Exploring Tax Morale

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The question of why people pay taxes is as old as taxes themselves. Allingham and Sandmo (1972) provided the main theoretical model based on the economics of crime approach (Becker [1968] 1974) where individuals would evade taxes as long as the payoff from tax evasion outweighs the costs of being caught evading. Increasing the costs of cheating – more audits, and stiffer penalties - should reduce tax evasion. Unfortunately, over time that theoretical approach has shown its limitations. First, it cannot explain why observed levels of tax compliance in empirical studies and in experiments are higher than the model’s theoretical predictions based on probabilities of detection and penalties. Second, exclusive reliance on incentives may crowd out voluntary tax compliance (Feld and Frey 2002, 2007), Incentives may be problematic when used to channel individual behavior; it has been shown that individuals deviate from optimal behavior even when those incentives are designed to maximize their own payoffs. The problem lies with the fact that incentives convey information about the principals’ beliefs regarding the agents (Bowles, 2008) Taxpayers may read authorities’ lack of trust in them from the incentives they choose and punish them . Third, in order to assimilate non-compliance with taxes with cheating the model assumes that a clear and objective demarcation between compliant and non-compliant behavior exists. Unfortunately, a case that happened in Australia in the late 1990s shows that authorities may not know where the demarcation line is; authorities first granted tax deductions to investors in certain schemes only to reverse course and charge them with tax evasion demanding back due taxes, interests and penalties. Finally, in lig... ... middle of paper ... ...st stems from the fact that voting does not ensure fair results. Madison (1788) observed this shortcoming of democracy and went as far as saying that individual freedoms are threatened not only by government actions, but also by the decisions of majorities that might undermine minorities' freedoms. Unfortunately, this issue remains unsolved; Levi (1998) pointed out that the introduction of safeguards to protect minorities may reduce the danger of a "dictatorship of the majority" but at the expense of generating resentment because of minorities' obstruction of majorities' will. Consequently, it seems unlikely that input government organizations would elicit taxpayers' trust (and Tax Morale) out of their actions regardless of earlier empirical results (a point to which we will return shortly). Let us turn attention towards government organizations in the output side.

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