A Tax Morale Approach to Compliance: Recommendations for the IRS

Abstract

This article appeared in the December 31, 2007 Annual Report to Congress of the National Taxpayer Advocate, which commissioned this research. 

Why do people follow the law? The answer, under the traditional theory of compliance, is fear of detection and punishment. The deterrence model, however, accounts for only a minor portion of actual compliance levels. It has such poor explanatory power because it assumes that the decision to comply is based solely on a rational cost-benefit analysis in which people weigh the benefits of non-compliance against the costs of detection and penalties. Recent literature reveals, however, that the decision to comply is not purely rational. Rather, personal values, social norms, and non-rational cognitive processes also strongly affect the decision.
What holds true for law in general holds true for tax compliance specifically. Traditional methods of enforcement through audit and penalties explain only a small fraction of voluntary tax compliance. Theorists and researchers attribute the vast majority of compliance to what they loosely describe as internal motivations or “tax morale.” The field is still young, the subject complex, and some of the empirical data is inconclusive. Nevertheless, the literature clearly indicates that tax morale plays a major role in tax compliance.
Although neither the exact components of tax morale nor the precise mechanisms by which they work have yet been fully delineated the literature has identified certain elements. Research shows that tax compliance is affected by (social and personal) norms such as those regarding procedural justice, trust, belief in the legitimacy of the government, reciprocity, altruism, and identification with the group. Cognitive processes, such as prospect theory, also influence an individual’s reaction to tax issues. Studies also indicate that certain demographic factors such as age, gender and education correlate with the tax morale.
The components of tax morale, like internal motivators in other areas of the law, are not static. They interact with each other and the environment and are influenced by each individual’s own cognitive framework. Consequently, an external agent, such as the IRS, can influence tax morale norms and thereby tax compliance. It can activate compliance norms in a variety of ways including education, properly framing communications, fair procedures, and a regulatory framework that incorporates current and future findings of tax morale research into its operations and dealings with taxpayers.
The Report makes three major recommendations. First, the IRS should establish a department devoted solely to exploring tax morale issues and implementing the findings. Second, the IRS should adopt a tax morale approach to tax compliance that recognizes the importance of taxpayers’ internal motivations and the effects on these motivations of societal conditions and institutions (such as the IRS) that interact with them. Third, using behavioral science research, the IRS should implement ongoing educational (long term and short term) programs and media campaigns. Since the subject of this Report is tax compliance of individual taxpayers, both the literature review and the recommendations focus on individuals. Both the tax morale concept and this Report, however, are relevant for all taxpayers.