How tax theory in economics treats us

Drawing on a caricature of the work of Dani Rodrik, for most mainstream economists a model is just a model and there are many models. Norms only enter into the picture in terms of clearly stated and testable components of models and models provide a means to explore the scope of theory. In principle, policy advocacy is supported by model findings and as such mainstream economists tend to start from the position that their work has the rigour and clarity of quantitative science and that its policy implications carry the force of empirical evidence. Critics meanwhile tend to argue that mainstream economics struggles to come to terms with the implicit normativity of its frames of reference and with the ethics its concepts and foci presuppose but that its discourse elides. In particular, they often criticise the tacit politicisation of its theory and method.

In a recent paper in Journal of Economic Issues, I explore a particularly interesting variant on the problem of unexplored normativity, politicisation and its ethical consequences. Put simply, standard theory of tax evasion inadvertently treats everyone as a criminal. Moreover, while recent work on theory of “tax morale” seems different it is not as different as one might think. Both contribute to a world of biddable neoliberal subjects.

Briefly, the formative work on tax evasion is Michael Allingham and Agnar Sandmo’s 1972 article “Income Tax Evasion:  A Theoretical Analysis,” and this treats the problem from the point of view of a standard utility function in which a rational economic agent must choose to pay tax or withhold payment (i.e. evade tax). This is essentially a calculative decision posed as optimisation in terms of the probability of being caught (via audit or informant etc.) and the size of any fine. But consider what thought process the theory is attributing to an economic agent:

1. It is permissible to break the law.
2. Breaking the law is what one would do if not prevented.
3. One is motivated to break the law even if one does not do so.

To be clear, the intent is merely to use a standard economic concept – the utility function – to explore taxation and to establish that tax evasion can be conceived as rational behaviour. But the unintended outcome is the normalisation of criminal behaviour. We are all criminals except and insofar as a loss/gain calculation is made in terms of possible sanction and risk tolerance.

What is very obviously missing here is the role of socialisation, institutions and a sense of the collective and individual good i.e. that we might recognise that it is right to pay taxes and good for society that we do. To be fair to Allingham and Sandmo, there is a further consideration in terms of possible “reputation damage”, but this is developed in subsequent models via its pecuniary impact despite that it is a hard to estimate non-pecuniary variable. And obviously the nature of the argument regarding the role of tax can be looked at differently if one is an advocate of modern monetary theory.  Yet it is still the case that longstanding mainstream theory inadvertently criminalises economic agency.

“Tax morale” takes a different point of view, rather than an implied stick it offers the carrot in the form of carefully framed communicative cues intended to make the economic agent decide to pay. This takes many forms but the dominant applied theoretical perspective is the behavioural economics of nudge theory.  As Blair Fix notes, this tends to:

1. Begin with the model rational utility-maximizing agent and claim this is false.
2. Create a test of the falsity of the model agent and confirm that it is false.
3. Keep the model agent as a benchmark and label the behaviour isolated in the test a “bias.”
4. Repeat the process for a new context of behaviour.

There are numerous criticisms of the limited nature of this approach. For our purpose, however, the main problem is that applications via nudging of manipulation of “bias” – the process of intervention – treat its subjects as a collection of feelings and behaviours that can be isolated and triggered. There is no moral economy here of the kind explored by Andrew Sayer. As such, theory of tax behaviour is not focused on addressing its subjects as fully conceived ethical beings who can be persuaded to a position in a deliberative sense. Economics does nothing to address the meta-trends or direction of travel of its times – there is no recognition of tax justice. Rather the technical skillset and concerns of economists inadvertently contribute to the production and reproduction of passive neoliberal subjects.  Arguably, this reproduction is itself imbricated with other processes – corporate tax avoidance and tax competition, deployment of Laffer Theorem style argument and legitimations, as well as, more broadly, strategies in “global wealth chains”, particular kinds of financialization and trends in technology of work.

To teach the economics of tax theory then, is a little like teaching mainstream economic theory of climate, it is to teach complacency.