## Rational choice theory, Taxation

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a.  Explain how the variable called "Respectful Procedure" is constructed from the authors' survey responses. (What values can the variable take on? Does a bigger number mean more or less respectful treatment?)

b.  Examine regression (4) in table 2. Explain the impact of more respectful procedures (i.e. cantons with relatively more respectful procedures compared to cantons with relatively less) on the rate of tax evasion. Now examine regression (5), where "respectful procedure" appears both on its own and as a cross-term with "direct democracy." From the coefficients in regression (5), how does the effect of respectful procedure change, depending on how much direct democracy is used in the canton?

c.  Use the basic model of tax compliance shown in Figure 17.5 of the textbook to illustrate the effects of (i) increasing the marginal tax rate, (ii) increasing the fine rate, and (iii) increasing the probability of audit.

d.  Base your answers to the following questions on the predictions of the model in part (c) above and the regression analysis of Feld and Frey.

i.  Does the sign of the coefficient on the marginal tax rate correspond to what one would expect from a rational choice theory of tax evasion?

ii.  Does the coefficient on the fine rate correspond to the rational choice theory?

iii.  Does the sign of the audit rate correspond to the theory?

e.  Why might more authoritarian procedures "crowd out" tax morale? Why might more authoritarian procedures result in less tax evasion even while crowding out tax morale?

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