Size, Causes and Consequences of the Underground Economy

Chapter 2Illegal, Immoral, Fattening or What?: How Deterrence and Responsive Regulation Shape Tax Morale

Lars P. Feld and Bruno S. Frey

There should be no place in our organization for brusqueness, incourtesy, or arrogance. We want the bureau representative to meet the taxpayer and discuss his problems sympathetically, understandingly, frankly and fairly ... Secretary of the U.S. Treasury (1929)

Introduction

The puzzle of the economic theory of tax compliance is why people do pay taxes. According to the seminal study by Allingham and Sandmo (1972), which in turn is based on Becker’s (1968) economic theory of crime, the extent of deterrence, as the product of the probability of being detected and the size of the fine imposed, determines the ...