Regulatory policy and taxpayer's morality

Sundday, January 15, 2017 http://daillyasianage.com m/news/447770/regulatory--policy-and-taaxpayers-morrality

Regullatory policy p an nd taxpaayer's morality m M S Sidddiqui

After all,, tax evasion n is illegal, annd individuaals have stronng incentivees to conceall their actuall income. An A intriguin ng and underrexplored sett of issues suurrounds the concept of tax t aversion? the notion thhat people fin nd taxes morre painful than other cateegories of exxpenses and losses. Threeat of punishmeent has been n emphasizedd as one of thhe effective tools to deteer taxpayers'' non-compliiance attitudes.. Fear has beeen used by tax authorities as a meaan to force taaxpayers to conform c to taax laws giveen that a taxp payer is view wed as a "peerfectly amorral, risk-neuttral or risk-aaverse, utilityy maximiziing individu ual who choooses to evadee tax whenevver the expeccted gain exceeded the cost". c The findiings from a mixed-mode m es survey inddicate that thhreat of punishment is innsignificant for f taxpayerss who are wiilling to com mply with taxx laws. Theyy tend to avooid taxes wheen they are threateneed with tax audits a and peenalties. Oveerall, threat of o punishmennt appears too have not onnly an insignnificant impaact on complliant taxpayeers but also trigger t their intentions too be less compliannt.

The threaat of punishm ment, consisting of tax audits, a tax peenalties and tax t rates, is used u in mostt

countries to deter taxpayers' non-compliance behavior. In general, most of the researches and studies show a positive correlation between audit probability and compliance. However, the impacts of audit probabilities on tax compliance are varied depending on the group of taxpayers.

For example, audit probabilities were found to have strong influences on tax compliance for sole proprietors but only little effect on salaried taxpayers. Hence, tax audits that specifically target a certain group of taxpayers seem to be more effective in increasing tax compliance rather than random audits.

A fundamental difficulty in analyzing tax evasion is the lack of reliable information on taxpayer compliance. Further, audit probabilities may only affect taxpayers who have the intention to evade. It has been suggested that taxpayers may only abide by tax laws when they have definite information about the possibilities of being audited.

On the moral side of evading tax is another view of complaint from inspiration from inside of mind. A research study presented at the UK Royal Economic Society's 2015 annual conference concludes that, offering tax evaders the opportunity to come clean voluntarily with reduced penalties is the best way to maximize tax revenues - even though it increases tax evasion. The study finds that although voluntary disclosure programs lead to an increase in evasion because individuals know they are unlikely to be caught if they evade taxes and the penalty is small if they decide to come clean later. On the other hand, tax collectors report that voluntary disclosure decreases administration costs for collecting taxes up to 90%.

The research finds that voluntary disclosure increases evasion. Governments in almost all OECD countries offer voluntary disclosure programs, under which people not yet under investigation for tax evasion are treated leniently when they declare foreign assets. German whistleblower evidence from 2010 implies that tax evaders come clean only after they think it is more likely that they will be detected. Evaders disclose only when they have to do so. An empirical study of US data in 2009 showed that individuals significantly increased their offshore deposits after the introduction of the voluntary disclosure program. Voluntary disclosure encourages rule-breaking but voluntary disclosure also maximizes tax revenues. The voluntary disclosure saves time and money for the tax office. A disclosure includes all information necessary to assess taxes at a lower cost than the government investigation.

German tax offices quantified the reduction in work time from 30% to 90%, with two thirds citing a decrease in work time above 80%. This saving may maximize net revenue widening the tax net. The author concludes that when there is a higher probability of detection, asking evaders to come clean voluntarily can increase tax revenues without overburdening the tax administration.

When tax evaders come clean voluntarily, many governments offer lower penalties. Such voluntary disclosure programs promise to increase tax revenues. But one might fear that lenient treatment to evaders encourages tax evasion, as the study of UK Royal Economic Society shows in the study. Nevertheless, offering voluntary disclosure can be beneficial for governments, as it saves administrative costs related to assessing the taxes of evaders.

To encourage tax evaders to come forward, governments in almost all OECD countries offer 'voluntary disclosure' programs. The UK, for example, offers a general voluntary disclosure program and additional special programs such as the money whitening facilities in Bangladesh.

When individuals not yet under investigation for tax evasion come forward and declare all foreign asset holdings, they are treated leniently?all income is taxed retroactively, but only a low fine applies.

Voluntary disclosure increases incentives to evade taxes and research shows that such programs increase the incentives to evade taxes. To understand why, note that many tax evaders come clean only after they perceive an increase in the probability that they will be detected. This can be the case, for example, because the government acquires whistleblower data from a tax haven bank, as Germany did in early 2010.

These changes in detection probabilities explain why voluntary disclosure programs increase tax evasion. When the detection probability remains low, the individual does not react. When the detection probability increases, however, voluntary disclosure offers the option to come clean at a relatively low cost. Thus, the individual evades taxes as if the detection probability was low for sure, and we know that tax evasion is more attractive when the detection probability is lower.

Without the option of voluntary disclosure, everybody would take the potential increase in the detection probability into account and would thus be less likely to evade taxes. Nevertheless, almost all OECD countries have a voluntary disclosure program, because it allows the tax authorities to save on administrative costs. Tax evaders themselves, who know where their money was hidden, can prepare a voluntary disclosure which, like a tax return, needs to include all information necessary to assess taxes at a lower cost than the government could assess the evaded tax. A strong majority of German tax offices state that administrative costs are significantly lower after a voluntary disclosure. When asked to quantify by how much working time decreases, the answers range from 30% to 90%, with two thirds citing a decrease in work time above 80%. The topic of voluntary disclosures is especially relevant today, as the detection probability for tax evasion has gone up (for example, due to whistle-blowers or better information exchange with tax havens). In this environment, a voluntary disclosure program is attractive, as it can increase tax revenues without overburdening the tax administration. When governments expect further increases in the detection probability, it may increase the fines after a voluntary disclosure. Despite its negative effect on tax evasion, it is a good idea to offer voluntary disclosure - at least as long as the main objective is to maximize tax revenues net of administrative cost.

Scholars have recognized through research that taxpayers are likely driven by an internal motivation to comply, arising out of one's innate sense of honesty, ethics, or civic obligation.

Taxpayers may be compliant considering the internal motivation, fear of legal sanction and social costs. These intrinsic motivations, sometimes called "personal norms," have also been the subject of a number of empirical studies. Another study surveyed individuals to compare the effects of legal sanctions, social stigma, and guilt on tax compliance.

Personal versus social rationales for tax compliance are not necessarily alternative theories, nor are they likely to be independent of one another. For example, a taxpayers' personal norms may be influenced by her perceptions of social norms of tax compliance. Once those perceptions of social norms have been internalized, however, violations of a taxpayer's personal norms are associated with feelings of guilt and discomfort from acting outside of one's own moral code, which should be distinguished from embarrassment or fear of social stigma.

A third external factor that appears to influence individuals' willingness to be dishonest is whether the individual perceives that a victim will be harmed by her dishonesty. For example, an individual might not feel guilty for telling a lie intended to make someone happy (e.g., "you look nice today"), but might feel guilty for telling a lie that benefits the liar at the expense of the other party or the society or the nation.

The moral or personal compliance or fear of punishment may succeed in reduction of tax evasion only when tax department gain confidence of tax payers of strict compliance of law and rule by themselves in determination and collection of tax on the basis of law and rules. It is argues for the importance of differentiating between intrinsic motivation, under which taxpayers comply with tax liabilities because of "civic virtue," and extrinsic motivation, in which they pay because of threat of punishment.

The writer is a legal economist