Tax Compliance as the Result of a Psychological Tax Contract: The Role of Incentives and Responsive Regulation

29 Pages Posted: 11 May 2006  

Lars P. Feld

Walter Eucken Institute; University of Freiburg - College of Economics and Behavioral Sciences; CESifo (Center for Economic Studies and Ifo Institute)

Bruno S. Frey

CREMA; University of Basel

Multiple version iconThere are 2 versions of this paper

Date Written: April 2006

Abstract

In this paper, we develop the concept of a psychological tax contract that goes beyond the traditional deterrence model and explains tax morale as a complicated interaction between taxpayers and the government. Based on crowding theory, the impact of deterrence and rewards on tax morale is discussed. As a contractual relationship implies duties and rights for each contract partner, sticking to the fiscal exchange paradigm between citizens and the state increases tax compliance. Citizens are willing to honestly declare income even if they do not receive a full public good equivalent to their tax payments as long as the political process is perceived to be fair and legitimate. At the procedural level, a friendly treatment of taxpayers by the tax office in auditing processes increases tax compliance.

Keywords: Tax Compliance, Positive and Negative Incentives, Responsive Regulation

JEL Classification: H26, H73, D73, D78

Suggested Citation

Feld, Lars P. and Frey, Bruno S., Tax Compliance as the Result of a Psychological Tax Contract: The Role of Incentives and Responsive Regulation (April 2006). Available at SSRN: https://ssrn.com/abstract=900366 or http://dx.doi.org/10.2139/ssrn.900366

Lars P. Feld

Walter Eucken Institute ( email )

Goethestrasse 10
Freiburg im Breisgau, Baden-W├╝rttemberg D-79100
Germany

University of Freiburg - College of Economics and Behavioral Sciences ( email )

Freiburg, D-79085
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Bruno S. Frey (Contact Author)

CREMA ( email )

S├╝dstrasse 11
Zurich, CH 8008
Switzerland
+41 44 380 00 78 (Phone)

University of Basel ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

Paper statistics

Downloads
349
Rank
65,041
Abstract Views
1,626