Tax Evasion, Tax Amnesties and the Psychological Tax Contract

Tax compliance has been studied in traditional public economics by heavily relying on deterrence as the most important compliance-increasing factor. This model of tax evasion is however challenged by inconclusive empirical evidence also pointing to the importance of tax morale as the individual’s intrinsic motivation to honestly pay taxes. Tax morale is, however, also endogenous and depends on an interaction of individual taxpayers and the state that could be perceived as a fiscal exchange in a broader sense. Such a fiscal exchange involves the provision of public services for the tax payments received, but it goes beyond purely monetary rewards as it is also affected by the way political decisions are made (procedural fairness) and by the way tax authorities treat taxpayers in tax audits (interactional fairness). The relationship between the taxpayers and the taxing state can thus be understood as an implicit or “psychological tax contract”, under which the government must balance strategies of deterrence with those of responsive regulation. In this paper, we extend the analytics of a “psychological tax contract” by considering the impact of tax amnesties on the contract.