The traditional literature on tax evasion frames taxpayers’ choices in terms of rather basic cost-benefit analyses involving the expected monetary return to tax evasion. Briefly put, individuals take action by considering the probability of being caught and the sanctions applied. In contrast with the mainstream line of thinking, this paper considers what happens when (1) tax compliance is considered a duty only if tax revenues are not wasted (bad-quality government expenditure); (2) assessing the probability of being detected and the punishment involved is actually a learning process, which unfolds by interacting with other people, both tax evaders and tax compliers; (3) being found guilty of tax evasion implies loss of reputation and social stigma; (4) as long as the government is fair and resources are not wasted, the reputational effects of auditing depends on the typical behavior of the community, i.e. on whether the social stigma falling upon the tax evader increases in a society in which most citizens comply with the tax laws. The theoretical context presented in this paper shows that when social interaction and stigma play a relevant role, the tax authorities can reach a higher level of tax compliance by reducing the tax burden and progressivity, and by simplifying the tax system. By contrast, the most frequently used measure to enforce compliance (increased auditing effort and heavier sanctions) can be counterproductive. In this light, the paper provides a theoretical framework that helps explaining some of the results created in Russia by the 2001 tax reform. As that episode demonstrates, a reduction of the tax burden and progressivity may have positive effects on tax compliance both in the short run and in the long run. Moreover, the paper shows that creating and nurturing an honest reputation may have positive effects on tax compliance without the financial and political costs of creating a moral stigma against dishonest behaviour. Put differently, this contribution emphasises the role of reputation and of fair behaviour in the realm of taxation, auditing and expenditure, and opens important insights into new research agendas. In particular, mutual trust between taxpayers and governments is crucial. Certainly, reputation and civility are important issues. Yet, when governments are considered corrupt and inefficient, tax compliance remains an illusion. Under such circumstances, repression can only make things worse: auditing becomes a form of arbitrary harassment, and tax evasion ends up being perceived as a justified reaction by the victims. As this paper underscores, simplifying the tax system and introducing a flat tax are important steps in the right direction. However, governments will need to do more than that in order to deserve taxpayers’ trust and confidence.