DENNIS KLINKHAMMER

HOW TO TREAT TAX EVADERS: A NEUROECONOMIC POINT OF VIEW

COLOGNE (2008)

Table of contents

1.

Introduction: Sovereign tax behavior?

3

2.

Development of tax collecting methods and their effects

4

2.1.

Taxpaying as a social dilemma

5

2.2.

Empirical evidence for the relationship between sanctions and trust

6

2.3.

The relevance of trust for taxpaying

9

3.

Taxpaying: A neural determined matter?

10

3.1.

What our brain thinks about taxes

11

3.2.

Neuronal determination of financial risks

12

4.

Summary

13

5.

List of literature

14

Writer′s assertion

1. Introduction: Sovereign tax behavior?

Dealing with tax behavior bases most times on a probabilistic point of view: Scientists

collect and interpret survey data and assume patterns for the behavior of the many (Fehr &

Camerer, 2007, p. 219). Especially in cases of fundamental rules and possible sanctions these

patterns may change and allow further interpretations. Consequently it is possible to analyze

the different effects of tax systems and their instruments. Incidentally this point of view deals

with the possible obligations and expectations between the citizenships that have to pay taxes

and the country that collects taxes. But the most important question is about the best method

for collecting these taxes and especially from those who want to avoid paying them.

Considering the large field of consequences of tax evasion for citizens and country and the

many possibilities to evade taxes, the total loss through this kind of tax behavior is hard to

measure. But it can be assumed that the total set of evaded taxes is very high and that this is a

major problem in every tax system. Therefore many scientists try to focus on the instruments

for perceiving lost taxes. Some of these instruments are sanctions by law or amnesties for

those who self-indicate their evasive behavior. Again it is possible to measure the effects of

sanctions and amnesties on the total income of taxes. But what about the internal motivation

of each of those tax evaders to react on this external tax collecting input? What kind of inner

progress urges the tax evader to pay his tax: Is it the sovereign thought about the

consequences, the late conviction that paying taxes is honest or is it more than thinking and

feeling ± perhaps it is an unavoidable reaction on that external tax collecting factor,

determined by WKHWD[SD\HU¶V genes?

This question is not as strange as it seems to be, because in the last few years many

medical and psychological scientists have focused on the neuronal determination of economic

behavior. That research field ± called neuroeconomics ± pointed out that for example the

results for a decision can be predicted seconds before the recipient himself is able to mention

his thoughts about a fictive or real situation (Soon et al., 2008, p. 543). Furthermore these

scientists search for an internal mechanism in human beings that is able to decide between

µZURQJ¶DQGµULJKW¶RUµIDLU¶DQGµXQIDLU¶,f such a determined and internal behavior exists, it

would be possible to look out for a tax system that seems to be adequate for most human

beings in a biological way and to measure the internal reactions concerning sanctions or

amnesties. Hence the intention of this seminar paper is to combine the psychological results

about the reactions to sanctions and amnesties with neuroeconomic research and their possible

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predictions for taxpaying behavior. It is not only a view on individual behavior; it is quite a

view inside the taxpaying individual itself.

2. Develop ment of tax collecting methods and their effects

As mentioned above there are two possible solutions for collecting taxes: The older point

of view focuses on sanctions against those who evade taxes; the second one deals with soft

and gentle influence on the tax evading individual. Hence there are two different underlying

theories between these concepts. Sanctioning seems to be an adequate method to deterrence

inappropriate behavior ± such like tax evading. It depends on the opinion WKDW³>«@SHRSOHDUH

UDWLRQDODFWRUV>«@´DQGtry WR³>«@PD[LPL]HWKHLUH[SHFWHGXWLOLW\´ (Murphy, 2008, p. 114).

According to neoclassical economics acting in a rational way means to calculate somehow the

relation between input and output. For example it would not be rational to buy one portion of

ice-cream for five Euros if there is a cheaper solution in the same area with equal quality.

Otherwise someone would pay too much and lose money.

Sanctioning tax systems try to manipulate the rational calculation of each individual:

Losing money or freedom are the major risks in evading taxes if the tax system declares

sanctions against tax avoiding law breakers. Both of these risks should be harder for each

individual than the loss through paying taxes. It is the basic assumption of sanctioning tax

V\VWHPV ³>«@ that by handing out harsh punishment and penalties to rule-breakers this will

deter them from re-offending in the future´0XUSK\, 2008, p. 115). But the most interesting

point about the punishing methods is the fact that there seem to be ³>«@Lnverse relationships

between the threat of legal punishment and the volume of crime´0XUSK\, 2008, p. 114).

Therefore scientists focus on the other possible solution for dealing with tax evaders:

InVWHDGRILQIOXHQFLQJWKHLQGLYLGXDOFDOFXODWLRQRIXVHWKH\IRFXVRQ³>«@SURFHdural justice

>«@´0XUSK\, 2008, p. 116) with the aim to interact with the emotions and ethical behavior

of the taxpaying individual. The basic assumption is that punishing people by sanctioning

them for inadequate tax behavior stigmatizes them and makes them feeling more

uncomfortable with the concept of collecting taxes compared to the actual situation itself.

This is what Murphy (2008) FDOOVWKH³>«@PHGLDWLQJHIIHFWRIHPRWLRQV>«@´p. 118). With

his 2008 published study ³(QIRUFLQJWD[FRPSOLDQFH7RPXQLVKRU3HUVXDGH´KHSURRIHGWKDW

there is a significant strong effect between being punished for tax avoidance in the past and

resentments against tax authorities and taxpaying. Furthermore he explains that these

resentments base on the previous experiences with tax authorities and that the positive effect

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