Is ethnic diversity a poverty trap? : a complex relationship between ethnicity, trust, and tax morale

Abstract

Much research indicates that ethnic diversity leads to suboptimal public goods provision and hinders economic development. However, similar levels of ethnic diversity are often associated with very different outcomes. This paper specifies under what conditions ethnic differences undermine tax compliance in multiethnic societies. Based on multilevel modeling of survey data from 70 countries, the paper shows that people belonging to small ethnic minorities in countries with a high level of ethnolinguistic fractionalization are also those the most willing to accept tax evasion. However, generalized trust and trust in the government moderate the relationship between ethnic fractionalization and tax morale among small ethnic groups. The analysis suggests that ethnic diversity is not a poverty trap because its effect can be largely offset by measures increasing interpersonal trust across ethnic lines and trust in political institutions. The paper uses a new dataset that identifies World Values Survey respondents’ membership in politically relevant ethnic groups.