Edited by Francesco Forte, Ram Mudambi and Pietro Maria Navarra
Chapter 12: Expanding the theory of tax compliance from individual to group motivations
There is widespread evidence that tax evasion - or illegal and intentional actions to reduce legally due tax obligations - is commonplace in nearly all countries (Schneider and Enste, 2002). Still, the puzzle of tax compliance is not why there is so much cheating, but why there is so little. Typically, the percentage of all individual income tax returns that are audited is significantly less than one percent, and the penalties on even fraudulent evasion are only a fraction of unpaid taxes. Virtually all economic models of taxpayer behavior conclude that there should be much more tax evasion than is actually observed. However, most people pay most of their taxes most of the time. The puzzle of tax compliance is to explain why people pay taxes. In this chapter I argue that this compliance puzzle can be explained, at least in part, by expanding the standard analysis of individual compliance behavior to incorporate the important ways in which individual decisions are shaped by group motivations. Taxpayers face well-known and well-identified individual motivations in their compliance decisions, motivations that originate with the standard economic model of tax evasion in which financial incentives are shaped by audit, penalty, and tax rates. However, there is growing evidence that these individual incentives, while important, are not always decisive.
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