Tax evasion in a transition from socialism to capitalism: The psychology of the social contract

Abstract

In a common assumption of the economics of tax evasion, extending beyond the basic Allingham-Sandmo model, the choice of a taxpayer to evade taxes depends upon the perceived fairness of the tax system.The purpose of the paper is to provide a psychological foundation for this assumption by drawing on Hayek's theory of human behavior as a process of rule following.According to the main hypothesis, taxpayers are more compliant with tax laws to which they can in principle give their full consent.A social contract as a basis of tax policy may provide a potent means to combat tax evasion particularly in transition economies that have inherited a deep mistrust of the government from their socialist past.