‘If You Get Too Cold, I’ll Tax The Heat’

Nobody likes the taxman.  Even those who in principle believe in spreading the wealth—even they get a twinge of fear at the mention of the IRS, April 15th and—worst of all—the dreaded audit. Don’t deny it.

That’s because the IRS has been pretty heavy-handed over the years, relying on the threat of audits and liens and seizures and harsh fines to scare citizens into compliance. These punitive tactics are based on classical economic theory, which says that we are all essentially self-interested, motivated only by the drive to maximize our own financial interests. Without such deterrents, according to this reasoning, there would be rampant cheating.

There are some flaws in this theory, however. First of all, the chances of any citizen being audited are actually quite low in many countries, and fines fairly mild, so one would expect widespread tax evasion. But this is not the case. Indeed, compliance is surprisingly high, and economic theory can’t explain this fact.

The problem, according to a team of University of Vienna psychological scientists, is that classic economic theory fails to factor in important psychological factors. Erich Kirchler and his colleagues wanted to explore the importance of trust and honesty in tax behavior, to see if there might be alternatives to strict control and punishment for regulating citizen behavior. They have been running studies to test whether an intrinsic motivation for cooperation might be a crucial, overlooked dynamic in regulatory strategy.

Trust in authorities originates in citizens’ beliefs in the benevolence of tax authorities—the idea that they are engaged for the common good. Kirchler and the others don’t believe that trust and benevolence should replace power, but rather that power and trust together will lead to compliance. The scientists call their theory the “slippery slope”—which means that power and trust influence one another. If either power or trust declines, so will the other, resulting in less tax compliance. So tax evasion peaks under conditions of low power and low trust, and compliance can be boosted either by strengthening power or by gaining trust, or both.

The scientists did a survey of self-employed taxpayers’ perceptions of power and trust, which confirmed this relationship: That is, strong compliance was linked to perceptions of high power and high trust, whereas with low power and trust, compliance slid “down the slope” to its lowest point. Another survey of taxpayers in Austria, the UK and the Czech Republic confirmed this, and also found that perceived trust in authorities was a strong predictor of voluntary cooperation. Power had zero effect on voluntary cooperation, but was strongly tied to enforced compliance. Intriguingly, voluntary cooperation was higher in older citizens and in taxpayers with more education.

The scientists also ran some experiments to test their theory. In one, they used scenarios to manipulate perceptions of authorities’ power and trustworthiness, and then measured citizens’ intentions to declare taxes honestly. They did this in Austria, Hungary, Romania and Russia—to compare different political and societal characteristics. In all these countries, honest intentions were more common if authorities were seen as powerful and trustworthy. Evasion spiked when both power and trust were lowest. Notably, a recent study of Italian taxpayers distinguished between “legitimate” power—a tool to protect good citizens from freeloaders—and “coercive” power—simple oppression, without any element of trust. Legitimate power was linked to trust in authorities, but coercion was not—indeed the opposite.

The scientists discuss these findings and more in an article that will appear in the journal Current Directions in Psychological Science. They also describe some real-world examples of these ideas in practice. For example, tax authorities in the Netherlands and Austria have launched pilot projects for young entrepreneurs, designed to foster mutual trust and cooperation—rather than relying entirely on control and punishment, which are very expensive. The goal is synergy between taxpayers and tax authorities: Taxpayers show a willingness to comply, and authorities provide services to make the process less onerous and threatening. Such efficient cooperation is evident in Switzerland, and morale around the issue of taxes is high. The idea is that regulation takes place on the “slippery slope,” where authorities must find the right balance between being supportive and ruling with an iron fist.

Follow Wray Herbert’s reporting on psychological science on Twitter at @wrayherbert.

APS regularly opens certain online articles for discussion on our website. Effective February 2021, you must be a logged-in APS member to post comments. By posting a comment, you agree to our Community Guidelines and the display of your profile information, including your name and affiliation. Comments will be moderated. Any opinions, findings, conclusions, or recommendations present in article comments are those of the writers and do not necessarily reflect the views of APS or the article’s author. For more information, please see our Community Guidelines.

Please login with your APS account to comment.