Social Structure, Transition and Public Attitudes towards Tax Evasion in Hungary

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1、Bla Janky*Social Structure, Transition, and Public Attitudes towards Tax Evasion in HungaryPaper prepared for the Conference on Tax Evasion, Trust, and State Capacities (St.Gallen, 17-19 October, 2003)First draftAbstractThis short paper presents some hypotheses about certain factors behind the low l

2、evel of tax morale in post-socialist Hungary. According to our assumption, some socio-cultural preconditions for the strengthening of financial discipline existed at the beginning of the transition. However, some other factors may have inhibited the improvement of tax moral. We argue that the instit

3、utions of the relatively market-oriented Hungarian socialist regime had a more detrimental effect on tax discipline than on other aspects of financial discipline. Moreover, the potential supporters of the emergence of civic morale have been among those who have benefited most from the lack of law en

4、forcement. Besides, the goverments tax policies have accepted, and partly legitimized some forms of tax evasion. We conclude from the experience of the Hungarian transition that rational and opportunistic policy-makers can diminish the problem of state capacities, even if tax morale remains unchange

5、d.* Department of Sociology and Communication. Budapest University of Technology and Economics. E-mail: jankyeik.bme.huIntroductionThis short paper investigates the factors that might have inhibited the improvement of tax morale in the post-socialist transition. We are particularily interested in th

6、e problems of Hungary, though, some of our arguments can be extended to other CEE countries as well. This study argues that there is no inevitable convergence towards western type tax-systems in Central-Eastern Europe. Our purely informal analysis relies on three main reasons. First, the legal and i

7、deological environment of the socialist second economy undermined the tax morale of those who participated in economic activities outside the socialist sector. It is important to note that they were who had become the core group of the new entrepreneurial class in the emerging market economy. The se

8、cond reason considers the incentives and opportunities for tax evasion in different parts of the society. We try to show that the temptation for tax evasion has been the strongest in those social groups whose members could be the major supporters of those norms that foster the improvement of financi

9、al discipline. Finally, we analyze the impacts of the weak institutions and the transitional recession on the strategies of state agencies forming and operating the tax system. We argue that those agencies have had strong incentives for at least partly accept the existing patterns of tax evasion as

10、given constraints of tax policy in the first years of transition. Thus, they havent focused their attention on the fairness of taxation. Instead, the public tax policy has primarily concentrated on the overall sum of payments. Our study lacks the systematic modeling of the investigated phenomena. Mo

11、reover its empirical evidence serves as an illutration rather than a test of our hypotheses. That is, this conference paper is more like a research plan than a well founded analysis.The paper first shortly discusses some of those sociological theories that might explain the differences in civic mora

12、le between different societies, and between different groups of a given society. We also outline a possible mechanism of the improvement of financial discipline in post-socialist societies. We point to the factors that may inhibit that kind of improvement afterwards. The conclusion is followed by a

13、presentation of some tables on public attitudes.Social Structure and Tax MoraleIn this section we try to shortly summarize the main hypotheses of some theories about the interrelations between social norms, social structure and the operations of modern economic- and political institutions. These the

14、ses are widely known, and fairly general anyway. Thus, the following analysis mainly aims at the clarification of our terminology. The impact of culture and family structure on trust and honesty has been investigated in the classical sociological literature as well as in several recent studies (e.g.

15、 Weber 1981, Lindenberg 1988, 1998). The role of the characteristics of personal networks in maintaining efficient state bureocracy has also been emphasized in numerous studies belonging to various disciplines. The types of reasoning and the forms of explication differ in the researches of different

16、 time and discipline. Nevertheless, the kernel of the hypothesis is probably the same in most studies: In communities where people build up mutually strong relationships with their siblings and neighbours, actors often tend to ignore even the basic fairness considerations when they interact with out

17、siders. Thus the prevalence of mutual distrust inhibit cooperation in interactions between individuals belonging to different close-knit family-networks. The ignorance of those peoples welfare who are outside the family circle might result in a low level of public spirit in societies of this kind. I

18、n this way culture and family structure may also affect corruption and tax morale. Lindenberg (1988, 1998) elaborated a simple terminology for the research of social structure and social norms. He distinguises two types of solidarity among people. Individuals in a community characterized by strong s

19、olidarity are ready to make serious efforts to improve those peoples welfare who belong to the same community. Frequent mutual help and a high level of redistribution can be observed in these groups. Weak solidarity, instead, connects individuals who do not sacrifice their own welfare in order to ma

20、ximize the related others one. However, weak solidarity requires the adoption of fairness consideratons in interactions. Strong solidarity implies collectivist norms based on the principles of need and equality, while weak solidarity relies on individualistic norms stressing the importance of equity

21、 and fairness. Strong solidarity is likelier to develop in small, close-knit networks. Moreover, it implies a definitive difference between norms adopted inside and outside the group. In intra-group interactions, self-sacrifice is expected. The pursuit of self (and group) interest, however, is not c

22、onstrained by moral obligations in inter-group transactions. Weak solidarity, on the other hand, fosters the development of universal norms that should be applied in every interactions. One should note, that the above mentioned characteristics implicate that weak solidarity cannot be developed until

23、 strong solidarity dominates.The emergence and maintance of strong solidarity norms can be traced back to the low level and uncertainty of the economic performance of the community, moreover to the high costs of creating formal market- and welfare institutions. These societies are characterized by c

24、lose and dense kinship (neighborhood) networks. Moreover, relations based on weak solidarity cannot be developed in them. Thus, strong solidairty itself also inhibits the emergence of complex institutions. In our opinion, the abovementioned trade-offs and causal mechanisms refer to fairly similar ph

25、enomena than the ones which are described in relation with the different types of trust (c.f. Rose-Ackermann 2001). Improving economic performance creates stronger incentives for the extension of cooperative interactions with outsiders. Those interactions foster the emergence of weak solidarity. On

26、the other hand, weak solidarity itself creates favorable conditions for business transactions and the emergence of effective complex organizations. The taxpayers dilemmas are strongly affected by the norms of solidarity. Attitudes based on strong solidarity do not prefer the voluntary reduction of t

27、he family resources in favor of unknown others. Nor do they support fairness considerations that take into account other (unknown) tax-payers contributions. Norms of weak solidarity, however, blame those who break a contract (in our case the rules of tax-paying) in order to free ride on (unknowon) o

28、thers. That is, the emergence of weak solidarity in a society improves the tax morale. This kind of evolution goes alongside with the improvement of financial discipline in general, and also with the changes of other attitudes concerning direct and indirect interactions with unknown others. Nonethel

29、ess, one can find an aspect of the strong and weak solidarity that may weaken their supposed impacts on tax morale. Strong solidarity may support high level of redistribution in the whole society, not only in the small-scale communities. That is, norms of strong solidarity might implicate positive a

30、ttitudes towards high levels of tax rates. On the other hand, weak solidarity may undermine the social support for heavy tax burden. However, this should not change tax-payers moral incentives if the rules on taxes are formed by legitimate processes. If one compares the socialist regimes of Central-

31、Eastern Europe to the advanced market economies, one should find that the weight of strong solidarity in social norms was significantly higher in the socialist societies than in western democracies. Theoretical and empirical studies as well suggest a low level of trust in post-socialist societies (e

32、.g. Sztompka 1999, Rose-Haerpfer 1998,). The lack of civil society and the inappropriate functioning of the markets urged citizens to strengthen their family and neighborhood networks. Moreover, the official ideology also supported the idea of equality, while the contractual approach to human intera

33、ctions was rather ignored (c.f. Lindenberg 1998). One should also note that complex organizations and civil society had been underdeveloped even before the emergence of socialist regimes in many of these societies. Thus, official ideology of those regimes partly reflected societal culture in the reg

34、ion. After the fall of the socialist regimes, the expectations and moral attitudes could not follow the pace of the institutional transformation. As a result, the new institutions of market economy and parlamentary democracy often have been characterized by under-performance. The sources of these ki

35、nds of problems are widely discussed in the literature For a comprehensive survey and further references see Sztompka (2000). As far as the general theory concerned, one could simply conclude that, at least in the long run, economic incentives may shape the norms of solidarity. At the same time, shi

36、fts in the dominant culture may result in (further) changes of the economic and institutional performances. That is, any pattern of norms and conventions fits a specific technological, economic and institutional environment. However, rapid and exogeneous changes of the institutional environment, for

37、 example, might lead to suboptimal functioning of the new institutions, because conventions, social norms and individual habits are still adjusted to the already disappeared circumstances. These arguments are common senses, and do not really help us to understand and predict the evolution of financi

38、al discipline in the new democracies of Central-Eastern Europe. Since some patterns of suboptimal functioning of the institutions may well be equilibrium outcomes, the likelihood of any improvement of financial discipline (at any time-scale) is a question to be answered. The puzzle remains even if w

39、e assume that the failures caused by the discrepancy between institutions and social norms urge those involved to revise their expectations and strategies. This is because not only conventions and norms can be evolved. In the case of financial discipline, the adjustment might mean the reduction of b

40、usiness transactions as well as the adaptation of institutions. The former is widely discussed in the literature, the latter plays an important role in our analysis of attitudes towards tax evasion. In order to refine the vague statements of the above mentioned theories, one should take account of i

41、ntra-society differences of solidarity-norms and incentives. Moreover, one should not ignore the uneven distribution of resources for influencing institutions and other peoples attitudes. Weber (1995 1905) pointed to the role of protestant sects which expected honest behavior in any business- or oth

42、er transactions. The economic success of those small communities fostered the spread of business virtue in the whole society. What earlier had been a moral obligation for few, later became a rational decision for all. Churches of different denominations also influenced norms of certain social groups

43、 in socialist societies. However, their roles in strengthening the norms of weak solidarity were rather marginal. Nonetheless, one could find those subcultures in which the official ideology and/or the mainstream moral attitudes were refused. Not only the small, close-knit groups of hard-core dissid

44、ents, but a larger number of skilled professionals (first of all the so called intelligentsia) also was open to the mainstream values of western democracies (c.f. Sztompka 2000). The overhelming economic success made western democracies attractive for many citizens of the socialist countries. Some p

45、eople (mostly certain goups of professionals) could get more information not only about the real magnitude of the difference between the welfares of eastern and western citizens, but also about the prevalent moral values in western democracies. The economic performance of the western world may have

46、helped to make those moral values attractive as well in the eyes of many East-European. Of course, the information flow always was imperfect. Moreover, the pretended values of the western societies were interpreted and evaluated from the East-Europeans particular points of view. Nonetheless, some no

47、rms of weak solidarity could spread through informal friendship networks. The increasing role of the second economy may also have fostered the emergence of some norms of civic cooperation and business virtue. There was some kind of preselection: those who refused the loyalty-based carrier patterns i

48、n the large, hierarchical organizations of the socialist economy, were readier to launch small businesses, or to work as self-employers. Moreover, the even the controversial experiences in the very underdeveloped market could show that there would be long-term benefits of the business virtue. Many o

49、f the participants of the second economy were strongly critical of the regime, thus they may have blamed the institutional environment for the market failures. That is, they did not necessarily interpret prevalent patterns of financial discipline as general and morally acceptable rules of market tra

50、nsactions. The transition has widened the gap between the characteristics of socialization and living conditions of different generations and social strata of the society. Many of those characteristics affect the influence of strong and weak solidarity on individuals conduct of (direct and indirect)

51、 interactions with their fellow citizens. Since the disappearance of the Iron Curtain, the relationships between eastern and western individuals and organizations have been intensifying. Nonetheless, personal experiences on advanced democracies are unevenly distributed in the post-soicalist societie

52、s. Those skilled professionals and businessmen who had been most critical of the socialist regime, were among the most enthusiastic contact-builders. Moreover, they were over-represented among those who ended up significantly better off after the first few years of the transition. In Hungary, for ex

53、ample, the return on education has been increasing dramatically. Besides, languague skills (scarce resources in Hungary) have become much more important in carrier opportunities than before.In sum, there were social groups in the socialist regimes that were open to the values of weak solidarity. Fur

54、thermore, their positive attitudes towards norms of weak solidarity could have been reinforced by the more intensive western influence and by their own success in the new institutional environment. The success of those social groups also mean that they have had a chance, at least, to foster the modi

55、fication of the dominant values of solidarity in the whole society. We hypothesize that their influence could have been effective in several dimensions of those solidarity-norms. We will argue, however, that this hasnt been happened in the case of attitudes towards tax compliance. The Lack of Improv

56、ement of the Tax MoraleIn the previous section, we have tried to find the major supporters and the possible mechanims of the improvement tax morale in post-socialist economies. We have traced back the particular norms of tax compliance to the more general norms of solidarity. In this section, we poi

57、nt to three factors that, according to our hypotheses, may have inhibited the spread of financial discipline in the case of taxpaying. Our argument primarily lies on the assumption that moral- and selfish incentives for tax evasion have significantly differed from ones for other forms of dishonest b

58、ehavior. This kind of discrepancy has been the strongest among those has otherwise found most attractive the various values of civic virtue. Furthermore, we argue that the adjustment of institutions may have stabilized existing attitudes on tax evasion.The Legacy of The Socialist Second EconomyIn ev

59、ery command economy, formal and informal market institutions weakened the failures caused by the poor performance of the socialist sector. Unlike most other socialist regimes, the Hungarian communist party launched itself the increase of market mechanisms in the economy already in 1960s. The differe

60、nt waves of reforms affected the socialist sector as well as allowed more space for small private enterprises and self employers. Thus, a kind of legal entrepreneurial class could grow out of the second economy in Hungary. The legality of many forms of private business activity may have fostered the

61、 spread of business virtue among socialist entrepreneurs. However, even in the reform-oriented Hungarian regime, the institutional background strongly limited the operations of market mechanisms (c.f. Kornai 1986, Gl 1997). Among the most important barriers was the lack of a transparent and coherent

62、 tax system. Without the existence of income- and value added taxes, the taxation of different kinds of small businesses were often inadequate, ad hoc, complicated, moreover, never comparable to the rules in other sectors. As market mechanisms were allowed to operate, norms of weak solidarity could

63、gain ground in the interactions among customers, entrepreneurs and managers of socialist enterprises. In the business-state relationships, however, notions of fairness and honesty could not develop. That is, a kind of discrepancy emerged between the (moderate) spread of business virtue and the lack

64、of improvement of tax morale. One should also note that the participants in the second economy were more likely to be highly critical of the regime. Thus, it was more easy for them to find apologies for any kind of tax evasion. We hypothesize that the above mentioned discrepancy between various aspe

65、cts of business virtue was smaller in those societies where market reforms were less extensive - if any kind of move towards market mechanism had ever happened. In those societies, much higher proportion of market transactions belonged to the shadow economy. This implicated that it was harder for en

66、trepreneurs as well as customers to step out of small close knit networks, and to increase the volume of private economic transactions. Less people could get experience of the operation of actual markets, and more of this experience belonged to conspiracy and crime. Thus, the particular legacy of the Hungarian system is the widespread