Tax Compliance Theory and the Literature

During the 1980s structured research into tax evasion and non-compliance became widespread following the political concerns in the United States of an increasing “tax gap.”1 Initially, the literature which emerged from the United States had a strong focus on economic theory. Utility theory, developed by Allingham and Sandmo,2 assumed taxpayers to be ‘utility maximisers’ in decisions of tax reporting and compliance, where tax evasion was viewed as worthwhile if the financial gains purely outweighed the financial costs. More recently, however, tax compliance studies3 have been based on social and psychological theories. Research studies in this field have argued that the human element plays a vital role in individual taxpayer compliance decisions. However, while the tax compliance literature has emerged from a wide variety of disciplines, there has been a lack of consensus and agreement as to why people do or do not pay their taxes. Indeed the tax compliance literature indicates that there are still many research gaps that need to be filled with respect to issues concerning tax morals, tax fairness and deterrence measures, for the likely improvement in overall taxpayer compliance. This chapter which undertakes a synthesis, generally chronological in order and by category, critically reviews and evaluates the state of knowledge of taxpayer compliance to 2012. In particular, studies based on the theory of economics that explain the change in taxpayer compliance behaviour,4 and others based on the theories of psychology and sociology that explain the varying levels of taxpayer compliance, reveal that some combination thereof is optimal in improving overall compliance. The focus in this chapter is upon three compliance variables which have been predominant throughout the review of the literature. They include the economic