Table Of ContentOUPCORRECTEDPROOF–FINAL,18/6/2018,SPi
The Leap of Faith
OUPCORRECTEDPROOF–FINAL,18/6/2018,SPi
OUPCORRECTEDPROOF–FINAL,18/6/2018,SPi
The Leap of Faith
The Fiscal Foundations of Successful
Government in Europe and America
Editedby
Sven H. Steinmo
1
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3
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Preface and Acknowledgments
ItwaslateOctober2011.IwasteachingattheEuropeanUniversityInstitutein
Florence,Italy,whereIhad beenworkingforoverthreeyears.Bynow Ihad
becomefairlywelladjustedtomanyoftheidiosyncrasiesoneconfrontsliving
inthiswonderfulandfrustratingcountry.ThoughIcan’tsayIwasperfectly
comfortable driving in this country yet, I had learned many of the informal
driving rules here. I had also gotten used to waiting in long lines to fill out
bureaucratic forms—only to have the bureaucrat who was supposed to deal
with themtellme thatIwas atthewrongwindow. Ihad gottenusedtothe
factthatmyInternetconnectionwassporadicatbestandthatbusesfollowa
schedule—but onlymost of the time. Ialso truly enjoyedthe slower pace of
life,thelongerconversations,andfabulousfoodthatthiscountryhastooffer.
Iwaswalkinghomefrommyofficeintheearlyeveningandsawacarwitha
young couple and two small children pull up next to the large garbage bins
parked on the side of the street near my apartment. I watched as a hand
reachedoutthroughtheopenwindowandthemaledriverdroppedaplastic
bagfullofgarbageonthestreet.Icouldn’tbelieveit.Notonlywasthisman
throwinggarbageonthestreetnexttothegarbagebin,hewasalsoteaching
hissmallchildrenthatitwasokaytobehavethisway.
While staring aghast as the car drove off, I began to think about whether
suchbehaviorwasimaginableinScandinavia.AsaNorwegianAmericanwho
has lived for a number of years in Sweden and Norway, I could scarcely
imagine a Scandinavian throwing a bag of garbage out of his car window
even in the middle of the night in a dark forest. Why, I kept wondering, do
peoplebehavesodifferentlyindifferentcountries?
AsfarasIknow,noonelikestoseethegarbagestrewnaroundonthestreets.
Sowhydosomepeopledoit?InmyexperienceItaliansaregenuinelylovely,
warm, and deeply friendly people. Their homes are incredibly clean and
orderly and despite the stories one hears about pickpockets in Rome and
house robberies in the hills above Florence, it has been my experience that
Italiansarehonestandremarkablytrustworthy.WhenIaskmyItalianfriends
about the kind of socially inappropriate behavior I witnessed that evening,
theytypicallyjustshaketheirheadsandsay,“It’sItalianculture.”Forthemost
part,theyarejustembarrassed.“It’sliketaxevasion,”onecolleaguesuggested.
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PrefaceandAcknowledgments
“Weallknowit’swrong,butlotsofpeopledoitjustbecausetheycangetaway
withit.”
Myfirstreactiontomycolleague’scommentwas,“thatmakes sense.” Italy
hasaserioustaxevasionproblemanditisacommonplacenarrativethatItalians
cheat on their taxes. In fact the former prime minister, Silvio Berlusconi, was
beingtriedfortaxfraudatthetimeandnoonedoubtedthathewasguilty.Asthe
New York Times reported, “Italians have been accused by some of making tax
evasionanationalsport.”1
Taxevasionseemedlikejustanotherexampleofthemanysociallydysfunc-
tional behaviors you witness living in Italy. Even a tourist will notice the
apparent absence of driving rules in this country...to say nothing of their
creative parking techniques. Living here you confront literally hundreds of
examples where people do not seem to have the same sense of civic respon-
sibility apparentin other countries. Tax evasionseemed tobe justone more
example of how perfectly good people sometimes behave in socially
dysfunctionalways.
Iwonderedwhy.
After my experience at the garbage bin, I became increasingly fascinated
withthewhyquestion.AsIthoughtaboutit,Iwasespeciallypuzzledbymy
untestedassertion:thataScandinavianwouldbemuchlesslikelytothrowa
bagofgarbageoutoftheircar—eveniftheyknewnoonewouldseethem—
than his Italian counterpart. I thought it was so, but the truth is I did
notknow.
Having lived in Italy, Sweden, Norway, the UK, and Japan, I have often
noticed that not only do social behaviors differ across countries, but so do
each country’s public institutions and systems of enforcement. Perhaps the
realdifferencesbetweenItalianandScandinavianbehavior,Ibegantowonder,
ismoreaproductofwhatpeoplecangetawaywith,ratherthansomedeeply
internalized pro- or anti-social values. I also realized that seeing a guy drop
garbageouthiswindowinpublictellsmeverylittleabouthowmostpeople
wouldbehave.Inshort,IcametorealizethatI,likemostpeoplewhonotice
differences in different societies, extrapolate from specific personal experi-
encesanddrawconclusionsaboutwholesocieties.
Maybe,Ibegantosuspect,thedifferencesbetweenItalianandScandinavian
behavior is not aproduct of some deep-seated culturalvariation. Maybe it is
simply because in Scandinavia rules (driving, littering, etc.) are enforced,
whereasinItalytheyrarelyare.
This puzzle stuck with me. This book is the product of a five-year-long
researchprojectwhichexaminesthispuzzle.2
I decided to study tax evasion. Tax evasion is illegal everywhere. For the
mostpartpeoplebelievethatitiswrongtoavoidtaxes.Buttheactualpractice
oftaxevasiondiffersdramaticallyfromonecountrytoanother.InSweden,for
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PrefaceandAcknowledgments
example,thegovernmentestimatesthatitlosesroughly8percentofpotential
taxrevenuethroughwhatiscalledthe“taxgap.”TheBankofItalyestimates
thatnearly27percentofpublicrevenueislostinitstaxgap(Santoro2010).
ThetaxgapintheUSisestimatedtobenearly16percentwhichis$450billion
ayearinlostrevenue(IRS2017).
In February 2012 I submitted a grant proposal to the European Research
Council (ERC) for a “Frontier Grant” in which I proposed to compare tax
compliance behavior in a small set of democratic nations. A key feature of
thisproposalwasthatIwouldapproachmypuzzlethroughtwoquitediffer-
ent methodologies—comparative historical analysis and laboratory experi-
ments. The idea was to examine the relationships between taxpayers and
theirstatesindifferentcountriesovertimeandthenuseexperimental/labora-
torymethodstoseewhetherpeoplein thesecountries todaywouldrespond
similarly or differently when faced with exactly the same institutions and
choices. Ihoped tocombine these approaches and methods togain insights
into the fundamental question of whether outcomes and behavior are so
differentindifferentcountriesbecausecitizensconfrontdiversesystems(tax
andotherwise),orwhetherthesystemsdifferbecausetheyconfrontdisparate
people.
At that point, there had already been a significant amount of work in
behavioraleconomicsfocusingontaxcompliancebehavior.Ireadthefascin-
ating studies by James Alm, Ernst Fehr, Simon Gachter, Benedikt Hermann,
LuigiMittone,BennoTorgler,andmanyothers.3Ilearnedfromthesescholars
thatitwasalreadywellunderstoodthattaxpayersdidnotbehaveasclassical
economic theory would expect them to behave. Instead, there seem to be
other motivations for paying taxes driven by what the scholars titled “tax
morale.” In addition, it appeared that tax morale varies from country to
country.Severalofthescholarsexplicitlyarguedthatmorestudiesshouldbe
done using laboratory experiments to test for differences in tax compliance
behavioracrosscountries.
This project attempted to do just this. But in addition to running experi-
ments in a number of countries4 we attempted to build the experimental
protocols around questions of interest to country specialists and policy-
makers. In short, the experiments did not stand alone. The results from our
behavioral experiments are reported in a series of articles as well as in the
forthcoming book, Willing to Pay?5 I cannot fully summarize the range of
findingsuncoveredinourexperimentshere,butIcanatleastreportthatthe
behavioralworkcastssignificantdoubtonclassicalculturalistexplanations.It
simplydoesnotseemtobethecasethatItalians,forexample,aremuchmore
likely to cheat each other than most other Europeans—when they are given
transparentandconsistentrules.Italiansaremorewillingtocheattheirstate,
however.Why?BecauseItalianstendtobelievethattheirstatecheatsthem.
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PrefaceandAcknowledgments
In contrast, most Swedes cheat less on their taxes than do people in almost
any other countrybecause they tend to believethat their government treats
them fairly and gives them value for their money (D’Attoma 2017; Pampel,
Andrighetto,andSteinmoforthcoming).
We also found that while some behavioral patterns do seem to vary from
country to country, the differences between individuals within countries are
often largerthanthedifferences betweencountries.Ineverysociety,includ-
ingSweden,therearesomepeoplewhodistrustotherpeopleaswellastheir
state and appear willing to cheat both their government and those around
them. At the same time, there are some who will pay taxes and/or sacrifice
their own short-term self-interest for the larger public good in every society.
Interestingly,thedistributionoftypesofindividuals(e.g.whetherpro-social
ormoreself-centered,forexample)doesappeartodifferacrosscountries.
Finally, we find that the way people behave in the laboratory does not
necessarilyreflecthowtheybehaveintherealworld.Perhapsmostsurprisingly,
we found that Italians and Romanians in the laboratory were more likely to
contribute to a public good in our experiments (or less likely to cheat their
colleagues)thanourBritishsubjects(Andrighettoetal.2016;Zhangetal.2016).
None of these laboratory results suggests that there is no such thing as
“culture” or that there are no attitudinal or behavioral differences between
countries.Onthecontrary,thereareimportantdifferencesinthewayspeople
behave in different countries. These differences, however, are rooted in the
lived experiences that people find themselves confronted with. These lived
experiences affect attitudes towards the state, expectations about others’
behavior, social norms, and, perhaps ultimately, social values. Italians and
RomanianscheatmoreontheirtaxesthanSwedesorAmericansnotbecause
they are more dishonest as a whole. Instead, compliance is lower in some
countriesthaninothersbecausesomestatesarelessefficacious,efficient,and
trustworthythanothers.Inshort,institutionsmatter.
Insum,ourbehavioralexperimentsdosuggestthattherearesomedifferences
in behavior and attitudes across societies. But the experiments cannot tell
uswhythesedifferencesexist.Tounderstandtherelationshipbetweentaxpayers
andtheirstates,weobviouslyneededtoexaminethestatesaswellascitizens.
Youcannotsimplystudycitizens’attitudesandbehaviorinordertounderstand
whatcitizensandtaxpayersbelieveabouttheirstate.Whetherpeoplepaytheir
taxes, abide by the rules and laws, or vote, is defined by this relationship. To
understandthisrelationshipweneedtoexaminebothsidesofthecoin.
Havingsaidthis,IrealizeofcoursethatIhavejustpeeledanotherlayerof
theonion.Ifitisthecasethatdifferencesincitizens’willingnesstopaymore
and/orcheattheirstateslessismostlydrivenbydifferenceinthecharacterof
the statesthemselves, then why arestates sodifferent? Specifically,how has
therelationshipbetweenthetaxpayerandthetaxcollectorevolvedovertime?
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PrefaceandAcknowledgments
Thisisthecentralfocusofthisbook.
Eachchapterinthisbookexaminesthefiscalhistoryofoneofthecountries
inthe“WillingtoPay?”project(Sweden,Italy,theUnitedKingdom,theUSA,
and Romania). It is clear both from previous work and from the behavioral
experiments conducted for this study that institutions are fundamental for
explaining why people behave the ways they do in different societies. This
book, then, explores how and why different countries have developed such
differentrelationshipsbetweentaxpayersandtheirstates.
Ifonewantstounderstandhowhumanbeingsgenerallybehavewhenfaced
with specific incentives and disincentives, then behavioral experiments can
and do offer significant insights. But if you want to understand why people
behave differently in different countries, you need to examine the social,
institutional,andhistoricalcontextinwhichthosedecisionsaremade.That
iswhatthisbookattemptstodo.
WhileIbelievethatwecanlearnagreatdealfrombehavioralexperiments,
Ihavelearnedthattheyalsoneedtobeinterpretedandplacedintocontext.
While the ambition of some experiments might be to isolate the decision
maker from the social or political context in which choices are usually
made, this has not been my goal. Instead, a central aim of this project has
beenpreciselytounderstandhowbroadersocial,political,andevencultural
contextsstructureandinformindividualdecisions.
After the introduction, the central chapters in this book each examine a
particular epoch in the development of the relationship between taxpayers
and their particular state. In each case we explore the evolution of that
relationshipfocusingonwhenandwhythisrelationshiphasbeenapositive
oneornot.Theconcludingchapter,writtenwiththeArgentinianscholarand
student of tax evasion, Marcelo Bergman, attempts to draw specific lessons
from the case studies for developing countries today. This, to be sure, is an
unusual twist for a largely historical volume. But I believe that we study
history and compare countries’ pasts not just because the comparisons are
interesting.Westudythempreciselybecausewehopeandbelievethatthese
narrativeshaveimplicationsfortoday.
This book is also unusual in that it will be offered “open access.” The
EuropeanResearchCouncilhaspressedustomakeallourpublicationsopen
accessonthelogicthattaxpayershavepaidforthisresearch,andthereforeall
taxpayers(andmanybeyond)shouldbeabletoeasilyreachthismaterialand
itsfindings.Ihavetoadmitthatthisfirstseemedlikeanoddsuggestionfora
comparativehistoricalvolume.Aftersomeconsideration,though,Iconcluded
thatthiswasawonderfulopportunitythatwouldallowustopresentourwork
andfindingsfarbeyondatraditionalacademicreadership.Itseemstomethat
there may be a number of policymakers, public officials, and policy activists
whomightbeinterestedinthelessonsthatcanbedrawnfromthesehistories.
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