Voluntary tax compliance

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

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

37. 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?

38. Strategic thinking

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

40. A strategy requires a goal

41. Plans are nothing, planning is everything. Eisenhower

42. Dynamic thinking is crucial

43. We get stuck in familiarpatterns

44. Ways of thinking Insights

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

47. 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