The effect of tax enforcement on tax morale

- We study the relation between formal and informal institutions towards tax compliance.
- We find evidence that tax enforcement has a positive effect on tax morale.
- Quantile regressions show that tax enforcement is higher for low levels of tax morale.
- High levels of morale are driven by individual traits rather than external factors.
- Policy implication: enforcement has a cumulative effect on compliance via tax morale.

In this paper we argue that tax enforcement is an additional contextual factor affecting tax morale, one of the most important determinants of tax compliance. By using a unique dataset that merges a representative sample of Italian households with administrative data on tax enforcement, we first find that tax morale is positively correlated with tax enforcement. Second, to deal with possible endogeneity of tax enforcement, we show that results are confirmed in an IV specification using the change in the tax gap at the provincial level as an instrument for tax enforcement. Finally, we provide evidence that the impact of tax enforcement and social environment is stronger at low quantiles of tax morale. Our results show that besides that of lowering the expected value of tax evasion, tax enforcement has an additional and indirect effect on tax compliance through its effect on tax morale.