Voluntary tax compliance. Enforcement. Cooperation between DIAN and Skatteverket / Anders Stridh & Lennart Wittberg - Swedish Tax Agency

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

2. Enforcement

3. Malcolm K. Sparrow
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.

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

5. Prospect Theory
Daniel Kahneman & Amos Tversky
• People are willing to take big risks in order to avoid losses
– Ex: Choose between Lose 1000 or 50/50-chans of losing 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 of winning 2000 or 0
Tax refund: less tax evasion
Tax debt: more tax evasion
Risk of loosing the business: more tax evasion
This means:

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

7. The German case
8,0%
8,5%
9,0%
9,5%
10,0%
10,5%
2001 2004
Andel som arbetar svart
22,0%
24,0%
26,0%
28,0%
30,0%
2001 2004
Andel som upplever en ganska hög upptäcktsrisk
Taxpayers participating in the informal sectorTaxpayers that perceive a high risk of detection
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
• Coercive power
Compliance through intimidation
• Legitimate power
Compliance through fairness
Reduces the willingness to comply
Increases the willingness to comply

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

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

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

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

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

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

19. What happens if a person don’t follow his
personal norms?
• Feelings of shame
• Very big threat to self image
• The person needs to confirm that his actions is right
– By finding ways to rationalize the behaviour
– By doing it again
– Can lead to change in personal norms

20. Trust based climate Antagonistic climate
Voluntary compliance
Enforcement
contributes to trust
Coerced compliance
Enforcement destroys
trust
Builiding trust and
fairness
Controlling
taxpayers
A strategic choice
Enforcement that support
social norms and the
willingness to comply
Enforcement used as
deterrence

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
Selection for
audit
Understand and
influence
behaviour
Right from the
start
Fixing the taxpayer
Fixing the
environment
Risk
management
An important shift

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

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

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. We have always a choice – we are 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
people to do
things
Its about
working with
people towards
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
Individual level
Audited taxpayers
Audits have often a
positive effect
Audits can have a
negative effect on
compliant taxpayers
Audits can have a positive
effect on non-compliant
taxpayers
Audits can have a negative
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. Proactive
measures
and support
Reassessments
due to
unnecessary
errors
Combat tax
evasion and
crime
More
resources
Fewer
resources
More
resources
To just keep correcting taxpayer errors is not
effective

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

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

35. Enforcement
Service
Other circumstances
Number of errors
Type of errors
Size of errors
”The system” The result

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 familiar patterns

44. Ways of thinking
Insights

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

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