Tax Morale and the Taming of Leviathan

Abstract

An explanation for tax morale based upon a simple model of psychological costs that depend on the perceived legitimacy of public policies is introduced. It is shown that empirically observed low levels of tax evasion can be explained even for a risk-neutral taxpayer with this model. In a discussion of aggregate tax revenue, it is argued that tax revenue as a function of tax rates may differ fundamentally from the notorious Laffer curve. An incompletely informed Leviathan government that incrementally varies the tax rate in order to maximise revenue may end up on the wrong side of the Laffer curve and set too high tax rates. An explanation for tax morale based upon a simple model of psychological costs that depend on the perceived legitimacy of public policies is introduced.

Keywords: Tax evasion, tax morale, cognitive dissonance, informal institutions

JEL Classification: H26, Z13