Berkeley Program in Law and Economics

This paper considers the puzzle of why a substantial number of people pay their taxes even when the probability of being caught when evading is virtually nil. Our suggestion is to augment the traditional theory of public enforcement to take into account tax morale -- the intrinsic motivation to support the taxing authority. We analyze the consequences of a variable probability of catching and punishing a tax evader and a variable fine on individual behavior and on social welfare. It is shown that as tax morale becomes more important, enforcement mechanisms should not be as widely used. However, if enforcement mechanisms are used, the probability of catching violators should be increased. Please contact the Program in Law and Economics at Boalt Hall School of Law, UC Berkeley, Berkeley, CA 94720 for a copy of this paper.