Can rewards foster honest tax behaviors?

Tax rewards are an important and useful fiscal policy tool for governments and tax administrations to plan strategies to increase tax revenue. Nevertheless, there is little clear empirical evidence of a positive effect of tax rewards on tax compliance; rather, in some cases a negative effect is even found. Consequently, this study considers a tax reward in the simplest form of a “negative penalty” (positive amount of money) in case of no tax evasion, instead of no penalty (as in the standard model). By making the tax system fairer, this kind of tax reward can spur tax morale and, thus, tax compliance. Tax rewards, therefore, could trigger a virtuous circle for increasing tax revenue. A survey study in Italy substantiates the main prediction of the theoretical model.