Combining Psychology and Economics in the Analysis of Compliance: From Enforcement to Cooperation

In tax compliance research, there has been a significant shift in research emphasis from the analysis of enforcement to the incorporation of trust-building measures that encourage cooperation. In this paper, we trace this shift. We first describe the four major "actors" in the tax compliance game and their complex interactions: taxpayers, elected government officials, appointed tax authorities (or the tax administration), and tax accountants. Second, we examine various perspectives on what determines the compliance decisions of individuals. We start with "economic" factors that are based on tax compliance as an individual decision under risk (e.g., audits and fines). We then move to factors based more on "psychology", like social norms, fairness, and interactions both between taxpayers and between taxpayers and the government. Indeed, over the past few decades the view of taxpayers has shifted from one in which an authoritarian government and its tax authority force citizens to pay their taxes under the threat of punishment, to a view in which both elected and appointed authorities provide the necessary services to enable compliance, and even more recently to a view of authorities and citizens cooperating with one another. Third, we present the "slippery slope" framework as a way of integrating economic and psychological aspects into a unified framework. We conclude with recommendations based on this framework that can improve compliance.