Understanding attitudes to value-added tax can help prevent tax evasion, writes Justin Thomas
Welcome or loathe VAT? It's all about fiscal psychology
The Biblical account of the Christian Nativity begins as a tale of tax. Joseph and Mary are on the road from Nazareth to Bethlehem, a trip necessitated by Joseph’s need to register for a Roman census connected to taxation. Later on in the Bible, we hear Jesus uttering the now oft-quoted phrase "render unto Caesar the things that are Caesar's and unto God the things that are God's".
This phrase is typically interpreted as Jesus counselling his followers to pay their taxes. Tax (and our uneasy relationship with it) is an age-old story. The UAE’s recent decision to introduce value-added taxation feels like a new chapter. Value-added taxation wasn’t the brainchild of the Romans; we have the French to thank for that. A relative newcomer, VAT in its current form was first introduced in France in 1954. It can be described as a tax on consumer expenditure collected by businesses on behalf of the government. Like all taxes, it has an impact on human behaviour, which has brought it into the field of the psychologist.
Fiscal psychology, a relatively new offshoot of the discipline, explores the beliefs and attitudes of taxpayers in an attempt to predict behaviour. Identifying the various factors implicated in non-compliance and tax evasion is obviously helpful for encouraging people to "render unto Caesar the things that are Caesar's” and perhaps to even do so smilingly.
Regarding VAT, consumers have little choice in whether they pay or not. However, whether they perceive it to be a valuable contribution to society or an unnecessary personal loss will depend mainly on the individual’s beliefs and attitudes. Community-minded individuals are often more positive about taxation, viewing it as a means to improving the quality of the shared environment and shared public services for all.
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Such civic-minded and positive attitudes toward taxation, however, are only sustained if the individual perceives government spending in a positive light too.
A recently publicised file from the UK’s National Archives details how England’s King Henry VIII blew almost an entire year’s tax revenue on Christmas celebrations. In 1509, the 19-year-old monarch spent the modern-day equivalent of Dh66 million on lavish festivities, while the total tax revenue for that year was Dh81 million. Attitudes towards taxation are inextricably tied to perceptions on government spending.
While it is the consumer who pays VAT, it is the business’ responsibility, in turn, to pay the collected funds on to the government. A rather cynical view of this arrangement suggests that the business, in essence, becomes an unpaid tax collector. It is at this point where VAT non-compliance, avoidance and evasion can and do occur. It is evident from research in other nations that VAT evasion is fairly widespread.
A study published in the Review of Economics and Statistics looked at data from five European and two Asian countries. The findings suggest that revenue losses vary greatly, from a low of three per cent (in the United Kingdom and France) to a high of 40 per cent (Italy). Research also suggests that this is not one or two bad eggs being grossly evasive but rather, many businesses all being somewhat non-compliant. A study from the Netherlands estimates that 34 per cent of companies had evaded VAT and a French study put the figure as high as 66 per cent.
Fiscal psychology has uncovered many factors that predict likely VAT non-compliance. Examples include the age of the business owner (youngsters evade more), duration of time in business (starts-ups evade more), moral attitudes towards taxation, civic-mindedness and perceived fairness of the system.
As the UAE prepares to join the other 130-plus nations operating some form of VAT, it will be useful to systematically explore peoples’ attitudes and beliefs about taxation here too. Preventing VAT evasion goes hand in hand with the introduction of VAT. Fiscal psychology has a potentially vital role to play in ensuring the best outcomes all around.