Tax Morale and the Legitimacy of Economic Policy

Abstract

It is proposed that a more accurate prediction of tax evasion activity than in the standard portfolio-choice model can be derived even for risk-neutral individuals if psychological costs are considered. Contrary to earlier models integrating psychological costs they are systematically derived by assuming a relationship between psychological costs, taxpayer satisfaction with public policy and taxes evaded. A formal concept of legitimacy of public policies is introduced and it is shown that legitimacy influences evasion activity.

Keywords: Tax evasion, tax morale, economics and psychology, political legitimacy

JEL Classification: H26, Z13