But It Only Benefits Them! The Influence of Social Ties on Taxation

Abstract

Purpose This paper concerns the influence of social ties with ‘others’ – people outside of one’s close-knit social groups - on tax morale and tax revenues. It is hypothesised that such social ties decrease in-group favouritism, changing citizens’ preferences for public goods and redistribution, and, thereby, increase tax morale. This increase in tax morale impacts tax policies and tax compliance, raising tax revenues. Approach I test the first part of this hypothesis – the relationship between social ties and tax morale – by using individual-level data and the first factor of three trust variables as a proxy for social ties with ‘others’. To determine whether social ties influence tax revenues, I rely on a historic, exogenous proxy of social ties with ‘others’ based on a project carried out in developing countries by Adelman and Morris in the 1960s. Findings The evidence does not reject the hypothesis that people with stronger social ties with ‘others’ have greater tax morale and that this translates into higher tax revenues. Originality The literature overwhelmingly views taxation from an atomistic individualist methodology. Viewing taxation from an organic interdependence methodology, this paper provides the first empirical evidence of the influence of social ties on taxation.