An evolving compliance model for tax enforcement

Abstract

Decades of research on regulatory rule enforcement prompted a battle of sorts between those who favor a deterrence approach and those who promote compliance approaches, between punishment and persuasian (Reiss, 1984; Hawkins, 1984; Pearce and Tombs, 1990; Snider, 1990). In some areas, evidence suggests that deterrence works, if only modestly, as in the area of occupational health and safety (Scholz, 1991; Braithwaite, 1985). In nuclear safety and other realms, a shift away from a rule enforcement approach toward a more communitarian style of self-regulation improves compliance (Rees, 1994). In other domains, however, it is unclear whether the effect of increased deterrence is positive or negative (Makkai and Braithwaite, 1994). Tax enforcement is an area where the effects of deterrence and compliance approaches are unknown (Andreotti, Erard and Feinstein, 1998). When taxpayers are audited, for example, and a penalty imposed, it is unclear whether they learn that they got away with a lot of things that the audit did not detect. The deterrence sign will be positive if this is the bigger lesson than the lesson that cheating will be punished. Sometimes an audit succeeds in deterring cheating in the long run, but in the year or two after audit taxpayers believe they are unlikely to be audited, and this has a dramatic negative effect on compliance in those two years. This and other kinds of complexity have moved the compliance literature over the past decade away from a crude contest between punishment and persuasion. Rather the debate has been about how to get the right mix of the two. In the case studies discussed in this essay, the Australian Taxation Office (ATO) became persuaded to an enforcement pyramid approach to regulation (Ayres and Braithwaite, 1992; Gunningham and Grabosky, 1998). This means regulatory staff prefer the low-cost option of persuasion first and escalate to more deterrenceoriented options (and ultimately to incapacitation) as less interventionist strategies successively fail. In this essay, we first consider the history of the development of an Australian Taxation Office (ATO) compliance model out of the work of the Cash Economy Task Force. Ultimately, the responsive regulatory model developed by this group was adopted as policy for all ATO operations. We consider how the model has begun to be applied in three domains: with large corporations, with high wealth individuals and in the cash economy. In each of these three domains taxpayer compliance is become more challenging.