The Tax Compliance Puzzle: Evidence from Theory and Practice

Abstract

What lawmakers, administrators, and researchers do not know about tax compliance erodes the foundation of government finances by threatening the equity, efficiency, effectiveness, and yield of the tax system. Modern tax systems rely heavily on voluntary compliance for revenue collection. Unfortunately, tax administrators and researchers have only a limited understanding of why people pay taxes and how much tax liability is uncollected, even though this information is critical for measuring administrative performance and for targeting compliance strategies. This article examines evidence on taxpayer compliance, both domestic and international, to provide a synthesis of what is understood about compliance, how administrators and lawmakers may best collect the taxes that have been levied, and how administrators and researchers may measure noncompliance and the effectiveness of approaches toward its reduction.