Compliant Taxpayers Research Articles

The Impact of Threat of Punishment on Tax Compliance and Non-compliance Attitudes in Malaysia

Threat of punishment has been emphasized as one of the effective tools to deter taxpayers’ non-compliance attitudes. Thus this study aims to explore the impact of threat of punishment on both individual taxpayers’ attitudes, compliance and non-compliance. The findings from a mixed-modes survey indicate that threat of punishment is insignificant on taxpayers who are willing to comply with tax laws. They tend to avoid taxes when they are threatened with tax audits and penalties. Overall, threat of punishment appears to have not only an insignificant impact on compliant taxpayers but also trigger their intentions to be less compliant.

Complexity, Compliance Costs and Non Compliance with VAT by Small and Medium Enterprises in Bangladesh: Is There a Relationship?

Similar to many developing nations, Bangladesh’s small and medium sector enterprises (SMEs) constitute some 90% of all businesses and play an important role in the country’s economic growth and employment. This study investigates the nature and extent of the relationships between the complexity of Bangladesh’s Value Added Tax (VAT) legislation, the costs of compliance with VAT in Bangladesh, and non-compliance (either intentional or unintentional) with the VAT legislation by Bangladeshi SMEs. These results could be important as it appears that SMEs are under-represented in terms of their contribution to Bangladesh’s VAT revenue collection, which if other foreign studies are relevant could be due in part to compliance costs. The current study is the first to empirically examine the relationships between the complexity of VAT legislation, compliance costs and noncompliance for SMEs in Bangladesh context. The study involved firstly a series of focus group interviews involving different types of SMEs taxpayers in Bangladesh. This was then followed by survey through a purposive sample of SMEs taxpayers in Bangladesh. The results suggest that a majority of the compliant SMEs taxpayers listed complexity in VAT law and compliance costs as the two important factors influencing VAT noncompliance in SMEs. On the other hand, non-compliant taxpayers emphasised more about the positive relationship between taxpayers and VAT officials for compliant behaviour. The likelihood of audits, penalties and sanctions were found to have less effect on VAT non-compliance for non-compliant taxpayers. In comparison, such monitoring and penalties would apparently improve compliant behaviour by compliant taxpayers. The findings of this research have practical policy implications, in that they can assist policy makers and administrators in their understanding of the potential interrelationships between legislative and regulatory complexity, the costs of complying with VAT legislation, and non-compliance with VAT legislation by SMEs. Having a robust and functioning VAT system is seen as an important attribute for a developing economy, so these findings may be important not only for Bangladesh, but also similar developing economies.

The Impact of Trust in Government on Tax Paying Behavior of Nonfarm Sole Proprietors

Abstract The paper explores the relationship between the taxpayers’ trust in government and their willingness to pay taxes. When honored, trust promotes feelings of goodwill between individuals, strengthens democracy, and reduces transaction costs in economic exchange. Literature on government regulation finds that if citizens trust the government they are more likely to comply with laws and regulations. In this article, the index of trust in government calculated by the American National Elections Studies (ANES) and the AGI (adjusted gross income) gap produced by the Department of Commerce’s Bureau of Economic Analysis (BEA) are used to test an empirical model if trust in government has a positive impact on tax compliance of the least compliant taxpayers group - nonfarm sole proprietors - controlling for the deterrent effects of tax enforcement. The results indicate that the higher trust in government improves tax compliance. The paper contributes to the existing literature on tax compliance by combining survey and statistical income reporting data to find evidence that perceptions about the trust in the government translate into actual tax payments

Introduction to the special issue on the role of the state in growth and development

The editedpapers in this special issueof InternationalTax andPublicFinance are drawn from the 69th Congress of the International Institute of Public Finance with a focus on The Role of the State in Growth andDevelopment, jointly hosted by the Universities of Catania, Messina and Reggio Calabria and which took place in Taormina on August 22–25, 2013. The first of the eleven papers accepted for publication here is based on a plenary session lecture given at the Congress. The remainder of the papers was submitted for publication after presentations at the Congress. All papers in this volume were subject to the regular refereeing process. One of the most important—and also hardest—roles of government is to raise adequate revenues for the provision of public goods and services. Adequate levels of public spending are crucial for the accumulationof humancapital andpublic infrastructure necessary for economic growth and development. The presence of the informal sector overlapping to a large extent tax evasion activity has always presented a challenge for tax administrations around the world, especially in developing countries, for raising adequate revenues. But the fact is that not all informal activities represent tax evasion and it is not worth spending the time and scarce resources of tax administrations to try to collect from very small taxpayers. Michael Keen and Ravi Kanbur in their paper “Thresholds, Informality, and Partitions of Compliance,” based on the Congress lecture delivered by Keen, examine the intersection of the establishment of tax thresholds to partition taxpayers and the presence and extent of informality. Central to their analysis is the belief that tax thresholds and informality are intimately related: informality incorporates a range of non-compliant and compliant taxpayers with the tax thresholds being a key determinant of their behaviors; at the same time,

Who Wins When Uncle Sam Loses? Social Insurance and the Forgiveness of Tax Debts

Small-scale tax collections decisions have large-scale distributive consequences. The central question addressed in this Article is whether a deliberate government decision to forgive or to not collect a tax owed can be justified, given the distributive consequences that may result. In brief, the government’s decision not to pursue full collection of a delinquent tax debt may give rise to two types of distributive outcomes: First, the benefits of non-collection may be captured by the forgiven taxpayer’s other creditors. Second, the costs of non-collection may be imposed upon compliant taxpayers and the public through higher taxes, decreased government provision of goods, services, and social assistance, or other macroeconomic impacts. These distributive outcomes may outweigh the potential justifications for tax non-collection. This Article demonstrates, however, that a social insurance framework, which conceptualizes tax non-collection as a transfer of the risk of financial distress from the taxpayer to the government in exchange for payment of an insurance premium, may justify these distributive outcomes and may hence justify the non-collection of tax debts. Further research is required to determine the extent to which tax non-collection procedures should be used to deliver social insurance, particularly given the existence of other government-provided social insurance programs.

Fighting Income Tax Evasion with Positive Rewards

This article provides experimental evidence regarding the influence of positive rewards on income tax evasion behavior. In particular, the authors experimentally test the impact of positive rewards in the form of individual lottery winnings for fully compliant taxpayers. Among other things, the authors find that these positive rewards lead to a higher rate of tax compliance. Moreover, there are two gender effects. Males not only evade taxes to a much higher extent than females they also show a stronger positive response to the lottery scheme. This allows us to draw some interesting policy recommendations on the efficient use of rewards as a complement of deterrence policies for fighting tax evasion.

What Goes Around Comes Around? Experimental Evidence of the Effect of Rewards on Tax Compliance

The current experimental study examined the effect of monetary rewards on tax compliance. Eighty-six participants were randomly assigned to one control and two reward conditions (low vs. high reward). Overall, tax compliance was not affected by the rewards. However, a change in compliance strategies was observed. It seems that rewards provoked an all-or-nothing behavior. Whereas in the reward conditions, participants were either completely honest or evaded all of their income, in the control condition, the amount of evasion varied more strongly. Furthermore, audited compliant taxpayers who are rewarded evaded less in the following period compared with audited compliant taxpayers who experienced no rewards.

Benchmarking Tax Compliance Efficiency Among South African Retail Firms Using Stochastic Frontier Approach

Random selection of taxpayers for audit mostly nets tax compliant taxpayers. There is hence a need to adopt other methods that are efficient and and effective in performing their specific and general deterrence roles. This article uses profit efficiency benchmarking to analyze selected retail firms tax compliance risk in South Africa over the 2005–2006 period. It seeks to identify firms that should be audited because of their suspected tax compliance risk, using a stochastic frontier analysis. The profit efficiency estimates of 24 retail stores are used to rank them in terms of their performance. They are also tracked over time. Approximately, 50 percent of the firms performed better than the average profit efficiency of 0.39. The top 10 firms are significantly performing better. However, the bottom 50 percent of the retail firms performed poorly and could be targeted for tax audit.

Quebec's Module D'Enregistrement Des Ventes (MEV): Fighting the Zapper, Phantomware and Tax Fraud with Technology

On January 28, 2008 the Quebec Minister of Revenue, Jean-Marc Fournier, announced that by late 2009 the MRQ will begin testing a device, the module d'enregistrement des ventes (MEV) that is projected to substantially reduce tax fraud in the restaurant sector. By 2010 or 2011 MEVs will be mandatory in all Quebec restaurants, where they will assure accuracy and retention of business records within electronic cash registers (ECRs). This paper moves beyond a discussion of the variety of sales suppression programs in use - zappers and phantom-ware. The concern here is on enforcement efforts, particularly the MEV. The intent is to assess the workability and effectiveness of the MEV solution by contrasting it with solutions adopted elsewhere. Two policy orientations guide enforcement actions in this area - one approach is rules-based; the other is principles-based. They are not mutually exclusive - degrees of blending are common. Rules-based jurisdictions adopt comprehensive and mandatory legislation regulating, and/ or certifying cash registers. Jurisdictions taking this approach include Greece and Germany. With the adoption of the MEV, Quebec will also fall within this group. Principles-based jurisdictions rely on compliant taxpayers following the rules. Compliance is enforced with an enhanced audit regime. The Netherlands and the UK fall into this group. After presenting a rough schematic of a how a zapper or phantom-ware facilitates a skimming fraud (absent many of the details considered in earlier papers), this paper will consider three rules-based enforcement approaches: the Greek fiscal electronic devices or FEDs, the Quebec MEVs and the German smart cards. The Dutch principles-based approach which is also favored by the UK will provide a policy contrast. A final section will consider how CSPs in a SSUTA framework could be used to achieve very similar outcomes as is currently realized under either the rules-based or principles-based approaches. CSPs in a SSUTA context blend the rules-based and principles-based approach within a unique (private sector) solution.

What Do We Know about Tax Fraud?: An Overview of Recent Developments

Benno Torgler What Do We Know about Tax Fraud? An Overview of Recent Developments QUESTIONS ABOUT TAX FRAUD HAVE BEEN AROUND AS LONG AS TAXES themselves and will remain an area of discovery as long as taxes exist. To understand the impact of a tax system, it is important to know who complies with the tax law as well as who does not. Tax fraud is a large and growing problem in almost all countries. Consider the example of the US annual growth rate of unpaid federal individual and corporate income taxes since 1973 (reported by Aim, 1999). Reliable estimates by the Internal Revenue Service (IRS) suggest a tax gap of the federal income tax of some $257 billion to $298 billion in 2001, which equals a noncompliance rate ofabout 15.5 percent to 16.6 percent for the federal income tax (IRS, 2005). The exploration of tax fraud is relevant for many reasons. Tax fraud reduces tax collection and tax performance within a country. It may lead to externalities such as an increase ofalternative taxes, which leads to an increase in the tax burden of compliant taxpayers. Tax fraud can create misallocations in resource use whenever individuals make an effort to cheat on their taxes. It also leads to behavioral changes (for example, choices of hours to work). The presence of tax fraud requires the government to invest in resources to deter noncompliance. There are various ways of engaging in tax fraud, such as claim­ ing false deductions (overreporting the amount of deductions), knowFor helpful comments and suggestions, thanks are due to Alison Macintyre and Marco Piatti. social research Vol 75 : No 4 : Winter 2008 1239 ingly changing income, concealing or transferring assets or income, and recording personal expenses as business expenses. The traditional approach treats the problem as one of rational decision making under uncertainty. This means that cheating on taxes is a gamble that will either pay off in lower taxes or, with the probability of detection, end in sanctions. This view oftaxpayer behavior was first presented in a formal model by Allingham and Sandmo (1972), influenced by the economics of crime approach (see Becker, 1968). A large num ber of research approaches to tax compliance continue on this framework (see Cowell, 1990). In a departure from this view, I will argue that such a portfolio analysis has its lim ita­ tions, including an inability to explain why many households comply more fully than predicted by this approach. Thus, it makes sense to go beyond a traditional deterrence approach in order to understand the causes and consequences of tax fraud. I will show that the recent trends in the literature bear out this argument. In particular, this review shows the usefulness of applying a multifaceted and interdis­ ciplinary approach. METHODOLOGIES A major difficulty in analyzing tax fraud is the fact that individuals have incentives to conceal their cheating. Thus, how can we measure tax fraud? We will discuss several methods, stressing that they are all subject to imprecision and controversy. Surveys One method of measuring tax fraud is the use of surveys that are typi­ cally designed to elicit taxpayers’ attitudes about their reporting. Such surveys can, however, also be used to estimate tax fraud. A main advan­ tage is that they include many socioeconomic, demographic, and attitudinal variables. This helps to investigate and test a rich set of (new) theories. Furthermore, surveys help to compare different countries and obtain insights into development over time. Certainly, the accuracy of surveys is not fully clear. Individuals may not remember their reporting 1240 social research decisions, they may not respond truthfully, or the respondents may not be representative, since the sensitive nature of tax fraud might create the incentive not to participate in such a survey. Audit Data Another direct method relies on information generated by the tax author­ ity as part of its audit process. The IRS conducts line-by-line audits of indi­ vidual tax returns for its Taxpayer Compliance Measurement Program (TCMP). TCMP provides information about noncompliance based on actual tax return data. These audits yield an estimate of the taxpayer’s “true”income, allowing measures ofindividual and aggregate tax evasion to be calculated. Tax returns...

Cooperative Tax Regulation

This Article describes a new approach to tax regulation based on cooperation, information sharing, and interest convergence. Currently, tax regulation in the United States relies too heavily on sticks and not enough on carrots. While recognizing that taxpayers will comply with the law in the presence of effective deterrence and enforcement, this Article optimizes the use of penalties as a compliance instrument by, among other things, rewarding compliant taxpayers, engaging taxpayers and their advisors in a participatory process, and appreciating the elegant power of cognitive devices that portray payment of taxes as a bonus rather than nonpayment of taxes as a penalty. Even with optimal penalties, tax officials cannot currently enforce the law effectively due to severe resource and information asymmetries. To overcome these debilitating shortcomings, the government must improve funding, recruiting, training, and retention. It must also partner with taxpayers and practitioners to strengthen detection, enforcement, and prosecution of abusive tax avoidance. Cooperative tax regulation can accomplish a cultural shift not only in taxpaying but also in tax advising and tax administration. Ultimately, it can produce a regulatory environment of collaboration rather than adversity, ex ante resolution rather than ex post controversy, and certainty rather than secrecy.

Shared subjective views, intent to cooperate and tax compliance: Similarities between Australian taxpayers and tax officers

The present study investigates how taxation is represented in the minds of Australian taxpayers and tax officers and whether shared beliefs and evaluations are related to taxpayer compliance. Shared tax views are assumed to facilitate positive interaction, and mutual satisfactory interaction to enhance taxpayers’ willingness to cooperate and comply. The sample comprised 292 compliant taxpayers, 547 non-compliant taxpayers identified by the Australian Tax Office (ATO), and 358 ATO officers who had direct contact with taxpayers. Shared perceptions were measured as similarity in beliefs and evaluations of tax law complexity, tax mentality, ethics and social norms, horizontal and vertical distributive fairness and fair exchange with the government, attitudes towards the government, and judgments of tax officers and tax preparers’ support. The ATO reported non-compliance was found to be related to respondents’ willingness to cooperate (i.e., filing timely and correctly) which, in turn, was related to respondents’ beliefs and evaluation of tax issues and their shared views on these issues. Willingness to cooperate appears to function as a mediator between tax compliance and taxpayer’s beliefs and evaluations as well as shared tax officials’ and taxpayers’ views.

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.

EITC Noncompliance: The Determinants of the Misreporting of Children

Internal Revenue Service data indicate that $ 4.4 billion in excess EITC was claimed for tax year 1994, largely due to violations of the qualifying child eligibility criteria. I find that the probability of misreporting a child is increasing in the size of the EITC and tax benefit. The estimated effect of the EITC on noncompliance is statistically significant, but modest in size. Reducing the size and scope of the EITC could improve compliance somewhat, but it would also reduce benefits to compliant taxpayers. Efforts to reduce the frequency of unintentional errors and enhance the effectiveness of enforcement activities might bring about greater improvements in EITC error rates, at a lower cost to compliant taxpayers.