The ghost of institutions past: History as an obstacle to fighting tax evasion

Abstract

If taxpayers believe past rates of compliance are indicative of the future, traditional measures for combating tax evasion can be compromised. We present evidence from a novel laboratory experiment with strategic complementarities showing that a history of low compliance can render a major institutional reform ineffective at reducing tax evasion. The experimental treatments manipulate the history of tax compliance by varying the percentage of tax revenue embezzled by a ‘politician’ – our measure of ‘institutional quality’. We show that tax compliance is substantially higher in good-quality than bad-quality institutions when there is no history of tax evasion. When a bad-quality institution is replaced with a good-quality one, however, tax compliance remains low, as if the institutional change had not occurred. The reason is that the institutional change leaves expectations about future compliance largely unaffected. A history of high-quality institutions, on the other hand, shields tax compliance only partly from institutional deterioration. We discuss reasons for this, policy implications of our findings and evidence that a society-wide poll can assist in overcoming the ‘ghost of institutions past’.