Tax Morale, Leviathan and the Political Process: A Theoretical Approach

Abstract

It is proposed that a more accurate predicition of tax evasion activity than in the standard portfolio-choice model can be derived even for risk-neutral individuals if psychological costs are considered. Contrary to earlier models integrating psychological costs they are systematically derived by assuming a relationship between cognitive dissonance, taxpayer satisfaction with public policy and taxes evaded. It is shown that this approach to modelling tax evasion can bridge a gap to the literature from economic psychology on the same topic by accounting for several influences that traditionally play a role there, but are neglected in the portfolio-choice model.