Norms of tax compliance

Tim Besley, Anders Jensen, Torsten Persson

12 February 2015



The fiscal crises following the global downturn in 2008 have thrown the spotlight on the capacity of some European governments to fund their spending commitments. In Greece, long-run difficulties in getting people to pay their taxes have certainly contributed to its difficulties of creating a sustainable fiscal position. This example raises several questions. Which factors shape tax compliance? To what extent are those factors due to standard economic considerations? Can we learn additional lessons by delving into social motives for compliance?

Economic and social motives for compliance

Traditionally, economists see tax compliance as a problem of incentives. This was first formalised by Allingham and Sandmo (1972), who focused on individual motives to pay taxes based on the costs and benefits of doing so. In their framework, tax compliance is enhanced by increasing penalties for evasion or the chance of detection. Economists are more reluctant to consider social motives for tax compliance, although they have on occasions appealed to non-pecuniary motives such as stigma, tax morale, or pro-social values.1 Such factors refer to the social context in which taxes are paid. Individual behaviour might be reinforced or undermined by what others do or how they react in social interactions. Tax compliance or evasion can thus be supported by social norms. In a world where pro-tax norms take root, even high levels of taxation may not require an overbearing system of monitoring and auditing. Plausibly, levels of taxation we now take for granted in many rich countries (40% of GDP or more) would not be feasible without strong tax-compliance norms.

Economists show a growing interest in social norms and have used a variety of approaches to study them. But applications to concrete phenomena, such as tax compliance, are still quite rare. Sociologists and others speak a great deal about social norms, but much less about how persistent they are and how they can be changed. Neither they nor economists have offered an integrated analysis of the interactions between the two types of motives – do social motives crowd in or crowd out individual motives?

Benabou and Tirole (2011) have introduced a framework for looking at social norms and their interaction with standard motives such as laws and incentives. The basic idea is that individuals are partly motivated by standard economic calculation, by intrinsic desires to behave in particular ways, but also by how their actions are perceived by others. The latter give individuals motives to use some actions to ‘signal’ their pro-social motivation. An increase in standard sanctions such as fines and punishments can be more or less effective depending on whether there is crowding in or crowding out around the ‘social equilibrium’ determined by the norm.

Empirical approaches to social norms

Empirical studies of social motivations can follow different routes. Two routes go through lab and field experiments, which can randomly manipulate the norm, or knowledge about it. But lab experiments may fail to reproduce real choices of people whether to pay their taxes. Field experiments are also limited in scope, since most tax authorities would not risk undermining compliance with major shocks to norms. A third route is to look for a natural experiment – a circumstance in the real world that is unrelated to the objective of the study.

UK local tax evasion and the poll tax

In Besley et al. (2015), we use a dynamic extension of the Benabou–Tirole model and two sets of natural experiments in the UK. The main natural experiment takes advantage of the poll tax enacted by the Thatcher government in the early 1990s. Sufficient time has now passed that we can credibly ask if that policy had a persistent effect on tax compliance. The poll tax – an equal tax levied on all citizens in a council – replaced a long-standing system of local property taxation. Its introduction in 1990 was met with unprecedented non-compliance and riots in the streets. As a consequence, it was replaced after only three years with a new version of the property tax.

Figure 1 shows that average evasion rates in the property tax system preceding the poll tax stood at 2-3%. However, the introduction of the tax saw them jump to over 10%. The restoration of the property tax did see an immediate decline, but to a level in excess of that of the 1980s. Evasion gradually declined over time, taking around ten years to return to the 1980s level.

Figure 1. Tax evasion, 1980–2009

Notes: Each observation is a yearly average across all councils of our main measure of evasion – the difference between net collected tax revenue and net tax liability on the local tax base. During 1990–1992, a property tax base was replaced by the poll tax, which was levied at a flat rate per head. See Section 3 of Besley et al. (2015) for further details.

While the initial non-compliance could have been based on the expectation of lax enforcement, it is implausible to argue that such expectations were held in the system that replaced it. Rather, it is plausible that the pattern of non-compliance subsequent to the poll tax reflected the creation and persistence of a non-compliance norm during the poll-tax era. In Besley et al. (2015), we set out to investigate this in a sample of 364 local authorities in the UK.

Persistence of social norms

A simple way to look for persistence is to see whether the pattern in Figure 1 is different before and after the poll-tax period in those local authorities that had high versus low poll-tax evasion. Figure 2 shows such a comparison, with a red line for high poll-tax evaders (above median evasion) and a blue line for low poll-tax evaders. Two facts jump out of this picture. There is no systematic difference between the red and blue lines before the poll-tax period. But once the poll tax is abolished, the red line remains above the blue line throughout the period. These facts suggest an explanation in terms of norms-based tax compliance. High poll-tax non-compliance created a norm of non-compliance in certain localities, which was hard to shift once the tax was abolished. However, the norm of compliance gradually restored itself over time. It is hard to explain this pattern by standard economic fundamentals. For example, in Besley et al. (2015) we show that the results hold up when one holds constant fixed characteristics of each local authority, and controls for a variety of economic, social, and political factors which might affect the proportion of poll-tax evasion, e.g., the transient poll-tax liability, household income, political affiliation, and housing market conditions.

Figure 2. Tax evasion, 1980–2009 (high and low poll-tax evaders)

Notes: Each yearly observation is an average of tax evasion across all councils in one of two subsamples: the blue line refers to the councils where average tax evasion in the poll-tax period was below the median; the red line refers to councils where poll-tax evasion was above the median.

The cost of the poll-tax experiment

It is clear from Figure 2 that the poll-tax experiment meant a substantial loss of revenue for the councils. Based on our analysis, we estimate the aggregate shortfall of property-tax revenue due to the poll tax at about £5 billion in 2009 prices, which is about 26% of the total value of the 2009 local tax liability.

Interactions between enforcement and social norms

In the paper, we also consider the interaction between individual and social motives discussed above. We use a large set of staggered council elections, which narrowly shifted the council from a single-party majority to the need to form a coalition, and the fact that single-party local governments enforce taxes much more forcefully than do coalition governments. Our model predicts that higher tax enforcement should have a larger effect on evasion over time in a council with a lower level of evasion. Exploiting the same grouping as in Figure 2, we indeed find support for this prediction – the same positive shock to enforcement lowers evasion by more in the councils behind the blue curve in the figure than in the councils behind the red curve.

The bottom line

If tax compliance is indeed supported by norms as this research suggests, then policies that are intended to strengthen tax compliance need to be built on an understanding of how social norms are created, change over time, and interact with traditional economic motives. This applies with particular force to countries like Greece that are trying to increase their fiscal capacity. Social norms can change but they seem to be ‘sticky’. Also, it may be the hardest to increasing tax compliance using standard economic incentives starting from a point where evasion is widespread.


Allingham, M and A Sandmo (1972), “Income Tax Evasion: A Theoretical Analysis”, Journal of Public Economics 1: 323–338.

Benabou, R and J Tirole (2011), “Laws and Norms”, NBER Working Paper 17579. 

Besley, T, A Jensen, and T Persson, (2015), “Norms, Enforcement, and Tax Evasion”, CEPR Discussion Paper 10372. 

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

Luttmer, E F P and M Singhal (2014), “Tax Morale”, NBER Working Paper 20458. 


1 See, for example, Cowell (1990) and Luttmer and Singhal (2014).



Topics:  Taxation

Tags:  tax compliance, tax evasion, tax, taxation, tax morale, social norms, incentives, poll tax, enforcement

Professor of Economics and Political Science at the London School of Economics; and Research Fellow, CEPR

PhD candidate in the Economics Department, LSE

Director and Professor of Economics, Institute for International Economic Studies and CEPR Research Fellow