The question of why people pay taxes is as old as taxes themselves. Allingham and Sandmo (1972) provided the main theoretical model based on the economics of crime approach (Becker  1974) where individuals would evade taxes as long as the payoff from tax evasion outweighs the costs of being caught evading. Increasing the costs of cheating – more audits, and stiffer penalties - should reduce tax evasion. Unfortunately, over time that theoretical approach has shown its limitations. First, it cannot explain why observed levels of tax compliance in empirical studies and in experiments are higher than the model’s theoretical predictions based on probabilities of detection and penalties.
Second, exclusive reliance on incentives may crowd out voluntary tax compliance (Feld and Frey 2002, 2007), Incentives may be problematic when used to channel individual behavior; it has been shown that individuals deviate from optimal behavior even when those incentives are designed to maximize their own payoffs. The problem lies with the fact that incentives convey information about the principals’ beliefs regarding the agents (Bowles, 2008) Taxpayers may read authorities’ lack of trust in them from the incentives they choose and punish them .
Third, in order to assimilate non-compliance with taxes with cheating the model assumes that a clear and objective demarcation between compliant and non-compliant behavior exists. Unfortunately, a case that happened in Australia in the late 1990s shows that authorities may not know where the demarcation line is; authorities first granted tax deductions to investors in certain schemes only to reverse course and charge them with tax evasion demanding back due taxes, interests and penalties. Finally, in light of public outcry, authorities backtracked claiming only back due taxes (Braithwaite Murphy and Reinhart 2007) .
That has prompted the search for alternative models that may better capture the complexity of tax compliant behavior (Alm, 1999). Theoretical concerns focused on the role of norms in explaining tax compliance behavior or attitudes about complying with taxes (e.g. Cullings and Lewis 1997, Schnellenbach 2006) Taxpayers may have an intrinsic motivation to comply with taxes which was termed Tax Morale (Torgler 2003b, 2006) which is shaped by individual and institutional norms (Torgler, 2003b). Unlike the traditional model of tax evasion, taxpayers’ rationality is assumed as limited; norms act as devices helping individuals to make their own tax compliance decisions (Torgler, 2003b) Although limited by the still developing links between tax compliance attitudes and tax compliant behavior (Halla, 2010) empirical results show plausibly Tax Morale may influence taxpayer behavior as it appears correlated with the size of the underground economy (Alm and Torgler 2006, Torgler and Schneider 2007).
The purpose of this paper is to work on the finding that trust in government affects Tax Morale to propose a more precise...