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

19 Pages Posted: 8 Jan 2007

See all articles by Lars P. Feld

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

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Abstract

A psychological tax contract goes beyond the traditional deterrence model and explains tax morale as a complicated interaction between taxpayers and the government. As a contractual relationship implies duties and rights for each contract party, tax compliance is increased by sticking to the fiscal exchange paradigm between citizens and the state. Citizens are willing to honestly declare income even if they do not receive a full public good equivalent to tax payments as long as the political process is perceived to be fair and legitimate. Moreover, friendly treatment of taxpayers by the tax office in auditing processes increases tax compliance.

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. Law & Policy, Vol. 29, No. 1, pp. 102-120, January 2007. Available at SSRN: https://ssrn.com/abstract=955581 or http://dx.doi.org/10.1111/j.1467-9930.2007.00248.x

Lars P. Feld (Contact Author)

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

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

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