Normative and Cognitive Aspects of Tax Compliance: Literature Review and Recommendations for the IRS Regarding Individual Taxpayers

Section Six — Normative and Cognitive Aspects of Tax Compliance: Literature Review and Recommendations 138 Normative and Cognitive Aspects of Tax Compliance: Literature Review and Recommendations for the IRS Regarding Individual Taxpayers TIPRA and OIC Cash Economy Strategy EITC Audit Challenges EITC Certification Simulation Tax Morale Preparers and Compliance Table of Contents Normative and Cognitive Aspects of Tax Compliance: Literature Review and Recommendations for the IRS Regarding Individual Taxpayers Marjorie E. Kornhauser* Summary Why do people follow the law? The answer, under the traditional theory of compliance, is fear of detection and punishment. This deterrence theory, 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 cost-benefit analysis in which people rationally 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 the exact components of tax morale are not yet fully delineated, nor the precise mechanisms by which they work, the literature already 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, reci- procity, 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 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. * ©Marjorie E. Kornhauser, Professor of Law, Sandra Day O’Connor College of Law, Arizona State University. The author wishes to thank the Florida Tax Review for its assistance in providing Bluebook citations for this study.

Normative and Cognitive Aspects of Tax Compliance: Literature Review and Recommendations for the IRS Regarding Individual Taxpayers

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