I love reading research studies that help me drive businesses forward. As a contract COO I’m always worrying how to optimize the performance of the team in a fun and productive way. Over the next few posts I’m going to dive into my favorite business authors who use research and case studies to make a point.
First up is Malcolm Gladwell. In his new book David and Goliath, using a simple example, he raises the question of why Americans are so honest about paying their taxes. Why don’t they cheat more?
Friedrich Schneider’s “The Influence of the Economic Crisis on the Underground Economy in Germany and other OECD countries in 2010” produced an honesty table ranking countries. The table listed countries according to the % of their economy that was underground, the amount concealed by citizens to avoid tax. Top of the table? USA with 7.8%. (most western societies are in the 8% to 15% range.) Bottom of the table? Greece with 25.2%.
Some academics would argue that the reason is simple. The cost to the citizen of getting caught is far greater than the benefits. But this simply is not true, as Malcolm states. In the US around 1% of tax returns are audited so the chances of being caught are very low. If caught, the IRS need to prove intent and in most cases that is very difficult and therefore the taxpayer pays back taxes owed plus some small penalties.
As Malcolm argues along with tax accountant James Alm, if Americans were acting rationally, tax evasion would be rampant.
The explanation worth considering, and I believe very relevant for business leaders, is the fact that citizens believe their system to be legitimate. Legitimacy is achieved through three characteristics. Everyone is treated equally, it is possible to speak up and be heard, and rules are in place which ensure you will treated in a consistent way and tomorrow will feel like today. If you like, fairness, having a voice, and predictability.
Greece’s tax regime is illegitimate according to Gladwell on this basis. Its tax code is a mess. Wealthy people get special insider deals. In other words, nothing seems fair, voices aren’t heard, and rules are in constant flux.
As you drive your business forward, it’s really important that your leadership has legitimacy. Are you treating staff fairly? Can employees give open and honest feedback? Are you a consistent leader and do your operational plans make sense to the people that have to execute them? As a recent Gallup survey showed, only 13% of employees are engaged at work!
Like the way we think? You’ll love the way we work.
Link to Malcolm Gladwell’s profile on 60 minutes Sunday Nov 24