Tax Compliance: Research Methods and Decision Processes

Abstract

Traditionally, research focuses on individual taxpayers that - when faced with a decision under uncertainty - are assumed to maximize their profits through rational decision processes. However, economic psychology and behavioral economics reveal several anomalies where the observed effects are opposite to the theoretical predictions. Moreover, psychological research provides evidence for the importance of factors such as the understanding of the tax law, attitudes towards taxes and tax morale, personal and social norms, and perception of distributive and procedural justice. In this paper, we provide a review of the research on tax compliance decisions. We address traditional approaches to study compliance decisions and anomalies as well as the psychological determinants of compliance. Since different research methods reveal different results, we describe the arsenal of research methods and their strengths and weaknesses. We pay specific attention to results from process tracing approaches in tax compliance research. We conclude with practical implications for policymakers and researchers in the field.

Keywords: tax compliance, slippery slope framework, power, trust, tax experiments, process tracing

JEL Classification: H2, H26