Is tax evasion a hot topic in economics and social sciences? A search for citations in the ‘Web of Science’ (January 2006; SSCI, SCI and A&HCI) yielded confirming results: from the beginning of documentation in 1945 to 1980, 75 citations were produced when the key words ‘tax’, ‘taxes’, ‘taxation’ and ‘evasion’ or ‘compliance’ were entered. In the following decade, 1981 to 1990, the number increased to 141, and reached 372 in the years spanning 1991 to 2000. Even faster growth is seen from 2001 to 2005, with 278 new publications registered. In 1986, Freiberg wrote that little is known about the extent of tax evasion, and even less is known about the criteria for enforcement of the law, or why some cases are selected for prosecution and others are not. Andreoni, Erard and Feinstein (1998) observed that from the beginning of the 1980s until the completion of their tax compliance review in the late 1990s there was an increasing tide of research on tax compliance. This tide has continued to grow into the present. As most of the publications are in the field of economics, an overwhelming majority refers to the influential models of tax evasion developed by Allingham and Sandmo (1972) and Srinivasan (1973) on the basis of Becker's 1968 theory of crime, which is tested by econometric modelling and analyses of empirical data, and further refined by adding specific variables which are assumed to influence tax compliance (cf. Franzoni, 2000).

Complexity of tax law

Tax laws are not always clear. As Slemrod and colleagues put it, ‘although one can assert that legality is the dividing line between evasion and avoidance, in practice the line is blurry; sometimes the law itself is unclear, sometimes it is clear but not known to the taxpayer, sometimes the law is clear but the administration effectively ignores a particular transaction or activity’ (Slemrod, Blumenthal and Christian, 2001, p. 459).

The concern of legality grows in parallel with the increasing globalisation of business, the increasing complexity of business structures, the nature of financing and transactions and tax flight by establishing businesses off shore, tax havens and money laundering (Owens and Hamilton, 2004). Bartelsman and Beetsma (2003) and Yaniv (1990) present suggestive evidence of income shifting in response to differences in corporate tax rates for a large selection of OECD countries. Modern organised non-compliant businesses act within the law, exploiting the law's shortcomings and loopholes. In Cyprus alone, an estimated 37,000 companies have been established using the advantages of a tax haven, and the number is increasing steadily (Courakis, 2001). Businesses take advantage of loopholes in the law and find more sophisticated ways to reduce tax payments when new regulations and laws are established in response to aggressive avoidance. Businesses also respond symmetrically to tax changes, moving into the underground economy if taxes increase, and out when they decrease (Christopoulos, 2003).

Most psychological studies on tax behaviour concentrate on income tax and determinants of compliance. The more tax knowledge possessed by taxpayers, the more positive these taxpayers' attitudes, the higher their ethical beliefs, the stronger their social norms and conviction of a fair tax system, and the stronger the deterrence in terms of audits and sanctions of evasion (e.g., Webley, 2004). Also, perceived opportunities not to comply determine tax behaviour. However, opportunities vary considerably and are definitely higher among the self-employed and entrepreneurs.

Opportunity to evade was found to be the most probable and relevant determinant of non-compliance (e.g., Antonides and Robben, 1995; Groenland and van Veldhoven, 1983; King and Sheffrin, 2002; Lewis, 1982; Robben et al., 1990b; Slemrod, Blumenthal and Christian, 2001; Vogel, 1974; Wallschutzky, 1984; Webley et al., 1991). It can be expected, therefore, that the self-employed and entrepreneurs are more prone to tax evasion than employed people earning a salary. Also, cash economy activity is more prevalent among the self-employed. On the other hand, Ahmed and Braithwaite (2005) argue that a number of studies have described small-business owners as law-abiding, responsible and ethical, and as taking their tax obligations seriously (e.g., Brown, 1985; Cunningham and Lischeron, 1991). Moreover, their personal characteristics have been portrayed as ambitious, hard-working, courageous and individualistic (C. J. Collins, Hanges and Locke, 2004; DeCarlo and Lyons, 1979; Verheul, Uhlaner and Thurik, 2005).

A taxpayer may voluntarily decide to pay taxes or make an explicit decision to avoid paying the full share. A single person's contribution does not really make much difference in the overall contributions to public goods. Therefore, not paying one's taxes is advantageous as the amount of public goods and one's participation in them remains almost unchanged, while at the same time one saves on taxes. If few taxpayers evade taxes, public goods will not disappear or be reduced significantly; however, if a considerable number of taxpayers evade, the provision of public goods is not guaranteed and ultimately everyone will suffer from a suboptimal choice.

The tax system represents a social dilemma with individual interests being in conflict with collective interests: two or more people are interdependent on obtaining outcomes; if few people try to maximise their own outcomes, defection is the rational choice. However, if a large number or all people maximise their outcome, the effect is that, sooner or later, everyone gets less than if they had chosen to cooperate (Dawes, 1980; Messick and Brewer, 1983; Mérö, 1996; Stroebe and Frey, 1982; Van Lange et al. 1992). In other words, the tax system represents an n-player social dilemma, often referred to as tragedy of the commons (Hardin, 1968), with defection as each taxpayer's rational strategy, independent of how other taxpayers decide to behave. If single taxpayers choose to pay their full share of taxes, they will be worse off because they support the free-riding, parasitic others (Torgler, 2003d).

This book brings together research that has traditionally been fragmented into camps of legal, economic and social-psychological scholarship. Each camp acknowledges the need to be aware of the others' findings, but few books have been as inclusive and successful in creating a coherent framework that can house these different bodies of research. Kirchler describes the various research traditions in detail, setting out the building blocks for the reader to survey at close range. These parts are then assembled to provide an integrated account of how some taxpayers take the path down the slippery slope of non-compliance, while most stay on the high ground. Kirchler acknowledges that some individuals are less willing to say no to evasion than others, that some are less committed and able, and that varying social contexts can make it easier to comply or harder. But the spotlight is not only on the strengths and weaknesses of individual taxpayers and their immediate environment. Tax authorities play their part too and can adopt enforcement policies that are likely to push taxpayers down the slippery slope. Too often tax authorities fail to communicate respect and trust to the taxpayer, instead playing the ‘cop’ who is single-mindedly in pursuit of the ‘robber’ taxpayer.

This book provides a new frame for analysing tax compliance research. Classic economic theory depicting taxpayers as rational cost–benefit analysts has long provided the benchmark for evaluating new developments in tax research. In this book, Kirchler reinvents the frame.

Traditional economic models of tax non-compliance assume that taxpayers make strategic decisions. Tax reports are the result of rational considerations of financial gains and losses. If it does not pay to evade because the probability of detection is high and the resulting fines are severe, then taxpayers are honest, otherwise they will not comply by under-declaring their income and overstating deductions. The rational model emphasises taxpayers' predisposition to behave dishonestly and suggests control and punishment as educational measures. Penalties are the predominant regulatory measures. Sanson et al. (1996) reviewed trends towards an increased reliance on punishment as a primary response to crime, and psychological research evidence on the efficacy of punishment. They discuss the circumstances under which punishment has positive effects and when it has detrimental effects. Moreover, they discuss the limited ability of the justice system to deliver punishment in a manner which might achieve the goals of rehabilitation and deterrence against relapse. Some approaches investigating tax systems for detecting strategies to improve compliance are solely outcome-oriented without considering human and social factors at all. Chu (1990) proposed a tax scheme under which taxpayers are given the choice between paying a fixed amount of taxes and thus being exempted from tax audit, and paying only what taxpayers claim they owe and being subject to tax audits for possible evasion. The model focuses merely on improving revenue collection and does not at all consider the relationship between taxpayers, tax collectors and the government and related fairness aspects.

This book seeks to collect and integrate economic-psychological research on tax compliance in general, focusing specifically on tax evasion. Research findings are integrated into a model based on two dimensions: originating from the interaction climate between tax authorities and taxpayers, the dimensions are defined by citizens' trust in authorities and the power of authorities to control taxpayers effectively. Depending on trust and the use of power, either voluntary compliance, enforced compliance or no compliance are likely to result. While economic studies on tax evasion have been growing immensely in the past decades, only about 10% of publications assume an economic-psychological perspective, i.e., one that focuses mainly on individual and social aspects of tax representations, decisions and behaviour. Thus, this book aims to fill the present gap by reviewing the accumulated economic-psychological knowledge and mapping the field.

After a brief introduction, the increasing concerns with the complexity of tax law and the growth of the shadow economy are described, and definitions of tax compliance, avoidance and evasion are presented. As a psychologist, I choose to approach tax behaviour from an individual and social-psychological perspective. The available research focuses on individual and the collective (social) representations of taxation as well as on tax morale, and decision-making. I have chosen to afford the majority of attention to income tax, with special attention to self-employed taxpayers' behaviour. More recently, interest has been shown in tax authorities' orientations towards taxpayers and the interactions between tax officers and taxpayers.

Tax non-compliance is a universal phenomenon. It takes place in all societies, in all social strata, in all professions, in all industries, in all religions and in virtually all economic systems. Scholars as far back as Plato wrote about the phenomenon. In the fifteenth-century Ducal Palace of Venice, there is a stone with a hole in it, through which people could inform the Republic about tax evaders (Adams, 1993; Tanzi and Shome, 1994). Governments as far back as ancient Egypt have struggled to maintain compliance with tax laws. Indeed, it has been suggested that tax resistance has played a significant role in the collapse of several major world orders, including the Egyptian, Roman, Spanish and Aztec empires (Erard, 1997). It is therefore surprising how little attention this phenomenon had received until recent years. Only during the past twenty-five years has the subject of tax compliance come into its own as a research area within economics. Since then, the number of studies on tax behaviour has significantly increased, as has the diversity of methods used to study evasion. This, however, is also an issue of concern since the results obtained by different measures are heterogeneous, due to difficulties of measurement, because ‘individuals often undertake substantial efforts to conceal their evasion’ (Andreoni, Erard and Feinstein, 1998, p. 836), but also to methodological biases. Moreover, most findings originate from studies conducted in the United States, which limits generalisability of results.

Tax laws are difficult to understand and are of little interest to the ordinary taxpayer. This attitude can result from the belief that taxes are to be paid, taxes are unavoidable as income is taxed at source, or that attempting to understand the law is not worth the frustration due to its complexity. For instance, Calderwood and Webley (1992) investigated hypothetical work reactions to a tax rate decrease or increase. The majority of respondents thought they would not change their workload at all, while one-third thought they might work more, independent of a decrease or increase, and less than 10% would reduce the amount of their work. The authors concluded that taxation is simply not salient in the daily lives of most people.

While taxes might not be a frequently disputed issue in day-to-day conversations, people do try to make sense of their contributions to the community when taxes are due or whenever government spending is contested or new taxes are introduced. Moreover, people discussing taxation issues evaluate fiscal policy, tax rates and the use of taxes for the provision of public goods, as well as the interaction between themselves as taxpayers and tax authorities.