feld & tyran 2002

KYKLOS, Vol. 55 – 2002 – Fasc. 2, 197–222

197

G4_HS:Aufträge:HEL002:14030_SB_Kyklos_02/02:14030_3AK:Kyklos_2002-02_S-155-312 29. April 2002 14:17

Tax Evasion and Voting:An Experimental Analysis

Lars P. Feld and Jean-Robert Tyran*

I. INTRODUCTION

The puzzle of tax compliance is why people pay taxes instead of evading them.Given the low probability of being audited in many countries and the compar-atively low penalties for those being caught, rational and selfish taxpayersshould decide to evade or at least underreport taxable income (Allingham andSandmo 1972, Andreoni, Erard and Feinstein 1998, p. 855). However, most tax-payers do the opposite by truthfully declaring their income to the tax authori-ties. Alm, McClelland and Schulze (1992, p. 22) indeed argue that

‘A purely economic analysis of the evasion gamble implies that most individuals would evade ifthey are ‘rational’, because it is unlikely that cheaters will be caught and penalised’.

According to the assessment of these authors, individuals should not declareany income under the estimated magnitudes for the probability of being caughtand the size of the fines imposed. Observed tax compliance rates can only beexplained by very high levels of risk aversion which are not supported by em-pirical evidence from other studies1.

Tax morale, which can be interpreted as an intrinsic motivation to pay taxes(Deci and Ryan 1985, Frey 1997a), is supposed to be an explanation for highcompliance rates, but it is infrequently specified which characteristics of thecompliance game shape tax morale2. There are only a few notable exceptions.

* University of St. Gallen, SIAW-HSG, Dufourstr. 48, CH-9000 St. Gallen, Switzerland, email:[email protected]; University of St. Gallen, Department of Economics, Bodanstr. 1, CH-9000 St.Gallen, email: [email protected]. The authors would like to thank Gerald Hosp and Han-nelore Weck-Hannemann for valuable comments and suggestions. The usual disclaimer applies.

1. Arrow-Pratt measures of risk aversion of more than 30 (!) must exist in order to account for thepresent compliance rate. Graetz and Wilde (1985) or Alm et al. (1992) report for different situ-ations a range of between one and two for the U.S. For similar values for Switzerland see Pom-merehne and Frey (1992).

2. Graetz and Wilde conclude on the basis of the Internal Revenue Service’s Taxpayer ComplianceMeasurement Program (1985, p. 358) that ‘the high compliance rate can only be explained in asatisfactory way either by taxpayer’s . . . commitment to the responsibilities of citizenship andrespect for the law or lack of opportunity for tax evasion’.

Kyklos_2002-02_S-155-312 Seite 197 Montag, 29. April 2002 2:17 14

LARS P. FELD AND JEAN-ROBERT TYRAN

198


In a survey study, Scholz and Lubell (1998) investigate whether trust in gov-ernment affects tax compliance. The higher the trust in government as assessedby respondents, the lower the likelihood of non-compliance and the higher thustax morale. Field studies by Pommerehne and Weck-Hannemann (1996) andFrey (1997b) show that tax evasion at the Swiss cantonal level is lower in directdemocratic cantons where referenda on budgetary issues are used as comparedto purely parliamentary cantons. Tax morale appears to be higher if taxpayerscan directly influence tax laws and tax rates, but also the rules of the tax gamein general.

In a recent paper, Feld and Frey (2002) argue that tax morale does not onlydepend on the legal framework and constitutional environment, but also on theinteraction of taxpayers with tax authorities. On the basis of a survey amongthe Swiss cantonal tax authorities, they report evidence that the tax authoritiesof cantons with well-developed direct participation rights are less suspicious iftaxpayers report remarkably low incomes. They treat taxpayers more respect-fully. Persons who do not submit their tax declarations, indicating that they donot comply with the basic rules of the game, are however more heavily fined indirect democratic cantons. Less severe tax evasion is fined with lower rates.Thus, in direct democracy, minor violations of the tax code are punished lessthan major violations. All in all, respectful treatment and trust are accompaniedby generosity in the case of minor human weaknesses, but by strong deterrenceif the psychological tax contract is at stake.

Experimental studies of tax compliance have considerably contributed to theunderstanding of what drives tax morale (Alm 1991)3. While early studies dis-cussed fiscal equity, recent studies focus on notions of moral behaviour as a rea-son for high compliance rates. Spicer and Becker (1980) and Becker, Büchnerand Sleeking (1987) present experimental evidence that perceptions of fiscal in-equity increase tax evasion4. Hite (1990) investigates the effects of the use oftax shelters as a notion of perceived inequity on the level of taxpayer complianceand reports a positive correlation between subjects underreporting income andsubjects perceiving tax shelters as unfair. Alm, McClelland and Schulze (1992)

3. The first experimental study of tax evasion was conducted by Friedland, Maital and Rutenberg(1978) without any discussion of tax morale. They find that large fines more effectively detercheaters than frequent audits, while Friedland (1982) finds the opposite by considering the qual-ity of information about the magnitude and credibility of fines. Spicer and Thomas (1982) reportthat compliance is affected by the presence of uncertain audit outcomes. Spicer and Hero (1985)analyze the impact of audits on post audit compliance and present evidence that subjects whohave been audited report higher taxable incomes.

4. Andreoni, Erard and Feinstein (1998) report that Webley et al. (1991) found opposite results ina similar experiment. See however Lewis (1978), Bordignon (1993) and Reckers, Sanders andRoark (1994).


TAX EVASION AND VOTING: AN EXPERIMENTAL ANALYSIS

199


and Alm, Jackson and McKee (1992a) find that the introduction of a public goodin exchange for the taxes paid increases compliance rates (see also Falkinger1988). Alm, Jackson and McKee (1992b) report experimental evidence that tax-payer uncertainty about the tax rate, the fine rate and the audit rate reduces taxcompliance if taxpayers receive something in exchange for their tax payments.

Baldry (1986) finds in an experimental study that some individuals do notcheat because of moral reasons (see also Alm, Sanchez and De Juan 1995 on therole of social norms). Alm, Jackson and McKee (1993) present experimental ev-idence that the possibility for voters to determine public spending shapes tax mo-rale: Tax compliance is significantly higher when individuals vote on the type ofa public good as the government service in exchange for the tax payment thanwhen the public good is imposed instead. Compliance is also higher when thevote is clear than when the vote is close. The more support a public good receivesfrom the group members, the higher is compliance. Tax evasion is considerablyincreased if an unpopular expenditure programme is imposed. Alm, McClellandand Schulze (1999) extend this analysis by allowing subjects to vote on tax, auditand fine rates in their experiment. They find that the possibility of voting affectscompliance outcomes significantly. In particular, when the group rejects higherenforcement, tax evasion increases above pre-vote evasion levels.

Neither the field studies, nor the experimental studies mentioned above havebeen able to present evidence as to why the possibility to vote increases tax com-pliance of citizens. These studies find that the existence of voting increases taxcompliance and attribute it to the proposed argument that voting positivelyshapes social norms, social capital or intrinsic motivations. Some authors arguethat a social or psychological tax contract between the government and the tax-payers going beyond a pure fiscal exchange emerges more easily if voters can di-rectly determine crucial parameters of the tax compliance game. The motivationsof taxpayers that lead to such a psychological tax contract are however seldom in-vestigated explicitly. Moreover, the link between trust in government and taxcompliance is still not fully established. Similarly, it is not clear why certain in-stitutions lead to a higher trust in government and in turn to higher tax compli-ance rates. Perhaps, some institutions more effectively than others signal the so-cial norm that taxpayers ought to comply with tax laws. Within specificinstitutional frameworks, a constitutional exchange relationship between thegovernment and the citizens more easily emerges. Other institutions enhance thepublic spiritedness of citizens and therefore also their intrinsic motivation to paytaxes. All in all, much remains to be learned about what citizens shape tax morale.

In this paper, we study why people have higher compliance rates if they areallowed to vote directly on a fine to sanction tax evasion as a crucial parameterinfluencing tax compliance. Since the different motives underlying the reason-



200


ing of taxpayers in their decision to comply with the tax law have to be control-led for as much as possible, this question is studied in an experimental setting.Experiments allow for controlling the individual decision-making environmentto a stronger extent than field studies.

Our experimental setting as well as the results obtained in this frameworkare novel in several ways. In contrast to the rather complicated experimental de-sign of Alm, McClelland and Schulze (1999), we conduct an experiment inwhich the relationship between tax compliance and the possibility of subjectsto vote in a referendum is stripped down to its essentials. First, punishment iscertain in our treatments. Thus, the probability of being detected is equal toone. By reducing the realism of the experiment and thus its external validity inthis respect, we exclude the difficulties arising from different subjective per-ceptions of the probability of detection and therefore considerably raise the ex-periment’s internal validity. Following Rabin and Thaler (2001), who discusssome of the difficulties arising from risk perception, these gains from increas-ing the internal validity of the experiment in our view clearly outweigh the cor-responding losses in the external validity.

Second, subjects state their contributions for all possible voting outcomes al-lowing to analyse subjects’ reactions even to those outcomes of the referendumthat will not actually materialise. Individual behaviour can therefore be inves-tigated in much more detail. Third, subjects cannot vote on statutory tax ratesor on planned spending for a public good. They can only vote on whether toadopt a fine or not. By focusing only on endogenous fines, the danger to con-found the impact of voting on compliance with the impact of the exchange re-lationship between taxes and government services on compliance is reduced. Itallows to concentrate on potential constitutional exchange relationships and onthe public spiritedness of participants instead of the pure fiscal exchange. Thus,complications that may invalidate the results do not occur. We run three treat-ments, a control treatment without any fine, a treatment with an endogenousfine and a treatment with an exogenous fine. This setting allows us to identifywhich factors have an impact on tax morale of subjects going beyond the notionof intrinsic motivation.

As in the experiment by Alm, McClelland and Schulze (1999), the tax pay-ment is defined as the individual contribution to a public good, while tax eva-sion is defined as occurring if subjects contribute less than the efficient contri-bution level. This definition of the tax payment draws on results from manyempirical studies that taxpayers perceive the tax as a payment for certain gov-ernment services that cannot be attributed individually but are neverthelessproviding them with some utility. This perception of fiscal exchange by taxpay-ers has a long tradition in public finance. Wicksell (1896) and Buchanan (1966,



201


1976) emphasise the importance of fiscal exchange for tax policy. Based on ev-idence from social surveys, Schmölders (1959) already discussed the relation-ship between the ‘tax mentality of the public’ and existing government serv-ices. Breton (1974) describes how unacceptable expenditure policies lead totaxpayers’ resentment. Vogel (1974) with Swedish and Lewis (1978) with Brit-ish survey data establish that public opinion towards taxation is also guided bythe perceived relationship between the tax payment and government services.They find that in particular people with high incomes have less favourable atti-tudes towards high taxes because they perceive to receive less public servicesthan respondents with lower incomes. In another survey study, Cullis andLewis (1985) report evidence that respondents favour higher taxes if taxes needto be increased to finance services. Finally, experimental studies by Alm, Mc-Clelland and Schulze (1992) and Alm, Jackson and McKee (1992a) establishthat such an exchange relationship between tax payments and government serv-ices significantly increases tax compliance. In order to control for the impact offiscal exchange on tax compliance, it is therefore necessary to establish the linkbetween the tax payment and the public good in the experimental setting. Con-sequently, the assumed relationship of fiscal exchange is contributing to the ex-ternal as well as to the internal validity of the experiment.

The main result in this paper is that the possibility of voting on the fine sig-nificantly increases tax compliance because taxpayers perceive the endogenousfine to be more legitimate than the exogenous fine. The endogenous fine is in-terpreted as a procedurally fair policy outcome, where procedural fairness isdefined as a particular kind of legitimacy. This result remains robust with re-spect to alternative motives like commitment, i.e., subjects who vote for thepunishment scheme feel obliged to consistently comply with their decision bycontributing higher payments, and reciprocity, i.e., subjects contribute higherpayments when they expect the other group members to adopt the punishmentscheme thus signalling their contribution. The established notion of legitimacyhas important implications for public policies that help to mitigate tax evasion.Our results suggest that constitutional reforms towards a stronger political in-fluence of citizens on tax laws, in particular on punishment in the case of taxevasion, are an important ingredient of a psychological tax contract betweentaxpayers and the government5. Compliance with tax laws is higher when citi-

5. All in all, we are well aware of the trade-off between the internal validity of the experiment, thatasks for control of as many conditions as possible, and the external validity of the experiment,that asks for an application to real-world problems (Frey and Bohnet 1996). Although the exper-imental results reported in this paper certainly have a lower external validity than the experimen-tal results of Schneider and Pommerehne (1981), the balance between external and internal va-lidity achieved in this paper is considerably high.



202


zens perceive them as procedurally fair. The paper is organised as follows. InSection II, we discuss the theoretical background. Section III presents the ex-perimental design. In Section IV, experimental results are presented on howcompliance behaviour is affected by voting. We offer some concluding remarksin Section V.

II. SOME THEORETICAL CONSIDERATIONS OR, WHAT SHAPES TAX MORALE?

Consider a simple public goods game, in which a public good is financed by vol-untary contributions of people benefitting from it. Because of the characteristicsof non-excludability and non-rivalness in consumption, an individual has incen-tives to consume the public good without paying for it. Each individual wantsthe public good to be provided by other individuals, but does not voluntarily payany contribution. According to standard neoclassical theory, individuals there-fore behave as free riders. Since each selfish and rational individual is exposedto the same incentives, a Nash-equilibrium obtains in which the public good isprovided at an inefficiently low level or is not provided at all. This reasoning im-plies that a government can correct this market failure by providing the publicgood and finance it by general taxes. Individuals basically face the same incen-tives and thus have to be forced to pay taxes. Because rational and selfish indi-viduals do not pay taxes voluntarily, coercive taxation has to be used.

In their basic model of tax evasion, Allingham and Sandmo (1972) arguealong these lines. According to their model, a risk-averse individual, who earnsa certain amount of money, chooses the share of income he/she wants to declareto the tax authority. The authors assume that individuals make this decision bymaximizing their expected utility. This decision is influenced by the marginaltax rate and the level of true income. Again, the incentives for rational and self-ish individuals to voluntarily pay taxes are pretty low in this model because un-declared income is not taxed. Therefore the individual faces a specific threat ofpunishment if he/she does not truthfully declare his/her income. He/she is au-dited with a specific probability of detection and fined when tax evasion hasbeen detected. The sum of revenue obtained from taxation of declared income,detected income evaded, and the fines, less the administrative costs to conductauditing of taxpayers is used to provide a specific amount of public goods. Inthis model, tax evasion can therefore be mitigated if expected fines are suffi-ciently high to deter taxpayers from cheating.

Since the seminal paper by Allingham and Sandmo, several authors have ar-gued that this reasoning falls short of correctly capturing the situation individ-



203


uals face in the tax compliance game. Expected punishment for tax evasion isrelatively low in most countries such that the actually observed level of taxcompliance cannot be explained by this model of tax evasion (Andreoni et al.1998, p. 855). Deterrence is not sufficiently high to satisfactorily predict taxcompliance rates. A similar verdict prevails in the case of the voluntary provi-sion of public goods. Many empirical studies, either employing field or exper-imental study designs, have provided evidence that an assessment of individu-als’ free-riding in public good games is too narrow a view. Of course free ridingis important at the margin. It is however reduced depending on the technologyunderlying the provision of the public good and its time horizon. Discrete, steplevel technologies allow for lower levels of free-riding than continuous provi-sion technologies. In repeated public good games, individuals can learn that co-operation is beneficial to them. Very often social norms and moral rules de-velop in such repeated settings.

Moreover, many people in both settings do not cheat in the first place. Indi-viduals are intrinsically motivated as Frey (1997a) points out. They do whatthey ought to do according to their individual ethical perception. They have in-ternalised a kind of publicspiritedness that guides their behaviour. ‘Morale’ isvery differently conceived in the literature, but at least it has the meaning thatthreatening uncertainties in social interactions are declined. If moral rulesguide individual behaviour, then a person can expect a certain behaviour fromothers, but also feels obliged to stick to the norm. From this perspective, freeriding could be prevented by the fact that rules influencing individual actioncontain norms of fairness, justice, commitment or reciprocity (Fehr andGächter 2000).

Non-standard theories of tax evasion and of public good provision have con-sidered the fact that individual actions are led by social norms. Bordignon(1990) analyses voluntary public good provision under the norm of uncondi-tional commitment. In his model, individuals behave according to the Kanteancategorical imperative: Each person behaves in the way he/she likes to betreated by others. Consequently, many people do not free ride, but voluntarilycontribute to a public good, such that an efficient level of the public good is pro-vided. Similar commitment rules exist in business relationships. Each entrepre-neur commits to a contract perceiving that this commitment enforces moral be-haviour in trade without the permanent threat of being punished by the courts:Honesty is the best policy. Cowell (1987) discusses similar kinds of honesty ina tax evasion framework on the basis of fairness considerations.

In contrast to unconditional commitment, individuals who follow a reciproc-ity norm are responding to friendly or hostile behaviour of their partners (Fehrand Gächter 2000, p. 160). Sugden (1984) discusses to what extent reciprocity



204


norms allow for a voluntary provision of public goods. According to this the-ory, individuals treat their partners in social exchange in a friendly way if theyexpect or anticipate that they are as well treated in a friendly way by their part-ners. They behave in an unfriendly way if their partners treat them in an un-friendly way. Smith (1990) includes such a reciprocity norm in a tax evasionframework. He argues that taxpayers comply with tax laws if they feel treatedin a friendly way by the tax authorities. His argument is similar to the one sug-gested by Frey (1997b) and Feld and Frey (2002): If taxpayers are treated re-spectfully, their tax morale increases.

The norm of reciprocity in tax evasion can also be followed if taxpayers per-ceive fiscal exchange to take place to a large extent: The more governments fol-low the principle of fiscal equivalence and provide public services according tothe preferences of taxpayers in exchange for a reasonable tax price, the moretaxpayers comply with the tax laws. Alm, McClelland and Schulze (1992) andAlm, Jackson and McKee (1992a) present experimental evidence that govern-ments which stick to the principle of fiscal exchange achieve less tax evasionof the taxpayers. Finally, reciprocity may obtain in the relationship between dif-ferent taxpayers. A taxpayer complies with the tax law if he/she perceives or an-ticipates that his/her fellow citizens declare their incomes in the tax declarationtruthfully.

In most analyses, these kinds of moral behaviours are added to the tradi-tional economic explanation. Tax morale in tax evasion models (and voluntarycontributions to public goods alike) is usually treated as an exogenous residual.This is however not adequate because a pure extrinsic motivation may crowdout the intrinsic motivation to pay taxes under certain conditions. There is aninteraction between tax morale and other parameters of the tax compliancegame like intensity of control, fines or the tax rate. The threat of a punishmentthat is imposed on taxpayers may constitute such a pure extrinsic motivation.For example, Scholz and Lubell (2001) find a crowding out of tax compliancewhen penalties are introduced. Frey (1997a) particularly emphasises thecrowding out of intrinsic motivations by extrinsic motivations. Weck-Hanne-mann and Frey (1995) as well as Frey, Oberholzer-Gee and Eichenberger(1996) report evidence from environmental policy and from Not-In-My-Back-Yard (NIMBY) goods like waste incinerators in which such crowding out ef-fects could be observed. By imposing monetary incentives, the public spirited-ness of individuals declines, leading to worse outcomes if the incentivesprovided by extrinsic motivations are over-compensated by the crowding out ofintrinsic motivations. Frey (1997b) argues that a similar relationship betweenextrinsic motivations and intrinsic motivations prevails in a tax compliance set-ting.



205


The conditions that lead to a crowding out of intrinsic motivations are ofmost interest in that respect. The possibility for taxpayers to vote on fiscal is-sues that are connected to tax evasion may help to crowd in intrinsic motiva-tions such that tax compliance improves. According to Alm, McClelland andSchulze (1999, p. 149), rational egoists should vote for the lowest control inten-sities and fines that are necessary to ensure compliance. However, voting mayalso serve as a signal by the government or by the other taxpayers that the tax-payer is treated in a friendly way in the tax evasion game and that the norm ofreciprocity is followed. Moreover, the possibility for voters to vote directly onmatters of content increases the legitimacy of policies. Tyler (1990) argues thatpeople comply with the law in general if they perceive the process as fair thatleads to this law. Direct political participation therefore particularly activatespublic spiritedness of taxpayers. As Pommerehne and Weck-Hannemann(1996) and Frey (1997b) argue, tax morale is higher in jurisdictions with refer-enda and initiatives.

III. EXPERIMENTAL DESIGN

All in all, these arguments reveal that tax evasion is influenced by different in-dividual motivations that need to be distinguished from each other. It is partic-ularly important to investigate which kind of moral reasoning leads to specificoutcomes. Thus, an experimental study of tax evasion has some merits. In thissection, we introduce the reader to the basic design of, the incentive structureunderlying and the parameters of the experiment in order to show how the taxcompliance situation is translated in the experimental design.

1. Basic Design

Our basic experimental design is a one-shot tax evasion game in which individ-uals are endowed with y tokens they could either deposit on a private or on agroup account. Three treatments are implemented (instructions can be obtainedfrom the authors upon request; the experiment was framed in neutral terms). Inthe first treatment, serving as baseline, subjects contribute to the collectivegood without being influenced by any fines. The contribution to the public goodis interpreted as an individual tax payment. The income from the group accountis computed as the sum of the contributions of all group members multipliedby a = 0.5. Since there is no direct relationship between the income (or bene-fits) received from the public good and the individual contributions, the pay-



206


ments are not equivalent to a user charge. Like in a situation in which individ-uals perceive the tax payment as necessary in order to finance public services,subjects in our experiment are allocating tokens to a group account.

In the second treatment subjects can decide on a fine. In the third treatment,serving as a control to the second, subjects are not allowed to vote on the fine.It is instead exogenously imposed. In all treatments, the number of group mem-bers is n = 3. We have chosen this group size, because, in the endogenous finetreatment, it is necessary to obtain an unambiguous majority of subjects for oragainst the fine. We kept the group size at n = 3 in the other treatments to gen-erate comparability. A simple majority in our experiment is thus achieved if atleast two of the three persons in one group vote for the adoption of a fine. Thegroup size is kept low in order to allow the participants in the experiment to as-sess their role of being a pivoter more easily. The meaning of majority in thisexperiment is therefore relatively specific. ‘Broad majorities’ in the three per-sons group setting are already establishing unanimity.

The endogenous fine treatment was sequentially conducted. First, subjectsvoted on the adoption or rejection of a fine and stated their expectations on vot-ing outcomes. Without knowing the actual voting outcome, they decided to al-locate their tokens to the private account or to the group account for all possiblevoting outcomes, i.e., if no other subject, one other subject or two other subjectsapprove the fine. Since subjects were asked to state their decisions for each po-tential alternative of voting outcomes instead of their single individual decisiononly, we follow the strategy method of Selten (1967). It allows us to conductwithin – subject comparisons in addition to across – subject comparisons ren-dering more powerful statistical tests. In each round, subjects were asked abouttheir expected contributions to the group account by the other subjects in thegroup. The sequence in the treatment with exogenous fines was similar with thenatural difference that no decision to adopt a fine occurred.

2. The Incentive Structure

The payoffs in the treatments can be clarified in the following way. In eachtreatment, each individual i receives an endowment of y tokens. A subject caneither keep ci tokens on the private account (0 ≤ ci ≤ 20) or allocate ti tokens onthe group account (0 ≤ ti ≤ 20). The payment of ti to the group account is thesubject’s tax payment. The decisions about ci and ti are made simultaneously.The monetary payoff, πi , for each subject in the group is

πi = ci + a ti , 1/3 < a < 1 (1)∑n

i=1



207


where a is the marginal per capita return from a contribution to the group ac-count. Since the marginal per capita return from a contribution to the privateaccount is 1 > a, the dominant strategy in this one shot game is non-compli-

ance. However, the aggregate payoff πi is maximised if each group member

is contributing all tokens to the group account, i.e., if everybody is fully com-

plying with the tax law because = an > 1.

If a fine is introduced, each subject decides to comply with the tax law, C, ornot to comply with the law, NC. Non-compliance or tax evasion is supposed tooccur if subjects contribute less than the efficient contribution to the group ac-count. This decision is influenced by the size of the fine, f, and the probabilityof being detected, p. The expected utility of non-compliance, E (u (NC)), foreach individual thus is

E (u (NC)) = p (y + aT–i – f ) + (1 – p) (y + aT–i ) = y + aT–i – pf (2)

where T–i is the sum of taxes paid by all taxpayers other than

The expected utility of compliance, E (u (C)), for each individual is

E (u (C)) = 0 + a (T–i + y) (3)

E (u (NC)) > E (u (C)), if y – pf > ay (4)

that is if y (1 – a) > pf

Thus it depends on the size of the fine and the probability of being auditedwhether a taxpayer evades taxes or not.

This purely rational non-cooperative one-shot game outlined above can beinterpreted as being the second stage of a two-stage game if voting on the fineis allowed for. The voting game constitutes the first stage of the game. In thisfirst stage, a voter can be pivotal or not pivotal. A voter is said to be pivotal ifhis/her voting decision affects the outcome of the referendum. Since the groupsize is n = 3, and the decision rule is majority voting, a voter is pivotal only ifexactly one of the other voters approves the fine. He/she is not pivotal if none

∑n

i=1

∂n

i=1πi

∂ti

∑

i (T–i = ∑ tj , j ≠ i .)n–1

j=1



208


or both of the other voters approve. In general, a voter who is only concernedwith the (instrumental) effect of his voting decision on the outcome of the ref-erendum is indifferent between approving and disapproving if he is not pivotal.If subject i is not pivotal, he/she is indifferent between both alternatives. Yesand No are both best replies.

Assume that non-compliance is strictly dominant, i.e., condition (4) holds,and subjects act purely rational. If subject i is pivotal, voting against the fine isthe unique best reply. The reason is that a rational voter anticipates that ti = 0 ischosen by all i in the second stage of the tax evasion game. As a consequence,he or she can increase πi by f if he/she rejects the proposal. Given pivotality, re-jection of the fine and no tax compliance is the unique Nash equilibrium out-come if condition (4) holds.

3. Parameters in the Experiment

The experiment was conducted in a computerised laboratory with undergradu-ate students in business adminstration, economics or law at the University ofSt. Gallen. Subjects were randomly and anonymously allocated to groups ofsize n = 3. Subjects belonging to one group did not know each other and werenot allowed to talk to each other. In all treatment conditions, the endowment isgiven by y = 20 tokens. The exchange rate was 1 token = 0.70 SFr. The marginalpayoff of the public good is fixed at a = 0.5. The number of participants in theendogenous fine session is N = 60 and in the exogenous fine session N = 42.We implement a probability of being audited of p = 1. If a fine is introduced, itis thus imposed with certainty to non-complying individuals. The fine is fixedat f = 4 tokens. Hence, according to condition (4), non-compliance is the dom-inant strategy if the fine is imposed. To analyse such a low fine is useful becausehypotheses on motivations of subjects that influence compliance behaviour ina tax evasion setting are most important in the case of low fines.

Subjects were not informed from the beginning of the session that tworounds with or without fines were planned. They were told that a new experi-ment would start in which the conditions changed. Subjects were revealed theirfinal payoffs only in the end of the whole session. They did not receive any in-formation about their performance after each treatment in order to preventthem from drawing any inferences as to how the subjects belonging to theirgroup might behave. The size of the fines is common knowledge in all



209


treatments6. In each treatment, subjects were asked to state their expectationsas to the sum of contributions of his/her group members in addition to the ex-pectations on the voting outcome in the beginning of the session mentionedabove. Correct expectations were rewarded by additional monetary incentives.

IV. EXPERIMENTAL RESULTS

It should be kept in mind that the dominant strategy for each subject withoutany fine is to evade all income from the fisc. Compliance rates should be zero.Individual compliance rates to the group account, which are provided byTable 1, indicate that this basic prediction of the simple tax evasion game doesnot hold: subjects contribute nearly 30 percent of the efficient contribution tothe group account.

A basic implication from the model is that the fine should not increase com-pliance rates because it is only a symbolic fine with an insufficient deterrencecapacity. Therefore, non-compliance is still the dominant strategy under thefine. Again, this result is not borne out by the data. If the fine is exogenous, thecompliance rate increases to 38.335 percent which is not significantly differentfrom compliance in the no fine treatment (t-statistic = 1.14). This result indi-cates that exogenous symbolic punishment as an extrinsic motivation neitherincreases nor decreases contributions. However, it may be that a slight deterrenteffect is counter-balanced by a crowding-out effect.

Table 1

Individual Contributions to the Group Account

6. All subjects had to answer several control questions before the experiment started. We informedthe participants that all subjects answered all control questions correctly.

Exogenous Constraint(N = 42)

No Other Subject Approves (N = 60)

One Other Subject Approves(N = 60)

Two Other Subjects Approve (N = 60)

Without Fine: Absolute Compliance

5.976(7.189)

4.567(6.855)

5.133(7.371)

Without Fine: Compliance Rate

29.881% 22.833% 25.665%

With Fine: Absolute Compliance

7.667(9.604)

13.367(8.712)

14.500(8.719)

With Fine: Compliance Rate

38.335% 66.835% 72.500%

Note: Each cell contains means and standard deviations in parentheses.



210


If subjects have the possibility to vote on the adoption of a fine and no subjectapproves this proposal, the compliance rate is 22.833 percent which is not sta-tistically different from the mean contribution in the treatment without any fineat any conventional significance level (t-statistic = 1.59). It is however signifi-cantly lower than compliance in the exogenous fine treatment. This result is inline with the one Alm, McClelland and Schulze (1999) report from their exper-iment: tax compliance falls if enforcement is not accepted in the referendum.If one subject approves, the overall compliance rate increases to 46.25 percentwhich is significantly different from the no fine treatment at the 1 percent level(t-statistic = 2.81). This holds independently of the actual adoption of the fineand is averaging the two compliance rates for approval by one other subject inTable 1. If two subjects approve the fine in the referendum, the compliance rateeven increases to 72.5 percent which is significantly different from the contri-bution in the no fine treatment at the 1 percent significance level (t-statistic =7.57). In total, effective compliance rates are 64 percent in the case of the en-dogenous fine treatment but only 38 percent in the case of the exogenous finetreatment.

In the following, we analyse whether differences occur between subjects ap-proving the proposal of a fine and those rejecting it and whether there are dif-ferences between the endogenous and exogenous fine treatment. By analysingthese differences we test legitimacy hypotheses first and consider alternativeexplanations for tax compliance like commitment and reciprocity as kinds ofrobustness analyses of the legitimacy hypothesis.

1. Legitimacy

Often, direct voter participation is supposed to lead to higher tax compliancebecause it increases the legitimacy of policy outcomes. The possibility for sub-jects to vote on the fine instead of solely experiencing the exogenously imposedfine attaches a higher legitimacy to a fine in the first as compared to the secondcase. If subjects feel that they have a direct impact on the political decision,they will perceive the procedure leading to the political outcome as fair. Thisleads them to behave cooperatively in order to sustain a fair procedure. Our ex-perimental results provide some evidence for this conjecture. Total compliancerates are higher in the case of the endogenous fine if two subjects approve thefine than in the case of the exogenous fine, a difference that is significant at the1 percent level (t-statistic = 6.071). They are not significantly higher if one sub-ject approves the fine (t-statistic = 1.360). Compliance is significantly lower ifno subject approves the fine (t-statistic = 3.503).



211


Figure 1

Compliance If One Additional Subject in the Group Approvesthe Fine (Compliance Rates Indicated above the Bars)

Figures 1 and 2 indicate that individual compliance rates are considerablyhigher for those subjects who approve the fine in the endogenous fine treatmentthan compliance is in the exogenous fine treatment. If one subject approves thefine, the compliance rate is 66.84 percent of subjects voting for the fine whichis significantly higher than the compliance rate of 38.34 percent in the exoge-nous fine treatment (t-statistics = 3.849). If two subjects approve the fine, thecompliance rate is 90 percent of those voting for the fine which is also signifi-cantly higher than the compliance rate of 38.34 percent in the exogenous finetreatment (t-statistics = 6.973). Moreover, the compliance rate of subjects vot-ing against the fine if two subjects approve the fine which is 55 percent is sig-nificantly higher at the five percent level than the one in the exogenous finetreatment (t-statistics = 2.25). The statistical results also hold if non-parametrictests are used.

0

4

8

12

16

20

0 1

Mean Contribution tothe Group AccountIf One OtherSubject Approves

Individual VotingDecision

25.67%n=30

66.84%n=30

No Yes



212


Figure 2

Compliance If Two Other Subjects in the Group Approvethe Symbolic Fine (Compliance Rates Indicated above the Bars)

Individual compliance rates might mask the comparison of effective total com-pliance rates in the endogenous and exogenous fine treatments. Remember thatthe effective compliance rate of 64 percent in the case of the endogenous finetreatment is nearly double the one of 38 percent in the case of the exogenousfine treatment. One may suspect that the higher total effective compliance ratein the endogenous fine treatment as compared to the exogenous fine treatmentis due to selection effects and not due to the legitimacy of the endogenous fine.A selection effect may arise if subjects vote for the fine who intend to contrib-ute anyway perhaps because they have a high intrinsic motivation to pay taxes.If by chance several (at least 2) subjects of this type happen to be in the samegroup, an endogenous fine will be accepted and contributions will be high.Similarly, if few highly intrinsically motivated subjects (less than 2) happen tobe in the same group, the fine will be rejected and contributions will be low. Toinvestigate the importance of selection effects, we consider the contribution de-cisions of those who vote Yes and of those who vote No separately. If selectioneffects are the driving force behind our results in the endogenous fine treat-ment, the contribution rates of, say, No-voters should be the same irrespective

0

4

8

12

16

20

0 1

Mean Contribution tothe Group AccountIf Two OtherSubjects Approve

Individual VotingDecision

55.0%n=30

90.0%n=30

No Yes

Individual Voting Decision

Mean Contribution tothe Group AccountIf Two OtherSubjects Approve



213


of whether the law is accepted or not. However, this is clearly not the case asFigure 3 indicates.

Figure 3

Compliance Differences between Yes- and No-Votes If the SymbolicFine Is Adopted or Rejected (Compliance Rates Indicated above the Bars)

Instead, contribution rates are similar for both, subjects voting for and againstthe symbolic fine. In contrast to that, they are significantly higher if the endog-enous fine is accepted than if it is rejected for both, subjects voting for andagainst the symbolic fine. Contributions of Yes-voters (compliance rate of 68.2percent) and No-voters (compliance rate of 62.2 percent) are not different irre-spective of whether the symbolic fine is rejected or accepted (t-statistic =0.359). More importantly, both Yes-voters and No-voters significantly contrib-ute more if the symbolic fine is accepted (compliance rate of 64 percent) thanif it is rejected (compliance rate of 21.9 percent) (t-statistic = 3.98)7. Finally,compliance is not statistically different between Yes- and No-voters in both

7. A Mann-Whitney test confirms these results. Contributions of Yes-voters and No-voters are notdifferent irrespective of whether the symbolic fine is rejected (p = 0.89) or accepted (p = 0.76).Both Yes-voters (p = 0.04) and No-voters (p = 0.01) significantly contribute more if the symbolicfine is accepted than if it is rejected.

0

4

8

12

16

20

Yes No Yes No

IndividualContributions

Accepted Rejected

62%68%

17%

23%

No YesYes No Yes



214


cases, in the case the fine is accepted or rejected. If the fine is accepted, com-pliance rates of subjects voting for and against the fine are virtually the same(t-statistic = 0.36). Similarly, compliance rates of yes- and no-voters are not sta-tistically different if the fine is rejected (t-statistic = 0.36). Thus, selection ef-fects are not the driving force behind our results. Instead, the endogenous ac-ceptance of a symbolic fine induces subjects to contribute more.

Abstracting from the fact that it is not rational to comply with the tax law fromthe perspective of the standard tax evasion model in the case of the low fine cho-sen in our experimental design, there seems to be one particularly plausible ex-planation for this evidence: Subjects perceive the fine that is approved by theirfellow group members as being more legitimate than an exogenously imposedfine. They contribute effectively more in the case of the endogenous than in thecase of the exogenous fine. Individuals voting for the fine contribute significantlymore if one or two subjects accept the fine than individuals in the exogenous finetreatment. Compliance rates are higher if the fine is accepted than in the case thefine is rejected. If two subjects approve the fine, individuals who vote against thefine contribute more than individuals in the exogenous fine treatment. Finally, in-dividuals who vote against the fine contribute effectively more if the fine isadopted than individuals voting for the fine contribute in the case the symbolicfine is rejected. The possibility to endogenously determine the punishment fornon-compliance raises compliance of the subjects. The referendum outcometransports the message that individuals should comply with the tax law. Even ifthey oppose the fine they thus follow this social norm because it activates theirintrinsic motivation to pay taxes. The higher legitimacy of the fine accepted in areferendum as compared to the exogenous fine thus shapes tax morale.

2. Commitment

The question is whether there actually are no other motivations that might ac-tivate tax morale. One potential motivation candidate is commitment. If (un-conditional) commitment is introduced as a motivation for subjects to complywith the tax laws, then compliance rates should be higher than in the case sub-jects behave as rational egoists. Commitment in our experimental setting im-plies that subjects who approve the fine should have higher compliance ratesthan those who do not approve the fine. As mentioned above, contributions ofYes-voters (compliance rate of 68.2 percent) and No-voters (compliance rate of62.2 percent) are not different irrespective of whether the symbolic fine is re-jected or accepted (t-statistic = 0.359). Therefore, it does not seem to be thecase that many voters follow a motivation of unconditional commitment.



215


Since additional motivations might guide individual compliance in situa-tions in which the fine is or might be adopted with a close or comfortable ma-jority, the commitment hypothesis can also be tested for the contributions in thecase no other subject in the group approves the fine. Figure 4 shows the differ-ences between the 30 subjects approving the symbolic fine and those rejectingit. Compliance of those rejecting the symbolic fine are more than double ashigh as those approving this proposal. The difference between both means issignificant at the 10 percent level (t-statistic = 1.80). Thus, the hypothesis hasto be rejected that subjects are guided by commitment as their motive of com-pliance with the tax law.

Figure 4

Compliance If No Other Subject in the Group Approvesthe Symbolic Fine (Compliance Rates Indicated above the Bars)

3. Reciprocity

A final candidate for explaining tax compliance in an endogenous fine treat-ment is reciprocity in the sense that subjects should treat other individuals inthe group in a friendly way if they are treated in a friendly way by them as well.

0

4

8

12

16

20

0 1

Mean Contribution tothe Group AccountIf Nobody ElseApproves

Individual Voting Decision

30.65%n=30

15.0%n=30

No Yes



216


Reciprocity in a tax evasion setting implies two distinct features. First it can beexpected that compliance rates of subjects who approve the fine are higher ifone or two additional members in the group adopt the proposal as well. The ap-proval of the fine serves as a kind of ‘psychological signal’ to the other mem-bers in the group that a subject intends to comply with the tax law. Figures 1and 2 indicate that this is actually the case. Compliance of subjects adopting thefine in the referendum is significantly higher if one (t-statistic = 3.95) or twoadditional subjects in the group (t-statistic = 3.37) adopt the fine. This evidenceimplies a different notion of legitimacy going beyond procedural fairness con-siderations. The referendum outcome is considered to be the more legitimate,the more subjects approve the fine.

Second, reciprocity implies that compliance rates are the higher the higherthe compliance a subject expects from the other group members. The statisticaltest of this additional hypothesis is conducted in a regression by ordinary leastsquares in which the contributions to the group account in the three cases of ap-proval by no, one or two subjects are the dependent variables, respectively. Theindependent variables are the individual voting decision and the expected con-tribution to the group account by other group members if no, one or two sub-jects approve.

Table 2

Least Squares Regression Results

Dependent Variable Contribution if No Approval

Contribution if One Subject Approves

Contribution if Two Subjects Approve

Constant 0.203(0.27)

–7.668**(2.69)

–1.842(0.33)

Individual Voting Decision –0.778(0.89)

8.444**(4.81)

6.610**(3.30)

Expected Contribution by Other Group Members

0.421**(13.46)

0.526**(4.99)

0.344*(2.38)

0.765 0.432 0.213

SER 3.320 6.792 7.735

d.f. 57 57 57

Notes: The numbers in parentheses are the absolute values of the estimated t-statistics. ‘**’, ‘*’ or ‘(*)’ show that the estimated parameter is significantly different from zero on the 1, 5, or 10 percent level, respectively. SER is the standard error of the regression, and d.f. the degrees of freedom.

R2



217


The results are shown in Table 2. Although there is a strong variation in the teststatistics, the model explains compliance quite well. Between 21 and 77 per-cent of the variance of the contributions can be explained. The results obtainedin the pairwise t-test on the differences of compliance between subjects approv-ing or rejecting the fine are reflected in the data as well. There is no statisticaldifference between subjects approving and rejecting in the case of the compli-ance if no subject approves the fine. However, compliance is significantlyhigher for subjects approving the fine in the case one or two additional subjectsin the group approve the fine. Hence, the bivariate test results are corroboratedif an additional explanatory variable is considered.

In addition, expected contributions have the expected positive impact onsubjects’ compliance in any of the three cases. The higher the tax morale oftheir fellow group members, the higher is the tax compliance of the subjects. Inorder to find out which one of the two variables has a stronger influence, wecomputed β-coefficients. It turns out that both variables have about the sameimpact on compliance if one additional group member approves the fine. Theβ-coefficient for the variable capturing the individual voting decision is 0.472,while the β-coefficient of the expected contribution is 0.489. In the case ofcompliance if two additional group members approve the fine, the individualvoting decision clearly has the stronger impact: Its β-coefficient is 0.382, whilethe β-coefficient of the expected contribution is 0.276.

All in all, the hypothesis that reciprocity increases compliance rates in thetax evasion game cannot be rejected: The more a subject expects the othergroup members to contribute, the more he/she contributes as well. Voting forthe fine appears to be interpreted as a positive ‘signal’ for compliance. If oneor two subjects vote for the fine, compliance is higher than in the case no sub-ject votes for the fine. What is obvious from these regression results is the factthat the two reciprocity variables do not explain compliance in the case of ap-proval by two subjects pretty well. The adjusted coefficient of determination isrelatively small. This might be a hint towards procedural legitimacy as an im-portant factor explaining compliance of taxpayers in an endogenous fine set-ting.

V. CONCLUSIONS

The central question in the analysis of tax evasion is why people pay taxes tosuch a large extent although the fines and auditing intensities in most countriesat best constitute a symbolic expected punishment for potential tax cheaters.Many arguments have been brought forward in the literature, the most promi-



218


nent of which is tax morale as an intrinsic motivation to pay taxes. Tax moraleis however discussed as a residual explanation frequently without referring toconditions that shape the intrinsic motivation of taxpayers. Direct voter partic-ipation in the political decision making process in the form of referenda mightbe a beneficial condition increasing tax compliance by citizens.

In this paper, we have provided experimental evidence on the impact of vot-ing possibilities on tax compliance. We find that tax compliance is higher onaverage in an endogenous fine treatment in which subjects are allowed to ap-prove or reject the proposal of a fine as compared to an exogenous fine treat-ment. The main explanation why people show a higher tax morale if they areallowed to vote on a fine is legitimacy. Not only do subjects who approve of thefine in the endogenous fine treatment have a considerably higher tax compli-ance than subjects in the exogenous fine treatment. Compliance rates are higherif the fine is accepted than in the case the fine is rejected. Subjects who rejectthe proposal of the fine show a higher compliance rate than subjects in the ex-ogenous fine treatment even if they know that the dominant strategy under theexistence of the low fine is non-compliance. Finally, individuals who voteagainst the fine contribute effectively more if the fine is adopted than individu-als voting for the fine contribute in the case the symbolic fine is rejected.

Such a behaviour can only be explained by referring to legitimacy. It can nei-ther be explained by commitment nor reciprocity alone. Subjects do not followa commitment norm in the sense that voting for the fine leads to higher com-pliance in any case. Compliance rates of subjects approving or rejecting theproposal are not statistically different from each other. If the fine is not ap-proved by any other group member, subjects who approve the fine even reveala lower compliance on average. This might be due to the fact that those whovoted for the adoption of the fine in the first stage of the experiment are alreadydisappointed if they are confronted with the possibility that others may notcomply with the tax law. In any case, this evidence contradicts the commitmenthypothesis. However, subjects seem to follow a reciprocity norm in the sensethat they have a higher tax compliance if the other group members approve thefine. The more people adopt the fine, the more legitimate the referendum out-come is perceived. The reciprocity norm extends beyond voting issues: Themore subjects expect the others to comply with the tax law, the higher is theirtax morale as well. And the higher their tax morale, the more they expect theothers to contribute.

All in all different notions of legitimacy appear to explain tax morale at leastto some extent. What is called legitimacy in this paper is a notion of proceduralfairness. Individuals perceive law as procedurally fair if the constitutionalframework leading to the law is perceived to be fair as well. The procedural



219


fairness activates their intrinsic motivation, in the topic analysed in this paper,it increases tax morale. In our controlled experimental setting, many character-istics of referendums are not varied. Of particular importance is the possibilityto discuss political issues before the referendum takes place. This discussionhelps to transform selfish individual preferences in socially sustainable deci-sions. The importance of discussion in referendums is discussed by Bohnet andFrey (1994). In our experimental setting, we decided to control the impact ofcommunication on referendum and compliance outcomes in order to focus onlegitimacy. According to the results presented in this paper, policies which en-hance the legitimacy of a decision-making process that leads to changes of theparameters in the tax compliance game mitigate tax evasion. Thus, the consti-tutional framework shapes tax morale in a considerable way.

REFERENCES

Allingham, M. G. and A. Sandmo (1972). Income Tax Evasion: A Theoretical Analysis, Journal ofPublic Economics. 1: 323–338.

Alm, J. (1991). A Perspective on the Experimental Analysis of Taxpayer Reporting, The AccountingReview. 66: 577–593.

Alm, J., B. R. Jackson and M. McKee (1992a). Estimating the Determinants of Taxpayer Compliancewith Experimental Data, National Tax Journal. 45: 107–114.

Alm, J., B. R. Jackson and M. McKee (1992b). Institutional Uncertainty and Taxpayer Compliance,American Economic Review. 82: 1018–1026.

Alm, J., B. R. Jackson and M. McKee (1993). Fiscal Exchange, Collective Decision Institutions andTax Compliance, Journal of Economic Behavior and Organization. 22: 285–303.

Alm, J., G. H. McClelland and W. D. Schulze (1992). Why Do People Pay Taxes?, Journal of PublicEconomics. 48: 21–38.

Alm, J., G. H. McClelland and W. D. Schulze (1999). Changing the Social Norm of Tax Complianceby Voting, Kyklos. 52: 141–171.

Alm, J., I. Sanchez and A. De Juan (1995). Economic and Noneconomic Factors in Tax Compliance,Kyklos. 48: 3–18.

Andreoni, J., B. Erard and J. Feinstein (1998). Tax Compliance, Journal of Economic Literature. 36:818–860.

Baldry, J. C. (1986). Tax Evasion Is Not a Gamble: A Report on Two Experiments, Economics Letters.22: 333–335.

Becker, W., H.-J. Büchner and S. Sleeking (1987). The Impact of Public Transfer Expenditures onTax Evasion: An Experimental Approach, Journal of Public Economics. 34: 243–252.

Bohnet, I. and B. S. Frey (1994). Direct-Democratic Rules: The Role of Discussion, Kyklos. 47: 341–354.

Bordignon, M. (1990). Was Kant Right? Voluntary Provision of Public Goods under the Principle ofUnconditional Commitment, Economic Notes. 3: 342–372.

Bordignon, M. (1993). A Fairness Approach to Income Tax Evasion, Journal of Public Economics.52: 345–362.

Breton, A. (1974). The Economic Theory of Representative Government. London: MacMillan.Buchanan, J. M. (1966). Public Finance in Democratic Process: Fiscal Institutions and Individual

Choice. Chapel Hill: University of North Carolina Press.



220


Buchanan, J. M. (1976). Taxation in Fiscal Exchange, Journal of Public Economics. 6: 17–29.Cowell, F. A. (1987). Honesty Is Sometimes the Best Policy, London School of Economics and Po-

litical Science, Discussion Paper No. TIDI/ 107.Cullis, J. and A. Lewis (1985). Some Hypotheses and Evidence on Tax Knowledge and Preferences,

Journal of Economic Psychology. 6: 271–287.Deci, E. L. and R. M. Ryan (1985). Intrinsic Motivation and Self-Determination in Human Behavior.

New York: Plenum Press.Falkinger, J. (1988). Tax Evasion and Equity: A Theoretical Analysis, Public Finance. 43: 388–395.Fehr, E. and S. Gächter (2000). Fairness and Retaliation: The Economics of Reciprocity, Journal of

Economic Perspectives. 14 (3): 159–181.Feld, L. P. and B. S. Frey (2002). Trust Breeds Trust: How Taxpayers Are Treated, forthcoming in Eco-

nomics of Governance 3.Frey, B. S. (1997a). Not Just for The Money: An Economic Theory of Personal Motivation. Chelten-

ham: Edward Elgar.Frey, B. S. (1997b). A Constitution for Knaves Crowds Out Civic Virtues, Economic Journal. 107:

1043–1053.Frey, B. S. and I. Bohnet (1996). Experiments, Theory – and Reality?, Jahrbuch Ökonomie und Ge-

sellschaft 13 ‘Experiments in Economics – Experimente in der Ökonomie’: 340–359.Frey, B. S., F. Oberholzer-Gee and R. Eichenberger (1996). The Old Lady Visits Your Backyard: A

Tale of Morals and Markets, Journal of Political Economy. 104: 193–209.Friedland, N. (1982). A Note on Tax Evasion as a Function of the Quality of Information about the

Magnitude and Credibility of Threatened Fines: Some Preliminary Research, Journal of AppliedSocial Psychology. 12: 54–59.

Friedland, N., S. Maital and A. Rutenberg (1978). A Simulation Study of Income Tax Evasion, Jour-nal of Public Economics. 10: 107–116.

Graetz, M. J. and L. L. Wilde (1985). The Economics of Tax Compliance: Facts and Fantasy, NationalTax Journal. 38: 355–363.

Hite, P. A. (1990). An Experimental Investigation of the Effect of Tax Shelters on Taxpayer Noncom-pliance, Public Finance. 45: 90–106.

Lewis, A. (1978). Perceptions of Tax Rates, British Tax Review. 6: 358–366.Pommerehne, W. W. and B. S. Frey (1992). The Effects of Tax Administration on Tax Morale, Unpub-

lished Manuscript, University of Zurich.Pommerehne, W. W. and H. Weck-Hannemann (1996). Tax Rates, Tax Administration and Income Tax

Evasion in Switzerland, Public Choice. 88: 161–170.Rabin, M. and R. H. Thaler (2001). Anomalies: Risk Aversion, Journal of Economic Perspectives. 15

(1): 219–232.Reckers, P. M. J., D. L. Sanders and S. J. Roarke (1994). The Influence of Ethical Attitudes on Tax-

payer Compliance, National Tax Journal. 47: 825–836.Scholz, J. T. and M. Lubell (1998). Trust and Taxpayers: Testing the Heuristic Approach to Collective

Action, American Journal of Political Science. 42: 398–417.Scholz, J. T. and M. Lubell (2001). Cooperation, Reciprocity and the Collective Action Heuristic,

American Journal of Political Science. 45: 160–178.Schmölders, G. (1959). Fiscal Psychology: A New Branch of Public Finance, National Tax Journal.

12: 340–345.Schneider, F. and W. W. Pommerehne (1981). Free Riding and Collective Action: An Experiment in

Public Microeconomics, Quarterly Journal of Economics. 96: 687–704.Selten, R. (1967). Die Strategienmethode zur Erforschung des eingeschränkt rationalen Verhaltens

im Rahmen eines Oligopolexperiments, in: H. Sauermann (ed.), Beiträge zur experimentellenWirtschaftsforschung. Tübingen: Mohr: 136–168.

Smith, K. W. (1990). Reciprocity and Fairness: Positive Incentives for Tax Compliance, mimeo, Uni-versity of Michigan, Ann Arbor 1990.

Spicer, M. W. and L. A. Becker (1980). Fiscal Inequity and Tax Evasion: An Experimental Approach,National Tax Journal. 33: 171–175.



221


Spicer, M. W. and R. E. Hero (1985). Tax Evasion and Heuristics, Journal of Public Economics. 26:263–267.

Spicer, M. W. and J. E. Thomas (1982). Audit Probabilities and the Tax Evasion Decision: An Exper-imental Approach, Journal of Economic Psychology. 2: 241–245.

Sugden, R. (1984). Reciprocity: The Supply of Public Goods through Voluntary Contributions, Eco-nomic Journal. 94: 772–787.

Tyler, T. R. (1990). Why People Obey the Law. New Haven: Yale University Press.Vogel, J. (1974). Taxation and Public Opinion in Sweden: An Interpretation of Recent Survey Data,

National Tax Journal. 27: 499–513.Webley, P., F. A. Cowell, S. B. Long and J. A. Swingen (1991). Tax Evasion: An Experimental Ap-

proach. Cambridge: Cambridge University Press.Weck-Hannemann, H. and B. S. Frey (1995). Are Incentive Instruments as Good as Economists Be-

lieve? Some New Considerations, in: L. Bovenberg and S. Cnossen (eds.), Public Economics andthe Environment in an Imperfect World. Boston: Kluwer: 173–186.

Wicksell, K. (1896). Finanztheoretische Untersuchungen nebst Darstellung und Kritik des Steuerwe-sens Schwedens. Jena: Gustav Fischer.

SUMMARY

The puzzle of tax compliance is why people pay taxes instead of evading them: Given the low ex-pected fines, rational taxpayers should underreport taxable income. However, most taxpayers truth-fully declare their income to the tax authorities, a behaviour that is usually explained by tax morale.In this paper, we study in an experimental setting which factors shape tax morale. The main result isthat the higher legitimacy of an endogenous fine as compared to an exogenously determined fineleads to higher tax compliance. This result is robust to competing explanations like commitment andreciprocity.

ZUSAMMENFASSUNG

Zum Thema Steuerehrlichkeit stellt sich die Frage, warum Menschen ihre Steuern bezahlen statt siezu hinterziehen. Angesichts der geringen zu erwartenden Bestrafung müssten rationale Steuerzahlereigentlich beschliessen, ein niedrigeres Einkommen zu deklarieren. Die meisten Steuerzahler jedochfüllen ihre Steuererklärung wahrheitsgetreu aus, was gewöhnlich mit Steuermoral erklärt wird. Indiesem Artikel untersuchen wir anhand eines Experiments, welche Faktoren die Steuermoral beein-flussen. Das wichtigste Ergebnis ist, dass eine endogene Strafe im Vergleich zu einer exogen festge-setzten Strafe die Steuerehrlichkeit erhöht. Dieses Ergebnis ist robust gegenüber konkurrierenden Er-klärungen wie Verpflichtung und Reziprozität, zwei Motivationen, die bei der Entscheidungsfindungin Gruppen eine Rolle spielen.

RÉSUMÉ

La question qui se pose face à l’observation fiscale est pourquoi les gens choisissent de payer leursimpôts au lieu de les évader. Vu les pénalités très basses à attendre, un contribuable rationnel devraitse décider à déclarer un revenu plus bas. La plupart des contribuables cependant remplissent leur dé-claration des revenus consciencieusement, ce qui est expliqué en général par la morale fiscale. Danscet article, nous étudions dans un cadre expérimentel les facteurs qui influencent le comportementdes contribuables. Nous trouvons que la légitimité plus forte d’une pénalité endogène par rapport àune pénalité exogène favorise la bonne volonté de payer les impôts. Ce résultat se montre robuste parrapport à des explications concurrantes telles l’obligation et la réciprocité, deux motivations quijouent un rôle dans la prise de décisions en groupes.


feld & tyran 2002

Documents