1. Threats in Latin American and Caribbean countries: how do inequality and the asymmetries of rules affect tax morale? Mariana Gerstenblüth Natalia Melgar Juan Pablo Pagano Máximo Rossi Department of Economics, School of Social Sciences, UdelaR. i 9th Arnoldshain Seminar- Montevideo-Punta del Este, 5-9 October 2009

2. Threats in Latin American and Caribbean countries: how do inequality and the asymmetries of rules affect tx morale ? 2 Outline Motivation Background Objective Data and methodology Results Conclusions

3. Threats in Latin American and Caribbean countries: how do inequality and the asymmetries of rules affect tx morale ? 3 Motivation There are some socio-demographic characte- ristics, as well as aspects related with trust, democracy and national pride that play a relevant role to understand individual behavior. Our main contribution to the literature on this field is based on showing the influence of the context: In particular corruption perception, GDPpc and inequity shape people decisions towards paying taxes.

4. Threats in Latin American and Caribbean countries: how do inequality and the asymmetries of rules affect tx morale ? 4 Background Alm and Torgler (2004): socio-demographic characteristics and the context (trust in the legal system and parliament, and level of financial satisfaction) matter. Schaltegger and Torgler (2005): taxpayers’ attitudes are significantly influenced by government’s decisions in the field of tax policies and by the authorities’ behavior.

5. Threats in Latin American and Caribbean countries: how do inequality and the asymmetries of rules affect tx morale ? 5 Objective In light of these previous researches, our objective is to analyze whether an environment with high levels of corruption and/or inequality leads to a decline in the tax morale of people, in the sense of the intrinsic motivation to pay taxes.

6. Threats in Latin American and Caribbean countries: how do inequality and the asymmetries of rules affect tx morale ? 6 Data and Methodology Using the Latinobarómetro 2005, tax morale (tm) is captured through the question: “Within a 1 to 10 scale, where 1 means “not at all justifiable” and 10 means “totally justifiable”, how much justifiable do you think tax evading is?” For ease of reading we inverted the answers order in a way that 1 corresponds to the lower level of tax morale and 10 to the highest. Then we construct the dummy TM, in a way that it equals 1 if respondent indicates 9 or 10 and 0 in other case. This, with the aim of taking into account the highest levels of tax morale. We estimate probit models

7. Threats in Latin American and Caribbean countries: how do inequality and the asymmetries of rules affect tx morale ? 7 Distribution of answers

8. Threats in Latin American and Caribbean countries: how do inequality and the asymmetries of rules affect tx morale ? 8 We estimate 4 models Model 1 : socio-demographics and GDPpc Model 2 : socio-demographics and GINI Model 3 : socio-demographics and Transparency International Corruption Perception Index (TI) Model 4: socio-demographics and GINI + TI

9. Threats in Latin American and Caribbean countries: how do inequality and the asymmetries of rules affect tx morale ? 9 Results (marginal effects) Model 1Model 2Model 3Model 4 Probability0,504 Age 26-400,0670,0720,0730,069 Age 41-600,0990,108 0,101 Age 61+0,1320,1430,140,133 Educa2*0,0330,0310,030,023 Educa3*0,0370,0470,0440,043 Educa4*0,0710,0630,0680,065 Educa5*0,090,0930,090,092 Selfemp-0,02-0,03-0,02-0,019 Inscale-0,018-0,01-0,015-0,016 Catholic-0,036-0,03-0,018-0,021 GDPpc0,112 GINI -0,07 -0,054 TI 0,0450,038

10. Threats in Latin American and Caribbean countries: how do inequality and the asymmetries of rules affect tx morale ? 10 Age: TM increases with age. Older people is more sensitive to sanctions or to the shame of being caught in an illegal activity. The aim of not harming social status which was attained with the passage of the years is a cost that people may take into account. Education: We find a significant difference between the lowest level and all included levels. The probability of presenting a high level of TM increases with education. Job type: self-employed people are more likely to have less tax morale. It might be possible that self- employed people are exposed to more incidents of corruption, as well as the fact that they suffer more directly and are more conscious of the tax burden. Results (cont.)

11. Threats in Latin American and Caribbean countries: how do inequality and the asymmetries of rules affect tx morale ? 11 Religion and religiosity: attendance to religious services makes no differences in attitudes towards tax morale. However, those people who identify themselves with Roman Catholic religion are more likely to have less TM. This result is consistent with Weber’s thesis: we might expect that there are significant differences among religious groups on this direction. Results (cont.)

12. Threats in Latin American and Caribbean countries: how do inequality and the asymmetries of rules affect tx morale ? 12 Income: the higher an individual places himself/ herself in the income scale, the lower the probability of having tax morale. This result implies that the cost of ilegality is inversely proportional to an individual’s income. This is consistent with some reforms in Latin American countries regarding tax structures. In particular, with the purpose of improving equity, some countries changed tax systems trying that richer people pay more taxes. Those reforms may strengthen tax evader’s incentives to avoid paying taxes and this effect could be higher in the case of rich people. Results (cont.)

13. Threats in Latin American and Caribbean countries: how do inequality and the asymmetries of rules affect tx morale ? 13 GDP pc: As expected, we find that this variable makes a significant difference. The inclusion of the logarithm of the variable implies that people who live in those countries that grow faster are more likely to have tax morale. Corruption perception (TI): the probability of having tax morale increases as the country improves its position in the ranking. In countries where corruption is systemic it cannot be assumed that the obligation of paying taxes is an accepted social norm. Corruption generally undermines the tax morale of the citizens, because they get frustrated (Torgler, 2004). Inequality (Gini): equity improves tax morale. Results (cont.)

14. Threats in Latin American and Caribbean countries: how do inequality and the asymmetries of rules affect tx morale ? 14 Conclusions There are a set of individual characteristics that play a relevant role such as age, years of schooling, income scale, self-employment and religious denomination. Asymmetries of rules make a significant difference reducing the probability of having tax morale. However, social status has a higher impact over people’s attitudes. We also found that context is determinant in shaping people attitudes so there is room for improvement in the quality of institutions and in particular, the democratic system.