Skip to main content
Log in

Enforce taxes, but cautiously: societal implications of the slippery slope framework

  • Published:
European Journal of Law and Economics Aims and scope Submit manuscript

Abstract

The general public often demands more frequent audits and harsher penalties to discourage tax evasion. This paper explores how deterrence via better-equipped tax agencies interrelates with the motivation to voluntarily pay taxes, and how both factors jointly influence tax evasion. For a panel of up to 25 European countries, this paper studies aggregate implications of the Slippery Slope hypothesis of tax compliance, and contributes to the literature on the societal dimension of tax evasion. The results suggest that both higher trust in authorities and increased deterrence efforts are positively associated with tax compliance. Trust and deterrence interact and depend on each other: if trust in authorities is low, an increase in tax enforcement works best for narrowing the tax gap (and vice versa). Generally, the positive influence of trust diminishes with increasing deterrence.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Subscribe and save

Springer+ Basic
EUR 32.99 /Month
  • Get 10 units per month
  • Download Article/Chapter or Ebook
  • 1 Unit = 1 Article or 1 Chapter
  • Cancel anytime
Subscribe now

Buy Now

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Fig. 1
Fig. 2
Fig. 3
Fig. 4

Similar content being viewed by others

Data availability

Data and code will be made available upon request.

Notes

  1. Taxpayers comply with the tax laws and report income honestly not because they are forced to do so, but because they want to or feel obliged to, for example due to moral or societal norms.

  2. See e.g. Andreoni et al. (1998) and Slemrod (2007) for comprehensive literature reviews. Third-party reporting deprives many taxpayers of the opportunity to cheat. This will be discussed in Sect. 2.

  3. See, for example, Frunza et al. (2011) and Pfeiffer and Semerad (2013) for definitions, detailed explanations and empirical applications.

  4. Lisi (2012), with a cross-country study, tried to test the SSF’s assumptions on the aggregate level. He finds negative correlations between trust (World Values Survey data), power (proxied with the “Rule of Law” index (World Bank)) and tax evasion (size of the shadow economy). However, the author failed to incorporate the interplay of trust and power, and his indicator for “power of authorities” might be rather a measure of government trustworthiness than of deterrence.

  5. Center for Social and Economic Research, a non-profit research institute based in Warsaw (Poland). CASE prepared the VAT-gap reports for the European Commission.

  6. Measures for other direct taxes, e.g. the personal taxes, with a comparable coverage of countries and years are not available.

  7. The ESS aims at mapping social and political attitudes in Europe. Starting in 2002, surveys are conducted every two years, covering more than 30 European countries.

  8. Tables and Figures with descriptions and sources of the data, a listing of average tax compliance, trust and deterrence in the EU countries used in the paper, as well as illustrations of dynamics of the variables of interest within countries and over time can be found in the Online Appendix.

  9. The explanatory and control variables used in this paper are not subject to multicollinearity. Given the rule of thumb that the Variance Inflation Factor (VIF) should not exceed a value of 10, all explanatory variables pass this condition. The highest VIFs are found for GDP (3.23), trust (2.64) and deterrence (1.18). The condition index of the explanatory variables is 3.57, markedly below the value of 30 which indicates strong multicollinearity. The condition index was calculated for a correlation matrix with an intercept.

  10. Tax compliance in year t will influence TC in year t + 1. However, with a small t, including lagged tax compliance as an additional control variable would introduce endogeneity to the statistical model (see, e.g., Nickell, 1981).

  11. Bulgaria, with a BLUP of around + 5 is a special case, since trust in authorities in this country is the lowest in the whole sample and audit efforts are only average, compared to the other European countries. Likely, tax compliance, which spiked around the years 2006–2008, was over-reported, at least in the years prior to Bulgaria joining the European Union in 2007. The large standard error for Luxembourg originates from calculating the BLUP with only two available observations.

References

  • Allingham, M. G., & Sandmo, A. (1972). Income Tax Evasion: A Theoretical Analysis. Journal of Public Economics,1, 323–338.

    Article  Google Scholar 

  • Alm, J., McClelland, G. H., & Schulze, W. D. (1992). Why do people pay taxes? Journal of Public Economics,48, 21–38.

    Article  Google Scholar 

  • Alm, J., McClelland, G. H., & Schulze, W. D. (1999). Changing the social norm of tax compliance by voting. Kyklos,52, 141–171.

    Article  Google Scholar 

  • Andreoni, J., Erard, B., & Feinstein, J. (1998). Tax compliance. Journal of Economic Literature,36, 818–860.

    Google Scholar 

  • Becker, G. S. (1968). Crime and punishment: An economic approach. Journal of Political Economy,76, 169–216.

    Article  Google Scholar 

  • Besley, T. and T. Persson (2013) Taxation and Development, in A. Auerbach, R. Chetty, M. Feldstein and E. Saez (eds) “Handbook of Public Economics 5”, North Holland pp. 51–110.

  • Bohnet, I., Frey, B. S., & Huck, S. (2001). More order with less law: On contract enforcement, trust, and crowding. American Political Science Review,95, 131–144.

    Article  Google Scholar 

  • Carrillo, P., Pomeranz, D., & Singhal, M. (2017). Dodging the Taxman: Firm misreporting and limits to tax enforcement. American Economic Journal: Applied Economics,9, 144–164.

    Google Scholar 

  • CASE Network (2013). Study to Quantify and Analyse the VAT Gap in the EU-27 Member States, No. 116.

  • CASE Network (2014). 2012 Update Report to the Study to quantify and analyse the VAT Gap in the EU-27 Member States, No. 120.

  • CASE Network (2016). Study and Reports on the VAT Gap in the EU-28 Member States: 2016 Final Report, No. 483.

  • CASE Network (2018). Study and Reports on the VAT Gap in the EU-28 Member States: 2018 Final Report, No. 496.

  • Cowell, F. A. (1990). Cheating the Government. Cambridge: MIT Press.

    Google Scholar 

  • Falkinger, J. (1995). Tax Evasion, Consumption of Public Goods and Fairness. Journal of Economic Psychology,16, 63–72.

    Article  Google Scholar 

  • Feld, L. P., & Frey, B. S. (2002). Trust Breeds Trust: How Taxpayers are Treated. Economics of Governance,3, 87–99.

    Article  Google Scholar 

  • Feld, L. P., & Tyran, J. (2002). Tax Evasion and Voting: An Experimental Analysis. Kyklos,55, 197–222.

    Article  Google Scholar 

  • Feld, L. P., & Frey, B. S. (2007). Tax Compliance as the Result of a Psychological Tax Contract: The Role of Incentives and Responsive Regulation. Law and Policy,29, 102–120.

    Article  Google Scholar 

  • Frey, B. S., & Jegen, R. (2001). Motivation Crowding Theory. Journal of Economic Surveys,15, 589–611.

    Article  Google Scholar 

  • Frunza, M., Guegan, D., & Lassoudiere, A. (2011). Missing Trader Fraud on the Emissions Market. Journal of Financial Crime,18, 183–194.

    Article  Google Scholar 

  • Gangl, K., E. Hofmann, M. Pollai, and E. Kirchler (2012). The Dynamics of Power and Trust in the “Slippery Slope Framework” and its Impact on the Tax Climate, available at SSRN: https://ssrn.com/abstract=2024946.

  • Kaplanoglou, G., Rapanos, V. T., & Daskalakis, N. (2016). Tax Compliance Behaviour During the Crisis: The Case of Greek SMEs. European Journal of Law and Economics,42, 405–444.

    Article  Google Scholar 

  • Keen, M., & Lockwood, B. (2006). Is the VAT a Money Machine? National Tax Journal,59, 905–928.

    Article  Google Scholar 

  • Kirchler, E. (2007). The Economic Psychology of Tax Behavior. Cambridge: Cambridge University Press.

    Book  Google Scholar 

  • Kirchler, E., Hoelzl, E., & Wahl, I. (2008). Enforced Versus Voluntary Tax Compliance: The “Slippery Slope” Framework. Journal of Economic Psychology,29, 210–225.

    Article  Google Scholar 

  • Kleven, H., Knudsen, M. B., Kreiner, C. T., Pedersen, S., & Saez, E. (2011). Unwilling or Unable to Cheat? Evidence from a Tax Audit Experiment in Denmark, Econometrica,79, 651–692.

    Google Scholar 

  • Kleven, H. (2014). How Can Scandinavians Tax So Much? Journal of Economic Perspectives,28, 77–98.

    Article  Google Scholar 

  • Kleven, H., Kreiner, C. T., & Saez, E. (2016). Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries, Economica,83, 219–246.

    Google Scholar 

  • Knack, S., & Keefer, P. (1997). Does Social Capital Have an Economic Payoff? A Cross-Country Investigation, The Quarterly Journal of Economics,112, 1251–1288.

    Google Scholar 

  • La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1999). The Quality of Government. The Journal of Law, Economics & Organization,15, 222–279.

    Article  Google Scholar 

  • Lisi, G. (2012). Testing the Slippery Slope Framework. Economics Bulletin,32, 1369–1377.

    Google Scholar 

  • Luttmer, E. F. P., & Singhal, M. (2014). Tax Morale. Journal of Economic Perspectives,28, 149–168.

    Article  Google Scholar 

  • Muehlbacher, S., Kirchler, E., & Schwarzenberger, H. (2011). Voluntary versus Enforced Tax Compliance: Empirical Evidence for the “Slippery Slope” Framework. European Journal of Law and Economics,32, 89–97.

    Article  Google Scholar 

  • Nickell, S. (1981). Biases in Dynamic Models with Fixed Effects. Econometrica,49, 1417–1426.

    Article  Google Scholar 

  • OECD. (2015). Tax Administration 2015: Comparative Information on OECD and Other Advanced and Emerging Economies. Paris: OECD Publishing.

    Book  Google Scholar 

  • Pfeiffer, S. and P. Semerad (2013). Missing Trader Fraud in European VAT, MENDELU Working Papers in Business and Economics 41.

  • Pomeranz, D. (2015). No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax. American Economic Review,105, 2539–2569.

    Article  Google Scholar 

  • Rothstein, B. (2000). Trust, Social Dilemmas and Collective Memories. Journal of Theoretical Politics,12, 477–501.

    Article  Google Scholar 

  • Sandmo, A. (2005). The Theory of Tax Evasion: A Retrospective View. National Tax Journal,58, 643–663.

    Article  Google Scholar 

  • Scholz, J. T., & Lubell, M. (1998). Trust and Taxpaying: Testing the Heuristic Approach to Collective Action. American Journal of Political Science,42, 398–417.

    Article  Google Scholar 

  • Schulze, G. G., & Frank, B. (2003). Deterrence versus Intrinsic Motivation: Experimental Evidence on the Determinants of Corruptibility. Economics of Governance,4, 143–160.

    Article  Google Scholar 

  • Slemrod, J. (2002). Trust in Public Finance, NBER Working Paper 9187.

  • Slemrod, J. (2007). Cheating Ourselves: The Economics of Tax Evasion. Journal of Economic Perspectives,21, 25–48.

    Article  Google Scholar 

  • Torgler, B. (2003). To Evade Taxes or Not to Evade: That is the Question. Journal of Socio-Economics,32, 283–302.

    Article  Google Scholar 

  • Torgler, B. (2006). The Importance of Faith: Tax Morale and Religiosity. Journal of Economic Behavior & Organization,61, 81–109.

    Article  Google Scholar 

  • Torgler, B. (2007). Tax Morale and Tax Compliance: A Theoretical and Empirical Analysis. Cheltenham UK: Edward Elgar.

    Book  Google Scholar 

  • Wahl, I., Kastlunger, B., & Kirchler, E. (2010). Trust in Authorities and Power to Enforce Tax Compliance: An Empirical Analysis of the “Slippery Slope Framework”. Law and Policy,32, 383–406.

    Article  Google Scholar 

  • Yitzhaki, S. (1974). A Note on Income Tax Evasion: A Theoretical Analysis. Journal of Public Economics,3, 201–202.

    Article  Google Scholar 

Download references

Acknowledgements

This research was funded by the German Research Council (DFG) in its Research and Training Group (RTG) 1723 “Globalization and Development”. I am grateful for guidance from Andreas Wagener and Kay Blaufus. I thank Susan Steiner, Tejasvi Velayudhan, Reinhard Weisser and conference & seminar participants in Rust (Austria), Hannover and Tokyo for helpful suggestions. I thank three anonymous referees for their many valuable comments.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Stefanos A. Tsikas.

Ethics declarations

Conflict of interest

The author has no financial arrangements that might give rise to conflicts of interest with respect to the research reported in this paper.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Electronic supplementary material

Below is the link to the electronic supplementary material.

Supplementary file1 (DOCX 131 kb)

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Tsikas, S.A. Enforce taxes, but cautiously: societal implications of the slippery slope framework. Eur J Law Econ 50, 149–170 (2020). https://doi.org/10.1007/s10657-020-09660-8

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10657-020-09660-8

Keyword

JEL Classification

Navigation