Social Norms Moderate the Effect of Tax System on Tax Evasion: Evidence from a Large-Scale Survey Experiment

Abstract

In this study, we reconcile conflicting findings from the extant literature on the impact of tax system parameters on tax noncompliance. We argue that social norms play a role of heuristics facilitating tax payers’ response to the instrumental incentives posed by the systemic parameters, such as tax rate and penalties for evasion, and thus moderate the effect of those parameters on willingness to evade taxes. Relying on a unique survey experiment conducted in fourteen countries of Central-Eastern Europe, we demonstrate two types of a conditioning effect of norms. First, the impact of tax rates on respondents’ propensity for tax evasion is moderated by the perceived norms of the society at large (descriptive norms). In particular, an increasing tax rate lowers the probability of evasion as long as one views “most others” as honest taxpayers, which highlights the importance of equitability (fairness) concerns for tax compliance decisions. In contrast, the impact of punishment is moderated by the perceived norms of one’s immediate reference group (subjective norms). Strong subjective compliance norms tend to effectively replace penalties as a mechanism discouraging tax evasion, suggesting that the deterrent effect of a penalty can be entirely suppressed when subjective norms are strong. These findings have important implications for the understanding of tax compliance decisions under different formal and informal regimes.