Governments impose the obligation of paying taxes in order to generate revenue to fund public services and, in parallel, they establish a system for the detection and punishment of offenders in order to ensure the model’s viability. This system is the most usual instrument of dissuasion in society today and, theoretically, it should be sufficient to ensure that individuals pay their taxes, due to the fear that evasion will be identified and penalised.

Even so, according to the standard economic model, a rational calculation regarding the low probability of being audited and regarding the relatively low severity of the punishment (in most societies) should lead to many individuals, even those with a high aversion to risk, opting to evade taxes in order to thus increase their disposable income.

In recent decades, studies on tax evasion and fulfilment of tax obligations have proliferated, shedding light on which factors influence the decisions of citizens in one direction or the other. Several recent studies (Bartolomé et al., 2020; Robins and Kiser, 2018) show that people’s level of integrity in relation to fiscal matters in Spain is higher than could be explained by the dissuasive instrument alone. The reason behind it should be sought in a series of factors of a personal and circumstantial nature that help prevent higher levels of tax evasion.

Over 2,000 citizens took part in an experiment, known as a factorial survey, that was carried out in two parts: a description of a specific context or situation (in a vignette) with a series of characteristics that the interviewees had to judge, and a more classical questionnaire where information was collected on the person responding to the survey and judging said vignettes. The results show that with regard to the coercive sanctions system, the rational calculation derived from the standard economic model has, as seen in other countries (Frey and Torgler, 2007), relevant effects also in Spain. In the face of this dissuasion mechanism, the individual decision of complying with or evading tax is based on four basic factors: real income level, tax rate, probability of being subjected to an audit and severity of the punishment for evaders.

Taking into account these factors when the sanctions and the probabilities of an inspection are high, the compliance of citizens tends to be greater, while, as income and the tax rate increase, the probability of evasion does too (Andreoni et al., 1998).

Even so, the answers of those surveyed to different hypothetical situations make it clear that coercion does not completely explain the fulfilment of tax obligations. The factors that help to understand social behaviour in this sphere are numerous and are related both to the personal situation of the individual (characteristics, values and attitudes) as well as to their perception regarding their surrounding circumstances.

To understand voluntary compliance it is important to take into account the concept of tax morale, which is constructed upon combining a set of personal attitudes, social norms and cultural patterns with the view of the role that the state plays around the payment of taxes. If citizens consider it legitimate, they accept the right of the state to collect taxes and, consequently, the personal obligation to pay (Levi, 1988). 

This implicit contract will be respected by the individual as long as the state maintains a dual basic condition: it must fulfil its obligation to provide public services and guarantee that other contributors also pay. Therefore, the level of global honesty is also important: if it is perceived that the state is inefficient at guaranteeing generalised compliance, individuals will be more likely to evade taxes, since they consider that evasion is a common practice.
 

There are obvious factors for deciding whether to pay or evade taxes, such as access to knowledge and resources relating to matters of fiscal evasion, prior experience in this field, or personal judgements regarding what one considers correct or incorrect. A predisposition or prior positive opinion towards evasion, the fact that colleagues support or practice this behaviour, and having material and cognitive resources that enable it to be carried out are, of course, significant factors in favour of tax evasion. 

Others are less obvious but also important, such as age or education. A higher educational level is associated, based on the results obtained in the study, with a lower probability of tax evasion. As regards age, older people show a greater predisposition towards complying with paying their taxes than younger people.

On top of sociodemographic characteristics, personal values and norms, as well as the individual’s attitude towards the state are also important in explaining the probability of evading or complying with tax obligations. Anyone who believes that the duty of the authorities is to reduce social inequalities shows a lower probability of tax evasion. And, in the same direction, those who give more weight to such values as equality, obedience, and equal opportunities, tend towards reducing the probability of non-compliance with tax payments. 

Personal interpretations of the role that the state should play with respect to its citizens and the levels of justice and corruption within the authorities also play a significant role. Individuals tend to comply more when they perceive that the state is operating in favour of reducing inequalities. And not only that: the perception that the environment closest to the individual has regarding these same elements also determines, in some way, his or her way of acting (role played by peers, social pressure).

By posing the decision of whether to evade or not in different scenarios (with a diversity of incomes, risk, state corruption, social compliance and other factors) to a sample of over 2,000 Spaniards, it has been shown that among all the elements considered, some have greater significance than others. 

The situational characteristics that most influence the decision are the level of tax compliance in society (in other words, to what measure the rest of citizens are complying), the risk of being detected by the authorities, and the tax burden that has to be faced. In contrast, elements such as the amount of income and of tax evaded, the severity of the punishment, the level of cover of the welfare state, and the level of corruption, show less significant but equally clear effects.

As for personal factors, prior opinions and predisposition with regard to tax evasion, as well as the opinions of those closest (family and friends) and the availability of intellectual or material resources for evasion tend to have a strong influence on the decision. In addition, people’s level of education, personal values, and moral principles of equality and obedience also explain the behaviour to a large extent. 

Thus, although we tend to believe that our decision on whether to evade or comply with our tax obligations is the result of a rational decision based on weighing up the benefits and costs of tax evasion, this does not show the whole picture. We pay or we evade taxes according to a combination of evaluations relating to the situation and the context of the moment, together with individual values and moral judgements (Torgler, 2011). 

When the level of honesty of society is high (some 75% of the population complies) or there are more possibilities of being detected (some 50%), the tendency towards fraud clearly decreases. In contrast, when only 25% of citizens comply or if there is a minimal risk of detection (5%), then tax evasion rises. The level of corruption also significantly affects the predisposition towards tax evasion, which is shown on the vertical axis (a section is presented of the scale from 1 to 10 in which 1 means “would not evade” and 10 means “would evade”).

If we base ourselves on the pure rational calculation of costs, benefits and risks, it would be expected that the majority of citizens would probably evade taxes. However, this is not the case. When it comes to weighing up whether they should evade tax or not, Spaniards not only make a rational calculation, but ponder and relativize the circumstances under which they would commit such fraud, the severity of the punishment, the probability of being detected, and also the level of corruption in the country and to what point the rest of citizens comply with their obligations. Furthermore, the values of citizens regarding equality, or the role of the state, and the immediate influence of their surrounding environment, tend to complete the pieces that explain the puzzle of tax evasion.

This article has been adapted based on the study:

BARTOLOMÉ, E., H. DÜLMER and L. COROMINA (2020): The tax compliance puzzle: The effects of economic and moral factors on tax evasion in Spain.

Other references:

ANDREONI, J., B. ERARD and J. FEINSTEIN (1998): «Tax compliance», Journal of Economic Literature, 36.

FREY, B.S., and B. TORGLER (2007): «Tax morale and conditional cooperation», Journal of Comparative Economics, 35(1). 

LEVI, M. (1988): Of rule and revenue, Berkeley/Los Angeles: University of California Press.  

ROBBINS, B., and E. KISER (2018): «Legitimate authorities and rational taxpayers: An investigation of voluntary compliance and method effects in a survey experiment of income tax evasion», Rationality and Society, 30(2).

TORGLER, B. (2011): Tax morale and compliance: Review of evidence and case studies for Europe, The World Bank, Policy Research Working Paper, 5922.