Feld, LarsFrey, BrunoAustralian National University. Centre for Tax System IntegrityAustralian Taxation Office2019-01-032019-01-031/06/20050 642 76876 51444-8211http://hdl.handle.net/1885/154894In this paper, we develop the notion of a psychological tax contract by looking on the conditions that shape tax morale and confronting it with empirical evidence. Based on crowding theory, the asymmetric impact of negative (deterrence) and positive incentives (rewards) on tax morale is discussed. As a contractual relationship implies duties and rights for each contract partner, sticking to a reciprocity norm among citizens as well as to the fiscal exchange paradigm between citizens and the state increase tax compliance. Citizens may also perceive their tax payments as contributions to the ‘bonum commune’ such that they are willing to honestly declare income even if they do not receive a full public good equivalent to their tax payments as long as the political process is perceived to be fair and legitimate. The contractual relationship has additional implications for the procedural level: a friendly treatment of taxpayers by the tax office in auditing processes increases tax compliance.49 pagesapplication/pdfen-AUCentre for Tax System Integrity, Research School of Social Sciences, Australian National UniversityCommonwealth of Australia336.200994Taxation - Australia.