Tax Morale

TLDR

Academic literature on tax compliance often diverges from tax administration practice, which focuses on policy parameters such as tax rate, detection probability, and penalties, and emphasizes improving tax morale to foster voluntary compliance. The study aims to broaden the definition of tax morale to include nonpecuniary motivations and to examine its implications for tax policy, particularly why morale‑enhancing interventions have yielded mixed outcomes. The authors analyze tax morale through multiple mechanisms, drawing on laboratory studies, natural experiments, and randomized field experiments to illustrate how nonpecuniary factors influence compliance. The findings confirm that tax morale is a significant driver of compliance and operates through diverse mechanisms identified in experimental and field evidence.

Abstract

There is an apparent disconnect between much of the academic literature on tax compliance and the administration of tax policy. In the benchmark economic model, the key policy parameters affecting tax evasion are the tax rate, the detection probability, and the penalty imposed conditional on the evasion being detected. Meanwhile, tax administrators also tend to place a great deal of emphasis on the importance of improving “tax morale,” by which they generally mean increasing voluntary compliance with tax laws and creating a social norm of compliance. We will define tax morale broadly to include nonpecuniary motivations for tax compliance as well as factors that fall outside the standard, expected utility framework. Tax morale does indeed appear to be an important component of compliance decisions. We demonstrate that tax morale operates through a variety of underlying mechanisms, drawing on evidence from laboratory studies, natural experiments, and an emerging literature employing randomized field experiments. We consider the implications for tax policy and attempt to understand why recent interventions designed to improve morale, and thereby compliance, have had mixed results to date.