Journal of Economic Psychology 40 (2014) ivvi

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Journal of Economic Psychology

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Editorial

Behavioral dynamics of tax evasion

Tax evasion, by its very nature as a criminal activity, occurs clandestine. From an economic viewpoint, it takes place if the
relative benets from not paying taxes correctly are larger than its expected costs; in psychology, the enigma is rather that
tax compliance is observed at an extent which cannot be explained by rational choice models. However, by combining the
rational logic of choice with psycho-logic, a more realistic explanation of taxpayers behavior emerges and valuable
insights are gained for designing effective regulation strategies for tax authorities.
A trend in tax research is the general acceptance of new methods. Most important is the emergence of laboratory
experiments. Since a long time they are established in psychology, more recently, they have been adopted by economists,
too. Agent-based modeling as another methodical evolution takes into account that taxpayers in the real world take their
actions as members of a complex social environment. Tax laws, tax practitioners, nancial intermediaries, tax authorities
and many others structure the dynamics of tax behavior. Since psychology as well as economics started with modeling
individual behavior it was unclear in the past whether and how it could be aggregated to the macro-societal level. The
crucial point is that society as a whole does not necessarily behave as the sum of its individual agents, but is rather a product
of the interaction among agents. Agent-based modeling renders it feasible to analyze articial societies with different
network and interaction structures with respect to all kinds of economic and social effects.
Incorporating the theoretical contributions from economics and psychology, as well as the empirical observations
obtained by the various methods, has changed tax research in many ways.
A good example for the interdisciplinary and multi-methodological effort in explaining the puzzle of tax evasion is
documented in the papers of this special issue on behavioral dynamics of tax evasion. Previous versions of several papers
published here were presented at the shadow 2011 conference in Mnster, Germany. It was the second edition of a biannual
conference on tax evasion and the shadow economy. The conference as well as this special issue was co-organized by our
colleague and friend Michael Pickhardt. Much to our regret, Michael deceased on October 2, 2012. We will remember him as
remarkable expert in our eld, with outstanding and creative ideas, always willing to share his thoughts and knowledge with
others.
We dedicate this special issue to the memory of Michael Pickhardt.

Overview of the papers

The rst paper in this issue by Pickhardt & Prinz (2014) provides a review of the development in the research eld of
behavioral dynamics of tax evasion. The authors give a comprehensive overview of the most crucial developments in all
major elds of tax evasion and compliance research, from economics via psychology to the application of physics theories
to tax evasion, encompassing theoretical, empirical, experimental and agent-based papers. The emphasis is on demonstrat-
ing the complexity of tax evasion in modern societies as well as presenting the most recent ndings.
As pointed out in the review of Pickhardt and Prinz, the slippery slope concept is a novel framework to analyze tax
evasion and compliance. The rst three papers apply and enhance this approach empirically, theoretically and
experimentally.
The paper of Kastlunger, Lozza, Kirchler, and Schabmann (by mistake, this paper has already been published in a previous
issue: Kastlunger, B., Lozza, E., Kirchler, E., & Schabmann, A., 2013. Powerful authorities and trusting citizens: The slippery
slope framework and tax compliance in Italy. Journal of Economic Psychology, 34, 3645) reports a structural equation
model analysis of the role of different forms of power in the so-called slippery slope concept of tax compliance. With a
sample of Italian self-employed taxpayers they show that beside power and trust also the form of power plays a crucial role
for tax compliance. In contrast to coercive power (which enforces tax laws by auditing and punishing), legitimate power,
understood as the expert knowledge and ability of tax authorities to apply tax laws, is positively correlated with trust. Trust,
moreover, is positively correlated with voluntary taxpaying.

http://dx.doi.org/10.1016/S0167-4870(13)00147-5
0167-4870/ 2014 Elsevier B.V. All rights reserved.
 Editorial / Journal of Economic Psychology 40 (2014) ivvi v

In a theoretical paper, Prinz, Muehlbacher, & Kirchler (2014) provide a formalization of the slippery slope concept by
differentiating between evasion-minded and compliance-minded taxpayers. The rst group increases tax compliance only
if coercive measures are applied whereas the second group reacts with higher tax compliance to persuasive measures of
authorities; furthermore, the number of evasion minded (compliance-minded) taxpayers increases (decreases) as the
number of evasion-minded persons becomes larger. The dynamization of the model shows the evolution of both groups
of taxpayers when a change of group via utility comparisons may occur. In all versions of the model, slippery slopes are
recovered.
Pellizzari & Rizzi (2014) employ an agent-based simulation model to study tax compliance effects of public expenditure,
trust and power of tax authorities on the level of an articial society. Heterogeneous agents maximize individual utility that
incorporates risk aversion, preferences for public expenditures and propensities to comply with tax laws. Moreover, the
interaction of agents is driven by expectations about the behavior of peers. The data generated are used to estimate slippery
slopes and, especially, how power and trust have an inuence on aggregate tax compliance.
One of the most important insights from psychology on tax evasion and compliance is that norms, emotions, and the
social distance to other taxpayers and authorities play a crucial role. The next two papers study the impact of shaming
on the one hand and sympathy as well as empathy on the other hand.
Coricelli, Rusconi, & Villeval (2014) test experimentally the effects of shaming rituals on tax compliance. Two versions of
shaming are distinguished: shaming as a form of offender stigmatization and social exclusion in contrast to shaming in
combination with forgiveness and, hence, social re-integration. Stigmatization with making the offender public and enforc-
ing nes leads to less tax compliance. Re-integrative shaming, however, reduces the level of tax evasion. Consequently, the
authors consider shaming a powerful, but also sensitive tool for ghting tax evasion by the tax authorities.
The role of sympathy for more unfortunate people with respect to tax compliance is one of the main concerns of the
Calvet & Alm (2014) paper. Having rst identied the participants sympathy levels, the impact of sympathy is tested
experimentally in a tax compliance game. Moreover, a psychological priming technique is employed to trigger empathy with
participants in another experiment of tax compliance. Whereas in the sympathy setting the levels are positively correlated
with tax compliance, such a correlation could not be found in the empathy priming experiment.
Fairness considerations and personal norms are among the most important factors determining individual as well as
aggregate social behavior. These are topics of the next two papers of this special issue.
Fairness is the main research topic in Bazart & Bonein (2014). They study experimentally effects of vertical and horizontal
inequity on tax evasion and compliance. The hypothesis is that tax evasion may take place to restore fairness concerning
perceived inequities. Vertical inequity provoked compensatory tax evasion whereas horizontal inequity did not. However,
with both vertical and more pronounced horizontal inequities, the latter result did no longer apply.
In a theoretical and experimental paper, Bernasconi, Corazzini, & Seri (2014) analyze the effects of hedonic adaptation to
tax rate changes with reference dependent preferences and ethical norms on tax evasion. Particularly, tax rate changes are
studied since they lead to higher or lower tax payments. Higher tax rates trigger theoretically and experimentally an
increase of tax evasion. However, when people adapted to the new tax levels, hedonic adaptation takes place and the tax
rate does no longer exert an effect on tax evasion.
As taxpayers in the real world are members of a group and part of social networks, it is important to investigate the
consequences the behavior of others in such social environments have for individual compliance. Three papers approach this
issue by means of agent-based modeling.
Andrei, Comer, & Koehler (2014) implement different structures of social networks in an agent based model. They show
that the topology of a network, e.g., regarding the number of connections between agents, plays a considerable role for the
collective behavior of agents. Further, high centrality in the connections promotes imitation of behavior between agents of
the network.
Another agent based simulation study on social networks is reported by Hashimzade, Myles, Page, & Rablen (2014). They
analyze occupational choice and the emergence of attitudes when agents are able to exchange information through social
networks. The simulation demonstrates that taxpayers risk aversion, occupational choice, attitude towards evasion and
compliance are inter-related and reinforce each other through the network. Consequently different compliance levels are
reached in different occupational groups; self-selection of agents to occupational groups could probably be used to predict
tax compliance behavior.
Pickhardt & Seibold (2014) apply the so-called Ising model of ferromagnetism to analyze tax evasion dynamics between
four different types of taxpayers and their reactions to several regulation strategies by tax authorities. The basic assumption
of the model, borrowed from statistical physics, is that particles tend to adjust their behavior with that of their neighbors.
The authors conclude that substantially higher audit probabilities than those applied in the real world would be necessary to
achieve stable compliance. Furthermore, they propose that due to imitation of behavior among agents, non-monetary
sanctions such as compliance enforcement after an audit would be a promising approach in combatting tax evasion.
The next three contributions focus on various aspects of the classical tools to deter non-compliance, i.e., auditing and
ning.
Tan & Yim (2014) report an experimental study introducing uncertainty about audit probabilities. In their design, actual
audit probabilities depended on the number of low income reporters, and, therefore, could not be foreseen by participants.
They show that lower uncertainty yielded similar compliance rates as in the control treatment with a xed audit probability,
whereas higher uncertainty resulted in more honest tax reports.
vi Editorial / Journal of Economic Psychology 40 (2014) ivvi

Soliman, Jones, & Cullis (2014) conducted two experiments to study interaction effects of audit probabilities and penalty
rates. An effect of increasing audit probability was observed only under constant high penalty rates. Vice versa, when audit
probabilities were kept constant at a high level, increasing penalties had no effect. The authors argue that in a dynamic
setting, taxpayers responses to these policy variables are subject to an adaptive learning process, which could partly explain
the differences between observed behavior and predictions from the neoclassical tax evasion model.
By means of agent-based modeling, Hokamp (2014) studies the effect of back-auditing on compliance. He also
incorporates heterogeneity in age of agents, which allows simulating the evolution of social norms during an agents
life-span. Findings suggest that age is relevant for tax evasion only if back auditing and social norm updating processes
are considered.
The nal two papers in the special issue deal with the role of time and effort investments by taxpayers, although at quite
different stages of the compliance decision.
Eichfelder & Kegels (2014) analyze a large data set from a survey of Belgian businesses on compliance costs, i.e., the time
and money necessary to comply with tax regulations. They show that compliance costs largely depend on customer-friendly
behavior of tax authorities. The timely provision of information emerged as the most important tool for reducing taxpayers
burden to comply with the law.
Whether the effort for earning taxable income affects compliance is studied by Durham, Manly, & Ritsema (2014).
Participants in their experiment were either endowed with money or had to earn income by participating in a double
auction market. Furthermore, the payment was framed either as a tax or as a market fee that would be veried with a
certain probability. A complex interaction of income source, income level and framing was observed. The authors argue that
different aspiration levels, i.e., the aspired level of net income, due to the sunk effort may account for their ndings.

References

Andrei, A. L., Comer, K., & Koehler, M. (2014). An agent-based model of network effects on tax compliance and evasion. Journal of Economic Psychology,
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Bazart, C., & Bonein, A. (2014). Reciprocal relationships in tax compliance decisions. Journal of Economic Psychology, 40, 83102.
Bernasconi, M., Corazzini, L., & Seri, R. (2014). Reference dependent preferences, hedonic adaptation and tax evasion: Does the tax burden matter?
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Stephan Muehlbacher
University of Vienna, Universitaetsstrasse 7,
Vienna, A-1010, Austria
Michael Pickhardt
Brandenburg University of Technology Cottbus,
Faculty 3, Institute of Economics,
Postbox 10 13 44, 03013 Cottbus, Germany
Aloys Prinz
University of Mnster, Institute of Public Economics,
Wilmergasse 6-8, 48143 Mnster, Germany