The Panama Papers - one of the biggest financial leaks in history - exposed how wealthy individuals and public officials offshore financial dealings and evade taxes. This incident caused public outrage and called for greater financial transparency and accountability but all of this fizzled out in a few months and people’s attention shifted elsewhere. A question that arises here is, do such cases actually change people’s attitude towards tax morality or spark temporary outrage just to fade away in the near future?
Tax morale is defined as the willingness to pay the correct taxes and is very closely related to tax morality and tax compliance in both developed as well as developing countries. The problem with tax evasion in India is not just a legal issue, as it also depends a lot on people’s tax morality as well. Do the revelations from these tax offshoring cases actually shape people’s tax morale or do they view tax avoidance as unavoidable reality? Our research seeks to answer these questions by understanding the complex relationship between tax morale, trust in media and emotional responses to financial corruption. We used an experimental design to analyse how exposure to different tax avoidance cases (long term vs short, hypothetical vs real) influence people’s willingness to comply with the tax laws. Additionally, we also check if the role of trust in news sources helps in shaping the tax attitudes.
Our study showed that surprisingly a small percentage of respondents were very well aware of the recent and past financial and economic developments. When different tax avoidance cases were assigned, in contradiction to our assumption, it did not strongly influence tax morale, meaning their behaviour towards tax avoidance remained relatively stable irrespective of the case provided.
It is also important to understand their preferred source of media and how it shapes their tax morale. Our results showed that the majority of the respondents prefer the Internet as the major source of information, followed by social media and newspapers. Television and neighbours, relatives, friends are relatively the least preferred source of information. Other than internet users, the preferred source is trusted. Among these, social media showed a stronger influence on tax perceptions. This result is in accordance with a study conducted in Indonesia where they found that social media has a significant positive impact on tax compliance. Therefore, effective use of social media can strengthen tax morale and this will lead to increased tax compliance.
When asked whether cheating on taxes is justifiable, the responses were mixed. Even though a high percentage of the respondents were strongly against it, a substantial percentage were neutral, suggesting they do not support tax evasion but are always open to exceptions. A small group even indicated that cheating on taxes is completely justifiable. A research conducted in Ethiopia concluded that citizens might evade taxes when they think the government is expected to spend the tax revenue in a way that will not benefit them. Although the majority of the respondents agreed that there should be repercussions for nonpayment of taxes, they preferred a lenient fine of 1-10% indicating that even though they recognise tax evasion as wrong, they don’t want harsh consequences. The results strikingly showed that people demand compliance from businesses but at the same time justify the tax avoidance for individuals. Research suggests that this attitude towards corporate tax evasion can be due to various reasons like government legitimacy, penalties and perceptions of fairness and selective justice.
The way people react to tax evasion varies widely. Our results show that if someone from their household does not pay taxes, 38.84% would feel shame while almost 17.36% showed indifference. A study conducted in the United States that supports the link between shame and indifference concluded that financial and shaming penalties increased the tax repayment, but only for those with smaller tax debt. This shame and indifference divide has extended even to the reporting of tax evasion cases. Only one third of the sample said that they would report tax evasion cases unconditionally, while the majority indicated that they would do so only under specific circumstances. This is very well explained in the rational choice theory, stating that people make decisions by rationally weighing the risks and benefits of different options to maximise their self-interest.
The analysis of emotional responses to the tax evasion case provided revealed that the majority of the respondents felt upset, followed by anger, shame and indifference. However, the emotions did not vary significantly across treatment groups. This shows that the case framing did not change the emotional responses, feelings are not driven by the situation but because of what is already ingrained in the participants’ mind. Even after controlling for the demographic characteristics like age, gender, education level and income, the tax evasion cases had no significant impact on the emotions.
Our results collectively point to a central point that tax morality in India is more about trust, fairness and the perception of justice than about rules or penalties. Across the different dimensions studied, the results suggest that compliance stops to be a moral obligation and turns into a calculated choice if individuals think that tax laws are selectively applied.
In order to truly change tax morality in India, reforms must go beyond enforcement. Some of the things that need to be considered are transparency in government spending, visible improvements in public services, and also simplifying tax laws. Financial literacy campaigns can focus more on long-term impact of tax evasion, specifically those that affect them directly. More actions should be taken for high-profile evaders and should be highlighted to convey that the law doesn’t just apply for the lower and middle class.
Ultimately, reforms should be made in terms of restoring faith in the system, making sure people feel that paying taxes is like a fair exchange rather than a duty. Tax evasion remains a morally questionable practice where everyone believes it's wrong but so many people find methods to defend it.
Netra Damani
