Taxes, norms & belief equilibria

Here's another recent finding in experimental economics:

We analyze how tax evasion is affected when the same income is earned without any effort, or with a moderate or high level of effort.We find that subjects who have invested high levels of time and effort evade significantly more taxes.

In other words, people who feel more entitled to their income, by virtue of sweating for it, are more likely to try to keep it.

You might think this unsurprising .But I think it highlights something I've said before - that neoliberalism is performative; it doesn't just describe the world, but creates it.

One claim of neoliberalism is that individuals are entitled to their incomes, as these are the result of work and contribution to society rather than to, say, luck or accidents of history. If people believe this, then they will have lower tax morale, and so will try to dodge taxes either legally or not. The neoliberal claim that higher tax rates reduce revenues will therefore be true. But this will be only so by virtue of people believing they are entitled to their incomes. Neoliberalism then becomes a self-fulfilling belief equilibrium*.

But we can imagine an alternative equilibrium - in fact we don't need to imagine it, as it has existed in some social democratic societies. In this, people regard their high incomes as a product of good luck, and feel obliged to share this fortune. As a result, they tolerate high taxes. In this world, the social democratic claim that high taxes don't reduce effort is true - but, again, only by virtue of people's prior beliefs.

This poses the questions: is it possible to shift the belief equilibrium away from the neoliberal to the social democratic one, and if so how?

It's in this context that we should interpret MPs' haranguing of companies for "immoral" but legal tax-dodging.

From one perspective, such finger-pointing makes no sense; if Labour MPs think companies should pay more tax, they should have changed the law during the 13 years they were in office. However, what they are trying to do is change social norms by stigmatizing tax dodging. This is more than reasonable. It is only by having norms which raise tax morale that higher tax rates can be reconciled with economic efficiency.

Whether MPs alone have the power to change norms is, however, another matter.

* The same might be true for corporate taxes. In a neoliberal world where managers' duty to maximize "shareholder value" is interpreted as narrow short-term profit maximization, we'll see more corporate tax dodging than we would in a world where social norms frown upon agressive tax planning with the result that companies who engage in it alienate customers and so suffer a loss of business.

Comments

[Luis Enrique]

"One claim of neoliberalism is that individuals are entitled to their incomes, as these are the result of work and contribution to society rather than to, say, luck or accidents of history. "

I don't know what neoliberalism thinks about this, but I get the feeling the prevailing view goes further than this. I think the prevailing view also thinks individuals are entitled to incomes that are the result of luck and accidents of history.

Whilst plenty of people might distinguish between inherited wealth and earned income, nobody think people aren't entitled to earned income resulting from luck (say being born with the skills to be a good footballer) or accidents of history (being born a talented footballer in a country that has a rich football league and talents scouts, rather than in rural Namibia).

[Richard Kerley]

To stick with corporate behaviour. Do we know if such corporate 'tax planning/ evasion ' is more likely to be found in companies - vide Starbucks , Google; Vodaphone etc - born or domiciled in the US/UK?
The work of Hofstedter /Trompenars et al might lead to at whether companies born in different cultures behave differently .
i.e. Do Nokia / Daimler do more or less 'tax planning ' than those currently being pilloried ?

[Effem]

Isn't everything in life luck? If you're born with intelligence and a passion for hard work you are essentially just lucky.

[Steven Clarke]

"Whether MPs alone have the power to change norms is, however, another matter."

I suspect the work of UK Uncut and the Tax Justice Network helped prepare the ground for this. MPs are probably reluctant to take the lead on issues like this. A successful civil society campaign shows them it can be done and reduces their reluctance.

When it comes to 'leadership' in changing attitudes, the demand for it from the public must be demonstrated before the politicians supply it.

[Shinsei1967]

"I suspect the work of UK Uncut and the Tax Justice Network helped prepare the ground for this."

Actually I think th elikes of UKUncut have set back any popular movement to deal with aggresive tax avoidance. By their studenty harrassing of Top Shop and Vodafone staff on a weekend, and their almost total ignorance of how the tax system works, they have put off the vast majority of the country that feels the tax system should probably be changed.

UKUncut lost its case against Goldman. The High Court said their complaints against Vodafone were unfounded.

If they actually did some research and campaigned against actual tax abuses that could easily be changed by Parliament they might get somewhere.

I recall telling a senior UKUncut guy two years ago that he should campaign against the loopholes whereby stamp duty was avoided on UK property.

He wasn't even aware that such a loophole existed. But he was happy to spend his Saturday at Topshop complaining about Philip Green.

[Magpie]

Some five years ago I had to be hospitalised.

Having nothing to do, I noticed this nurse, because she was pretty much always there.

After seeing her at the hospital for over 12 hours in a row and being a bit nosy, I asked her, half in jest, if she was part of the hospital's furniture. She smiled and said that she was about to finish her two eight-hour shifts. They were short of staff, blah, blah, blah.

She got an eight-hour break and, surprise, she was back at the ward.

I'd say, that woman works pretty hard; she sweats for her money. But she cannot evade taxes: her taxes are deducted from her paycheck before she lays her hands on the money.

Compare now that nurse with someone who buys shares, and sees their capital appreciate.

How does this story fit with that paper's findings?

[Steven Clarke]

@Shinsei1967

I'm not saying the likes of UK Uncut have an intelligent plan for a sensible tax system, or have helped achieve one. Merely that I doubt politicians (I'm thinking particularly of Margaret Hodge on the PAC) would have led as much on this without their actions.

[Strategist]

>>> "I think the prevailing view also thinks individuals are entitled to incomes that are the result of luck and accidents of history."

"The only thing an Englishman resents more than paying tax on his earned income is paying tax on his unearned income." I don't know who said that, but there's definitely something in it.

[Anonymous]

Individuals and companies are entitled to whatever income and wealth the law stipulates.
The issue is whether they deserve it.

[The Thought Gang]

@Shinsei1967

Sadly, I think Stephen Clarke is right. UkUncut and the TJN have shown that half-informed hyperbole (call that the 'moral' argument if you like, or call it people screaming 'it's not fair' at anything they can't be bothered to understand) gets results. Corporate tax is now headline news, and companies are changing how they behave. I can guarantee you that every PLC board will have reviewed whether their tax arrangements could put them in the centre of a damaging PR storm.

Well considered analysis of the reasons for 'abuse' and what can be done just don't provide fuel for 'hard hitting' interview on the Today Program, or late night phone-ins on 5live.

Hodge and the PAC are just following the mood, happily free from the shackles of the ministers who have to temper their rhetoric lest someone expect them to actually do something.

The campaigners don't seem to appreciate the irony, but they are actually changing behaviour by using the free market, rather than regulating it. Starbucks didn't hand over £10m because the rules changed, they did it because being perceived as tax a users was threatening their bottom line. It's the Nike sweatshop thing all over again.

[Carin Robert]

What was that complaint against vodafone?

[aragon]

On a previous topic

http://www.thesun.co.uk/sol/homepage/news/politics/4950558/Muslims-in-prison-up-200-sparking-radicalisation-fears-in-jails.html

"It means 13 per cent of lags in our jails are now Muslim, compared to just six per cent in 1997."

Muslims are over-represented in prison ?

[SteveH]

I find the premise very hard to believe.

I do wonder if workers were allowed the same opportunities for tax evasion whether the 'harder' working ones would be the most likely to avoid it!

I think a fundamental difference between socialists and everyone else is that socialists believe people should work to contribute to the overall welfare of society, the welfare of all, whereas non socialists believe in meritocracy, i.e. people are judged and rewarded accordingly.

I fall in the socialist camp.

I also think those that work hard must be really inefficient at what they do. I know some people where I work who work weekends, I put this down to them not being able to get the job done during the normal working week!

[hapa]

finding: "We find that subjects who have invested high levels of time and effort evade significantly more taxes.

restatement: "people who feel more entitled to their income, by virtue of sweating for it, are more likely to try to keep it."

you've added feelings here, but the feelings might have come earlier. it could just be habit. a person with a habit toward money games gets a complimentary habit for tax games at no extra charge.

if you want to add feelings to it, you could put the feelings in before the money was made, that the person 'felt' very strongly about getting as much money as possible, in every possible way, and never thought of the taxes as separate from the income at all.

[Mark Wadsworth]

If we had Land Value Tax instead of taxes on output and employment, then it wouldn't really matter either way, as the LVT gets collected either way.

Admittedly, it is only people with a bit of generosity of spirit who would vote for LVT in the first place, but then again, it requires a real nastiness of spirit and a corruption of everything to be the sort of person who wants to impose taxes on output.

So these people vote for income tax and then evade it.

[Adam]

Rather than neoliberalism creating this situation, where people who've earned their income feel that they deserve to keep it, might it not be at least partly intrinsic to our nature? We don't work hard for fun, most of us, we do it -- with all the delay in gratification, stress, opportunity cost, etc -- for the rewards. Seeking to maximise those rewards seems to me to be fairly logical (whereas the systems we implement to raise the funds we need for our chosen societal models is something of a choice).

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Muchos Gracias for your article. Will read on...

[SteveH]

"Seeking to maximise those rewards"

Have you just finished a management course?

Slaves didn't work to maximise their rewards, they revolted for that reason!

Workers revolt and maximise your rewards!

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[andrew]

One claim of neoliberalism is that individuals are entitled to their incomes, as these are the result of work and contribution to society.

Fine.

Consider the opposite:

One claim of !neoliberalism is that individuals are not entitled to their incomes, as these are the result of work and contribution to society.

If you were not entitled to the fruits of your efforts, assuming the rules that decided your income were somehow random,

wouldnt a rational actor minimise the amount of effort expended?

[Blissex]

I find these discussions about neo-liberalism stultifying because it seems to me that it is just a fig leaf.

The actual politics that are "performative" out there are those of incumbency, and in particular incumbency in property.

Voters rejected the politics of incumbency in unionized jobs by electing Thatcher, as the endless strikes and barely veiled blackmail of "critical" categories of incumbent workers made the UK a pretty sorry place in the 70s and 80s.

After that rejection, it is the interests of incumbents in property, the so-called "aspiration nation", that have been the main theme of politics since Thatcher, and Blair went along with that, because that's what most voters now want.

In the USA the same, as David Frum not so long ago wrote of the Republicans:

«Rather than workable solutions, my party is offering low taxes for the currently rich and high spending for the currently old, to be followed by who-knows-what and who-the-hell-cares.

This isn’t conservatism; it’s a going-out-of-business sale for the baby-boom generation.»

There the UK is too, with both New Labour and Tories doing their worst to create or pander to incumbents in property.

It is very sad that by and large the last few decades of UK history have been dominated by the politics of incumbency, first of one type and now another.

But it happened before, as David Landes wrote in his book:

«The annals of competition show entire national branches dragging and withering -- not this and that enterprise, but the whole industry. Sometimes, having learned their lesson, the last members of the branch move away, generally to cheaper labor; that is smart, but also easy, and evidence more of rationality than enterprise.

And sometimes, as in Britain and Holland earlier, entrepreneurs retire to a life of interest, dividends, rents, and ease.»

In the UK (and Australia, and the USA, ...) most voters bought enthusiastically into the dream of a plantation economy, with most voters in the role of lords of the plantation living off endless capital gains, and lazy losers and immigrants made to working hard to support them, thanks to the magical effect of benefits cuts.

[SteveH]

I prefer the high union density of say, Sweden, to the profit before all else mentality of the UK. When Thatcher first went up for re-election in 1983 the Falklands war played a huge part, it wasn't some rational debate about incumbency. Thatcher's poll ratings were at record lows before this. History is never as clear cut as Blissex makes out, it is just that hindsight can be made to make it look like that.

Down with hindsight!

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