91AV

People may complain about paying taxes, but tax evasion is relatively uncommon. So why do people actually comply? 91AV economics student Thomas Jovanovic-Pelletier, from Ottawa, ON, spent the summer looking into this puzzle by first looking at what researchers in the area have done to solve it and then designing his own experiments to test some questions that are still left unanswered. He received a 91AV Independent Student Research Grant to fund his study.

According to his advisor on the project, economics professor Dr. Craig Brett, it is a mystery as to why people pay their taxes. The first attempt to try and explain it was a crime and punishment type logic, where people pay their taxes from fear of being caught. This does not explain all the reasons people comply though.

“There has to be something else at work here, some intrinsic honesty, trust in the government, or a sense this is the right thing to do,” says Brett.

Jovanovic-Pelletier examined two theories in particular, one was the slippery slope framework, which explains that trust and power modulate each other.

“If your authorities are perceived to be very powerful, but are not trustworthy, you can make people pay taxes as long as people think that they cannot get away with cheating, but you have totally crowded out any intrinsic motivation to pay taxes. You are not getting any voluntary compliance at that point,” says Jovanovic-Pelletier.

According to Jovanovic-Pelletier, in democracies just the idea of taxpayers having more control and the ability to influence an outcome, what economists call agency, makes them more likely to pay their taxes.

Jovanovic-Pelletier explains that another aspect of tax compliance is tax morale, which is your willingness to pay taxes.

“There are a lot of factors that increase and decrease your tax moral,” he says. “The fiscal exchange model explains that people paying taxes see their taxes as a payment in exchange for services offered. So, if you are happy with the services offered, you are happier paying your taxes.”

Economists have studied trust and agency, but rarely in the context of people’s willingness to pay taxes. Jovanovic-Pelletier scoured the literature on how trust and people’s ability to influence an outcome affects people’s behaviour, with an eye to applying these lessons to tax compliance.

“The hypotheses are based on research in experimental and behavioural economics, as well as the literature on the psychology of taxpayers, law, and neuroscience.”

Jovanovic-Pelletier concluded that agency is related to the influence that people have in how tax dollars are spent.

“The idea being that those people asked to express their preferences will comply to a greater degree than those who were not,” he says.

On the matter of trust, Jovanovic-Pelletier explains that there is more to tax compliance than merely trusting the government. Trust has a “slippery-slope” element to it. The more trusting you are in one situation, the more you tend to be in others. So, in countries where the general level of trust in others is higher, you tend to have more tax compliance.

After graduation, Jovanovic-Pelletier hopes do a joint law and master’s in economics degree and study tax law.