Why does the majority of the UK population pay their taxes honestly and correctly, given that the likelihood of being caught evading is extremely small?
Standard economic theory suggests that a much larger proportion of taxpayers should evade than do in reality. Economic literature has attempted to investigate this phenomenon, with numerous reasons able to provide strong evidence, such as the overweighting of small probabilities (Alm et al, 1992), the role of reputation (Allingham and Sando, 1972) and the fact that most workers do not have the opportunity to evade. This paper looks to provide light on another reason; the social drivers of compliance. The role of social norms (internal and external) and social networks will be considered as both are reasons for why UK citizens pay their taxes. While social networks can sometimes have a negative effect on compliance, for example if a taxpayer interacts with a large number of tax evaders, the positive effect of social cohesion can be seen to outweigh this.
According to Cullis et al (2012), social norms have two aspects; those that are internal and those that are external. The former refers to the benefit of being 'true to oneself' and the latter of 'conforming to the behaviour of others' (p. 160). It is possible to separate these two types of social norms to assess their contribution in UK taxpayers paying their taxes honestly and correctly, but they should also be considered together in having an overall impact on an individual's decision on whether to comply or not.
Firstly, it can be argued that all taxpayers have an internal social norm; that is their own expectation of what is 'right'. If they stray from this internal norm and evade instead of comply, this can incur feelings of guilt and anxiety as Torgler describes (2003) and can be modelled as a disutility or a cost to the individual if they were dishonest as Gordon suggests (1989). Equally, compliance can be modelled as a 'warm glow' in standard models of tax evasion, which is most likely positive (Frey and Torgler, cited in Cullis et al, 2012), hence an individual can benefit psychologically from complying. Therefore, internal social norms have a positive effect on tax compliance and can help explain why the majority of the UK population pay their taxes honestly.
Secondly, taxpayers in the UK conform to external social norms, developed with the knowledge of others' beliefs and attitudes. Cullis et al investigate the different attitudes of the British and Italians and determine their social norms on several aspects, including political representativeness and social institutions. For example, they suggest that the central role of the Catholic Church in redistributing income in Italy means that Italians' attitudes to paying tax are different to those of the British, where redistribution occurs via the state. Their findings suggest that social norms can affect compliance in two ways, which they explain using prospect theory. They proposed that the norm in the UK is greater tax compliance than in Italy, so the prospect curve for a British taxpayer is less steep than that of an Italian as the British derive a greater psychic benefit from tax compliance. Additionally, Cullis et al argue that the Italians and British have different 'aspiration' reference points, again because of social norms. They put forward the idea that British people have an assumption that some of their income must go towards the state, but this presumption is not made by Italians. As a result, their prospect curves are also shifted.
When testing their assumptions, Cullis et al indeed find that British nationality is positively correlated with honest income declaration. They conclude that there may in fact not be a significant difference between the gradients of the prospect theory curves, which suggests that norms on opinions of the state do not have a big impact but that there is a difference between the reference points of the British and Italians as shown in Figure 1 (Cullis et al, 2012). Hence, the external social norms in the two countries influence the aspirations of taxpayers with regards to what claim the state lays on the income, and since the aspiration in the UK is higher, this can help to explain why the majority of UK taxpayers comply.
The study also found there to be differences within country studies. For example, education affected the responses of some taxpayers in the model, with Economics students more likely evade than others and in a previous paper from 2009, Lewis et al found that gender also had an impact, with males more likely to evade than females. These findings suggest that there could be inter-country differences, and although the UK population pays taxes honestly on an aggregate level, there may be certain groups with a much higher level of compliance than others. Again, these results reinforce the idea that social norms impact an individual's decision to comply.
Some studies have suggested that it is necessary to consider both types of norms together, as social norms are interdependent (Onu and Oats, 2014). In addition, Wenzel has put forward the argument that internal norms are in fact simply an internalisation of external social norms (cited in Onu and Oats). Therefore, there is some debate on whether or not internal norms have much of an impact when considered as separate to external social norms. Nonetheless, it is still clear that social norms do impact an individual's decision to comply, but this may be largely as a result of internalisation of external norms.
Social networks, another of the social drivers of compliance, can impact the decision to comply in two ways, according to Hashimzade et al (2014). Firstly, it acts as a method in which social norms are transferred between individuals and secondly, it is vessel used to transmit knowledge regarding audit policy. In their paper, Hashimzade et al show how the second feature can have a negative impact on compliance as evaders are able to share information with one another and this can increase tax evasion. However, the first can have a positive effect on the payment of taxes in the way that positive social norms can be shared among groups leading to a greater incidence of compliance. Hence, in the UK, the transmission of norms such as the belief that some income should be paid to the state ('aspiration' reference points) through social networks means that the majority of the UK population pay their taxes honestly and correctly.
One of the reasons why this effect of social networks may have a larger positive impact on tax compliance than the effect of sharing knowledge of audit policy does negative is because of the negative impact tax evasion has on an individual's reputation if discovered as described in Allingham and Sando's paper. Due to the social norm of compliance and the negative reputation connected to evading, an individual is unlikely to broadcast the fact that they do not declare their taxes honestly, and so knowledge will not be shared among evaders. This negative effect of social networks can be seen as insignificant, and so social networks have a positive net effect on tax compliance in the UK.
Another way in which social networks have a positive effect on tax compliance is through forming a cohesion among individuals which incentivises them to invest in public goods. For example, there is a positive correlation between pride, which produces a sense of group identity and tax compliance (Torgler). Where there is a greater sense of unity, such as that of 'being British', it is more likely that taxpayers will pay their taxes honestly and correctly. UK citizens may be more willing to contribute to public good provision if they see that it benefits their network and they are more likely to base decisions on compliance with this in mind. This could be as a result of a greater feeling of guilt if an individual does not comply. Therefore, social networks contribute to the honest payment of taxes in the UK through transmission of positive social norms and by creating a sense of cohesion.
In conclusion, there are a number of reasons why the majority of the UK population complies with tax payments, one of them being the social drivers of compliance. Internal and external norms both motivate an individual to comply as a taxpayer may have feelings of guilt if they decide not to. In addition, social networks allow for these positive social norms to be transmitted between individuals as well as providing a sense of unity, which means that taxpayers are more willing to contribute to the provision of public goods. For these reasons among others, the majority of the UK population pay their taxes honestly and correctly, even though the probability of being caught evading is extremely small.