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Voluntary tax compliance

Voluntary tax compliance. Cooperation between DIAN and Skatteverket. Anders Stridh & Lennart Wittberg, 1 – 5 June 2015. Enforcement.

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Voluntary tax compliance

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  1. Voluntary tax compliance Cooperation between DIAN and Skatteverket Anders Stridh & Lennart Wittberg, 1 – 5 June 2015

  2. Enforcement

  3. There is a certain foolishness in traditional enforcement approaches. They wait until the damage has been done and then they react, case by case, incident by incident, failure by failure. Enforcement agencies accept the work in the form in which it arrives, and, therefore, have tended to organize their activities around failures rather than around opportunities for intervention. Malcolm K. Sparrow

  4. How will the taxpayer behave after an audit? • Evade more? • Evade less?

  5. Prospect TheoryDaniel Kahneman & Amos Tversky • People are willing to take big risks in order to avoid losses • Ex: Choose between Lose 1000 or 50/50-chans oflosing 2000 or 0 • People are not willing to take big risks in order to gain more • Ex: Choose between Win 1000 or 50/50-chans ofwinning 2000 or 0 This means: Tax refund: less tax evasion Tax debt: more tax evasion Risk of loosing the business: more tax evasion

  6. ”Old” evader Much extra revenue Low preventive effect New evader Little extra revenue High preventive effect One evading taxpayer Evasion Time

  7. The German case Taxpayers that perceive a high risk of detection Taxpayers participating in the informal sector Danish researchers have shown that risk of detection had no impact on taxpayer behaviour directly. But, the tax morale (social norms) had improved.

  8. Is deterrence effective?

  9. The purpose of audits is NOT • To maximise revenue • To perform as many checks and audits as possible The purpose is to increase the willingness to comply in the long run

  10. External pressure (incentives) can increase or decrease the individuals own moral convictions. • The moral conviction will decrease if the incentives are perceived to be controlling. • The moral conviction will increase if the incentives are perceived to be supportive. Crowding theory, Bruno S Frey

  11. Slippery slope model

  12. Perceptions of power • CoercivepowerCompliancethroughintimidation • Legitimate powerCompliance through fairness Reduces the willingness to comply Increases the willingness to comply

  13. Norms and deterrence + + Strong norms in favour of compliance Social norms Personal norms Behaviour - - Low deterrent effect of enforcement Michael Wenzel, 2002

  14. Norms and deterrence - - Weak norms in favour of compliance Social norms Personal norms Behaviour + + High deterrent effect of enforcement

  15. Norms and deterrence - - + + Weak norms in favour of compliance Strong norms in favour of compliance Social norms Personal norms Behaviour + + Higher deterrent effect of enforcement

  16. Norms and deterrence + + + + Stronger norms in favour of compliance Strong norms in favour of compliance Social norms Personal norms Behaviour - - Low deterrent effect of enforcement

  17. Norms and deterrence + + + + Stronger norms in favour of compliance Strong norms in favour of compliance Social norms Personal norms Behaviour To support social norms is the purpose of enforcement, not deterrence.

  18. Norms and deterrence + + + + Stärkernormerförattbetalaskatt Strong norms in favour of compliance Social norms Personal norms Behaviour • Social norms: • What others do • What others think To support social norms is the purpose of enforcement, not deterrence. Enforcement can influence this

  19. What happensif a person don’tfollowhis personal norms? • Feelings ofshame • Verybigthreattoself image • The person needstoconfirmthathis actions is right • By findingwaystorationalize the behaviour • By doing it again • Canleadtochange in personal norms

  20. Trust basedclimate Antagonistic climate Voluntarycompliance Coercedcompliance Enforcement that support social norms and the willingness to comply Enforcement used as deterrence Enforcementcontributesto trust Enforcementdestroys trust Controllingtaxpayers Builiding trust and fairness A strategic choice

  21. Communication and enforcement Is the purpose to intimidate… …or to protect honest behaviour? You must comply, or else… We will make sure that others comply.

  22. The evolution of the thinking Risk management Selection for audit Understand and influence behaviour Right from the start Fixing the taxpayer Fixing the environment An important shift

  23. How do we perceive the taxpayers?Are the taxpayers the problem?

  24. The philosophical perspective “The man who possesses character excellence does the right thing” Who you are determines what you do “It’s not who you are underneath, it’s what you do that defines you” What you do determines who you are

  25. The practical perspective It is easier to change the environment than to change the person… …regardless of what we might think of a persons character

  26. Wehavealways a choice – weare not victims We don’t chose this view • They don't understand • People are strange We chose this view • We have not explained well enough • We have not understood the needs

  27. Its not about manipulating peopleto do things Itsaboutworkingwithpeopletowards common goals Its about building trust and fairness

  28. We can influence the environment in many ways • Social norms • Most taxpayers are compliant • Most taxpayers want to comply • Simplify and automate • Integrated software • Enforcement (not deterrence) • About fairness • About social norms • We never use threats • Its about catching “those who evade”

  29. General level Other taxpayers Audits have often a positive effect Individual level Audited taxpayers Audits can have a negative effect on compliant taxpayers Audits can have a negative effect on non-compliant taxpayers Audits can have a positive effect on non-compliant taxpayers

  30. The effect of audits depends on… • The selection • Follow-up audit can be a good idea • How the audit is carried out • How audit activities are reported in media

  31. To just keep correcting taxpayer errors is not effective Proactive measures and support Reassessments due to unnecessary errors Combat tax evasion and crime More resources Fewer resources More resources

  32. 1 Catch big evaders 4 3 Create better indivual preventive effect by “follow-up” audits Create better general preventive effect by audit the “right” areas (according to the public) 2 Stop new evaders 4 different audit strategies ”Old” evaders New evaders

  33. “For every complex problem there is an answer that is clear, simple and wrong.” H.L. Mencken

  34. ”The system” The result Enforcement Service Othercircumstances Numberoferrors Typeoferrors Sizeoferrors

  35. Discussion • What is the purpose of enforcement in Colombia? • Should the purpose be different? • What consequences does this have on how we choose goals and what we measure as success?

  36. Strategic thinking

  37. What we intend to do What we did This is our view This is what we do

  38. A strategy requires a goal

  39. Plans are nothing, planning is everything. Eisenhower

  40. Dynamic thinking is crucial

  41. We get stuck in familiarpatterns

  42. Ways of thinking Insights

  43. Working with things or people Unpredictable Difficult to control Unique cases Predictable Control All cases exactly the same

  44. Strategic thinking is about • Understanding the past and present • Not predicting the future but having an idea of the current direction and have foresight about the future • Thinking ahead • Thinking in abstracts and patterns • Collecting knowledge and gaining insights

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