Recep Tekeli Adnan Menderes University, Turkey Policy Research Institute, MOF, Japan

Recep Tekeli Adnan Menderes University, Turkey Policy Research Institute, MOF, Japan

Research Questions Find out which factors determine Tax Morale in two OECD Countries? Are there any differences/similarities in determination of tax morale between Turkey and Japan? 2

outline Explain the term tax morale and why it is important Show the magnitude of tax morale What determines tax morale? Empirical results on tax morale determination will be presented 3

Statement of the Problem Why do people pay taxes? 4

What would lead citizens to behave more honestly, provide correct information and improve the tax compliance rate? tax morale? the existence of an intrinsic motivation to pay taxes a moral obligation to pay taxes, a belief in contributing to society by paying taxes. Tax morale, unlike tax evasion, measures not individual behavior but individual attitude. 5

Why Tax Morale is Important? German scholars in the 1960s (e.g. Schmölders, 1970 and Strümpel, 1969) tried to bridge economics and social psychology by emphasizing that economic phenomena should be analyzed from a perspective larger than the traditional neoclassical point of view (e.g., Lewis, 1979, 1982) (see Torgler and Schneider 2007b:444). In this respect, Torgler and Schneider (2007a:10-11) argue that values and attitudes can affect individual behavior. Apart from sanctions, Spicer and Lundstedt (1976) argued that a set of attitudes and norms might have affect on the choice between tax compliance and evasion. 6

Tax noncompliance is actually inevitable fact in all societies Schneider (2005:600) defines the shadow economy as: The shadow economy includes all market-based legal production of goods and services that are deliberately concealed from public authorities : to avoid payment of taxes and social security contributions, to avoid having to meet certain legal labor market standards, such as minimum wages, and to avoid complying with certain administrative procedures. 7

Estimates of the size of the shadow economies Schnieder (2005) and Schneider et al (2010) have provided estimates of the size of the shadow economies for developing, transition and highly developed OECD countries over the periods of time 8

Estimates of the size of the shadow economies in EU Table 1: The size of shadow economy in 26 EU countries and Turkey Size of the shadow economy (as % of GDP) EU Countries 1989/1990 1994/1995 1999/2000 2007 Austria 6.9 8.6 9.8 10.1 Belgium 19.3 21.5 22.2 23.1 Bulgaria 29.4 33.2 36.9 41.2 Czech Republic 15.9 17.2 19.1 21.2 Denmark 10.8 17.8 18 19 Estonia N.A N.A N.A 42.3 Finland 13.4 18.2 18.1 19.2 France 9 14.5 15.2 15.7 Germany 11.8 13.5 16 16.7 9 Great Britain 9.6 12.5 12.7 13.2 Greece 22.6 28.6 28.7 31 Hungary 21.4 23.9 25.1 26.4 Ireland 11 15.4 15.9 16.4 Italy 22.8 26 27.1 27.4 Latvia 32.5 36.3 39.9 44.3 Lithuania 24.7 27.1 30.3 34 Luxembourg N.A N.A N.A 10.2 Malta N.A N.A N.A 27.7 Netherlands 11.9 13.7 13.1 13.2 Poland 21.3 24.3 27.6 29.1 Portugal 15.9 22.1 22.7 22.5 Romania 26.2 30.6 34.4 38.9 Slovakia 14.3 16.2 18.9 21.1 Slovenia 21.5 24.3 27.1 29.5 Spain 16.1 22.4 22.7 23.1 Sweden 15.8 19.5 19.2 20.4 Turkey 26.3 29.4 32.1 35.2 Average 17.9 21.5 23.0 24.725

The shadow economy has reached a remarkably large size and increasing over the years Size of the shadow economy (as % of GDP) 1989/1990 1994/1995 1999/2000 2007 Turkey 26.3 29.4 32.1 35.2 Average EU Countries 17.9 21.5 23.0 24.725 10

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Shadow Economy in Turkey and Japan 12

How Shadow Economy and Tax Morale Relates? A reduction of tax morale reduces the moral costs of behaving illegally and increases the incentives to work in the underground economy (see Torgler and Shneider2007). Core hypothesis: A higher degree of tax morale, defined as the intrinsic motivation to pay taxes, reduces the size of the shadow economy in a country, ceteris paribus. 13

previous studies: higher tax morale leads to a smaller shadow economy Alm and Torgler (2006) focus on Europe and the United States. They find a strong negative correlation (r=-0.460). Torgler (2005) in Latin America, finds a strong negative correlation (r=-0.511). Torgler and Schneider (2009) finds a significant correlation based on data from more than 50 countries Alm, Martinez-Vazquez, and Schneider (2004) focusing on transition countries finds a strong negative correlation (-0.657) 14

Tax Morale to analyse what may shape tax morale among taxpayers. We define tax morale as the intrinsic motivation to pay taxes : it is not an output variable such as tax evasion or the size of shadow economy. It measures an individual s willingness to pay taxes, the moral obligation to pay taxes or the belief that paying taxes contributes to society. Data are extracted from the World Values Survey (WVS) (see Inglehart et al., 2000). 1981 1990/1991 1995/1996-1999-2001-2005/2007 15 1346 individuals in Turkey and 1096 individuals in Japan

Magnitude of Tax Morale (TM) Please tell me for each of the following statements whether you think it can always be justified, never be justified, or something in between : V200. Cheating on tax if you have the chance. 1 2 3 4 5 6 7 8 9 10 never justified always justified Re-coding (0, 1, 2, 3) 16

cautions the measurement of tax morale is not free of bias However, the degree of honesty is expected to be higher because in the WWS the tax morale is defined less sensitive than directly asking whether a person has evaded taxes. Moreover, the dataset is based on wide-ranging surveys (based on more than two hundred questions) it was assumed to reduce the probability of respondent suspicion. (see Torgler 2004, Torgler and Schneider 2007a; Torgler and Schneider 2007b; Torgler and Shaltegger 2006; Torgler et al 2010). 17

TM Magnitude in the EU 18

TM Magnitude in the APEC 19

TM Magnitude in OECD 20

What do the graphs say? In sum, the results for tax morale show that Japan and Turkey rank in the highest as compared to other countries within their regions. Thus, this gives a task to explain why tax morale is very high in these two countries; what determines tax morale and are there any similarities between these two countries in the determination of tax morale level. 21

Determinants of Tax Morale (Model and Variables) TM i 1 TRUST i 2 PRIDE i 3 POL i 3 HAPPY i k k 1 X i The Ordered Probit models help to analyze the ranking information of the scaled dependent variable (tax morale). The equation has a non-linear form; only the sign of the coefficient can be directly interpreted, not its size. Therefore, calculating the marginal effects is a method to find the quantitative effect a variable has on tax morale. The marginal effect indicates the change in the share of (or the probability of) taxpayers belonging to a specific tax morale level (i.e. 0,1,2,3) when the independent variable increases by one unit. 22

Dependent Variable TM From the fifth wave of World Values Survey Many studies used WVS Torgler and with his collegeues 23

Magnitude of Tax Morale in Turkey and Japan 24 Country Justifiable: cheating on taxes Japan (2005) Turkey (2007) Never justifiable 82.90% 80.50% 2 6.00% 12.50% 3 4.50% 4.00% 4 2.60% 1.10% 5 2.20% 1.10% 6 0.10% 0.20% 7 0.30% 0.20% 8 0.40% 0.10% 9 0.10% 0.10% Always justifiable 0.90% 0.30% Total 1075 1341 (100%) (100%) Mean 1.5 1.3 Standard Deviation 1.32 0.97

Independent Variables Main variables: Trust, Pride, Political attitudes, Happiness, 25

CONTROL VARIABLES Age, Gender, Education and awareness, Marital status, Economic status Occupation status 26 Religiosity

Variables used in the literature Dependent Variable Table 7: Literature: Determinants of Tax Morale (excerpted from Torgler and Shaltegger 2006:415) Tax Morale Regions Europe a North and Latin America b Independent Variables Age + + + Gender (female) + + + Education (-/+) (+) + Married + + (+) Self-employed - (+) - Income - - - Financial Satisfaction + + + Church Att endance + + +(Asia) Religious + + (-/+ ) Trust in Government + + + Trust in Legal System + + Trust in court/legal + system Trust in the president + Trust public officials + + Pride + + Direct democracy +(Switzerland) +USA Pro-democratic + + + attitudes Local autonomy + 27 Transition, Asian Countries and Australia c

TRUST: trust in the government, trust in the legal system and trust in the parliament Could you tell me how much confidence you have in the government in your capital/ have in the legal system / have in the Parliament : is it a great deal of confidence, quite a lot of confidence, not very much confidence or none at all? 1 2 3 4 a great deal none at all Hypothesis 1. The more extensive the citizens trust in the government, in the parliament and the legal system (justice or the court), the higher the tax morale. 28

TRUST Table 9: Trust Justice System Confidence in Country Justice System Japan Turkey A great deal 17.20% 36.80% Quite a lot 64.80% 38.90% Not very much 15.50% 16.30% None at all 2.50% 8.00% Total 1031 (100%) 1313 (100%) 29

TRUST Table 10: Trust Parliament Confidence in Country Parliament Japan Turkey A great deal 1.20% 22.70% Quite a lot 22.00% 38.80% Not very much 55.40% 24.00% None at all 21.30% 14.60% Total 1012 (100%) 1277 (100%) 30

TRUST Table 11: Trust The Government Confidence in Country The Government Japan Turkey A great deal 1.60% 27.60% Quite a lot 29.50% 36.00% Not very much 50.20% 21.80% None at all 18.80% 14.50% Total 1028 (100%) 1304 (100%) 31

PRIDE How proud are you to be...? (specific nationality, e.g., Turkish, Japanese, Korean, Dutch etc. ) 1 2 3 4 very proud Quite proud Not very proud not at all proud Hypothesis 2. The greater the citizens national pride, the higher the tax morale 32

PRIDE Table 12: Pride. How proud of Country nationality Japan Turkey Very proud 22.20% 81.30% Quite proud 38.80% 15.10% Not very proud 35.10% 2.90% Not at all proud 3.80% 0.60% Total 1030 1264 (100%) (100%) 33

POLITICAL ATTITUDES ideology and pro democratic attitude How would you place yourself in a political scale? 1 2 3 4 5 6 7 8 9 10 extreme left extreme right Would you say that our country is governed by a democratic political system? 1 2 3 4 5 6 7 8 9 10 not democratically governed country is completely governed by a democracy Hypothesis 3. A stronger pro democratic attitude leads to a higher tax morale 34

Table 13: Ideology 35 Self positioning in Country political scale Japan Turkey Left 2.40% 7.90% 2 2.20% 3.90% 3 9.00% 7.00% 4 9.70% 6.00% 5 27.10% 12.90% 6 25.60% 18.80% 7 9.50% 7.70% 8 10.30% 13.50% 9 2.10% 6.60% Right 2.00% 15.70% Total 863 (100%) 1143 (100%) Mean 5.5 6.2

Table 14: Democraticness 36 Democraticness in own Country country Japan Turkey Not at all democratic 0.80% 6.90% 2 0.60% 4.20% 3 3.00% 7.10% 4 2.60% 8.30% 5 8.00% 11.20% 6 23.00% 16.50% 7 24.90% 15.50% 8 24.50% 13.80% 9 9.30% 7.70% Completely democratic 3.10% 8.80% Total 998 (100%) 1277 (100%) Mean 6.9 6

HAPPINESS Taking all things together, would you say you are: 1 2 3 4 very happy quite happy not very happy not at all happy Hypothesis 4. Tax morale increases with individual s well being 37

Table 15: Happiness Feeling of Country happiness Japan Turkey Very happy 29.20% 37.40% Quite happy 60.50% 48.90% Not very happy 9.20% 9.40% Not at all happy 1.10% 4.30% Total 1066 (100%) 1345 (100%) 38

CONTROL VARIABLES Age, Gender, Education and awareness, Marital status, Economic status Occupation status 39 Religiosity

1. Age Do older people have higher tax morale than younger? 40

Table 16: Age Age Group Country Japan Turkey 15-24 7.00% 20.70% 25-34 16.50% 31.60% 35-44 17.40% 21.80% 45-54 20.80% 14.20% 55-64 21.50% 6.20% 65 16.70% 5.50% Total 1096 (100%) 1346 (100%) Mean 48.1 36.5 41

2. Gender Categorical variable [1= male (in the reference group), female=2] Do gender differences affect the level of tax morale? 42

Table 17: Gender Sex Country Japan Turkey Male 44.10% 50.20% Female 55.90% 49.80% Total 1096 (100%) 1346 (100%) 43

3. Marital status Categorical variable: married (in the reference group), single, living together, divorced, separated, widowed] Do married people have different levels of tax morale than others? 44

Marital status Table 18: Marital status. Country Marital status Japan Turkey Married 72.80% 66.40% Living together as married 1.70% 0.10% Divorced 3.00% 1.40% Separated 0.60% 0.20% Widowed 4.70% 2.30% Single/Never married 17.20% 29.60% Total 1090 (100%) 1346 (100%) 45

4. Education [continuous variable for higher educational level attained: 1= low (never gone to the school), 10 = higher education)] Do more educated people have higher tax morale level than less educated people? Awareness Did you read daily newspaper last week to obtain news/information? (categorical variable: 1=yes, 2=no) 46

Table 19: Educational level Country Highest educational level attained Japan Turkey No formal education - 8.30% Inadequately completed elementary education - 3.80% Completed (compulsory) elementary education 8.20% 36.60% Incomplete secondary school: technical/vocational type/(compulsory) elementary education and basic vocational qualification Complete secondary school: technical/vocational type/secondary, intermediate vocational qualification Incomplete secondary: university-preparatory type/secondary, intermediate general qualification 1.30% 2.60% 11.50% 6.90% 4.00% 3.30% Complete secondary: university-preparatory type/full secondary, maturity level certificate Some university without degree/higher education - lower-level tertiary certificate University with degree/higher education - upper-level tertiary certificate Total 47 48.00% 26.70% 1.90% 1.00% 25.10% 10.80% 1072 (100%) 1346 (100%)

Torgler and Shaltegger (2006:409) suggested that future studies should take a look at informal education such as time spent for reading a newspaper to investigate whether awareness affects tax morale or not. Table 20: Awareness. Country Information source: Daily newspaper Japan Turkey Used last week 90.10% 58.60% Not used last week 9.90% 41.40% Total 1080 (100%) 1343 (100%) 48

5. Economic class we used scale of incomes: [1=low income, 10=high income]. Do the levels of tax morale vary with the level of tax payers income? 49

50 Table 21: Incomes Country Scale of incomes Japan Turkey Lower step 14.80% 22.90% second step 13.80% 26.60% Third step 13.50% 14.10% Fourth step 11.40% 14.80% Fifth step 9.10% 3.20% Sixth step 9.20% 7.50% Seventh step 7.80% 1.30% Eigth step 5.80% 5.80% Nineth step 7.30% 1.90% Tenth step 7.30% 1.90% Total 1000 (100%) 1321 (100%) Mean 4.7 3.3

6. Occupation status [full time employed (in the reference group), part time employed, self employed, unemployed, at home, student, retired, other] Does the occupation status of individual influence tax morale? 51

Table 22: Employment status. Country Employment status. Japan Turkey Full time 38.40% 22.20% Part time 15.50% 2.70% Self employed 11.60% 14.50% Retired 9.90% 9.10% Housewife 17.90% 34.60% Students 2.80% 8.40% Unemployed 1.60% 6.10% Other 2.40% 2.40% Total 1055 (100%) 1346 (100%) 52

7. Religiosity Does the religion make any differences to the levels of tax morale? Apart from funerals, (for non-muslims weddings, and christenings), about how often do you attend religious services these days? 1 2 3 4 5 6 7 more than once a week once a week Once a month only on special holy days once a year less often never or practically never 53

Table 23: Religious services attendance. How often do you Country attend religious services. Japan Turkey More than once a week 1.70% 14.00% Once a week 1.60% 20.20% Once a month 6.50% 1.80% Only on special holy days/christmas/easter days 42.10% 23.80% Once a year 22.30% 3.30% Less often 15.00% 4.00% Never practically never 10.80% 32.90% Total 1090 (100%) 1320 (100%) 54

Table 24: Religiosity Country Religious Person Japan Turkey A religious person 24.20% 82.60% Not a religious person 62.10% 16.90% A convinced atheist 13.70% 0.50% Total 958 1320 (100%) (100%) 55

3. Empirical results on tax morale in Turkey SPECIAL THANKS TO ASSOC PROF DR MUHITTIN KAPLAN UNIVERSITY OF MELIHSAH KAYSERI 56

Note that trust, religious service attendance and pride are recoded For example: How proud are you to be...? (specific nationality, e.g., Turkish, Japanese, Korean, Dutch etc. ) 1 2 3 4 very proud quite proud not very proud not at all proud Recoded as: 1 2 3 4 not at all proud not very proud quite proud very proud 57

Table 40: Determinants of Tax Morale in Turkey (2007) 58

Table 40 (continued) Determinants of Tax Morale in Turkey (2007) 59

Table 40 (continued) Determinants of Tax Morale in Turkey (2007) 60

Results from tables Statistically Significant variables: Trust (trust in the government and trust in legal system) (+) pride (+) religiosity (+) the prodemocracy ( ) unemployment ( ) house wife ( ) reading daily newspaper rate( ) Income, education, gender (woman), marital status, happiness and ideology did not have any effect on tax morale 61

Results from tables An increase in the trust in government (trust in legal system) by one unit increases the share of subjects indicating the highest tax morale by 2.5 to 4.7 (2.6 to 3.6) percentage points An increase in pride by one point raises the share of persons indicating the highest tax morale value by more than 3 to 4 percentage points A one point increase in the prodemocracy index reduces the share of persons with the highest tax morale by 2 percentage points The proportion of unemployed who report the highest tax morale is approximately 10 percentage points lower than the one of full time employees. The proportion of house wife who report the highest tax morale is approximately 8percentage points lower than the one of full time employees. An increase in religious attendance increases the tax morale between 8 and 10 percentage points. If the reading daily newspaper rate increases, tax morale decreases by 8 to 10 percentage points. 62

3. Empirical results on tax morale in Japan 63

Table 41: Determinants of tax morale in Japan (2005) 64

Table 41: Determinants of tax morale in Japan (2005) 65

Table 41(continued): Determinants of tax morale in Japan (2005) 66

Results from tables The trust in government and trust in legal system, the prodemocracy, religiosity, marital status and ideology did not have any effects on tax morale in Japan the significant variables: gender (women) (+) education (+) age (+) pride (+) self employment ( ) income ( ) 67

Results from tables An increase in Pride by one point raises the share of persons indicating the highest tax morale value almost 3 percentage points (only in one estimation) Our results indicate that the proportion of self employed who report the highest tax morale is approximately 18 percentage points lower than the one of full time employees. Japanese women seem to have stronger tax morale than men in Japan The result indicates that an increase in income scale by one point reduces the share of persons indicating the highest tax morale value by less than 1 percentage point. Results show that education has significant effects. We found that if the individual s education level increases tax morale increases by 1.5 to 2 percentage points. The proportion of people aged over 50 who report the highest tax morale is approximately 19 percentage points higher than the 18 29 year old reference group (lower age category). The proportion of people of the age 30 49 who report the highest level of tax morale is around 10 percentage points higher than the 18 29 year old reference group. 68

Similarities/differences in determination 69

3. Empirical results on tax morale in Japan & Turkey TM i k TRUSTi PRIDE POLi HAPPYi X 1 2 i 3 3 k 1 4 JAPAN i 70

Table 42: Determinants of tax morale in Turkey& Japan 71

Table 42 (continued): Determinants of tax morale in Turkey& Japan 72

Table 42 (continued): Determinants of tax morale in Turkey& Japan 73

Results from combined estimations Happiness, ideology, income, education, gender (woman), marital status and did not have any effect on tax morale The significant variables the trust in government and trust in legal system (+) pride (+) religiosity (+) age (+) the prodemocracy ( ) Country dummy (JAPAN) (+) self employment ( ) unemployment ( ) the reading daily newspaper rate ( ) 74

Results from combined estimations An increase in the trust in government (trust in legal system) by one unit increases the share of subjects indicating the highest tax morale by 3 (2.6) percentage points An increase in Pride by one point raises the share of persons indicating the highest tax morale value by more than 2.6 to 3.4 percentage points A one point increase in the prodemocracy index reduces the share of persons with the highest tax morale by 1 percentage point. Our results indicate that the proportion of self employed who report the highest tax morale is approximately 8 percentage points lower than the one of full time employees. The result indicates that an increase in self employee by one point reduces the share of persons indicating the highest tax morale value by 8 percentage points. 75

The proportion of unemployed who report the highest tax morale is approximately 8 percentage points lower than the one of full time employees. An increase in unemployment by one point reduces the share of persons indicating the highest tax morale value by almost 8 percentage points An increase in religiosity raises the tax morale between 3.8 and 4.5 percentage points. If the reading daily newspaper rate increases, tax morale also decreases by 4 to 5 percentage points. Older individuals tend to exhibit higher tax morale as the coefficients on age are statistically significant in all estimations. A one point increase in the age increases the share of persons with the highest tax morale approximately 1 percentage point, meaning that getting old leads to higher tax morale. 76

The coefficient on the country dummy (JAPAN) is statistically significant in models (#4 to 8). We observe that individuals in Japan have higher tax morale than those in Turkey. The marginal effects indicate that being a resident/or a citizen of Japan rather than of Turkey increases the probability of reporting the highest tax morale by around 4.3 to 6.1 percentage points, and this result is robust across various specifications. 77

final points Not only trust in the government might have an effect on tax morale, but also trust in the court, or the legal system. An increase in the level of democracy decreases the tax morale level. Tax morale of unemployed and selfemployed is lower. While unawareness has significant effects on tax morale level, education does not affect tax morale. Pride has positive effect on tax morale level especially in Turkey. The results on religion: It seems that tax cheating is immoral for a Muslim. There is a cultural differences in tax morale level: Being from Japan rather than from Turkey increases the probability of stating that tax cheating is never justified by between 4.3 percentage and 6.1 points. 78

Thanks for listening 79