Most importantly, Alm et al. stressed that “individuals exhibit much diversity in their behaviour.” Some are primarily worried about getting caught and penalized; others (especially businesspeople who face competition) are more concerned about the behavior of other taxpayers/neighbors/competitors; others think in terms of civic duty and/or public services and may weigh those considerations against the perceived accountability and efficiency of the state. These different factors are all likely to vary across different countries, institutions, and cultures, and much information about such factors can be estimated from surveys.

Alm et al. also found that “tax revenues increase with greater enforcement efforts, but this payoff declines as the probability [i.e., of being caught and punished for tax evasion] increases.” They later note that “compliance increases with [indicators of the availability of public goods and services], and suggest that government can increase compliance by providing goods that their citizens prefer more, by providing these goods in a more efficient manner, or by more effectively emphasizing that taxes are necessary for receipt of government services.” Tax compliance can also have important spillover benefits to firms. The literature on tax compliance notes that one indirect benefit of tax compliance is the discipline imposed on small businesses to prepare and maintain accurate financial accounts (e.g., income statement, balance sheet). Sandford (1995) noted many of the relevant benefits (particularly improvements in information systems and financial control) and these have been further documented by the tax compliance cost literature.

Cummings et al (2004) used both survey-based evidence and experimental results in the U.S., South Africa and Botswana and concluded that tax morale and tax compliance levels appear to be influenced by “the fairness of tax administration, the perceived fiscal exchange, and the overall attitude towards the respective governments.” Alm and Torgler (2006) analyzed tax morale and correlations with cultural differences in the U.S. and Europe. There is strong evidence that tax morale differs across countries, with relatively higher tax morale in the U.S., Austria and Switzerland and relatively lower tax morale in Spain, Portugal and Belgium. They also found strong negative correlation between the size of the “shadow economy” and the degree of tax morale<sup>2</sup> . Higher “tax morale”, in turn, is correlated with various estimates of tax compliance<sup>3</sup> .

In South Africa, Fjeldstad analyzed compliance with local “service charges” (user fees that bear some similarity to taxes) using survey data, and found that failure to comply with service charges (which displayed high degrees of variation both within communities and between communities

> 2 “Tax morale” was measured by responses to survey questions from the World Values Survey: “Please tell me for each of the following statements whether you think it can always be justified, never be justified, or something in between: ... Cheating on tax if you have the chance.”  The size of the shadow economy is measured as a percent of official GDP, using the estimates of the shadow economy from Schneider and Klinglmair (2003) based largely on currency demand.

> 3 Although Alm, Lewis and others have noted that “tax evasion is notoriously difficult to measure”. For example, Alm and Martinez-Vazquez note “A major difficulty in analyzing evasion is its measurement” and in turn cite Tanzi (1980) and Schneider and Enste (2000) “for discussion and applications of various approaches to measurement, all of which are subject to much imprecision and controversy.” Lewis says “Methods of assessing the extent of tax evasion have been indirect and open to a great deal of error.” He goes on to cite Gutman’s methods, (later elaborated by Schneider), using cash demand as a proportion of the money supply as a proxy variable for evasion. However, in the 21<sup>st</sup> century, the growing use of electronic finance has also opened up many new opportunities for tax evasion.

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