted channels in the mix).

But if you have one or two okay-ish channels, with a lot of adverts, and the rest is just a bad wash, then you’re far more likely to say “I refuse to pay for this, sorry”.

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.