The Leap of Faith: The Fiscal Foundations of Successful Government in Europe and America PDF
Preview The Leap of Faith: The Fiscal Foundations of Successful Government in Europe and America
OUPCORRECTEDPROOF–FINAL,18/6/2018,SPi The Leap of Faith OUPCORRECTEDPROOF–FINAL,18/6/2018,SPi OUPCORRECTEDPROOF–FINAL,18/6/2018,SPi The Leap of Faith The Fiscal Foundations of Successful Government in Europe and America Editedby Sven H. Steinmo 1 OUPCORRECTEDPROOF–FINAL,18/6/2018,SPi 3 GreatClarendonStreet,Oxford,OX26DP, UnitedKingdom OxfordUniversityPressisadepartmentoftheUniversityofOxford. 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OUPCORRECTEDPROOF–FINAL,18/6/2018,SPi Preface and Acknowledgments ItwaslateOctober2011.IwasteachingattheEuropeanUniversityInstitutein Florence,Italy,whereIhad beenworkingforoverthreeyears.Bynow Ihad becomefairlywelladjustedtomanyoftheidiosyncrasiesoneconfrontsliving inthiswonderfulandfrustratingcountry.ThoughIcan’tsayIwasperfectly comfortable driving in this country yet, I had learned many of the informal driving rules here. I had also gotten used to waiting in long lines to fill out bureaucratic forms—only to have the bureaucrat who was supposed to deal with themtellme thatIwas atthewrongwindow. Ihad gottenusedtothe factthatmyInternetconnectionwassporadicatbestandthatbusesfollowa schedule—but onlymost of the time. Ialso truly enjoyedthe slower pace of life,thelongerconversations,andfabulousfoodthatthiscountryhastooffer. Iwaswalkinghomefrommyofficeintheearlyeveningandsawacarwitha young couple and two small children pull up next to the large garbage bins parked on the side of the street near my apartment. I watched as a hand reachedoutthroughtheopenwindowandthemaledriverdroppedaplastic bagfullofgarbageonthestreet.Icouldn’tbelieveit.Notonlywasthisman throwinggarbageonthestreetnexttothegarbagebin,hewasalsoteaching hissmallchildrenthatitwasokaytobehavethisway. While staring aghast as the car drove off, I began to think about whether suchbehaviorwasimaginableinScandinavia.AsaNorwegianAmericanwho has lived for a number of years in Sweden and Norway, I could scarcely imagine a Scandinavian throwing a bag of garbage out of his car window even in the middle of the night in a dark forest. Why, I kept wondering, do peoplebehavesodifferentlyindifferentcountries? AsfarasIknow,noonelikestoseethegarbagestrewnaroundonthestreets. Sowhydosomepeopledoit?InmyexperienceItaliansaregenuinelylovely, warm, and deeply friendly people. Their homes are incredibly clean and orderly and despite the stories one hears about pickpockets in Rome and house robberies in the hills above Florence, it has been my experience that Italiansarehonestandremarkablytrustworthy.WhenIaskmyItalianfriends about the kind of socially inappropriate behavior I witnessed that evening, theytypicallyjustshaketheirheadsandsay,“It’sItalianculture.”Forthemost part,theyarejustembarrassed.“It’sliketaxevasion,”onecolleaguesuggested. OUPCORRECTEDPROOF–FINAL,18/6/2018,SPi PrefaceandAcknowledgments “Weallknowit’swrong,butlotsofpeopledoitjustbecausetheycangetaway withit.” Myfirstreactiontomycolleague’scommentwas,“thatmakes sense.” Italy hasaserioustaxevasionproblemanditisacommonplacenarrativethatItalians cheat on their taxes. In fact the former prime minister, Silvio Berlusconi, was beingtriedfortaxfraudatthetimeandnoonedoubtedthathewasguilty.Asthe New York Times reported, “Italians have been accused by some of making tax evasionanationalsport.”1 Taxevasionseemedlikejustanotherexampleofthemanysociallydysfunc- tional behaviors you witness living in Italy. Even a tourist will notice the apparent absence of driving rules in this country...to say nothing of their creative parking techniques. Living here you confront literally hundreds of examples where people do not seem to have the same sense of civic respon- sibility apparentin other countries. Tax evasionseemed tobe justone more example of how perfectly good people sometimes behave in socially dysfunctionalways. Iwonderedwhy. After my experience at the garbage bin, I became increasingly fascinated withthewhyquestion.AsIthoughtaboutit,Iwasespeciallypuzzledbymy untestedassertion:thataScandinavianwouldbemuchlesslikelytothrowa bagofgarbageoutoftheircar—eveniftheyknewnoonewouldseethem— than his Italian counterpart. I thought it was so, but the truth is I did notknow. Having lived in Italy, Sweden, Norway, the UK, and Japan, I have often noticed that not only do social behaviors differ across countries, but so do each country’s public institutions and systems of enforcement. Perhaps the realdifferencesbetweenItalianandScandinavianbehavior,Ibegantowonder, ismoreaproductofwhatpeoplecangetawaywith,ratherthansomedeeply internalized pro- or anti-social values. I also realized that seeing a guy drop garbageouthiswindowinpublictellsmeverylittleabouthowmostpeople wouldbehave.Inshort,IcametorealizethatI,likemostpeoplewhonotice differences in different societies, extrapolate from specific personal experi- encesanddrawconclusionsaboutwholesocieties. Maybe,Ibegantosuspect,thedifferencesbetweenItalianandScandinavian behavior is not aproduct of some deep-seated culturalvariation. Maybe it is simply because in Scandinavia rules (driving, littering, etc.) are enforced, whereasinItalytheyrarelyare. This puzzle stuck with me. This book is the product of a five-year-long researchprojectwhichexaminesthispuzzle.2 I decided to study tax evasion. Tax evasion is illegal everywhere. For the mostpartpeoplebelievethatitiswrongtoavoidtaxes.Buttheactualpractice oftaxevasiondiffersdramaticallyfromonecountrytoanother.InSweden,for vi OUPCORRECTEDPROOF–FINAL,18/6/2018,SPi PrefaceandAcknowledgments example,thegovernmentestimatesthatitlosesroughly8percentofpotential taxrevenuethroughwhatiscalledthe“taxgap.”TheBankofItalyestimates thatnearly27percentofpublicrevenueislostinitstaxgap(Santoro2010). ThetaxgapintheUSisestimatedtobenearly16percentwhichis$450billion ayearinlostrevenue(IRS2017). In February 2012 I submitted a grant proposal to the European Research Council (ERC) for a “Frontier Grant” in which I proposed to compare tax compliance behavior in a small set of democratic nations. A key feature of thisproposalwasthatIwouldapproachmypuzzlethroughtwoquitediffer- ent methodologies—comparative historical analysis and laboratory experi- ments. The idea was to examine the relationships between taxpayers and theirstatesindifferentcountriesovertimeandthenuseexperimental/labora- torymethodstoseewhetherpeoplein thesecountries todaywouldrespond similarly or differently when faced with exactly the same institutions and choices. Ihoped tocombine these approaches and methods togain insights into the fundamental question of whether outcomes and behavior are so differentindifferentcountriesbecausecitizensconfrontdiversesystems(tax andotherwise),orwhetherthesystemsdifferbecausetheyconfrontdisparate people. At that point, there had already been a significant amount of work in behavioraleconomicsfocusingontaxcompliancebehavior.Ireadthefascin- ating studies by James Alm, Ernst Fehr, Simon Gachter, Benedikt Hermann, LuigiMittone,BennoTorgler,andmanyothers.3Ilearnedfromthesescholars thatitwasalreadywellunderstoodthattaxpayersdidnotbehaveasclassical economic theory would expect them to behave. Instead, there seem to be other motivations for paying taxes driven by what the scholars titled “tax morale.” In addition, it appeared that tax morale varies from country to country.Severalofthescholarsexplicitlyarguedthatmorestudiesshouldbe done using laboratory experiments to test for differences in tax compliance behavioracrosscountries. This project attempted to do just this. But in addition to running experi- ments in a number of countries4 we attempted to build the experimental protocols around questions of interest to country specialists and policy- makers. In short, the experiments did not stand alone. The results from our behavioral experiments are reported in a series of articles as well as in the forthcoming book, Willing to Pay?5 I cannot fully summarize the range of findingsuncoveredinourexperimentshere,butIcanatleastreportthatthe behavioralworkcastssignificantdoubtonclassicalculturalistexplanations.It simplydoesnotseemtobethecasethatItalians,forexample,aremuchmore likely to cheat each other than most other Europeans—when they are given transparentandconsistentrules.Italiansaremorewillingtocheattheirstate, however.Why?BecauseItalianstendtobelievethattheirstatecheatsthem. vii OUPCORRECTEDPROOF–FINAL,18/6/2018,SPi PrefaceandAcknowledgments In contrast, most Swedes cheat less on their taxes than do people in almost any other countrybecause they tend to believethat their government treats them fairly and gives them value for their money (D’Attoma 2017; Pampel, Andrighetto,andSteinmoforthcoming). We also found that while some behavioral patterns do seem to vary from country to country, the differences between individuals within countries are often largerthanthedifferences betweencountries.Ineverysociety,includ- ingSweden,therearesomepeoplewhodistrustotherpeopleaswellastheir state and appear willing to cheat both their government and those around them. At the same time, there are some who will pay taxes and/or sacrifice their own short-term self-interest for the larger public good in every society. Interestingly,thedistributionoftypesofindividuals(e.g.whetherpro-social ormoreself-centered,forexample)doesappeartodifferacrosscountries. Finally, we find that the way people behave in the laboratory does not necessarilyreflecthowtheybehaveintherealworld.Perhapsmostsurprisingly, we found that Italians and Romanians in the laboratory were more likely to contribute to a public good in our experiments (or less likely to cheat their colleagues)thanourBritishsubjects(Andrighettoetal.2016;Zhangetal.2016). None of these laboratory results suggests that there is no such thing as “culture” or that there are no attitudinal or behavioral differences between countries.Onthecontrary,thereareimportantdifferencesinthewayspeople behave in different countries. These differences, however, are rooted in the lived experiences that people find themselves confronted with. These lived experiences affect attitudes towards the state, expectations about others’ behavior, social norms, and, perhaps ultimately, social values. Italians and RomanianscheatmoreontheirtaxesthanSwedesorAmericansnotbecause they are more dishonest as a whole. Instead, compliance is lower in some countriesthaninothersbecausesomestatesarelessefficacious,efficient,and trustworthythanothers.Inshort,institutionsmatter. Insum,ourbehavioralexperimentsdosuggestthattherearesomedifferences in behavior and attitudes across societies. But the experiments cannot tell uswhythesedifferencesexist.Tounderstandtherelationshipbetweentaxpayers andtheirstates,weobviouslyneededtoexaminethestatesaswellascitizens. Youcannotsimplystudycitizens’attitudesandbehaviorinordertounderstand whatcitizensandtaxpayersbelieveabouttheirstate.Whetherpeoplepaytheir taxes, abide by the rules and laws, or vote, is defined by this relationship. To understandthisrelationshipweneedtoexaminebothsidesofthecoin. Havingsaidthis,IrealizeofcoursethatIhavejustpeeledanotherlayerof theonion.Ifitisthecasethatdifferencesincitizens’willingnesstopaymore and/orcheattheirstateslessismostlydrivenbydifferenceinthecharacterof the statesthemselves, then why arestates sodifferent? Specifically,how has therelationshipbetweenthetaxpayerandthetaxcollectorevolvedovertime? viii OUPCORRECTEDPROOF–FINAL,18/6/2018,SPi PrefaceandAcknowledgments Thisisthecentralfocusofthisbook. Eachchapterinthisbookexaminesthefiscalhistoryofoneofthecountries inthe“WillingtoPay?”project(Sweden,Italy,theUnitedKingdom,theUSA, and Romania). It is clear both from previous work and from the behavioral experiments conducted for this study that institutions are fundamental for explaining why people behave the ways they do in different societies. This book, then, explores how and why different countries have developed such differentrelationshipsbetweentaxpayersandtheirstates. Ifonewantstounderstandhowhumanbeingsgenerallybehavewhenfaced with specific incentives and disincentives, then behavioral experiments can and do offer significant insights. But if you want to understand why people behave differently in different countries, you need to examine the social, institutional,andhistoricalcontextinwhichthosedecisionsaremade.That iswhatthisbookattemptstodo. WhileIbelievethatwecanlearnagreatdealfrombehavioralexperiments, Ihavelearnedthattheyalsoneedtobeinterpretedandplacedintocontext. While the ambition of some experiments might be to isolate the decision maker from the social or political context in which choices are usually made, this has not been my goal. Instead, a central aim of this project has beenpreciselytounderstandhowbroadersocial,political,andevencultural contextsstructureandinformindividualdecisions. After the introduction, the central chapters in this book each examine a particular epoch in the development of the relationship between taxpayers and their particular state. In each case we explore the evolution of that relationshipfocusingonwhenandwhythisrelationshiphasbeenapositive oneornot.Theconcludingchapter,writtenwiththeArgentinianscholarand student of tax evasion, Marcelo Bergman, attempts to draw specific lessons from the case studies for developing countries today. This, to be sure, is an unusual twist for a largely historical volume. But I believe that we study history and compare countries’ pasts not just because the comparisons are interesting.Westudythempreciselybecausewehopeandbelievethatthese narrativeshaveimplicationsfortoday. This book is also unusual in that it will be offered “open access.” The EuropeanResearchCouncilhaspressedustomakeallourpublicationsopen accessonthelogicthattaxpayershavepaidforthisresearch,andthereforeall taxpayers(andmanybeyond)shouldbeabletoeasilyreachthismaterialand itsfindings.Ihavetoadmitthatthisfirstseemedlikeanoddsuggestionfora comparativehistoricalvolume.Aftersomeconsideration,though,Iconcluded thatthiswasawonderfulopportunitythatwouldallowustopresentourwork andfindingsfarbeyondatraditionalacademicreadership.Itseemstomethat there may be a number of policymakers, public officials, and policy activists whomightbeinterestedinthelessonsthatcanbedrawnfromthesehistories. ix
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