Tax Policy Challenges in the 21st Century

S. 632I. Why Do People Pay Tax?

Why do people pay tax? And why they do not? These are two sides of the same coin in the relationship between taxpayers and tax administrations. As important as it is to understand – and to avoid – tax evasion, identifying the reasons why people comply with their tax obligations can be a useful tool for tax administrations to improve their systems.

In recent years, much attention has been dedicated to explaining – and to avoiding – tax evasion. The recent OECD BEPS Report is one important example. On the other hand, less attention has been given to understanding what motivates people to pay their taxes. One possible explanation for this could be the idea that taxpayers and tax administrations are always fighting each other, and the latter are continuously chasing the former.

Examining taxpayers’ behavior, James Alm states that some people pay tax even when there is a low probability of being caught if they do not pay. After some experiments, he concluded that different reasons explain this behavior. Some individuals pay tax because they overestimate the probability of being audited. Others pay because they value the public good that their taxes finance.

One imp...