To Pay or Not to Pay? Business Owners’ Tax Morale: Testing a Neo-Institutional Framework in a Transition Environment

Abstract

In order to understand how the environment influences business owner/managers' attitudes towards tax morale, we build a theoretical model based on a neo-institutionalist framework. Our model combines three complementary perspectives on institutions-normative, cultural-cognitive and regulatory-instrumental. This enables a broader understanding of factors that influence business owner-managers' attitudes towards tax evasion. We test the resulting hypotheses using regression analysis on survey data on business owner/managers in Latvia-a transition country, which has undergone massive institutional changes since it was part of the Soviet Union over 25 years ago. We find that legitimacy of the tax authorities and the government (normative dimension), feeling of belonging to the nation (cultural-cognitive dimension) and perceptions of the risk and severity of punishment (regulatory-instrumental dimension) are all associated with higher tax morale for business owners and managers.

Coercive, normative, and mimetic isomorphisms as drivers of corporate tax disclosure

“…In this way, the State responds to public demands and acts as a responsible and powerful stakeholder. Finally, our results indicate that the State is itself in search of social legitimacy, which ultimately enables it to improve tax collection (Mickiewicz et al, 2019).…”

Morality of informality: Tax morale in the Serbian business sector: An empirical investigation

“…Similar findings obtained in a real effort laboratory experiment shows that individuals with an evasion opportunity judge tax evasion as less unethical (Blaufus et al, 2015). Hence, following Mickiewicz et al (2017) an additional hypothesis is formulated:…”

“…However, as these surveys do not have a specific question regarding the morality of cheating on taxes, authors approximated tax morality by using "taxes as obstacle" and obtaining tax morality as a residual error term after controlling for other effects. Mickiewicz et al (2017), similar to this paper, uses a survey of businesses (owners and managers) conducted in Latvia in 2010. It examines how various institutional factors affect tax morality of business owners and managers.…”

“…More recently, tax morality has become one of the key issues in the empirical research on tax compliance (Lago-Peñas & Lago-Peñas, 2010), and has been related to the various environmental factors that the taxpayer takes into consideration when reaching his tax compliance decisions (Filippin, Fiorio, & Viviano, 2013). However, most of the literature on tax morality was devoted to individuals, and so far, only a few studies have focused on firms (Alm & McClellan, 2012;Mickiewicz et al, 2017).…”

“…Following empirical literature (Alm & McClellan, 2012;Mickiewicz et al, 2017;Bird et al, 2008;Lago-Peñas & Lago-Peñas, 2010) the article examines determinants that shape tax morality of businesses (owners and managers) in Serbia. The paper exploits novel data set for more than 1,000 businesses (firms and entrepreneurs) collected in 2017 that provide information about the attitudes towards paying taxes and informal economy, perceptions towards the tax system and experiences with tax authorities.…”