OECD – TAX AND DEVELOPMENT: WHAT DRIVES TAX MORALE? WHAT DO CITIZENS, PARTICULARLY THOSE IN DEVELOPING COUNTRIES, THINK ABOUT PAYING TAX? DOES IT MATTER? THIS STUDY PROVIDES FRESH ANALYSIS OF PUBLIC OPINION SURVEYS TO EXAMINE WHAT LIES BEHIND CITIZENS’ “TAX MORALE” – THEIR MOTIVATION TO PAY THEIR TAXES – OTHER THAN THEIR LEGAL OBLIGATION TO DO SO. Tax revenues provide governments with the funds they need to invest in development, relieve poverty, deliver public services and build the physical and social infrastructure for long-term growth. However, many developing countries face challenges in increasing their revenue from domestic sources. These challenges include a small tax base, a large informal sector, weak governance and administrative capacity, low levels of per capita income, domestic savings and investment and possibly tax avoidance by elites. Some countries, including half of those in sub-Saharan Africa, raise less than 17% of their gross domestic product (GDP) in tax revenues. This is the minimum level considered by the UN as necessary to achieve the Millennium Development Goals. By way of comparison, OECD countries raise on average close to 35% of GDP in tax revenues. Developing countries and development partners alike increasingly realise the importance of mobilising domestic financial resources for development (Box 1.1). For example, the Doha Declaration on Financing for Development (2008) and the Busan Partnership for Effective Development Cooperation (2011) both encourage a greater role for domestic resources, taxation in particular, in funding development Although there is a strong correlation between the level of a country’s development and its tax revenues, there are significant differences across countries at similar stages of development (see Annex A). For example, why is it that while Jordan and Guatemala have very similar levels of GDP per capita, tax revenues in Jordan are around 33% of GDP, while in Guatemala revenues only amount to around 13% of GDP (almost half of the expected level given its GDP per capita)? And why is it that the citizens of some countries are happy to pay their taxes (e.g. practically all Ghana’s citizens), while others are not (e.g. most of Serbia’s)? Research shows a significant correlation between tax morale and tax compliance in both developing and developed countries. For example, tax morale is an important determinant of the “shadow economy” and therefore has an impact on tax evasion (Torgler, 2011). Thus, understanding better what drives differences in tax morale across countries is a key element in understanding differences in tax compliance. It also offers a more “grassroots” perspective on tax systems than administrative and quantitative measures, such as tax to GDP ratio.