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Enhanced enforcement outcomes through a responsive regulation approach to sales tax enforcement
Abstract
In this study, targeted interventions were applied in a natural quasi-experimental setting to taxpayers engaged in sales tax theft and evasion to gauge both the direct and indirect impacts of a responsive regulation approach to compliance enforcement. The approach adopted included substantial engagement with targeted businesses and deferral of more punishing forms of deterrence based on the target’s level of cooperation and effort to return to and maintain compliance. Results were was found to be 2.17:1. Additionally, the impact of the targeted responsive regulation interventions greatly exceeded the results obtained in deterrence-only control groups in terms of tax assessments compared to multiple control groups to determine the indirect impact of the interventions and to compare the responsive regulation approach to traditional deterrence-only enforcement results. The indirect versus direct impact of the targeted responsive regulation enforcement regimen overall and assessment per dollar of cost (5.21).
This article is an introduction to meta‐research, a systematic and replicable process of synthesizing research findings across a body of original research. After introducing the reader to the core of meta‐research methodology, meta‐research logic and tools are applied to present an evidence synthesis of empirical research on responsive regulation. The article concludes with a meta‐research agenda for regulation and governance scholarship, and five key lessons from the empirical responsive regulation literature.
This paper presents a study of taxpayer rationales for evasion and theft in a sales tax environment. It is based on content analysis of 375 criminal investigation case files in multiple industries and author interviews with business owners facing criminal investigations. The evidence examined supports the development of a typology of sales tax noncompliance that informs a more targeted, responsive and effective enforcement regime informed by the specific peculiarities of the sales tax environment. The study suggests that such an approach could result in rehabilitation of a substantial number of noncompliant taxpayers without reliance on incapacitating deterrence measures. © 2016 School of Taxation and Business Law (Atax), UNSW Business School, UNSW Australia. All rights reserved.
Tax evasion is a complex phenomenon which is influenced not just by economic motives but by psychological factors as well. Economic-psychological research focuses on individual and social representations of taxation as well as decision-making. In this book, Erich Kirchler assembles research on tax compliance, with a focus on tax evasion, and integrates the findings into a model based on the interaction climate between tax authorities and taxpayers. The interaction climate is defined by citizens' trust in authorities and the power of authorities to control taxpayers effectively; depending on trust and power, either voluntary compliance, enforced compliance or no compliance are likely outcomes. Featuring chapters on the social representations of taxation, decision-making and self-employed income tax behaviour, this book will appeal to researchers in economic psychology, behavioural economics and public administration.
The current study was designed to investigate U.S. taxpayer's perception of the severity of tax evasion relative to other offenses, in general, and white‐collar crimes, in particular. We compared the perception of tax evasion to 20 other offenses, including violent crimes such as rape and murder and relatively minor offenses such as jaywalking. Due to the recent focus by lawmakers and the media on white‐collar scandals and the lack of comparisons in prior literature, we also included six white‐collar crimes. Overall, the results indicate that tax evasion was viewed as only somewhat serious. When comparing tax evasion to other white‐collar offenses, we found that tax evasion was perceived as equal in severity to minimum wage law violations and rated less serious than the other four white‐collar crimes investigated. Most demographic factors (age, gender, education or income level, political affiliation, etc.) did not seem to be related to perceptions of tax evasion. However, location of taxpayers did have some effect. These findings differ from several previous studies.
The purpose of this study is to explore with more rigor and detail the role of social norms in tax compliance. This study draws on Cialdini and Trost’s (The Handbook of Social Psychology: Oxford University Press, Boston, MA, 1998) taxonomy of social norms to investigate with more specificity this potentially decisive (Alm and McKee, Managerial and Decision Economics, 19:259–275, 1998) influence on tax compliance. We test our research hypotheses regarding the direct and indirect influences of social norms using a hypothetical compliance scenario with 174 experienced taxpayers as participants. Factor analysis of the social norm questions successfully identified four distinct social norm constructs, in line with Cialdini and Trost (1998). Results of the path analysis show that individuals’ standards for behavior/ethical beliefs (personal norms) as well as the expectations of close others (subjective norms) directly influence tax compliance decisions, whereas general societal expectations (injunctive norms) and other individuals’ actual behavior (descriptive norms) have an indirect influence. This shows that social norms have important direct as well as indirect influences on tax compliance behavior. We also investigate a number of attitudinal variables that may be related to social norms and taxpayer compliance. The results of this study further clarify the important role that social norms have with regard to taxpayers’ compliance behavior.
Decades of research on regulatory rule enforcement prompted a battle of sorts between those who favor a deterrence approach and those who promote compliance approaches, between punishment and persuasian (Reiss, 1984; Hawkins, 1984; Pearce and Tombs, 1990; Snider, 1990). In some areas, evidence suggests that deterrence works, if only modestly, as in the area of occupational health and safety (Scholz, 1991; Braithwaite, 1985). In nuclear safety and other realms, a shift away from a rule enforcement approach toward a more communitarian style of self-regulation improves compliance (Rees, 1994). In other domains, however, it is unclear whether the effect of increased deterrence is positive or negative (Makkai and Braithwaite, 1994). Tax enforcement is an area where the effects of deterrence and compliance approaches are unknown (Andreotti, Erard and Feinstein, 1998). When taxpayers are audited, for example, and a penalty imposed, it is unclear whether they learn that they got away with a lot of things that the audit did not detect. The deterrence sign will be positive if this is the bigger lesson than the lesson that cheating will be punished. Sometimes an audit succeeds in deterring cheating in the long run, but in the year or two after audit taxpayers believe they are unlikely to be audited, and this has a dramatic negative effect on compliance in those two years. This and other kinds of complexity have moved the compliance literature over the past decade away from a crude contest between punishment and persuasion. Rather the debate has been about how to get the right mix of the two. In the case studies discussed in this essay, the Australian Taxation Office (ATO) became persuaded to an enforcement pyramid approach to regulation (Ayres and Braithwaite, 1992; Gunningham and Grabosky, 1998). This means regulatory staff prefer the low-cost option of persuasion first and escalate to more deterrence-oriented options (and ultimately to incapacitation) as less interventionist strategies successively fail.
The strengthening in the 1980s of third- This paper analyzes empirically the ef- party information repowUng,4tax related fects of audit rates and certain other fac- transactions to the IRS and IRS matching tors on the filing of federal individual *n- of such reports to tax returns means that I few additional opportunities for effective come tax returns and the self-reporting Of 2 taxes due. Using data drawn from the An- third-pafty reporting remain. Penalties nual Report of the Commissioner of In- for underreporting tax liabilities also underwent drastic revisions during the ternal Revenue and the Statistics of In- past decade and the 1989 penalty revision come for the years 1977-86, we estimate legislation suggests that further penalty that self-mported taxes in 1986 would have increases are not feasible. The 1989 re- been greater by approximately fifteen bil- structuring of taxpayer penalties seems lion dollars had the federal audit rate re- to reflect agreement that the severity of mained constant at its 1977 level durlng the penalty structure of the 1980s in com- the intervening period. bination with a historically low audit rate created some unfairness in the tax en- 3
We analyze the effect of social norms and enforcement on the dynamics of taxpayer compliance. Specifically, we develop two models to evaluate the movement between classes of compliant and noncompliant taxpayers. Our analysis suggests that the effect on compliance of changing enforcement levels depends on whether the taxpayer population is initially compliant or noncompliant. Compliant populations are insensitive to changes in enforcement policies until enforcement becomes sufficiently lax, when we observe a sudden shift to high levels of noncompliance in equilibrium. In contrast, relatively noncompliant populations respond to increased enforcement by gradually increasing compliance. Then, when enforcement becomes sufficiently harsh, we find a sudden shift in equilibrium to very high levels of compliance. After the taxpayer population shifts from compliance to noncompliance, or vice versa, our models predict that returning to the previous enforcement policy will not cause the population to return to its pr...
A long standing debate has existed between those who believe deterrence-based enforcement strategies work for gaining compliance from offenders and those who believe gentle persuasion and cooperation is more effective. This article is concerned with the issue of how to best deal with offenders so as to increase support for the law and lower the rate of subsequent re-offending. Using survey data from 652 taxpayers who have been through an enforcement experience with the Australian Taxation Office, the present study will show that depending on how an enforcement experience is perceived by offenders (as either stigmatic or reintegrative in nature) can influence the feelings of resentment they experience, but more importantly these feelings of resentment mediate the effect of punishment on subsequent compliance behaviour. In other words, it is these feelings of resentment in response to disapproval that go on to predict who will and will not comply with their subsequent obligations under the law.
A significant body of research has been accumulated concerning tax morale and tax compliance. This paper takes a stroll through the experimental findings, focussing on personal income. After briefly discussing the traditional topic of deterrence the main focus is on the social and institutional factors which until now have received only limited attention. Copyright 2002 by Blackwell Publishers Ltd
Criminal justice policies and measures for reform almost invariably include some aspect of deterrence-based models in their attempt to control crime. It is believed that making the costs of offences more onerous than the derived benefits will inhibit individuals from committing crimes. This study explores the utility of deterrence theory for criminal justice by examining it in the context of tax evasion. Tax evasion is useful in examining deterrence since it occurs in a setting in which the conditions for deterrence are most likely to exist. In this study, Canadian survey data were examined to gain an understanding of the effect of criminal justice sanctions on tax evasion. Findings suggest that perceived penalties are not as important to decisions about evading tax as are perceptions of the possibility of being apprehended. Some implications of this finding are that strategies of deterrence based upon penalty size may be ineffective if individuals contemplating tax evasion do not think they will be caught. This study raises questions about the adequacy of compliance strategies based upon the severity of sanctions, and discusses regulatory measures that lie outside of the criminal justice system which may hold more promise.
In this paper, we use a computational modeling approach to examine the long-standing social issue of tax compliance. Specifically, we design an agent-based model-the Networked Agent-Based Compliance Model (NACSM)-where taxpayers not only exist within localized social networks, but also possess heterogeneous characteristics such as perceptions about the likelihood of audit and apprehension. When making compliance decisions, agents in our model factor in their neighbors' compliance strategy payoffs. We find that for a given enforcement regime, a world with limited knowledge of neighbor payoffs appears to lead to higher levels of aggregate compliance than when agents are aware of neighbor strategy payoffs and factor these into their individual compliance decisions. As this paper demonstrates the strength and initial results of our approach, we point to the need for further research using the NACSM approach and similar models as well as the development of higher fidelity agent-based compliance models.
Deterrence models generally predict compliance patterns based solely on the subjective probability and utility of outcomes associated with alternative actions. Yet recent work in behavioral decision theory suggests that compliance decisions may also be affected by how the risks of noncompliance are described and how the decision-maker's preferences are expressed. We report five experiments that examine how the cognitive heuristics evoked by these descriptive and procedural variables affect tax compliance. Using tax decision problems involving how to choose a tax professional, whether to take a questionable deduction, and how to approach an impending tax audit, we find that taxpayer preferences are significantly influenced by descriptive and procedural variables that traditional expected utility models ignore. We discuss the implications of these results for (1) extending compliance theory to understand a broader range of compliance behavior and (2) utilizing cognitive heuristics to predict the consequences of various enforcement policies.
The paper gives an overview of some main themes in the theory of tax evasion, starting from Allingham and Sandmo (1972). It reviews the comparative statics of the original model of individual behaviour where the tax evasion decision is analogous to portfolio choice, and its extensions to incorporate socially conscious behaviour, participation in the black labour market and tax evasion by firms. It also discusses the analysis of tax incidence and the problems involved in moving from individual to aggregate analysis. Finally, it reviews the issues that arise in formulating models of optimal taxation in the presence of tax evasion.
In a game-simulation context, the tax evasion behavior of 13 law students was observed. Findings indicate that the possibility of being detected and fined for tax evasion was a more effective deterrent than the size of such fines, although both the magnitude of fines and their probability affected tax evasion. Vague information about the probability that fines will be imposed enhanced the deterrent power of low probability audits and small fines. Results support the proposition that variation in the probability of threat enactment has a stronger effect on the threatened person's behavior than the severity of the threats. It is suggested that when the probability of threat enactment is sufficiently high, a mild threat might be as effective a deterrent as a severe threat. (7 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
We investigate the role of externalities in tax evasion arising from congestion of the auditing resources available to local tax authorities. The empirical analysis employs a novel method due to Graham (2008) that mitigates most of the problems that surround the identification of endogenous social effects [Manski (1993)]. Identification exploits the information contained in the variance of concealed income at differ-ent levels of aggregation, and an identifying restriction suggested by the different technologies to audit taxable income and tax credits in Italy. We use a unique dataset containing audits of about 80,000 small businesses and professionals in Italy. We find a social multiplier in the range 2.5 -3, meaning that the equilibrium response to a shock that induces an exogenous variation in mean concealed income is up to three times the initial average response.
The Internal Revenue Service Restructuring and Reform Act of 1998 directed the IRS to transform itself into an agency focused on "customers." What affect will such a focus on service have on compliance? This article analyzes not only the post-IRS reform statistics on enforced compliance but also considers the more important question of the likely impact of IRS friendliness on so-called "voluntary compliance." Although some have suggested that a kinder IRS might prompt increased voluntary compliance, this article argues that it likely will not, based on the literature examining the impact on voluntary compliance of tax collector service to taxpayers and the use of a softer tone in correspondence with taxpayers. By contrast, the literature reflects the possibility that the perception of procedural fairness on the part of the IRS might increase compliance. This suggests that the IRS can benefit from treating taxpayers fairly but that it would be unwise for the IRS to focus on service at the expense of enforcement. (A related paper considers the interplay between norms and enforcement in tax compliance.)
What will increase individuals' compliance with the federal income tax? There are rich legal, economic, and sociological literatures examining this question. The traditional answer that increased enforcement will increase compliance is supported by both economic modeling and a number of experiments. However, studies show that appeals to normative beliefs about honesty in taxpaying play an important role as well. A number of scholars have suggested that vigorous enforcement of the tax laws may be counterproductive because it may suggest that noncompliance is the norm. This article argues, in part, that enforcement and a compliance norm are not inconsistent but rather are complementary. In other words, enforcement can buttress norms-based appeals for compliance. To support this argument, the article draws on an array of empirical evidence from both experimental "games" conducted in the laboratory and field experiments involving taxpayers. The interplay of enforcement and taxpaying norms manifests itself somewhat differently in different contexts. Studies suggest that there is a societal norm of compliance with tax obligations but that there may be a norm of noncompliance among certain groups. The IRS may therefore be best served by targeted compliance strategies. With respect to mainstream, generally compliant taxpayers, the IRS can rely on broad-based matching of information returns with taxpayer returns, low levels of audits, and norms-based appeals. With respect to groups with norms of noncompliance, the IRS can use enforcement not only for detection and deterrence but also to try to build a critical mass of compliant taxpayers and thereby influence the group norm.
This paper offers interview data on the tax compliance behavior of small cash businesses. We find that such businesses systematically underpay income, employment and sales taxes through income underreporting. The results show that participation in a parallel cash economy facilitates tax evasion and that cash business owners seek out sympathetic tax preparers. We also find that norms and opportunity, but not equity or tax law complexity, strongly influence such decisions to underreport income. The behavior patterns indicated by our data suggest specific policy tactics in the effort to close the tax gap.
Recent developments in regulation and tax administration in Australia inspired this article on tax compliance and responsive regulation. This article analyzes the economics of crime and compliance as the dominant approach to tax enforcement of the past three and a half decades. It evaluates the key advantages and disadvantages of the economic approach as well as its application to tax. The article then explores responsive regulation as an alternative method that draws on the economic paradigm but also supplements this approach with other theories, particularly those involving identity, conflict escalation, and procedural justice. Building on this analysis and a case study of Australian investors in mass marketed tax schemes, the article suggests that the broader, more balanced, and closely tailored method of regulating responsively may enable regulators to draw on the advantages of the economic model while alleviating some of its drawbacks. Responsive regulation may therefore constitute a superior method for regulating compliance.
This book transcends current debate on government regulation by lucidly outlining how regulations can be a fruitful combination of persuasion and sanctions. The regulation of business by the United States government is often ineffective despite being more adversarial in tone than in other nations. The authors draw on both empirical studies of regulation from around the world and modern game theory to illustrate innovative solutions to this problem. Their ideas include an argument for the empowerment of private and public interest groups in the regulatory process and a provocative discussion of how the government can support and encourage industry self-regulation.
I. Introduction Since the turn of the century, legislation in Western countries has expanded rapidly to reverse the brief dominance of laissez faire during the nineteenth century. The state no longer merely protects against violations of person and property through murder, rape, or burglary but also restricts "dis crimination" against certain minorities, collusive business arrangements, "jaywalking," travel, the materials used in construction, and thousands of other activities. The activities restricted not only are numerous but also range widely, affecting persons in very different pursuits and of diverse social backgrounds, education levels, ages, races, etc. Moreover, the likeli hood that an offender will be discovered and convicted and the nature and extent of punishments differ greatly from person to person and activity to activity. Yet, in spite of such diversity, some common properties are shared by practically all legislation, and these properties form the subject matter of this essay. In the first place, obedience to law is not taken for granted, and public and private resources are generally spent in order both to prevent offenses and to apprehend offenders. In the second place, conviction is not generally considered sufficient punishment in itself; additional and sometimes severe punishments are meted out to those convicted. What determines the amount and type of resources and punishments used to enforce a piece of legislation? In particular, why does enforcement differ so greatly among different kinds of legislation?
This paper tests empirically whether measurable activities of the IRS Criminal Investigation Division (CI) affect taxpayer compliance. The analysis is based on a state-level cross-section for the time period from 1988 through 2001. First, I find that CI activities have a measurable and significant effect on voluntary compliance. Second, I conclude that the mix of sentenced cases (tax and money laundering) is not a significant determinant of tax compliance. Third, media attention shows some weak evidence of increasing compliance, at least among money laundering cases. Fourth, I find that incarceration and probation (rather than fines) have the most influence on taxpayers. Simulations using the estimated models show that the direct effect of doubling the audit rate on assessed tax collections (reported amounts and additional taxes and penalties) is 16.7 billion. I estimate the general deterrence or spillover effects from either audit or CI activities to be approximately 94%.
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