The Economic Psychology of Tax Behaviour

Abstract

The Economic Psychology of Tax Behavior, by Brinch Kirchler, is reviewed.

BRINCH KIRCHLER, The Economic Psychology of Tax Behaviour (Cambridge University Press, 2007, 243 pages, $91.00).

What factors affect individual tax compliance? For a student of behavioral tax, Professor Erich Kirchler's recent book is a good introduction to the complex field of tax-compliance research. Wim its bibliography of 500 articles, The Economic Psychology of Tax Behaviour thoroughly summarizes prior compliance research across disciplines, particularly from economic decision-making and social psychology.

A more experienced behavioral tax researcher will find the themes presented here familiar. These readers may benefit, however, from the book's global perspective. The author, a professor of psychology at the University of Vienna who visited at the Australian National University at Canberra and the University of Sydney while writing the book, incorporates research from Australia, New Zealand, Austria, Switzerland, Sweden, Latin America, and Africa mat U.S. researchers may not have studied.

Kirchler's review of prior tax compliance literature is organized into four main areas.

In the first, labeled the "Social Representation of Taxes," he compiles research on the psychological determinants of tax compliance, such as tax knowledge, individual perceptions and attitudes toward taxes, personal, social and societal norms, motivation, and morale. Kirchler's discussion of fairness as a factor focuses on the three areas of justice in social psychology (Wenzel, 2003): distributive justice (the exchange of resources), procedural justice (trust in governmental procedures), and retributive justice (appropriate sanctions).

In the next section, 'Tax Compliance Decisions," Kirchler shifts from the social psychology literature to socio-economics, summarizing prior tax research on prospect theory, framing effects and factors such as the probability of audit (and repeated audits), penalties and fines, tax rates, and income levels.

The opportunity to evade is discussed as a separate area of research, "Self-Employment and Taxpaying." Research on factors related to entrepreneurship, such as work effort, are included here.

In the fourth area, the author summarizes the relationship between citizens and the state as the "Interaction Between Tax Authorities and Taxpayers," presenting different audit selection methods and strategies to build a voluntary compliance structure. And finally, the author gets to the book's main premise - that the way the tax-enforcement agency treats its taxpayers is crucial to the success of a voluntary tax system. Kirchler contrasts a "cops and robbers" or "hunter" approach of strict enforcement with a "customer" orientation, concluding that a relationship of trust is a necessary element for tax compliance. He concludes with his "slippery-slope model," which compares the taxpayer's trust in taxing authorities to the taxing authority's power over the taxpayer and the impact on tax compliance.

The strength of this book is that it presents a well-organized review of the tax-compliance literature. This is also the book's greatest weakness because it does not afford Kirchler the opportunity to fully develop and explore his core idea - that the interaction of taxpayers and taxing authorities and the element of trust are crucial to tax compliance.

The summary of prior literature can be a bit misleading when not placed in current context. For example, the author refers to a number of research projects based on the Taxpayer Compliance Management Program (TCMP), noting the richness of this data set and its use by the IRS in setting audit-selection criteria. However, TCMP audits have not been conducted for years and the IRS has replaced this program with less intrusive National Research Program (NPR) examinations.

Kirchler's model could be applied to the shifts in IRS philosophy over the course of the last decade. During the period following the IRS Restructuring and Reform Act of 1998, the IRS moved to a customer model with emphasis on serving the public and meeting the needs of taxpayers. When, in 2003, Mark Everson was appointed Commissioner of Internal Revenue, he redefined the mission of the IRS, using the slogan "Service + Enforcement = Compliance," restoring the element of enforcement. At the time of this writing, a permanent replacement for Everson, who resigned in May 2007, has not been confirmed.

The Economic Psychology of Tax Behaviour provides a very useful review of tax-compliance research in a social psychology context. Kirchler's model of the relationship of taxpayers to the tax authority suggests a framework that can be further developed in future research.

References

REFERENCES

Wenzel, M. 2003. Tax compliance and the psychology of justice: Mapping the field. In Taxing Democracy: Understanding Tax Avoidance and Evasion, Valerie A. Braithwaite, ed. (Aldershot: Ashgate): 41-69.