۱- Introduction

۲- Literature Review and Hypothesis Development

۳- Data and variable construction

۴- Model and Empirical Analysis

۵- Conclusions

References

Abstract

Low tax morale is associated with domestic tax evasion. We find evidence of cross-border equity flows designed to evade taxes in low tax morale countries. Using Foreign Portfolio Equity Investment (FPI) flows into 21 OECD countries from 138 source countries and an index of tax morale from the World Value Survey (WVS), we show that individuals in countries with low tax morale engage in tax evasion via roundtripping through tax havens. This allows them to benefit from differential taxes applied to foreign investors vis-a-vis domestic investors. Our results remain robust to various measures of tax morale and distinct subsamples.

Introduction

Tax morale, the intrinsic motivation to pay taxes or feel guilt from failure to comply (Luttmer & Singhal, 2014), has been linked to domestic tax evasion by underreporting taxable income (Alm, Sanchez, & de Juan, 1995; Alm & McClellan, 2012; Halla, 2012; inter alia). Are these tax morale effects so pervasive that they motivate individuals also to engage in international evasion schemes, even to the extent that international portfolio investment flows are influenced? This study finds robust evidence that this, in fact, is the case. The determinants of tax morale have been widely explored (for example, Hofmann, Hoelzl, & Kirchler, 2008; DeBacker, Heim, & Tran, 2015; OECD, 2013; Luttmer & Singhal, 2014). Tax morale is negatively correlated with shadow economy activities and positively correlated with direct democracy. This may be explained by differences in the fairness of tax administration, perceived equity of fiscal exchange, attitude toward respective governments (Cummings, Martinez-Vazquez, McKee, & Torgler, 2004), differences in culture, which also interact with demographics (Botelho, Harrison, Hirsch, & Elisabet, 2001), and trustworthiness (Ashraf, Bohnet, & Piankov, 2006). However, proxies for tax morale are challenging to construct. Slemrod and Weber (2012) argue that a single tax morale indicator, rather than an index of indicators, provides a more straightforward gauge of its relative importance. Recent survey efforts on culture and social values include questions on attitudes toward tax paying and corruption, inter alia (World Values Survey; Inglehart et al., 2014). Herein, we use an indicator based on country-level survey response data to questions of perceived tax fairness.1 Since measuring tax evasion is challenging (Alm & Torgler, 2011), we use roundtripping as an indirect approach to capture it. We focus on OECD foreign portfolio investment (FPI) inflows through tax havens that are attributable to changes in tax savings. The concept of roundtripping is straightforward and illustrated in Fig. 1. Domestic investors create and capitalize shell companies overseas, in tax havens, before they invest those funds back into their home capital markets, where incoming funds are now recorded as foreign capital and taxed at a more favorable rate. Changes in the tax differential between a domestic investor and a foreign investor is an important determinant of foreign equity flows (Hanlon, Maydew, & Thornock, 2015; Kemme, Parikh, & Steigner, 2017) and an indicator of tax evasion, but not the only one. We find that the attitude of individuals toward the payment of taxes in general, or tax morale, is another noteworthy determinant of tax evasion, which has not been studied extensively in this context.