By Alex M. Parker

Law360 (April 10, 2020, 7:19 PM EDT ) Research on so-called tax morale — the elusive and often counterintuitive reasons individuals and businesses voluntarily pay taxes, beyond legal enforcement — may offer insight into how likely citizens are to comply with enormous personal sacrifices being asked of them to fight the novel coronavirus pandemic.

Most governments are doing everything they can to keep people indoors and halt the spread of the deadly virus, which causes the respiratory disease COVID-19. But their legal efforts, limited by capacity, can go only so far. With random enforcement, people will make decisions based not only on the legality of their actions but also by evaluating the risk-reward, how the rest of their community is behaving and their own moral code.

To many tax academics, the calculus people use in deciding how to respond to government mandates to quell the spread of the novel coronavirus, which causes the respiratory disease COVID-19, is the same they use when confronting their tax bills.

Years of study indicate that if the parallel holds true, a key factor will be trust in government — as well as the clarity of instructions and perceptions of whether the rules are being applied fairly to all of society.

Taxes are one of the oldest forms of financial interaction in recorded history. As Oliver Wendell Holmes put it, they're the price we pay for civilization. Yet this foundation rests on surprisingly fragile ground. No government can afford to audit every citizen and ensure that everyone reports and pays what the law demands. To a degree, all tax authorities rely on voluntary reporting and the honor system. Fear of arrest or fines can explain much of tax compliance — but not all. 

In fact, compliance often has an inverse relationship to enforcement from tax administrations.

Researchers have spent decades trying to capture the reasons why citizens comply with tax laws and looking for correlations to social factors such as cultural norms, integrity of government institutions and the growth of illegal so-called shadow economies. In the U.S., most citizens feel good about paying taxes and following the rules, despite a lot of grouching. But in countries like Greece, rampant evasion persists, and those who do pay taxes feel a bit like suckers. What explains the difference?

Academics have found that tax morale often correlates with trust in government and clear conceptions of where the money will be spent. According to a September 2019 report from the Organization for Economic Cooperation and Development, tax morale can even increase with with higher taxation. More taxes to provide more public services lead to higher levels of compliance, what the OECD called a "virtuous cycle."

"If you look at tax morale, a core element is that it's driven by outcomes," said Benno Torgler, a professor of economics at the Queensland University of Technology in Australia. "Reciprocity matters a lot to citizens. If citizens sacrifice, it's important that government needs to reciprocate."

For instance, a 2010 study co-authored by Torgler found that taxpayers in Botswana have higher willingness to pay taxes than in neighboring South Africa, despite the latter's much more sophisticated tax administration. The authors attribute the difference to Botswana's history of democratic rule, compared with South Africa's fraught experiences with apartheid and social unrest. 

But the research has also shown that tax morale isn't something that governments can change easily. Many have tried to prod taxpayers with so-called nudge techniques, like notices about where the money will be going. However, the evidence that these tactics have an effect is mixed.

While the contexts are very different, the coronavirus pandemic presents similarities with the tax morale quandary. Governments around the world are asking citizens to make enormous personal and financial sacrifices by staying inside and avoiding others to stop the virus' spread. Many administrations have been frustrated by the refusal of some to follow the guidelines, but enforcing them at every street corner isn't possible for even the most aggressive government. Much of the public messaging has focused on younger individuals, who face a somewhat lesser health risk from the disease but are still likely to spread it to others.

As with taxes, citizens are being asked to make a personal contribution to ultimately benefit themselves but also the overall community. And whether they comply will hinge not only on their own beliefs but also what they think others are doing. After all, if neighbors are spreading the virus anyway, one person's decision to maintain social distancing will have a much smaller overall effect.

Tax experts say that if the research on tax morale has any relevance to the pandemic measures, it shows the importance of clear messaging and ensuring that the public believes in the overall effort and understands why the measures are undertaken. Even citizens who distrust their government generally may believe in the necessity of the pandemic responses, if they can understand them.

"Even if you think, 'Oh, all of our politicians are corrupt,' there's still a killer virus out there. You may still listen to them about a health issue," said Grace Perez-Navarro, deputy director of the OECD's Center for Tax Policy and Administration. "In the case of taxes, when you're paying money and you think they're putting the money in their pocket, it affects you in a different way."

Perez-Navarro said this is why communication is critical, as well as drawing up guidelines that are clear.

"What has struck me is that the same issue of complying with both the letter and spirit of the law or guidance comes up in both cases," she said. "People often will try to push the envelope here and try to get away with as much as they can if the law is in any way considered unclear or there is a possibility to interpret it in different ways."

Just as taxpayers feel less eager to pay if they believe the rich or well-connected are avoiding their obligations, they're also less likely to want to follow health guidelines if they perceive that the program is being carried out unfairly.

Erzo Luttmer, a professor of economics at Dartmouth College, pointed to the scandals of several lawmakers who sold stock before the virus spread to pandemic proportions, provoking allegations that they were acting on inside information.

"Those are prime examples that would undermine trust of those in charge, and undermine morale to comply with them," he said.

Just as higher tax morale can lead to a cycle of better public services and more trust between citizens and government, an enforcement-only approach could provoke a backlash requiring even more harsher measures. Political scientists are just beginning to wrap their heads around the implications as China uses its broad police powers to keep the virus under control and Hungary's ruling officials are accused of using the crisis to seize further power. 

"Tax morale complements enforcement activities. People are willing to do things for the greater good if they believe that what they're doing actually helps the greater good," Luttmer said. "Whether you believe the leadership has good intentions is critical."

--Editing by Tim Ruel and John Oudens.

For a reprint of this article, please contact reprints@law360.com.