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Why Pay Taxes? A Review of Tax Compliance Decisions

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  • Erich Kirchler

    () (University of Vienna, Faculty of Psychology)

  • Stephan Muehlbacher
  • Barbara Kastlunger
  • Ingrid Wahl

Abstract

Since the standard model of income tax evasion (Allingham & Sandmo, 1972; Srinivasan, 1973) was published, much research has tested its four parameters (level of actual income, tax rate, audit probability, penalty rate) for empirical validity. Surveys, laboratory experiments and analysis of aggregate data revealed ambiguous evidence for the model’s behavioral implications. The present article reviews these studies and concludes that compliance decisions can only partly be explained by the rational choice approach. We suggest that depending on the climate in a society, compliance stems from two different factors. In a climate of distrust, high power of authorities is needed to enforce tax compliance and increasing fines and audit probabilities may be an effective tax policy. In a climate where taxpayers trust the authorities of their state, however, other variables gain in importance. Knowledge, attitudes, moral appeals, fairness and democracy may lead to voluntary compliance. In this case, draconian fines and intrusive audits can take unintentional effects and would corrupt tax morale.

Suggested Citation

  • Erich Kirchler & Stephan Muehlbacher & Barbara Kastlunger & Ingrid Wahl, 2007. "Why Pay Taxes? A Review of Tax Compliance Decisions," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0730, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  • Handle: RePEc:ays:ispwps:paper0730
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    File URL: http://icepp.gsu.edu/files/2015/03/ispwp0730.pdf
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    References listed on IDEAS

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    Cited by:

    1. Lindeboom, Maarten & van der Klaauw, Bas & Vriend, Sandra, 2016. "Audit rates and compliance: A field experiment in care provision," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PB), pages 160-173.
    2. Antoci, Angelo & Russu, Paolo & Zarri, Luca, 2014. "Tax evasion in a behaviorally heterogeneous society: An evolutionary analysis," Economic Modelling, Elsevier, vol. 42(C), pages 106-115.

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    Keywords

    compliance decisions; tax evasion; audits; fines; trust;

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