Tax Evasion in a Transition from Socialism to Capitalism: The Psychology of the Social Contract

Abstract

In a common assumption of the economics of tax evasion, extending beyond the basic Allingham-Sandmo model, the choice of a taxpayer to evade taxes depends upon the perceived fairness of the tax system. The purpose of the paper is to provide a psychological foundation for this assumption by drawing on Hayek's theory of human behavior as a process of rule following. According to the main hypothesis, taxpayers are more compliant with tax laws to which they can in principle give their full consent. A social contract as a basis of tax policy may provide a potent means to combat tax evasion particularly in transition economies that have inherited a deep mistrust of the government from their socialist past.

Keywords: tax evasion, social contract, economics of psychology, transition economies, Austrian economics