Rationality vs. Emotions: The Case of Tax Ethics and Compliance

Abstract

Businesses that rely heavily on cash transactions have been found to be particularly susceptible to low tax ethics. Recent research indicates that cash is a highly powerful and tempting reward, which elicits a strong emotional response. In this paper we investigate how emotions affect tax ethics in a series of experimental studies. Specifically, we show that affective priming and the ease with which moral judgments are retrieved moderate tax ethics. We also show that the relative effectiveness of deterrence, such as audit probabilities and tax fines, is moderated by affect. These results point towards a complex picture of tax ethics, requiring a multifaceted policy approach that emphasizes not only enforcement, but also cognitive and affective aspects of human behavior.

Keywords: affect, cognition, emotion, rationality, tax evasion, tax ethics, tax compliance

JEL Classification: C91, H20, H26