Appropriate and legitimate use of enforcement

Evidence from research

• To be more good than bad for compliance, enforcement must be done right
• Power, if perceived as coercive, may reduce trust and voluntary compliance
• Retributive justice is important for voluntary compliance
• Different tax climates, different enforcement strategies

Enforcement must be done right to have overall positive effects on compliance

There is no doubt that enforcement tools such as audits remain an essential part of a tax administration’s toolkit. There is plenty of evidence that enforcement can increase compliance through deterrence. However, a large and growing body of research examining both economic and psychological factors shows that enforcement must be used with great care to yield net benefits:

• While deterrent effects are well established, more and more studies document that they are neither universal across types of taxpayers (e.g., Laine, Silander & Sakamoto 2020) nor different socio-economic and cultural contexts (e.g., Williams & Horodnic 2017).
• Moreover, even when desired deterrent effects of audits materialize, audits may at the same time be perceived as coercive rather than legitimate and thus negatively affect trust, tax morale and, hence, voluntary compliance (e.g., Kaplanoglou & Rapanos 2015).
• The way audits are handled by the tax authority also matters: while research shows that delayed feedback on audits can have significant deterrent effects on future compliance, it comes with a price because the audited taxpayers perceive the process and the tax authority as more unfair (Muehlbacher et al. 2012; Kogler, Mittone & Kirchler 2016).
• In addition, even less intrusive measures such as supervision on timely tax payments may lead to delayed tax payments, indicating a crowding-out of intrinsic motivation to comply (Gangl, Torgler, Kirchler & Hofmann 2014).

Power, if perceived as coercive, may reduce trust and voluntary compliance

In a recent study for the Taxpayer Advocate Service in the USA, Erard et al. (2019) conducts a survey on how audited and non-audited taxpayers perceive the tax system and the Internal Revenue Service (IRS). They find that audits tend to induce negative attitudes among audited taxpayers, who tend to perceive greater coercive power within the IRS, have relatively less trust in the agency, and express weaker sentiments with regard to voluntary compliance. Furthermore, audited taxpayers are also relatively more likely to indicate that paying taxes feels like something is taken away from them, rather than as a contribution to society. Regarding the effects of audit on compliance, the conclusion is mixed: Audited taxpayers do report a higher perceived level of audit risk, but they also perceive a relatively low level of sanctions for noncompliance.

Gangl et al. (2015) further explores the double-edged nature of coercive power using survey data from a representative sample of Austrian self-employed taxpayers. The find that trust is closely linked to perceptions of legitimacy: taxpayers who consider coercive power to be illegitimate tend not to trust the authority, whereas those who consider coercive power to be legitimate tend to trust the authority. This, in turn, may determine whether citizens’ interactions with the authority is characterized by antagonism and lack of compliance or synergism and compliance. Which of these perceptions of power dominate may depend on perceptions of how coercive power is used: targeted against non-compliant taxpayers to safeguard the cooperative majority (i.e., retributive justice) or randomly to threaten all taxpayers in general to comply.

Retributive justice is important for voluntary compliance

Based on survey data from a sample of self-employed taxpayers, Kogler, Muehlbacher & Kirchler (2015) finds that while perceived retributive justice has no direct effect on the taxpayer's own compliance, it does have a significant positive effect on trust, which in turn leads to voluntary compliance. At the same time, perceived retributive justice is positively related to the perception of power as being legitimate, which is important in building or maintaining a service- or confidence-based tax climate.

Sjoberg et al. (2019) conduct a survey experiment based on a very large sample of 65,000 respondents from 50 countries, which allow the authors to assess causal effects across a wide range of contexts. The study shows that increasing the salience of anti-corruption efforts has a significant effect on tax morale, and that this effect is quite homogenous across countries. Thus, the study provides evidence that retributive justice is an important driver of tax morale and, hence, voluntary compliance.

Different tax climates, different enforcement strategies

In an experimental study of behavioral responses to authority, Silverman, Slemrod & Uler (2014) investigates the interplay between two sources of authority - authority “to” (legitimate power) and authority “in” (expert knowledge) – as drivers of compliance. They find that neither affects voluntary compliance without the other, while together they induce more voluntary compliance than any other combination of policies. This indicates that the reaction to an authority depends on whether that authority is perceived to be legitimate.

Using survey data from taxpayers from three culturally different countries (Austria, Finland, and Hungary), Gangl et al. (2020b) find that coercive power is negatively related to implicit trust and in turn to intended tax compliance. This shows that coercive power’s positive impact on tax compliance is undermined if coercive power reduces implicit trust. The study also shows that for all countries, legitimate power positively affects tax compliance intentions only via reason-based trust, thus supporting previous findings about the relationship between legitimacy and trust.

Based on a combination of an online and a lab experiment, Gangl et al. (2020a) argues that depending on the perceived interaction history between tax authority and taxpayer, different policies are needed to build or maintain confidence. They find that in an antagonistic climate, a combination of high coercive and high legitimate power can change the climate to one of confidence. Importantly, however, the same power combination applied in a confidence climate actually erodes this climate. Thus, the strategies and instruments needed to move from an antagonistic or service climate to one of confidence may no longer work - or can even be counter-productive - once a confidence climate has been established and needs to be maintained.