Taxes and Benefits: Two Options to Cheat on the State


  • We would like to thank two anonymous referees and the Editor for their very helpful comments. The article has also benefited from comments and discussions with Bruno S. Frey, Franz Hackl, Wolfgang Luhan, Gerald Pruckner, Corné van Walbeek, Hannes Winner and participants at the first World Meeting of the Public Choice Society 2007 in Amsterdam. The usual disclaimer applies. This article was partly written during Martin Halla's visiting scholarship at the Institute for International Economic Studies at Stockholm University in 2007. He would like to thank for the stimulating academic environment and hospitality there. This research was funded by the Austrian Science Fund (FWF): National Research Network S103, The Austrian Center for Labor Economics and the Analysis of the Welfare State. A substantially different version of this article, solely analysing Austrian data, — however carrying almost the same title — circulated as Working Paper No. 0505 of the Department of Economics at the University of Linz. That old article has retired!


In this article we study the social norms to abstain from cheating on the state via benefit fraud and tax evasion. We interpret these norms (called benefit morale and tax morale) as moral goods, and derive testable hypotheses on whether their demand is determined by prices. Employing a large survey data set from OECD-member countries we provide robust evidence that the demand responds to price proxy variables as predicted by theory. The main general conclusion of this article is that social norms (which are widely accepted as determinants of individual economic behaviour) are themselves influenced by economic factors.