Hard-Earned Income and Tax Compliance

Abstract

Is the effort invested to achieve taxable income a relevant factor for tax compliance? If the value of income increases with the effort exerted, reluctance to pay taxes should be high. On the other hand, if income is perceived as compensation for one’s endeavor, there is too much at stake to take the risk of being audited and paying a fine. Consequently, tax evasion should be more likely if income was obtained easily. These contradicting predictions were tested in a questionnaire study with samples from eight countries (Australia, Austria, England, France, Italy, New Zealand, Spain and Switzerland; N = 1,223). Results show that the effort exerted to obtain taxable income and the aspiration level matter in compliance decisions. Hard-earned money is more likely to be reported honestly to tax authorities, particularly if the aspiration level can be satisfied by honest tax reporting.