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Tax Compliance as the Result of a Psychological Tax Contract: The Role of Incentives and Responsive Regulation

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Author Info
Lars P. Feld
Bruno S. Frey

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Abstract

In this paper, we develop the concept of a psychological tax contract that goes beyond the traditional deterrence model and explains tax morale as a complicated interaction between taxpayers and the government. Based on crowding theory, the impact of deterrence and re-wards on tax morale is discussed. As a contractual relationship implies duties and rights for each contract partner, sticking to the fiscal exchange paradigm between citizens and the state increases tax compliance. Citizens are willing to honestly declare income even if they do not receive a full public good equivalent to their tax payments as long as the political process is perceived to be fair and legitimate. At the procedural level, a friendly treatment of taxpayers by the tax office in auditing processes increases tax compliance.

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Publisher Info
Paper provided by Center for Research in Economics, Management and the Arts (CREMA) in its series CREMA Working Paper Series with number 2006-10.

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Date of creation: Apr 2006
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Handle: RePEc:cra:wpaper:2006-10

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Related research
Keywords: Tax Compliance; Positive and Negative Incentives; Responsive Regulation;

Other versions of this item:

Find related papers by JEL classification:
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy-Making and Implementation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lars Feld & Bruno Frey, 2000. "Trust Breeds Trust: How Taxpayers are Treated," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. Cullis, John G. & Lewis, Alan, 1997. "Why people pay taxes: From a conventional economic model to a model of social convention," Journal of Economic Psychology, Elsevier, vol. 18(2-3), pages 305-321, April. [Downloadable!] (restricted)
  3. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November. [Downloadable!] (restricted)
  4. Frey, Bruno S, 1997. "A Constitution for Knaves Crowds Out Civic Virtues," Economic Journal, Royal Economic Society, vol. 107(443), pages 1043-53, July. [Downloadable!] (restricted)
  5. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June. [Downloadable!] (restricted)
  6. Alm, James & Sanchez, Isabel & de Juan, Ana, 1995. "Economic and Noneconomic Factors in Tax Compliance," Kyklos, Blackwell Publishing, vol. 48(1), pages 3-18.
  7. Slemrod, Joel & Blumenthal, Marsha & Christian, Charles, 2001. "Taxpayer response to an increased probability of audit: evidence from a controlled experiment in Minnesota," Journal of Public Economics, Elsevier, vol. 79(3), pages 455-483, March. [Downloadable!] (restricted)
  8. Werner Güth & Vittoria Levati & Rupert Sausgruber, 2005. "Tax morale and (de-)centralization: An experimental study," Public Choice, Springer, vol. 125(1), pages 171-188, July. [Downloadable!] (restricted)
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  9. Spicer, M W & Lundstedt, S B, 1976. "Understanding Tax Evasion," Public Finance = Finances publiques, , vol. 31(2), pages 295-305.
  10. Alm, James & Jackson, Betty & McKee, Michael, 1992. "Institutional Uncertainty and Taxpayer Compliance," American Economic Review, American Economic Association, vol. 82(4), pages 1018-26, September. [Downloadable!] (restricted)
  11. Dubin, Jeffrey A & Graetz, Michael J & Wilde, Louis L, 1987. "Are We a Nation of Tax Cheaters? New Econometric Evidence on Tax Compliance," American Economic Review, American Economic Association, vol. 77(2), pages 240-45, May. [Downloadable!] (restricted)
  12. Elffers, Henk & Weigel, Russell H. & Hessing, Dick J., 1987. "The consequences of different strategies for measuring tax evasion behavior," Journal of Economic Psychology, Elsevier, vol. 8(3), pages 311-337, September. [Downloadable!] (restricted)
  13. Porcano, Thomas M., 1988. "Correlates of tax evasion," Journal of Economic Psychology, Elsevier, vol. 9(1), pages 47-67, March. [Downloadable!] (restricted)
  14. Kirchler, Erich, 1999. "Reactance to taxation: Employers' attitudes towards taxes," The Journal of Socio-Economics, Elsevier, vol. 28(2), pages 131-138, July. [Downloadable!] (restricted)
  15. Feld, Lars P. & Kirchgassner, Gebhard, 2000. "Direct democracy, political culture, and the outcome of economic policy: a report on the Swiss experience," European Journal of Political Economy, Elsevier, vol. 16(2), pages 287-306, June. [Downloadable!] (restricted)
  16. Eliza Ahmed & Valerie Braithwaite, 2004. "When Tax Collectors Become Collectors for Child Support and Student Loans: Jeopardizing the Revenue Base?," Kyklos, Blackwell Publishing, vol. 57(3), pages 303-326, 08. [Downloadable!] (restricted)
  17. Alm, James & McClelland, Gary H & Schulze, William D, 1999. "Changing the Social Norm of Tax Compliance by Voting," Kyklos, Blackwell Publishing, vol. 52(2), pages 141-71.
  18. Bruno S. Frey & Matthias Benz & Alois Stutzer, 2003. "Introducing Procedural Utility: Not only What, but also How Matters," CREMA Working Paper Series 2003-02, Center for Research in Economics, Management and the Arts (CREMA). [Downloadable!]
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  19. Pommerehne, Werner W & Weck-Hannemann, Hannelore, 1996. " Tax Rates, Tax Administration and Income Tax Evasion in Switzerland," Public Choice, Springer, vol. 88(1-2), pages 161-70, July.
  20. Alm, James & Jackson, Betty R. & McKee, Michael, 1993. "Fiscal exchange, collective decision institutions, and tax compliance," Journal of Economic Behavior & Organization, Elsevier, vol. 22(3), pages 285-303, December. [Downloadable!] (restricted)
  21. Alm, James & McClelland, Gary H. & Schulze, William D., 1992. "Why do people pay taxes?," Journal of Public Economics, Elsevier, vol. 48(1), pages 21-38, June. [Downloadable!] (restricted)
  22. Feld, Lars P & Tyran, Jean-Robert, 2002. "Tax Evasion and Voting: An Experimental Analysis," Kyklos, Blackwell Publishing, vol. 55(2), pages 197-222.
  23. Gary S. Becker, 1968. "Crime and Punishment: An Economic Approach," Journal of Political Economy, University of Chicago Press, vol. 76, pages 169. [Downloadable!] (restricted)
    Other versions:
  24. Torgler, Benno, 2005. "Tax morale and direct democracy," European Journal of Political Economy, Elsevier, vol. 21(2), pages 525-531, June. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Lars P. Feld & Benno Torgler, 2007. "Tax Morale after the Reunification of Germany: Results from a Quasi-Natural Experiment," School of Economics and Finance Discussion Papers and Working Papers Series 209, School of Economics and Finance, Queensland University of Technology. [Downloadable!]
    Other versions:
  2. Friedrich Schneider, 2006. "Shadow Economies and Corruption all over the World: What do we really Know?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Alessandro Balestrino, 2006. "Tax Avoidance, Endogenous Social Norms, and the Comparison Income Effect," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  4. Lars P. Feld & Bruno S. Frey, 2006. "Tax Evasion in Switzerland: The Roles of Deterrence and Tax Morale," CREMA Working Paper Series 2006-13, Center for Research in Economics, Management and the Arts (CREMA). [Downloadable!]
    Other versions:
  5. Lars P. Feld & Benno Torgler & Bin Ding, 2008. "Coming Closer? Tax Morale, Deterrence and Social Learning after German Unification," School of Economics and Finance Discussion Papers and Working Papers Series 232, School of Economics and Finance, Queensland University of Technology, revised 16 Jun 2008. [Downloadable!]
    Other versions:
  6. Schneider, Friedrich, 2008. "The Shadow Economy in Germany - A Blessing or a Curse for the Official Economy?," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 38(1), pages 89-111, March. [Downloadable!]
  7. Johanna D'Hernoncourt & Pierre-Guillaume Méon, 2008. "The not so dark side of trust: Does trust increase the size of the shadow economy?," Working Papers CEB 08-030.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
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