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Focus on tax ethics: Does more transparency actually bring more honesty?
Economist Johannes Lorenz analyzes transparency and tax morale in Germany. Results and policy measures for tax avoidance.
Focus on tax ethics: Does more transparency actually bring more honesty?
The discussion about tax ethics and transparency has increasingly become the focus of social and political debates in recent years. Economist Johannes Lorenz is investigating whether maximum transparency regarding personal income data could promote tax compliance among citizens. In his current study, based on the results of previous research, he finds that more transparency does not necessarily lead to higher tax revenues. This is particularly important in the context of German tax culture, where the idea of making tax data public is perceived as unusual.
Given the serious tax evasion in Germany, which, according to estimates by the University of London, amounted to over 125 billion euros annually in 2019, the question arises as to whether wider publication of income and tax data could actually have a positive impact on tax compliance. Lorenz, who works as a research fellow in the special research area “Accounting for Transparency” at the University of Paderborn, analyzes various tax transparency scenarios in his study.
Investigation approaches and results
For his analysis, Lorenz developed a “small world” network model. In this model, a fictitious district with 1,000 residents is simulated over a period of 40 years. In this simulation, residents can estimate their neighbors' income, for example based on the size of their houses or the choice of automobiles they own. The model also assumes an audit probability of 5% per year by the tax authorities.
Lorenz tested three different scenarios: In the first scenario, in which no tax data is published, tax fraud is common because people do not know what their neighbors are doing. In the second scenario, where taxable income is published, social pressure arises. Citizens who learn that their neighbors pay less taxes tend to act more honestly. Finally, the third scenario with maximum transparency shows that the majority of taxpayers optimize their taxes legally, as the fear of detection and punishment for tax evasion prevents many from acting fraudulently.
The central finding of this study is that partial transparency generates the highest tax revenue. While maximum transparency leads to the legalization of tax avoidance strategies, moderate disclosure is more effective in minimizing tax losses. Lorenz has announced that he will further refine the model in future studies.
Regulatory framework for tax avoidance
The StUmgBG, which pursues the goal of greater transparency, expands taxpayers' obligations to cooperate and leads to new investigative powers for tax authorities. In addition, Directive (EU) 2011/16 promotes the automatic exchange of information in cross-border taxation. Further measures, such as the Tax Haven Defense Act and the Minimum Taxation Directive Implementation Act, show the political will to take active action against tax avoidance and evasion.
The challenges and opportunities arising from the combination of research and regulation show that a multifactorial approach is necessary to effectively combat tax evasion. From now on, the discussion about tax transparency, supported by empirical research and legal frameworks, will continue to gain in importance.