Peer pressure: The puzzle of aristocrats’ tax compliance in early nineteenth-century Moscow

by Elena Korchmina (University of Southern Denmark, Odense)

This blog is based on the author’s paper which was recently published on early view|: https://onlinelibrary.wiley.com/doi/10.1111/ehr.13114.

Contemporary Russian elites – oligarchs – are famous for exploiting Russia’s natural resources.  The level of corruption in Russia is overwhelming, and living standards are declining despite abundant natural resources—whatever Russian propaganda claims.  But Russian elites in the past behaved very differently. This paper shows that Russian nobles readily complied with their tax obligations even in the absence of state enforcement.

My research  provides empirical evidence on how a weak state could rely on the voluntary compliance of elites and thereby avoid the need for costly enforcement.  I investigate the introduction of the income tax in Russia in 1812, using a novel dataset to estimate the individual-level tax compliance of Russian nobles. The dataset is constructed from the self-reported tax returns of all Russian aristocrats who owned real estate in Moscow province.

The standard approach to measuring tax compliance involves comparing the demands of the Russian government before the imposition of the new tax with the amount of revenue collected subsequently. However, adoption of this methodology is impossible because the Russian government did not have any expectations about the new tax.  It is thus necessary to apply a more sophisticated methodology for measuring tax compliance at the individual level.  Specifically, I estimate the income per unit of labour— ‘rouble income per male serf’—which nobles would expect to receive across their estates.  I then compare the declared income per unit of labour of estates to this benchmark and assume that any lower values reflect cheating in the nobles’ declaration of income (after accounting for tax cuts on paid interest).

How was the income per serf determined?  Under serfdom, payments were only partly determined by market forces. To a great extent, the ability of nobles to raise quitrents was constrained by written and unwritten social norms.  We know from narrative sources that any extra payments on serfs led to harsh conflicts between serfs and their masters, so there was some consensus between the landowners and their peasants as to what level of quitrent was appropriate.  Consequently, ‘rouble income per male serf’ was not determined purely by economic conditions but by consensus among the elite. Specifically, a norm emerged whereby an income of 10 roubles per male serf was sufficient. Any deviation from this norm may be considered a sign of tax evasion.

As Figure 1 shows, only 38 per cent of aristocrats declared less than 10 roubles per serf;  the majority, 62 per cent, , declared 10 roubles or more.  Those aristocrats whose income per serf was less than 10 roubles—potential tax evaders— exhibited a common feature: they held different types of credit obligations.  Over half of those reporting an income per serf of less than 10 roubles reported some debt obligation, compared to 22 per cent  of those reporting more than 10 roubles per serf.  Crucially, debts allowed nobles to make tax deductions that decreased their taxable income, and hence their reported income per serf.

Nobles tended to report their debt obligations honestly—see Figure 2—providing further evidence that tax evasion was relatively low.  A comparison of the self-reported tax returns with official bank documents shows that 70 per cent of debtors honestly declared information about loans. Thus, among those 38 per cent of potential evaders, the  overwhelming majority (70 per cent ) were honest debtors.

The high level of tax compliance was achieved by a creative method of tax collection, based on public disclosure, which imposed high reputational risks for nobles.  Tax collection and compliance were monitored by elected local bodies— the Noble Assemblies of deputies.  The deputies were selected by the same nobles from whom they received their tax returns; they were relatives, friends, and acquaintances.  This meant they knew about each other’s wealth status, which had to be demonstrated in accordance with accepted cultural standards in noble society.  The size of a noble’s holdings—as well as their trustworthiness—was central to their reputation.  So, tax collection was based on peer monitoring underpinned by unofficially circulated information among nobles—information not available to state officials who are usually considered to be tax collectors.

On the basis of private narrative sources and state financial documents, my findings show that the Russian nobility reliably declared their income: only 10 to 30 per cent of aristocrats evaded tax, despite the limited legal repercussions of evasion.  Did this behaviour by the  Russian elite provide  the basis for economic growth after the abolition of serfdom?

To contact the author: ekor@sdu.dk