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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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  • Lars P. Feld
  • Bruno S. Frey

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 rewards 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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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 287.

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Date of creation: Apr 2006
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Handle: RePEc:zur:iewwpx:287

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

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Cited by:
  1. Jochen Hundsdoerfer & Christina Sichtmann, 2009. "The importance of taxes in entrepreneurial decisions: an analysis of practicing physicians’ behavior," Review of Managerial Science, Springer, vol. 3(1), pages 19-40, March.
  2. 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).

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