The importance of behavioral economics in tax research and tax reform: The issues of tax compliance and tax simplification

Abstract

This paper presents evidence that too narrow an approach in research can produce misleading conclusions when the wider context of the tax system and the environment in which it has to operate are considered. Two areas are used to illustrate this situation – tax compliance and tax simplification. A behavioral factor – the ability and willingness to consider a complex and changing wider environment - might not only be one explanation for the narrowness of much research but also why tax reform itself is often conducted on an incremental and ad hoc basis. This paper therefore goes on to develop a systematic or strategic approach to tax reform and suggests a role for a permanent body to oversee the process – similar in some ways to the role reserve banks play in the conduct of monetary policy.