Public spirit on immigration issues and tax morale in Italy: An empirical investigation

Journal of Behavioral and Experimental Economics 81 (2019) 11–18

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Public spirit on immigration issues and tax morale in Italy: An empirical investigation

T

Francesco Nemore, Andrea Morone

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Università degli Studi di Bari "Aldo Moro", Dipartimento di Economia, Management e Diritto dell'Impresa, Largo Abbazia Santa Scolastica, 53, 70124 Bari (Italy)

ARTICLE INFO

ABSTRACT

JEL Classification: F22 H11 H26 H53 H75 I38

Tax evasion is undoubtedly a pervasive phenomenon likely to impact negatively on equity, social capital and social cohesion. A growing body of research has started to investigate the role of “tax morale,” as the intrinsic motivation to pay taxes, in driving individual tax compliance decisions. Given the increasing anti-immigration sentiment among Italian taxpayers, triggered by recent continuous migrant inflows from North African countries, the aim of this paper is to shed light on the relationship between tax morale and public spirit on immigration issues. Drawing on the European Value Survey longitudinal dataset, a large-scale, cross-national and longitudinal survey research program on basic human values and belief systems among people in Europe, we derived an index capturing the degree of perceived threat from immigration inflows (IBTS) and a tax morale indicator (TM). Controlling for a set of widely investigated tax morale determinants, we found that the IBTS coefficient is always negative and statistically significant at the highest significance level. This means that an increase in the degree of perceived threat among taxpayers always crowds out tax morale, reducing their willingness to comply with the law.

Keywords: Tax morale Tax compliance Immigration Perceived threat Welfare use

1. Introduction Tax evasion is undoubtedly a major problem for various reasons. Firstly, it causes a reduction in tax revenue, with greater imposition on income, which has a tax base that is hardly deductible from taxation. Secondly, it produces differences in treatment between people with equal contribution capacity, undermining the principle of horizontal equity and reducing social capital and community cohesion. The identification of the main drivers likely to explain tax compliance should be a prominent objective of economic policies in all countries facing a large share of shadow economies. According to a prominent strand of tax evasion literature rooted in the seminal work of Allingham and Sandmo (1972), taxpayers are utility-maximizing actors who approach the opportunity of tax cheating like any risky decision. Nevertheless, this rational economic model seems incapable of explaining the high level of voluntary tax compliance even when the benefits of cheating far outweigh the risks (Andreoni et al., 1998). To solve this puzzle, a growing body of literature has turned its attention to the role of “tax morale,” defined as “intrinsic motivation” to pay taxes in order to provide a fair contribution to the society (Luttmer and Singhal, 2014). The aim of this paper is to shed light on the determinants of tax

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morale by investigating the role of public concerns on immigration policies in Italy likely to affect tax morale. For over a decade, Italy has been one among many European countries experiencing the largest increase in migratory influx. The OECD International Migration Database clearly shows that between 2007 and 2016, on average, approximately 360,000 migrants arrived in Italy each year. The Ministry of Interior statistical notebook depicts a clearly emerging picture. It evidently shows how the number of asylum seekers has decupled from about 13,310 in 2007 to 123,600 in 2015. In our empirical estimates we will focus on data for the four-year period 2007–2010. In 2007 the landings settled at 20,455. The numbers then rose again in 2008 to 36,951. While in 2009 they fell to 9573 and in 2010 to 4406, however in 2011 there was a new surge in arrivals amounting to 64,261 migrants. Such concerns have intensified after a number of upheavals that changed the political geography of North African countries causing the consequent wave of immigrants who landed in Lampedusa Isle and other southern Italian coasts. However, it took until the first quarter of 2011 for immigration issues to receive as much as 6% of newspaper and TV news’ attention, against only 2% as the European average (Pavia Observatory, 2011). Consequently, among other European countries, Italians’ opinions have increasingly become oriented towards

Corresponding author. E-mail addresses: [email protected] (F. Nemore), [email protected], [email protected] (A. Morone).

https://doi.org/10.1016/j.socec.2019.05.004 Received 9 April 2018; Received in revised form 8 March 2019; Accepted 20 May 2019 Available online 21 May 2019 2214-8043/ © 2019 Elsevier Inc. All rights reserved.

Journal of Behavioral and Experimental Economics 81 (2019) 11–18

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anti-immigration as indicated in a recent YouGov survey (2016). Yet the phenomenon seems to have been drastically reduced. In the year 2018 there were only 23,009 landings compared to 116,616 of 2017 (−80.27%) and to 170,923 of 2016 (−86.54%). However, according to the last Standard Eurobarometer Survey (Spring 2017, Wave EB87.3) immigration is the second most important issue in Italy after unemployment. The main driver of such negativity towards recent immigrant incursions lies in the widespread concern that immigrants are making increasing use of public assistance programs (Boeri, 2010). Italy is feared to become a new “welfare magnet”, attracting further immigration and consequently becoming stuck in a “welfare trap”. While much of the recent empirical literature on tax evasion and tax morale in Italy focused mostly on defining an optimal enforcement framework to increase the effectiveness of deterrence measures (Frey, 2003; Dell'Anno, 2009; Filippin et al., 2013; Russo, 2013), only a handful of papers devoted attention to the social, cultural and institutional factors likely to drive tax compliance behaviors (Lewis et al., 2009; Kastlunger et al., 2013). Moreover, to our knowledge, there are absolutely no previous studies worldwide trying to relate, even generally, the public spirit on immigration issues with citizens’ willingness to commit tax evasion. To identify the effect of citizens’ immigration perception on tax morale, we will use individual-level survey data from the European Value Survey, a large-scale, cross-national and longitudinal survey research program on basic human values and belief systems among people in Europe. Based on some questions on individual attitudes towards immigration, we will use an index of perceived threat from migratory inflows as our main explanatory variable (IBTS). This item should provide a good proxy for the perception of the migratory phenomenon among Italian taxpayers. We will endogenize our tax morale indicator (TM) by exploring its alleged empirical relationship with IBTS. The outline of the paper is as follows. Section 2 provides an exhaustive literature background on tax morale determinants and its interaction with ethnic diversity and redistributive policies. Section 3 and 4 respectively describe data and the empirical strategy. Section 5 discusses and addresses the potential endogeneity of our index of perceived threat from migratory inflows (IBTS). Section 6 offers some concluding remarks.

More recently, Dwenger et al. (2016) showed how, in a (natural randomized) field experiment, a significant percentage of individuals totally conform to the payment of church tax in Germany even if deterrence measures were absent. While 20% of people pay at least the actual taxes due, the remaining 80% evade them and most of them completely. Yet Dwenger et al. provide evidence of how intrinsically motivated compliance is substantial and that a significant part of it can be guided by duty-to-comply preferences. Along the same lines, Bott et al. (2014) found in a large-scale field experiment that, by drawing on moral appeal via a sense of fairness or a societal benefits argument in a letter from the tax authorities, the average self-reported foreign income of Norwegian taxpayers has almost doubled. Several channels are believed to influence individuals’ tax morale and various empirical studies seem to support this conjecture. A line of research further explored taxpayers’ relationship with the state by focusing on perceptions individuals have of their government or the equity of tax programs (Hartner et al., 2008; Besley et al., 2014). The idea is that an unfair tax system likely enhances taxpayers’ incentives to rationalize cheating, thus reducing tax morale. A number of pioneering studies already investigated the relationship between tax evasion and perceived inequities in tax systems, finding a strong positive correlation among them (Spicer, 1974; Song and Yarbrough, 1978). Another recent strand of literature showed how culture is able to shape compliance decisions (Kountouris and Remoundou, 2013; Alm et al., 2017) but also trust in the government, courts and legal systems and national pride are found to positively affect tax morale (Torgler, 2001; Lago-Penas and Lago-Penas, 2010). Yet, some contributions seem to progressively emphasize the pivotal role of other underlying mechanisms. Among these, a growing literature has been focusing on the effect of higher ethnic diversity in each country population. Lago-Penas and Lago-Penas (2010) showed that the ethnic-linguistic fractionation in European countries is significantly and negatively correlated with individuals’ tax morale. The impact of ethnic heterogeneity on tax morale seems to be mediated by intra-group discrimination. This would imply that taxpayers would support policies offering favorable treatment to their ethnic groups and withdraw sustenance for other groups (Tajfel, 2010). As a consequence, the individual tax morale can be directly influenced by their social identities. Alesina and La Ferrara (2005) argue that some psychological processes may underlie the close correlation between ethnic heterogeneity and economic results. In this perspective, once people are categorized as part of a group, they tend to compare their group with other groups. As a result, individuals can attribute positive utility to the well-being of members of their own group and negative utility to that of members of other social groups. Now, in recent years, the immigration phenomenon has significantly increased ethnic diversity in Italy and in many other European countries. Particularly, the media attention focused mostly on the emergence of refugees from the Middle East and North Africa. Migrant influx has grown exponentially in recent years, also thanks to the rescue operations promoted by many humanitarian organizations operating in the Mediterranean Sea. The roots of these migratory phenomena lay in disparities in wages and more generally in employment and welfare provisions between developed and developing countries. In North Africa, for example, population growth far exceeds the speed of job creation. Moreover, internal conflicts driven by political, ethnic and religious interests further exacerbate the living conditions of indigenous people, pushing them towards refugee or asylum seeker status in more prosperous countries (Castles et al., 2013). Much of the economic literature over the last decades has investigated a number of significant and non-negligible concerns about different economic impacts caused by migratory phenomena. Particular focus was devoted to possible effects on native workers’ wages and employment (Clemens and Hunt, 2017). However, the greatest concern in the public debate on immigration has been on the rate of welfare take-up and whether immigrants contribute their fair share to the

2. Literature background The literature on tax evasion extensively analyzed individuals’ behavior by adopting the economics-of-crime approach by Allingham and Sandmo (1972). According to this approach, economic agents’ optimum choices are a function of four determining factors: tax rate, audit probability, fine rate and risk aversion attitude. However, in recent years, some pioneering contributions showed how individuals seem to be guided to tax compliance by a series of non-pecuniary motivations such as moral feelings, socially accepted norms, guilt and reciprocity in relationships (Andreoni et al., 1998). In this sense, Luttmer and Singhal (2014) provide a useful framework by gathering all these motivations under the umbrella term “intrinsic motivations.” Considering that tax compliance does not seem to be fully enforced by enforcement levels, audit probabilities and their resulting fines, and non-pecuniary factors seem to play a decisive role. a growing body of literature has begun to consider “tax morale” as a key determinant of tax compliance decisions. According to the "Cologne school of tax psychology," individuals’ tax morale can be defined as an “intrinsic motivation to pay taxes” (Schmölders, 1960, 1970). Throughout the years, the literature on tax morale has seen a wide and vigorous increase in contributions (Lewis, 1982; Pommerehne et al., 1994; Alm et al., 1992; Frey, 1997; Andreoni et al., 1998; Feld and Tyran, 2002; Alm and Torgler, 2006; Cummings et al., 2009; Torgler, 2011). 12

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welfare system. Public opinion generally considers immigration to be a major burden for public finances (Borjas and Hilton, 1996). Razin and Wahba (2015) provide empirical evidence of how the generosity of the welfare state negatively affects the skill composition of migrants in a regime with free migration, thus attracting only low-skilled migrants. This is particularly true for all European countries being called on to tackle the problem of largely unskilled illegal immigration with a per capita welfare cost much higher than the U.S. because of the more generous state benefits and more controlled labor markets (Brücher et al., 2002; Razin and Sadka, 2015). Our work complements the copious literature documenting the negative impacts of ethnic fragmentation on governments' redistributive policies and, more generally, on public sector performance. Alesina et al. (1999) found that spending shares of productive public goods in U.S. cities, metropolitan areas and counties were inversely related to the ethnic fragmentation of those communities. Similarly, Luttmer (2001) provided evidence supporting that preferences for welfare spending were not only driven by financial motivations but also by interpersonal preferences. In particular, interpersonal preferences revealed an increase in support for welfare spending as the share of local beneficiaries of the same ethnic group rose. Similar results are confirmed in subsequent empirical studies by Lee and Romer (2006) and Romer et al. (2007). Along these lines a new strand of literature has focused attention on the most recent migratory waves, including those motivated by refuge reasons. Hansen and Lofstrom (2003) found that in Sweden over the 1990–1996 period, refugees exhibited a high degree of structural dependence on welfare over the natives. The policy implication they derive was extremely enlightening: refugees can become stuck in a welfare trap. More recently, Dahlberg et al. (2012) found that increasing the share of refugees in the Swedish population reduced support for redistribution policies in the form of preferred social benefit levels. Yet Chevalier et al. (2018) showed that the local governments of postWorld War II West Germany reacted to migratory shocks with a selective and persistent increase in local taxes and welfare spending and how those policies had far-sighted effects on the most current redistributive policies. Differently, Dustmann et al. (2016) estimated the causal effect caused by the migratory flow of refugees on the electoral results in Denmark and discovered that, in the majority of Danish municipalities, wider allocations of refugee shares increase voting shares for anti-immigration parties. In a very recent contribution, Alesina et al. (2018) examined the attitudes of natives in some countries in terms of immigration perceptions and implications derived for supporting redistributive policies. According to their estimates, misperceptions lead natives to believe that migrants are different culturally and religiously, and that they benefit disproportionately from welfare state generosity. Boeri (2010) argues that these negative perceptions on immigrants are essentially driven by the concern that migrants abuse welfare, thus creating a fiscal burden for the hosting country. These fears grew further with the advent of the economic crisis in 2008 confirming how, historically and during severe recessions, the public opinion towards immigration takes a widespread negative turn (Citrin et al., 1997). A peculiar characteristic of the Italian welfare is its geographical fragmentation. While pensions, unemployment benefits and some family aids are administered centrally by the government, subsidized housing programs and income support, likely to be suitable for refugee immigrants, are fully delegated to local governments and, more specifically, to municipalities. In addition, Italian municipalities are bound to comply with the so-called "Internal Stability Pact" to ensure the containment of net indebtedness of local government. The welfare system fragmentation and the presence of the Internal Stability Pact spending constraint make resource allocation policies closer and more intelligible to citizens, thus progressively increasing public concerns. Our work contributes to the previous literature by shedding some light on the relationship between tax compliance and taxpayer attitude

towards ethnic fragmentation determined by continuous migratory inflows in Italy in recent years. In particular, our work aims to provide an empirical analysis of the impact of the Italian taxpayers' negative perceptions of migration on their tax morale by estimating its magnitude and offering a starting point for some indications of policy. The idea behind our contribution is that individuals show no preference for welfare redistribution, thus withdrawing support behind public goods funding when migrants can be perceived as structurally dependent on the welfare system. We find that as the degree of threat perceived by migrant flows increases, individuals reveal a significant reduction in their tax morale. This crowding-out effect also remains robust when checking for some relevant determinants at both the individual and the regional levels. 3. Data and variables The empirical analysis provided in this paper uses the European Value Survey longitudinal dataset1 (EVS, 2015). Since 1981, every nine years, this survey is repeated in an increasing number of countries. The first wave was performed in 1981–1984, a second wave in 1990–1993, a third wave in 1999–2001 and a fourth in 2008–2010. Italy is among the countries that has participated in each wave so far. We will now draw on the fourth wave of EVS (2008–2010). This wave contains an original section allowing us to rely on a number of opinions regarding public spirit on taxation and immigration that have been collected on a total sample of 1519 individuals. More generally, the EVS survey is made up of numerous statements about the socio-economic condition and attitudes of Italians towards issues related to life, family, work, religion, politics and society. They are asked to answer by stating whether they agree with some statements in the questionnaire. We aim to model Italians’ individual tax morale as a function of the perceived threat from migratory inflows and of some widely used control variables. In our model we combine individual-level and regional-level data that have been found to influence individuals’ compliance attitudes. 3.1. Iindividual level data To detect individual attitudes about tax morale, we will draw on the following general question: Please tell me for each of the following statements whether you think it can always be justified, never justified or something in between: Cheating on taxes if you have the chance. This question has been widely used in tax morale literature (Torgler and Schneider, 2007; Martinez-Vasquez and Torgler, 2009). Responses to this statement were coded in a 10-points Likert scale with 1 standing for “Never justifiable” and 10 standing for “Always justifiable”. In order to use a PROBIT estimation, we will use a dummy variable (TM) where the tax morale has value 1 if individual responses were in the range 1–5 (high tax morale) and 0 if the answers were in the range 6–10 (lower tax morale). Regarding questions on individual attitudes towards immigration, we will use an index of perception of threat of migratory inflows as our main explanatory variable (IBTS). This variable expresses the answers provided, on a scale from 1 to 5, to the following statement: Please indicate to what extent you agree or disagree with each of the following statements regarding immigrants living in your country: Immigrants will become a threat to society. This variable will be labeled as IBTS throughout the paper. The answers to this statement could vary between 1 (standing for "In the 1 The European Values Survey (EVS) is a representative large-scale, crossnational and longitudinal survey research program on basic human values and belief systems among people in Europe. More detailed information can be found at https://europeanvaluesstudy.eu/.

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future the proportion of immigrants will become a threat to society") to 10 (standing for "In the future the proportion of immigrants will not become a threat to society"). Since we were interested in identifying an index that grows based on the degree of perceived threat from immigration inflows, responses to this statement have been recoded so that the first point on the Likert scale is equivalent to the lowest degree of perceived threat and the tenth point to the highest degree of perceived threat. In this way, item scores increase to the same degree as aversion to migratory inflows. This item should provide a good proxy for the perception of the migration phenomenon among Italian taxpayers. We are going to endogenize our tax morale indicator (TM) by exploring its alleged empirical relationship with IBTS. Earlier literature has shown that socio-economic characteristics such as gender, age, marital status, education, employment status, religiosity, size of town and self positioning in a political scale are important co-determinants of attitudes towards tax evasion (Alm and Torgler, 2006; Torgler, 2002, 2005, 2006; Torgler and Schneider, 2009; Cummings et al., 2009; Dörremberg and Peichl, 2013; Cyan et al., 2016). We therefore include control variables for all of these dimensions into our regressions.2 One of the possible critical points in using survey responses is that they may be affected by some bias and reporting errors. However, as stressed by Martinez-Vazquez and Torgler (2009), the literal formulation of the question is less intrusive than the case in which interviewees were asked whether they actually engaged in some tax evasion behavior. In addition, surveys have been widely used in economic literature (Knack and Keefer, 1997; Slemrod, 2002; Ariely and Davidov, 2011).

4. Empirical strategy and results Table 1 shows the pairwise correlations between all the variables that we consider in the econometric models. Our main explanatory variable, IBTS, is highly and significantly correlated with our tax morale indicator (TM) and comes with a negative sign, as expected. More generally, our endogenous variable seems to be closely correlated with all the variables at the individual level and, in particular, positively with religiosity and negatively with the self political scale. The index of perceived threat from migratory inflows (IBTS) has a high correlation with our control variables, highlighting possible multicollinearity problems. To check for multicollinearity, we computed the Variance Inflation Factor (VIF) after running a linear regression model on all our variables. The VIF was equal to 2.87, thus leading us to exclude a significant suspicion of multicollinearity. In fact, according to some rules of thumb, collinearity can only be an issue when the VIF is greater than 30 when checking some of the single variables (see Chatterjee and Hadi, 2015). In our case, no variable revealed VIFs greater than 30. However, we detect high correlations among NUTS-1 level variables such as the irregularity rate of employment, GDP per capita and the annual inflow of non-EU citizens. Such relevant correlations may still cause estimates to be inefficient and inaccurate. To conveniently address these shortcomings, we run auxiliary pairwise regressions to purge the irregularity rate of employed, and the annual inflow of, nonEU citizens from the effect of GDP per capita. Then we employ residuals of these regressions as our new explanatory variables. We will first employ a PROBIT specification where the endogenous variable has value 1 if individuals’ responses to the tax morale question were in the range 1–5 (high tax morale), and 0 if the answers were in the range 6–10 (lower tax morale). Thus, we will fit the following baseline econometric model:

3.2. Geographical area level variable To take into due consideration the potential influence on tax morale of the macroeconomic conditions relative to the place individuals reside, we introduce regional-specific characteristics into our specifications. These controls allow for monitoring and capturing specific regional circumstances able to describe the macroeconomic climate, as well as the cultural framework likely to influence individual tax morale. Particularly, in our estimates we will introduce some control variables that are measured at the NUTS level.3 While for the majority of European states the NUTS-1 classification can identify individual federated states such as German Federal States of Germany, the Regions of Belgium, Denmark, Sweden, Continental Finland, Ireland, Croatia, Wales, Scotland, for Italy the subdivision is for over-regional areas, from the economic rather than geographical point of view: North-west, North-east, Center, South and Islands (it does not therefore correspond to any intra-national entity). In our econometric specifications we will employ NUTS-1 level data on regional GDP per capita, the irregularity rate of employment and the annual inflows of non-EU citizens in 2008. We used the annual inflows of non-EU citizens in the year preceding that of this survey (2008), since the data of the fourth EVS wave were collected during October, November and December 2009. This allows an adequate time margin for Italian taxpayers to have become cognizant of the migration phenomenon. We take all the macroeconomic variables from the website of the Italian National Institute of Statistics (Istat).

TMi =

+

Xi +

1 IBTSi

+

2 Irregratei

+

3 GDPpercapita

+

i

where TMi represents individual i tax morale; Xi is a vector of sociodemographic characteristics like gender, age, marital status, educational level, employment status and size of town; Irregrate indicates the irregularity rate of employment in the NUTS-1 level region individuals live, GDPpercapita accounts for the Gross Domestic Product per inhabitant in the NUTS-1 level region individuals live, IBTSi is our perceived threat index from migratory inflows and εi is the error term. To the extent that taxpayers are worried about how migrants can become stuck in a welfare trap (Borjas and Trejo, 1991; Borjas and Hilton, 1996; Borjas, 1999; Brucher et al., 2002; Hansen and Lofstrom, 2003), we should expect a negative sign for the IBTS coefficient. This means the higher the IBTS coefficient, the lower the tax morale. Taxpayers are induced to restore equity in their “fair trade” with the government by relaxing their tax morale. As tax morale becomes lower, it seems plausible that there will be a negative effect on tax compliance as well. Table 2 reports the estimated coefficients and marginal effects (ME) in our PROBIT regressions. In Model 1 we present the estimated parameters of our baseline specification. Our main objective is to check for the confounding effect of some major regional-level variables that are expected to shape individuals’ tax compliance decisions. The irregularity rate of employment has been used to adequately approximate the regional share of the shadow economy. In fact, individuals’ incentive to tax evasion behaviors could depend on the overall incidence of regional underground economies rather than on specific immigration-related issues. Additionally, the GDP per capita allows us to check if the effect of perceived threats from immigration could be linked to regional wealth. Both coefficients are negative but they are far from being statistically significant. In Model 2 we included religiosity and self-positioning in the political spectrum to verify whether the negative impact of immigration inflow on tax morale still persists when safely taking into account the

2 Details on all individual-level and geographical area-level variables are reported in Table 1A of the Appendix. 3 The Nomenclature of Statistical Territorial Units (NUTS) has been introduced at the level of the European Union (Eurostat) for statistical purposes. The nomenclature of territorial units for statistics is a geographical system, according to which the European Union is divided into hierarchical levels. The four hierarchical levels are known as NUTS-0, NUTS-1, NUTS-2 and NUTS-3.

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F. Nemore and A. Morone

Table 1 Pairwise-correlations between our variables. Tax Morale Tax morale Irregrate2008 Religiosity Selfpolscale GDP per capita IBTS Aninflow2008

Irregrate 2008

1000 −0.028 0.274 0.053⁎⁎ 0.041 −0.106⁎⁎⁎ 0.000 0.039 0.138 −0.152⁎⁎⁎ 0.000 −0.030 0.240

Religiosity

Selfpolscal

GDP percapita 2008

IBTS

Aninflow 2008

1000 0.106⁎⁎⁎ 0.000 0.045 0.126 −0.964⁎⁎⁎ 0.000 0.062⁎⁎ 0.021 0.962⁎⁎⁎ 0.000

1000 0.214⁎⁎⁎ 0.000 −0.109⁎⁎⁎ 0.000 0.104⁎⁎⁎ 0.000 0.098⁎⁎⁎ 0.000

1000 −0.051 0.082 0.382⁎⁎⁎ 0.000 0.031 0.287

1000 −0.061⁎⁎ 0.022 −0.914⁎⁎⁎ 0.000

1000 0.064⁎⁎ 0.016

1000

Notes. ⁎⁎ p < 0.05. ⁎⁎⁎ p < 0.001. Table 2 Tax morale and perceived threat from immigratory inflows (PROBIT estimation).

Irregrate2008 Gdppercapita2008 (log) Religiosity

Model 1 Coefficient

ME

−0.000 (0.050) −0.233 (0.206)

−0.000 (0.007) −0.035 (0.031)

−0.092 (0.021) 4.121 (2.136) YES 1317 71.07 0.000 −360.40

−0.014 (0.003)

Model 2 Coefficient

Selfpoliticalscale IBTS Constant Socio-demographic controls Observations Wald chi2 Prob > chi2 Logpseudolikelyhood

⁎⁎⁎

YES 1317

⁎⁎⁎

0.048 (0.060) −0.285 (0.240) 0.028 (0.026) −0.012 (0.029) −0.111⁎⁎⁎ (0.026) 4.774 (2.497) YES 1048 76.17 0.000 −263.53

Table 3 Tax morale and perceived threat from migratory inflows (IV PROBIT estimation).

ME 0.007 (0.008) −0.039 (0.033) 0.004 (0.004) −0.002 (0.004) −0.015⁎⁎⁎ (0.004)

Irregrate2008

YES 1048

Socio-demographic controls IPTI instrumented (Aninflow2008) Observations Wald chi2 Prob > chi2 Logpseudolikelyhood Wald test of exogeneity Chi 2 Prob > chi2

Gdppercapita2008 (log) Religiosity

Model 1 Coefficient

ME

0.035 (0.034) −0.160 (0.168)

0.009 (0.009) −0.041 (0.040)

−0.376⁎⁎⁎ (0.043) 4.939⁎⁎⁎ (1.858) YES YES

−0.097⁎⁎⁎ (0.023)

1317 1151.06 0.000 −3511.24

1317

Selfpoliticalscale IBTS Constant

Notes: Dependent variable is tax morale (TMi). All the columns include sociodemographic controls like gender, age, marital status, educational level, employment status and size of town. Irregrate2008 are residuals from an OLS regression of Irregrate2008 and GDPpercapita2008. Robust standard errors in parentheses. ⁎⁎⁎ p < 0.01, ** p < 0.05.

1.29 0.257

YES YES

Model 2 Coefficient

ME

0.074 (0.043) −0.159 (0.257) 0.011 (0.029) 0.147⁎⁎⁎ (0.056) −0.406⁎⁎⁎ (0.016) 4.039 (3.493) YES YES

0.019 (0.010) −0.041 (0.059) 0.003 (0.007) 0.038 (0.023) −0.106⁎⁎⁎ (0.027)

1048 1591.70 0.000 −2705.07

1048

YES YES

0.44 0.507

Notes: Dependent variable is tax morale (TMi). All the columns include sociodemographic controls like gender, age, marital status, educational level, employment status and size of town. Irregrate2008 are residuals from an OLS regression of Irregrate2008 and GDPpercapita2008. Instruments: log of residence permits being issued for asylum applications and humanitarian reasons. Robust standard errors in parentheses. ⁎⁎⁎ p < 0.01, ** p < 0.05.

degree of religiosity and the political orientation of taxpayers. These controls are believed to be extremely suitable in shaping taxpayers' economic behavior by promoting tax compliance and sanctioning misbehaviors. More specifically, the former is added to further investigate if differences in tax morale can be driven by a different degree in the religious services attended in a week. The more religious people are, the more likely it is that the Church could act as a moral constraint institution positively influencing compliance among taxpayers. The coefficient is positive as expected but not statistically significant. The latter is a measure of the political attitude of Italian taxpayers in terms of political positioning (left, center or right) allowing us to verify how tax compliance can be influenced by the type of voting. We came to a negative estimate that is not statistically relevant. Most importantly, data strongly reveal that, as the degree of perceived threat of migratory inflows increases, the probability of being highly compliant is significantly reduced. The coefficient of IBTS is negative and highly significant in both models with a substantially stable magnitude. On top of that, even the marginal effects are shown to be stable with an estimated reduction in the probability of being highly

compliant equal to 1.4 percentage points in Model 1 and 1.5 percentage points in Model 2. Furthermore, we find the intrinsic motivations to comply with tax laws to be negatively correlated to individuals’ beliefs about possible repercussions of migratory inflows, even when controlling for all socio-demographic characteristics of Italian taxpayers. 5. Endogeneity issues In this analysis, taxpayers’ fears about immigration have been considered as exogenous sources of influence on individuals’ tax morale, but identification problems may arise if IBTS exogeneity does not hold. Indeed, there may be some form of reverse causality at work. Given the cross-sectional nature of our data in principle, a problem of causal identification is possible. It may happen that a lower tax morale 15

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substantially unaffected by controls and is shown to be always significant at the highest significance level. The impact of natives’ concerns about immigration related issues in shaping individual tax morale has proven to be an economically relevant one.

leads to a greater perceived threat of immigration. For instance, it is plausible that the lower the tax morale, the greater the increase in fear of immigration, so that those who started increasing their fear of immigration in 2008 were those with the lowest tax morale to begin with. If this is the case we would not be able to disentangle the effect going from perceived threat from migrants inflows to tax morale from that going from tax morale to perceived threat. In the past, solutions to the reverse causality problem have been identified through instrumental variable estimation. In our econometric specifications, we implement an instrumental variable approach where the annual inflow of non-EU citizens in 2008 has been efficiently selected as an instrument to provide exogenous variation in our IBTS index. The correlational analysis in Table 1 provides evidence, not only on the validity of our instrument (being orthogonal to our tax morale indicator), but also on its relevance through a statistically proved correlation with the IBTS perception index. Indeed, our immigration perception index is positively correlated with the annual migratory inflows in 2008 (Aninflow). The latter, moreover, does not seem to be correlated with our tax morale indicator and is therefore likely to be used as an instrument for allowing exogenous variation in IBTS. In Table 3 we report estimations from a PROBIT model where the presence of a possibly endogenous covariate (IBTS) has been taken into account. Model 1 replicates our baseline specification to ease comparisons with Model 1 in Table 2. Even here, regional-level controls do not produce significant effects on individual tax morale. The irregularity rate of employment comes with a positive sign whereas the regional GDP per capita enters with a negative coefficient. However, both of them do not reach statistical significance. In Model 2 we reproduce our extended specification in which taxpayers' religiosity and political orientation have been added as further relevant regressors. Similar to Model 2 in Table 2, the coefficient of Religiosity is positive but not significant. Different from previous results, we recognize the prominent role of political attitudes in explaining individuals’ tax morale. The highly positive coefficient of the self political scale reveals higher tax compliance attitudes as we move progressively towards right-wing positions. This result is consistent and amply confirmed in Lozza et al. (2013). More importantly, as expected, the IBTS coefficient enters with a negative sign and with a statistical significance at 1% level in both models. Taxpayers who feel threatened by migrant landings show a significant reduction in their willingness to pay taxes. By instrumenting IBTS with the regional inflows of non-EU citizens, we detect a huge decrease in the probability of revealing a higher level of tax morale by about 9.7 percentage points in Model 1 and 10.6 points in Model 2. Overall, both specifications revealed sufficient stability to the inclusion of all individuals’ socio-demographics and regional macroeconomic covariates. It is noteworthy to observe that the IBTS index has been

6. Concluding remarks Tax evasion is undoubtedly a pervasive phenomenon likely to negatively impact on equity, social capital and social cohesion. The concept of “tax morale”, defined as an “intrinsic motivation to pay taxes”, has proven to be the main determinant likely to drive individual tax compliance decisions. More specifically, tax compliance seems to depend on many unobservable drivers that go far beyond the factors preached by any classical deterrence model. Much of these unobservable factors, including social norms, perceived fairness and equity in each citizen-government relationship come from other disciplinary fields such as social psychology and economic psychology. Currently, the recent immigration phenomenon has increasingly become one of the central issues of public debate in Italy, due to continuous refugee landings and asylum seekers mostly deriving from Northern African countries. These migratory inflows contributed to most of the anti-immigration sentiment among Italian taxpayers who are worried about the increasing welfare use and the growing fiscal burden for Italian municipalities’ balance sheets. To the extent that public immigration-related concerns are slashing social cohesion, this situation provides an interesting setting for studying the likely impacts of the perceived threat from migratory inflows onto individuals’ tax morale. Drawing on the European Value Survey longitudinal dataset, a large-scale, cross-national and longitudinal survey research program on basic human values and belief systems among people in Europe, we derived an index capturing the degree of perceived threat from immigration inflows (IBTS), and a tax morale indicator (TM). Controlling for a set of widely investigated tax morale determinants, we found that the IBTS coefficient is always negative and statistically significant at the highest significance level. Moreover, the estimated coefficients are shown to be stable, even when adding several relevant economic and attitudinal controls. This means that an increase in the degree of perceived threat among taxpayers always crowds out tax morale, reducing their willingness to comply with the law. This clear evidence appears to confirm that the growth of ethnic fragmentation being triggered by the recent and continuous flows of migrants is able to have serious repercussions on taxpayers' compliance attitudes. The negative impact on their tax morale may have reduced support for redistributive policies, as individuals are not willing to support public goods funding when migrants can be perceived as structurally dependent on the welfare system.

Supplementary materials Supplementary material associated with this article can be found, in the online version, at doi:10.1016/j.socec.2019.05.004.

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Appendix Table 1A. Table 1A Data description. Variable

Description

Source

TM Tax Morale

Question F116: Please tell me for each of the following statements whether you think it can always be justified, never justified, or something in between… Cheating on taxes if you have the chance (scale from 1 to 10) 1=never justifiable, 10=always justifiable Question G042: Please look at the following statements and indicate where you would place your views on this scale (scale from 1 to 10) 1=in the future the proportion of immigrants will become a threat to society,10=in the future the proportion of immigrants will not become a threat to society Question X001: Sex of respondent 1=Male, 2=Female Question X003R2: Age recoded in three intervals 1 = 15–29 years, 2 = 30–49 years, 3 = 50 and more Question X007 (recoded): What is your current legal marital status? 1=Married, 2=Divorced/Separated, 3=Widowed, 4=Single/Never married Question X025R: What is the highest level you reached/completed in your education? 1=Lower, 2=Middle, 3=Upper Question X028: Are you yourself gainfully employed at the moment or not? Please select the employment status that applies to you 1=Full time, 2=Part time, 3=Self employed, 4=Retired, 5=Housewife, 6=Student, 7=Unemployed Question x049a: Size of town 1=under 5000; 2 = 5000–20,000; 3 = 20,000–100,000; 4 = 100,000–500,000; 5 = 500,000 and more Question F028: Apart from weddings, funerals and christenings, about how often do you attend religious services these days? 1=More than once a week, 2=Once a week, 3=Once a month, 4=Only on special holy days/Christmas/Easter days, 5=Other specific holy days, 6=Once a year, 7=Less often, 8=Never, practically never Question E033: In political matters, people talk of “the left” and “the right”. How would you place your views on this scale generally speaking? (scale from 1 to 10) 1=Left, 10=Right Gross Domestic Product at markets price per inhabitant in the NUTS-1 level region in 2008

2008 EVS wave

IBTS Immigrants become a threat to society Gender Age Class Marital Status Educational Level Employment Status Size of Town Religiosity

Self positioning in a political scale GDP per capita (log) Irregularity rate of employment Annual inflow of non-EU citizens (log)

Rate being calculated for employees and work units as the ratio of the type of non-regular employment and the corresponding total employment, in percentage units in 2008 Number of residence permits being issued to new migrants for asylum applications and humanitarian reasons

2008 EVS wave 2008 EVS wave 2008 EVS wave 2008 EVS wave 2008 EVS wave 2008 EVS wave 2008 EVS wave 2008 EVS wave

2008 EVS wave ISTAT Italian National Institute of Statistics ISTAT Italian National Institute of Statistics ISTATItalian National Institute of Statistics

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