Tax Evasion: Cheating Rationally or Deciding Emotionally?
GATE Working Paper No. 07-24
40 Pages Posted: 9 Nov 2007
Date Written: October 2007
The economic models of tax compliance predict that individuals should evade taxes when the expected benefit of cheating is greater than its expected cost. When this condition is fulfilled, the high compliance however observed remains a puzzle. In this paper, we investigate the role of emotions as a possible explanation of tax compliance. Our laboratory experiment shows that emotional arousal, measured by Skin Conductance Responses, increases in the proportion of evaded taxes. The perspective of punishment after an audit, especially when the pictures of the evaders are publicly displayed, also raises emotions. We show that an audit policy that induces shame on the evaders favors compliance.
Keywords: tax evasion, emotions, neuro-economics, physiological measures, shame, experiments
JEL Classification: C91, C92, D87, H26
Suggested Citation: Suggested Citation