ABSTRACT
Chapter 3 covers economic incentives (taxes, fines, and rewards) in standard public economics. Tax systems have been discussed in terms of at least three different criteria: (i) the need for taxes to be fair, (ii) the need to minimize administrative costs, and (iii) the need to minimize disincentive effects. The trade-offs between efficient and equitable outcomes are evaluated by a social welfare function in optimal taxation theory. The social welfare function may take various forms, depending on society’s taste for equity. Tax systems have to achieve a range of public policy objectives in a complex and changing environment. In the rational choice approach, tax compliance is in one’s self-interest. Policymakers try to raise the perceived costs of violation by increasing the certainty of detection and strengthen the severity of punishment. Thus, the rational choice approach predicts that the frequency of violation will decrease if the perceived costs associated with offending decisions are increased.
