Luca Andriani LCCGE Seminar London 9 November 2012 Tax Morale and Pro-Social Behaviour: Evidence from a Palestinian Survey Luca Andriani LCCGE Seminar London 9 November 2012

Main Question What is the impact of pro-social behaviour on tax morale among Palestinians? Pro-social behaviour = public spirit & associational activity

Pro-social behaviour Public Spirit positive attitude adopted by the citizens for the benefit of the community even though this might incur in personal cost or reduced personal gain (Kelman 1987) Associational Activity Individuals engaged in voluntary activities

Tax Morale and pro-social behaviour Tax morale approach (Torgler 2005; Frey and Torgler 2007; Cummings et al 2009) Tax evasion not only a matter of tax burdens and probability of audit (Andreoni et al 1998; Torgler 2005) but also a matter of social norms internalised by a community. Some individuals/communities might be more respectful of social norms than others Tax morale = intrinsic motivation for an individual to pay taxes beyond the probabilistic approach. Individuals are against tax evasion because it is morally unacceptable.

Tax Morale and pro-social behaviour Literature so far: Cross country empirical analysis (Torgler 2005, Lago-Penas et al 2010; Frey and Torgler 2007). Tax evasion is lower in countries with higher tax morale Micro-level but high income countries (Cannary et al 2007, Alm and Gomez 2008; Barone and Mocetti 2009) Why the existing gap with developing countries? Tax morale is a relatively new topic of research (easier to focus on cross-country analysis given the data availability) Lack of surveys in developing countries covering opinions about tax evasion

Why Palestinian Territories? Palestinian Territories & tax morale: a pioneer research Due to the lack of independent Palestinian state the WBGS are affected by a combination of weak formal institutions and strong informal institutions. Hence a system of community governance that goes beyond the simple associational life. The role of pro-social behaviour might be even more intensive than in other contexts. Attitude of the citizens towards tax compliance is central in a context of state-capacity building and it can provide useful insights on the shaping of the state-society relation Associational life is affected by vertical linkages with the Palestinian Authority for the seeking of more governmental support (Jamal 2007). This can undermine the delivery of the sense of civic engagement to extent of reducing the importance of tax compliance.

Palestinian Territories

Methodology: Bivariate Probit Model

Methodology: Bivariate Probit Model Estimation opportunities Estimate the marginal effect of the change of an observable characteristic (ex. trust in institutions) on the joint probability of an individual to be tax moral and her self-reported pro-social attitude Estimate the predicted conditional probabilities. i.e. Estimate how the propensity for an individual to be tax moral changes in the presence of pro-social behaviour compared to the case when pro-social behaviour is absent Ex. we can estimate how much higher (or lower) the probability of a Palestinian to be against tax evasion is when she is engaged in associational activities compared to when she is not engaged in associational activities 17/11/2018

Dependent variables of tax morale and pro-social behaviour

Variables 17/11/2018

Bivariate Probit Baseline 17/11/2018

Marg. Eff. joint probabilities of tax mor. and pro-soc. behaviour 17/11/2018

Marginal effects on joint probabilities of tax morale and pro-social behaviour 17/11/2018

Marginal effects on joint probabilities of tax morale and pro-social behaviour

Marginal effects on joint probabilities of tax morale and pro-social behaviour 17/11/2018

Predicted odds ratios for employed and unemployed

Predicted odds ratios for public sector and self-employed

Robustness 1: Volunteers, Membership and Putnam Groups

Robustness 2: Alternative measures of public spirit 17/11/2018

Robustness 3: tax morale public spirit and Institutional Trust 17/11/2018

Robustness 4: tax morale associational activity and Institutional Trust 17/11/2018

Conclusions Tax morale is lower when Palestinians are involved in associational activities. This occurs even when we consider Putnam-group organisations Tax morale increases with public spirit Public spirit has more impact when there is a lack of confidence in the institutions and in the rule of law. Interestingly, more public spirit is required for a self-employee in order to deal with tax compliance than for a worker in the public sector, regardless the level of confidence and trust in the institution

Conclusions Even though the lack of independence, trust in institutions and importance of the rule of law play a crucial role. Hence consistent process of institutional transparency might be recommended. The use of bribe is one of the elements of the public spirit In the robust analysis we replicate the bivariate probit models by including democratic spirit as in Torgler (2005) and Lago-Penas et al (2010). Same results!

Limitations No data on tax compliance and the size of the Palestinian shadow economy (it would interesting to compare tax morale with tax compliance and trust in institutions with shadow economy. We could set interesting estimate and possible forecasting measures!) This paper is mainly concern with the Palestinian context. Cautious in generalisations. Nevertheless there are some similarities with findings in cross-country analysis and micro-level analysis Our analysis is not able to estimate a possible average level of tax evasion. The survey does not permit to produce any type of estimation in this sense. However, this work shed light on the attitude of citizens toward tax compliance especially in the view of a more consistent process of state-capacity building. 17/11/2018

Thank you!!

Predicted odds ratios for employed and unemployed

Predicted odds ratios for employed and unemployed

Public spirit and associational activity under the baseline model

Marginal effects on joint probabilities (public spirit =0 and association = 1)

Unconditional joint probabilities between tax morale and public spirit

Structure Relationship between tax morale and pro-social behaviour Tax system in West Bank and Gaza Strip Methodology & empirical model Data and variables Empirical results & discussion Conclusion

Correlation between tax morale and pro-social behaviour

Unconditional joint probabilities between civic engagement and working sectors

Unconditional probabilities between civic engagement and association

Ranking of the institutions according to trust

Ranking of the institutions according to trust (respondents that are politically active)

Tax system in WBGS Even though WBGS are regulated by a single tax system, the Palestinian fiscal policy faces major constraints The political uncertainty of the Palestinians’ Territories favours the building of personal and patrimonial linkages in order to assure political and personal loyalties between the institutional authority and some influential taxpayers (Fjeldstad et al 2002). Negotiations were used to solve dispute on tax assessment especially until 2000 in order to receive discounts of exempts Social obligations and political intervention affected the work and the integrity of the tax officers (Fjeldstad et al 2002). This situation undermines the citizens’ perception of good governance and their opinion about the regulatory capacity of the authority (Fisher et al 2001)

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