Tax compliance and psychic costs: Behavioral experimental evidence using a physiological marker

• It uses heart rate variability, an established measure of stress, in a taxation experiment.
• It provides physiological evidence that moral sentiment or social norms (tax morale) matter for the decision to pay taxes.
• It presents experimental data indicating that feeling of guilt may explain compliant behaviour.
• It looks at heterogeneity among experimental tax payers with respect to compliance behavior and physiological reactions.

Although paying taxes is a key element of a well-functioning society, there is still limited understanding as to why people actually pay their taxes. Models emphasizing that taxpayers make strategic, financially motivated compliance decisions seemingly assume an overly restrictive view of human nature. Law abidance may be more accurately explained by social norms, a concept that has gained growing importance as research attempts to understand the tax compliance puzzle. This study analyzes the influence of psychic stress generated by the possibility of breaking social norms in the tax compliance context. We measure psychic stress using heart rate variability (HRV), which captures the psychobiological or neural equivalents of psychic stress that may arise from the contemplation of real or imagined actions, producing immediate physiologic discomfort. The results of our laboratory experiments provide empirical evidence of a positive correlation between psychic stress and tax compliance, thus underscoring the importance of moral sentiments for tax compliance. We also identify three distinct types of individuals who differ in their levels of psychic stress, tax morale, and tax compliance.