The psychic costs of tax compliance: nature and implications for policy

A major principle of tax law is that taxes should be equitable in the demands that they place upon the section of the population at which they are aimed. It has been increasingly recognised that the costs incurred over and above the revenue paid to the authorities, as a consequence of compliance with tax law are the significant way in which inequity in the application of taxes comes about. Strong economic cases have been made for the inclusion of such compliance costs as an argument in the tax policy function. Compliance costs have been regarded as having three components: financial, time and "psychic". The financial and time components have been researched for more than fifty years. However, as the state of knowledge about these components of compliance costs has grown so the psychological component has been increasingly neglected. This neglect does not arise from a suggestion that "psychic" costs are unimportant, but rather from a pessimism about the practical means available for their measurement. From an examination of the fiscal literature on "psychic" costs two main factors emerge: an anxiety factor and a resentment factor. Both of these factors constitute negative emotional responses to the fiscal environment of the individual taxpayer. Furthermore, this examination suggests that the application of psychological models and psychological scaling and measurement techniques can go a considerable way toward elaborating the nature of "psychic" costs.