The relationship between tax morale and the informal economy

Individuals choose whether or not to evade taxes by being influenced by the social environment provided by the society in which they live and the psychological conditions nurtured by this social environment.

There are two main approaches to examining the relationship between tax morale and the informal economy. The first is the standard economic approach, which is also grounded in the economic crime approach. According to this approach, individuals consider factors such as penalties, audit rates, tax rates, and the risk of being caught when making their choices about whether to turn to the informal economy. The second approach is the view based on the behavioral approach in the tax compliance literature. According to this approach, even if tax audit and penalty rates are very low, the tendency of individuals to turn to informal activities is not as high as the standard economic approach suggests. The conclusion we can draw from this is that tax and the informal economy should be evaluated not only with the expected utility maximization approach but also with the behavioral approach, which includes many socio-economic factors.

According to rational choice theory, the factor that determines whether individuals comply with taxes voluntarily is primarily related to the perceived high level of the risk of being caught and punished. In other words, the most important factors that will ensure an individual's voluntary compliance and thus reduce informality are tax audits, the deterrent effect of penalties, etc.

Moral values, social norms, and other psychological factors have no effect on individuals' tendencies to evade taxes. Therefore, tax morale has no effect on the informal economy. Since this approach does not include moral values in the evaluation, according to this approach, there is no interaction between tax morale and the informal economy.

The fact that this approach, which attempts to explain the relationship between tax morale and the informal economy, does not reflect reality can be explained by examining the tax systems of developed countries. When a cost-benefit analysis is performed in these countries, it is seen that the tax evasion that emerges and the resulting non-tax market economy estimates are much higher than the actual rates found in those countries. Although classical economic models have shown significant developments in tax theory in recent years, they are insufficient in explaining the factors affecting tax evasion. Because tax evasion is not only an economic and financial problem, it is also a subject of study by other social science branches such as psychology, sociology, and criminology.

According to the behavioral approach, also called the "attitudinal model" or "the theory of moral sentiments" in the literature, the only factor that determines individuals' preferences regarding whether or not to pay taxes is not individual utility maximization. Psychological and social elements also affect individuals' attitudes and behaviors in complying with taxes.

For example, thoughts such as which public expenditures the collected tax revenues are spent on by the state and how they are spent are important for individuals. If individuals think that public expenditures are wasted or not used appropriately, this can negatively affect their tax morale and cause them to evade taxes. Conversely, if public expenditures are considered fair and efficient, this will support both tax morale and the reduction of the informal economy.

When we examine the factors affecting the informal economy in OECD countries between 1999 and 2010, the effect of tax morale on the informal economy ranks fourth in terms of determining the informal economy.

In Turkey, it is possible to say that higher income groups benefit more from tax avoidance methods. This is because low-income earners have difficulty meeting the costs that must be borne to take advantage of loopholes in the tax system (for example, the costs of creating multiple financial advisors and a good accounting unit); inefficiency, frequency of audits, and productivity have been seen as some of the factors that increase taxpayers' tax compliance. However, it is difficult to increase the audit rate because the costs that must be borne are increasing rapidly.

Therefore, it is possible to increase the taxpayers' perception of audits through the deterrent effect of tax penalties and effective auditing.