Social norms and tax compliance: framing the decision to pay tax

Observed levels of taxcompliance are higher than predicted levels (when predictions are based on Allingham and Sandmo's neoclassical model of tax evasion). They are higher if socialnorms recognise the importance of compliance. But how do socialnorms frame decisions to pay tax? Can prospect theory be applied to shed insight into the way that socialnorms exert their influence? An analysis of questionnaire responses (from Italy and from the UK) suggests that they exert their influence by changing the reference points that individuals use when they code changes as ‘gains’, or ‘losses’. The evidence suggests that socialnorms frame the decision to pay tax by changing individuals’ perceptions of their entitlement to income. This consideration is important when designing policy to deter evasion.