ATTITUDE OF TAX PAYER TOWARDS THE TAX SYSTEM IN NIGERIA

1. INTRODUCTION

Tax collection is more successful when based on voluntary compliance. Even in high-capacity states, taxpayers evade taxation far less than would be expected if individual decisions were driven by fear of detection (Alm, McClelland, & Schulze 1992; Andreoni et al 1998). In the developing world, enforcement-led compliance is even less likely. Tax collection institutions are underdeveloped, and increased tax enforcement and penalties for evasion have often had weak effects on overall tax revenues. In these contexts, voluntary compliance is likely to play an important role in expanding the tax revenue base, at least initially. But these are also places where social contract norms – the attitudes that underlie voluntary compliance – are unlikely to be well-established or widespread. While voluntary compliance is an important component of successful tax regimes, there is little understanding of how norms favoring compliance emerge. The bulk of the literature on state-building and taxation presumes the slow evolution of a social contract between the state and critical economic actors (Bates and Lien 1985; Levi 1988; North 1990; Tilly 1990; Rosenthal 1998; Lieberman 2003). This social contract imposes obligations on both parties: citizens are expected to pay taxes, regardless of their degree of support for the sitting government; in exchange, states are expected to provide public goods. Coercion may be important in the early stages of state formation, when the state acts as little more than a “stationary bandit,” but states soon find that coercion alone cannot secure the compliance of mobile asset holders (Tilly 1985). From this perspective, it is repeated rounds of state-society bargaining – not the expansion of enforcement capacity – that produces the social contract that characterizes the successful tax regimes of today. What is missing from this account is the place of individual attitudes. Critical economic actors may strike bargains with the state, but it is unclear how these bargains result in the spread of social contract attitudes to the general population. Which individuals are “first movers” in terms of adopting a belief in the state’s unconditional right to tax? Does the provision of public

goods quickly produce pro-compliance beliefs and behavior? Further, if some groups are perceived to have privileged access to the state, would not members of other groups resist tax payment and reject social contract norms? In this paper, we examine why some individuals adopt attitudes favorable to the social contract on taxation. We argue that the emergence of social contract attitudes is driven partly by a fiscal exchange logic. Where taxpayers believe that the state will provide goods in exchange for taxes, they are more likely to adopt norms that support the social contract. But local incentives and institutions also shape individual attitudes toward taxation. We argue that social contract attitudes are less likely to emerge where local communities are able to effectively engage in “self-help” provision of club goods, which individuals may see as acceptable substitutes for state-provided services. can serve as a substitute for state-provided services. Put simply, the adoption of social contract norms is driven by both supply of public goods and by objective demand for public goods. This paper uses public opinion data from eleven Nigerian cities to investigate why individuals adopt attitudes about taxation that we see as consistent with a social contract orientation. Our dependent variable is respondents’ expressed attitudes toward a citizen obligation to pay tax. The survey asked respondents to agree with one of two normative statements: “citizens should always pay their taxes, even if they disagree with the government”

versus “citizens should only pay taxes if they believe in their government”. We view the

question as an indicator of underlying attitudes regarding the social contract: individuals who do not condition tax payment are more likely to see state-society relations as imposing obligations on citizens, whereas those who link tax payment to approval of government may also view state authority as conditional. We refer to agreement with statement A as unconditioned support for a citizen obligation to pay tax or, more abstractly, as support for the social contract.

2. STATE FORMATION, TAXATION, & INDIVIDUAL ATTITUDES

In studies of the formation of modern Western European states, the development of tax

collection capacity proceeds in tandem with the increasing sophistication and societal

penetration of states. The literature stresses the importance of iterated bargaining between states and societal actors (Bates & Lien 1985; Levi 1988; Tilly 1990; Rosenthal 1998). The outcome of this bargaining is the establishment of a mutually beneficial social contract, in which taxes are exchanged for both public goods and, possibly, representation. Studies of tax regimes in other settings have often adopted this framework, focusing on the evolution of consensual relations between tax-seeking states and tax-paying dominant classes (Lieberman 2003; Jones Luong & Weinthal 2004). At base, the historical institutionalist literature posits a simple exchange: individuals agree to pay taxes, and states agree to provide public goods. In the developing world, particularly in sub-Saharan Africa, such exchange relations have

been slow to emerge. Many of these countries do not rely on direct taxation to finance their budgets; government bureaucracies usually have low monitoring and enforcement capacity; and states deliver fewer social services and public goods. In order to explain this state of affairs, scholars have generally offered macro-structural explanations, such as the availability of alternative sources of government revenue, ethnic diversity, group inequality, or patterns of state formation (Alesina et al 1999; Ross 2001; Acemoglu et al 2001; Baldwin & Huber 2010).

The resource curse literature is an example of the use of structural factors to explain political outcomes. The logic here is that state-society bargaining does not occur if states do not make extractive demands on their subjects, which is itself a function of states’ natural resource profiles. Thus, where states have access to natural resources, especially oil, tax collection, political accountability, and demands for representative institutions all remain weak (Herb 2005; Ross 2011). In these kinds of structural accounts, the low-capacity-low-accountability character of these states is depicted as a trap from which it is difficult to devise means of escape. Where states do not (or cannot) rely on taxation, they have few incentives to (or cannot) deliver social services and develop ties of accountability with their populations. According to a different structural logic, cooperation across groups is more difficult if countries have high levels of ethnic diversity or group inequality, and politicians will win election by promising to provide private goods to their own constituencies. In these cases, states underprovide public goods and successfully resist demands for accountability, and individuals, presumably, do not adopt norms in support of paying taxes. Both historical institutionalist and structuralist accounts see individual attitudes as primarily reactive. Citizens do not develop expectations of state delivery of public goods – and do not bargain for their delivery -- until they are asked to pay for such goods. Extractive demands generate individual preferences, which then generate collective action by society or by segments of society. Though these mechanisms are not spelled out, it would seem that norms of civic duty or individual preferences for state delivery emerge only as a result of interactions with state institutions. How these norms and expectations are internalized by diverse segments of the population is not examined. It is therefore unsurprising that the literature on tax compliance, which draws on survey and experimental data, remains in near-complete isolation from these other literatures. The tax compliance research is firmly micro in its orientation, and it has identified several individual level determinants of tax evasion and compliance (Alm, Jackson & McKee 1992; Andreoni et al 1998; Scholz & Lubell 1998; Alm et al 2006). In this literature, coercion plays a complicated role in explaining behavior, and scholars have increasingly privileged the importance of “tax morale”, which is an individual’s intrinsic motivation to pay tax. In explaining the individual attitudes that support tax payment, three factors are important: the existence of norms that reflect a social contract between state and society; trust in state institutions; and perceptions about the tax compliance of others. For the most part, however, the tax compliance literature studies the effects of such factors in high state capacity environments where tax morale is also already relatively high. These models shed little light on the mechanisms that produce widespread social contract attitudes in a given place, or, indeed, if the factors they identify have leverage in countries where social contract norms are less widespread than in the developed world.

3. INDIVIDUAL SOCIAL CONTRACT ATTITUDES

This paper explains individual attitudes toward taxation in a context where both tax enforcement and social attitudes are still in the early stages of development. We argue that the adoption of pro-tax norms is important during the establishment of tax regimes, since these norms boost compliance and can offset weak collection or state enforcement capacity. Even in modern industrialized countries, enforcement is costly and has not been shown to have strong, uniform effects on compliance. In the developing world, states are even less able to directly deter tax evasion. In contexts of weak state penetration, the popular adoption of pro-compliance norms seems the most promising route to increased tax revenues and the first moves toward social contracts. But what drives the adoption of these norms? Private goods In electoral regimes, core or electorally crucial constituencies are often granted greater access to state services and state spending (Dixit & Londegran 1996; Golden & Picci 2008; Weinstein 2011). In Africa, differential public investment is often organized on ethnic lines, and the effects

of favoritism toward ruling coalition members can be seen in the distribution of roads (Burgess et al 2009), education and health spending (Franck & Rainer 2009), and the creation of new administrative districts (Green 2010). Across much of the developing world, including sub- Saharan Africa, clientelism is a winning strategy for politicians, and voters often expect – and even demand -- targeted redistribution over more general delivery of public goods (Wantchekon 2003, Lindberg 2003; Keefer 2007). For many African voters and politicians, elections are partly about the transformation of public finances into private goods. Membership in ethnic or partisan winning coalitions is often treated as an important determinant of individuals’ access to resources, voting preferences, and political participation. Can we link membership in winning coalitions to attitudes toward taxation and state revenue? Would likely “winners” in the game of clientelistic redistribution be more likely to pay taxes or support the state’s right to tax? Looking at taxation explicitly, there is some ambiguity about how membership in ruling coalitions affects taxation. On the one hand, members of ruling coalitions might be more likely to support an expansion of the state and tax revenue, as they are likely to benefit from heavier state coffers. But these same individuals might think twice if the tax burden falls disproportionately on their shoulders, as Kasara (2007) suggests it does. She argues that African states more heavily tax their core constituencies – in this case, presidents’ co-ethnics – because they simply have greater extractive capacity when dealing with these groups. Greater tax burdens, however, need not be inconsistent with willingness to pay. In his study of tax policy in South Africa and Brazil, Lieberman (2003) shows that the group solidarities of the tax-paying classes play an important role in explaining the initial divergence in the tax collection capacity of the two countries. For Lieberman, individuals willingly pay taxes where they see state policy as benefiting a group to which they belong, even if they themselves will not be beneficiaries. Lieberman delves into how institutions shape the creation of cleavages and solidarities, but the relevant point here is the tie he makes between tax collection capacity and group interest. If we extend this to individual attitudes, we would expect a positive association between membership in winning coalitions and social contract attitudes. Anderson and Tverdova (2003) provide an alternative mechanism linking ruling coalition membership and support for the state. In their analysis of the impact of corruption on evaluations of government performance, they find that political allegiances play an important mediating role in individuals’ evaluations. Supporters of incumbents are more likely to express

trust in public officials and positive evaluations of government performance, regardless of the level of corruption (also, Chang & Kerr 2009). Thus, members of ruling coalitions may expect benefits for their own group, but they may also be more likely to feel that tax revenue will be well-used. Both these attitudes work in favor of pro-tax attitudes. On the other hand, those who do not belong to ruling coalitions may be unlikely to hold attitudes that favor the expansion of Club goods A second mechanism focuses on the link between internal community attributes, access to group-delimited or club goods, and social contract norms. In Nigeria and in other low-capacity states, public goods are provided at suboptimal levels, and communities and individuals often engage in “self-help” provision of such goods. These efforts range from the forging of somewhat amorphous trade and trust networks to the collective provision of schools and roads to the creation of concrete non-state agents of order, such as ethnic militia and vigilante groups. Access to these goods is almost always limited to those who contribute to their creation. Why are these kinds of club goods provided in some communities to a greater extent than in others? The literature on risk-pooling, reaching back to James Scott’s foundational work, suggests that individuals in the developing world are often embedded in networks based on both norms of reciprocity and more tangible enforcement mechanisms (Scott 1976; Fafchamps 1992). These networks are often premised on income transfers within the group, and they thereby serve as valuable protection against income shocks. Co-ethnicity is a strong basis for the creation and

maintenance of these kinds of networks (Grimard 1997), as are religious co-affiliation and other kinds of social ties (Grief 1994; Cassar & Wydick 2010). While the bulk of the evidence for risk-pooling comes from rural settings, Cox and Jimenez (1998) show that reciprocal networks of cash transfers and mutual insurance exist in urban areas as well.

4. DATA AND EMPIRICAL DESIGN

We use data from a survey conducted in eleven Nigerian cities in December 2010 (N=2750). A city-representative sample was selected using a stratified, clustered sampling procedure; individual informants were selected using a random-walk protocol from GIS-selected starting points. Gender parity was imposed. The cities are drawn from each of the three zones into which Nigeria is often divided, and they vary in terms of demographics, politics, and riot-proneness.

There are three northern cities (Bauchi, Kano, Sokoto), three middle belt cities (Jos, Kaduna, Lafia), and five cities in southeastern and southwestern Nigeria (Ibadan, Lagos, Aba, Enugu, and Onitsha). In many cases, paired comparison guided our selection. For instance, Lafia and Jos are similar with respect to the structure of local grievances and demographics, but they vary in terms of riot-proneness.

Nigeria is a good testing ground for our theory. First, this is a context in which we would expect social contract attitudes to be especially unlikely to emerge. The oil boom of the late 1970s generated an increasingly corrupt and predatory state, and oil still accounts for about 80 percent of budget revenues. State governments are heavily dependent on federal transfers, and the tax collection infrastructure is weak, even by African standards. Indeed, Nigeria is often seen as an exemplar of the resource curse (Lewis 1996; Sala-i-Martin & Subramanian 2003). Both the rule of law and services delivery were largely ignored until the beginning of the transition to multi-party democracy in 1998/1999. This has fostered a large informal economy and a do-ityourself public attitude toward infrastructure and contract enforcement on the part of communities and individuals. In addition, communal riots are common in several cities, a religiously-marked division between North and South has periodically threatened the survival of

the state, and the explosion of criminal activity since 1990 has encouraged the formation of ethnic militia to provide community policing (Author, forthcoming). Distrust of government institutions and of other Nigerians is widespread (Lewis 2006).

Secondly, significant changes in taxation and services delivery have occurred in some

Nigerian states over the past ten years. This creates interesting variation across the cities sampled. In the most striking example of tax reform in Nigeria, Lagos State was able to increase its tax revenue more than ten fold between 2003 and 2007. This was partly fueled by the need to raise revenue. In a surprising test of the durability of the resource curse, federal transfers to Lagos State were suspended in 2003, over a bureaucratic dispute, and the state government responded by stating that it would fund itself via tax revenues Dramatic improvements in revenue collection coincided with visible expansion of social services, even in slums and marginal areas. Public attitudes toward the government and toward taxation have also altered quickly. Lagosians express higher degrees of government approval and greater support for tax payment than other Nigerians. Developments in Lagos State suggest that virtuous cycles of

taxation and services delivery can be established, even in unlikely contexts. In addition to the suitability of the case, the survey data allows us to examine questions for which existing data is ill-suited. Though the Afrobarometer has started collecting some data on

taxation, the World Values Survey (WVS) has traditionally been the data source used by those interested in tax compliance. WVS questions sometimes convey normative commitments or prompting, and they are therefore likely to produce over-reporting of tax morale. Our data includes more detailed and less biased measures of attitudes toward taxation, and it also allows us to construct a novel and more reliable measure of tax payment. The urban focus of our survey is also a strength. Social contract attitudes are likely to emerge first in urban settings. Urbandwellers are more likely to have experienced repeated interactions with the state, and they also navigate a more complex and diverse social world than residents of rural areas. Yet we still know fairly little about the political attitudes of this population.

Research Design

Due to the ordinal nature of our dependent variable, the statistical analysis relies on ordered logistic models with city fixed effects.2 As a robustness check, we also incorporate city-level factors via multi-level estimation techniques that explore nested data (Rabe-Hesketh and Skrondal 2008). This latter approach recognizes the hierarchical structure of that data, correcting potentially underestimated standard errors of regression coefficients.

5. Results

In discussing the statistical estimations, we first assess the direction of effects, statistical significance, and coefficient robustness. We then compare the substantive effects of the coefficients identified as significant in the estimations. Table 1 shows the results from ordered logit estimations, testing our hypotheses H1, H2 and H3 separately and then combining the key independent variables in a full model (Model 4). In this set of results, the dependent variable is individual attitude towards taxation with higher values showing a more favourable attitude towards a broad social contract on taxation (agreement with the statement that “citizens should always pay their taxes, even if they disagree with the government”).

Several findings stand out. Only one of our operationalizations of the “private goods”

hypothesis H1 is supported by the estimations. That is, there is weak support for the idea that membership in winning coalitions affects individual attitudes toward taxation. Sharing a partisan Our results are robust when we collapse the four-level dependent variable into a binary variable grouping support for statement A versus support for statement B and use binary logit models with city fixed effects.

Attitudes and Actual Behavior: Who Pays Taxes?

Finally, we turn to the important question of whether social contract norms actually have

concrete effects on tax compliance. We find that some of the factors driving social contract attitudes also underlie individual tax payment, and we also establish that social contract attitudes have an independent effect on tax compliance. Results of the tax payment model are presented

Before we discuss the findings, it is important to comment on the construction of our

behavioral variable, since individuals have incentives to conceal tax evasion. Because of these incentives, explicit questioning about tax payment can result in over-reporting of tax compliance. It may also generate some degree of respondent suspicion and hostility toward enumerators, which can corrupt responses to other questions as well. In high-corruption, lowcapacity states like Nigeria, the costs of detection are lower and norms against tax evasion are weaker. Individuals in these settings may be substantially more likely to truthfully report tax payment than those in high-enforcement contexts, but the potential costs of direct questioning still outweigh the value of data collected.

Consequently, our survey did not directly ask respondents if they paid taxes. Instead, the survey included a series of questions regarding taxation. After asking if the respondent was aware of reforms to tax collection in their state of residence, she was asked if she currently paid more taxes and levies than she had three years previously. This was a simple yes/no question, but, surprisingly, more than 42 percent of respondents volunteered that they did not pay taxes.

We use this volunteered response to construct a binary measure of tax payment. Those who reported that their taxes increased or decreased were presumed to have paid taxes, while those

Conclusion

Our findings have several implications for those who are interested in the development of state capacity and accountability in weak states in the developing world. Most simply, we show that social contract orientations exist even in contexts like Nigeria, where resource curse and predatory state dynamics are presumed to prevent their emergence. Attitudes supporting citizens’ obligation to pay tax are not general: only about 40 percent of our urban sample express such views, and these attitudes are likely to be far more rare in rural contexts. Our data supports the emphasis on services provision that underlies many neo-institutional economic explanations of state formation (e.g., North 1990; Grief 1994). Individuals are more likely to support the state’s right to tax if they have received concrete benefits from the state and view the state as efficient in its use of tax revenues. More controversially, we show that state contact need not be benevolent in order to change individual orientations toward the state. Urban Nigerians

who have been solicited for bribes – and those who have suffered due to state-sponsored destruction of illegal structures – are more likely to express unconditioned support for a citizen obligation to pay taxes than those who lacked these negative experiences of state contact. To our knowledge, this is the first direct evidence for the link Tilly poses between state extortion and societal acceptance of state authority.

An even more complicated story is suggested by our findings about the effect of social context on attitudes toward taxation. We find that the character of community relations has a direct impact on the adoption of social contract norms. When individuals live in areas that are able to solve problems of security and contracting on their own, without recourse to the state, these individuals are much more likely to condition citizens’ obligation to pay taxes. This finding suggests the importance of a factor neglected by the resource curse literature, which assumes that the need for tax revenue will produce state actions that yield societal compliance. We instead suggest that communities may construct substitutes for state services provision in the absence of the state, and these substitutes can serve as a potentially durable impediment to the adoption of social contract attitudes. Ethnic diversity may be statistically associated with weaker public goods delivery (Alesina et al 1999), but these contexts may be more propitious for the

spread of social contract norms than communities characterized by greater cohesion and effective collective action. In terms of policy implications, states would be well-served by providing alternatives to existing club goods providers. For instance, strengthening or extending the reach of formal bank services may reduce residents’ reliance on informal savings clubs.

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