Monopoly over legitimate use of
violence and capacity to force its citizens to pay tax are the two attributes that make State fundamentally different from any other institutions which exists in a society. However, it’s capacity to collect tax without use of any violence
(or threat thereof) with minimum coercion and least persuasion
depends on a number of determinants which indicate nature of its governance and
legitimacy it has.
Classical Economists attribute wealth of a Nation in terms of physical capital which it is endowed with. Social
scientist James Coleman brought the idea of a new form of capital which he
termed as Social Capital. It is
attributed in terms of degree to which people come together and work towards a
destiny with a common set of belief and a collective purpose. Francis Fukuyama
had termed this phenomenon as Spontaneous
sociability in which unrelated and unknown people can come together and
create effective institutions.
Measured in terms of quantum of social
capital a society is endowed with; we can classify them as in to High trust and Low trust society. A society with a huge social capital is referred
as High trust society where a high degree of trust exists amongst citizens,
government, business and other institutions. This propensity to trust is
reflected in its legal systems, rules which govern behaviours of institutions,
interactions amongst various authorities and its various interfaces with common
citizens.
Contrary to it, a Low trust society endowed
with a lesser amount of social capital. Its citizens, Business, Government etc
maintain a suspicious relation with each other, if not a hostile one. Engagement
amongst them are characterised by formal and rigid rules, involving a lot
friction resulting in high transaction costs. All agencies and economic agents
are suspicious to each other; decision making is painfully slow, resulting in
huge economic as well as opportunity costs. It ends up in businesses remaining uncompetitive,
inefficient public services, poor standard of living for its citizen,
widespread discontent towards public institutions and rampant corruption.
People in those Low trust societies
view their Government as robber barons, and taxation by government is considered
as an expropriation of one’ own wealth. People perceive the political ruling
class, and bureaucracy, as parasites, living on public money without
contributing anything back to the society. Any expenditure by the government is
viewed with suspicion and therefore such a government ends up with a huge bureaucracy, with lots of checks
and balances which often ends acting at cross purposes. For example, having a huge audit, anti corruption and such departments to check the executive functions.
In such a setting, tax evasion is rampant and tax
bureaucracy is perceived to be widely corrupt. Non payment of tax has got a
certain amount of legitimacy and is not viewed as a serious social offence.
Citizens want state to coerce others to pay tax, yet he himself is of the firm
belief that taxes can be evaded, as according to him, state in return, is not
providing back enough in terms of public goods. Payment of tax is not seen as a
moral obligation but as an expropriation of his wealth by the state. Tax
payment is seen as a Zero sum game and not as a Positive sum one. Aggregation
of this individual behaviour is reflected in the norms and value systems of such
society.
Sense of fairness is a powerful
parameter to understand how and why people pay tax and evade it. In a Low trust
society like India, every tax payer is of the firm belief that he pays taxes
disproportionate to what others pay. Salaried people complain that it is only they who regularly pay tax without default (through TDS of course), while business
men believe that tax rates are too high to make them a decent profit in commensuration
with their risks and efforts. While poor people complain that rich don't get taxed enough, urban middle class talks about their tax money being squandered
away. Thus practically, every section of the society perceives that the tax
regime is unfair to them.
Public goods game (a tool developed
by Social scientists to test how much an individual are ready to contribute to
a public cause whose benefits are shared equally with all irrespective of
individual contribution) can be a good indicator or a proxy to a society which
will tell how many of its members are ‘free riders’ and others as ‘beasts of
burden’.
‘Me paying more tax’ is a fallacy
that gets deeply drilled in our minds because of certain cognitive biases that
we are carrying with all along. Behaviour scientists call it as ‘Self serving
Bias’ where we individually are tempted to believe that our contributions for a cause
are always higher than what actually is. Similarly, we are always flooded with
the news of tax evasions and money confiscated; tax evaders arrested and prosecuted
tax that remains unpaid etc. This ready-made news tempts us to fall in to
‘Availability bias’ where we are made available with a lot news which tempts us
to believe that tax evasion is the norm and its payment is an exception. On the
other side, common man never hears much about the amount of tax collected, who
paid and how much etc. Again, in the name of privacy, our tax department is
also unwilling to reveal any illuminating data on tax payments other than gross
collection figures.
In a Low Trust Society, rational
actors are always tend to be tax evaders or free riders, unless they are
threatened with punishment. However, men are not that kind of rational,
independent and isolated economic agent but are social animals who receives and
radiates signals and cues from the society he interacts and part of. He always
learns and adapts to the patterns of the ‘Significant others’ in the society
and easily confirms to the norms and collective behaviour of the society in
which he lives.
People all over the world are seen to
be more ready to pay the tax if their neighbours and rest of the citizens are
seen to pay it diligently. In other words, it is more about ‘Contagion effect’
which can act in either of the directions. Hence, it is important for tax
authorities to make information regarding tax payments of this ‘significant
others’ and the compliance level of people living in neighbourhoods and a
particular geographic region. If privacy concern does not allow tax authorities
to publish details about individual tax payers; nothing will be stopping them
from giving more data about tax payment patterns at more granular levels.
For instance, details of gross tax or
median tax paid, in a particular neighbourhood area or a particular PIN code - Colaba
in Mumbai, for example - will be illuminating and will help others to understand tax
compliance in that locality. If any asymmetry between the perceived income or
consumption pattern and tax actually paid exists, it can be examined in detail.
This will mount a moral pressure on residents of that area to be more honest in
their tax matters. It will help others to move out of their ‘Me paying more
tax’ fallacy and will illuminate about contributions of others too.
Nudging people to pay tax by
increased compliances by way of making tax evasion difficult through means like
PAN – Bank Accounts - Aadhaar linkage or some such means will have a huge positive spill-over by way of making
honest tax payers feel morally satisfied. This will help them to perceive
that everybody is now ‘forced’ to pay the tax. It then incentivises people to
behave in such a way that is beneficial to the collective interest of the
society. Adding to this, if he receives information about tax paid by others ,
whom he perceives as evading the tax, he then start to believe that it’s a
‘fair game' to pay the tax and feel vindicated. This ends up in more tax
payments and thereby triggers a virtuous cycle where a resource rich government
undertake activities that further enhance the wealth, and prosperity of its
citizens.
Even though Tax policing and
enforcements is a short to medium term tactics, by topping it up by
disseminating desirable information, it can lead to a situation where tax
payments will be a Social habit internalised by the citizens. Tax, hence not only have to be collected,
but also seen to have collected..
References-
1- Fukuyama,
Francis. Trust: The social virtues and the creation of prosperity.
No. D10 301 c. 1/c. 2. Free Press Paperbacks, 1995
2- Kahneman,
Daniel. Thinking, fast and slow. Macmillan, 2011.
