Why do we pay taxes?

Latin America is one of the regions in the world that is most affected by a deficient tax compliance that affects the capacity of national and subnational states to provide public goods to society and redistribute incomes through transfers and progressive taxes.   

The average tax evasion rates in Latin America reach close to 27 percent for consumption taxes (IVA, for its acronym in Spanish), and almost 50 percent for income tax. That is, one out of 2 persons with tax obligations does not pay income tax. Compared with developed countries, this situation shows that in countries such as the United States, income tax evasion reaches approximately 16 percent.

Multiple studies emphasize that tax non-compliance is due to the lack of enforcement by public authorities. A greater supervision and control, and application of penalties and fines to tax evaders could reduce this type of behavior. In addition, certain studies on the subject point to the hypothesis that certain cultural aspects and of reciprocity toward the state determine the "tax morale" of the citizen, which in turn positively affects compliance with tax obligations.   

In 2013, CAF presented the results of an experiment on tax compliance. The experiment was carried out in the Municipality of Sucre (Caracas, Venezuela) in 2011, based on a local tax for enterprises. As part of the study, 6,100 enterprises were selected, divided into five treatment groups (each one received a letter with different information regarding the payment of taxes) and a control group. 

• The first letter sought to test if taxpayers react to greater control and enforcement from the tax authority. In particular, the letter informed about: modernization of the Direction of Municipal Income Tax, the incorporation of new prosecutors, a system to control their jobs, and a new information system to facilitate the identification of taxpayers, and the follow-up of their payment statements with the Municipal Offices.
• The second and third letter explored the reciprocity effect, that is, if taxpayers feel motivated to comply because their taxes finance pubic goods that they value, such as significant advances in terms of security, cleanliness, mobility, works, control of informal commerce, and recovery of public spaces. The third letter also emphasized assistance actions for the most vulnerable population, detailing policies in the areas of health, nutrition, recreation, and work.
• The fourth letter explored the concept of tax morale in a strict sense, exalting the responsibility and commitment of taxpayers.
• The fifth letter was a simple placebo, communicating the new address of the collection agency, its contact telephone number and web page, common information shared with all the other letters. 

How did enterprises respond in each case? 

To evaluate the behavior, the fiscal balance of each enterprise before and after receiving the letter (June, 2011) was compared with the values corresponding to the group of enterprises which did not receive any information (control group).

• The results suggest that most of the effect was due to small companies, who sold less than USD 4,700. They reduced their accumulated pending tax obligations by approximately 8 percent toward mid-August (a month and a half after receiving the letter). However, this was a short term effect: toward mid-October (four months after receiving the letter) the effect was gone.
• In the case of the second letter, which emphasized the provision of public goods that were relevant for the firms, there was a significant effect, albeit slightly lower than in the case of the control and enforcement letter (a reduction of 6.7 percent of the debt balance in mid-August).
• In the case of the third letter, which emphasized the provision of public goods that are relevant for social inclusion, the repercussion was weaker and non-significant.
• In the case of the fourth and fifth letter, reminding taxpayers about the importance of tax morale, and the placebo, respectively, results were also weaker, although the former seems to have had a greater effect than the latter. 

In conclusion, the results suggest that control and enforcement are key factors to encourage tax compliance, followed by reciprocity in the case where public goods directly benefit the taxpayer. Contact between tax authorities and taxpayers are very important to achieve greater tax compliance. This effect seems greater in small companies, probably due to the perception of control, detection of non-compliance, and penalties.