Transparency and predictability in tax administration

Evidence from research

• Lower tax complexity and higher service quality reduces evasion
• Reducing uncertainty through information increases voluntary compliance and reduce unintentional mistakes
• Information reduces unintentional mistakes and compliance costs

Higher service quality and lower tax complexity reduces evasion

A lack of transparency and predictability in the tax system can be bad for taxpayers’ willingness to comply as well as create opportunities for evasion that would not otherwise be there under less complicated and uncertain conditions.

For example, Hanousek & Palda (2004) shows that a higher perceived quality of government services is related to a lower frequency of tax evasion. Cummings et al. (2009) also find that tax compliance increases with individual perceptions of good governance and, additionally, that responses to enforcement are enhanced by these perceptions. Richardson (2006) finds that complexity has the strongest impact on tax evasion compared to other important factors like education, income source, fairness and tax morale.

Reducing uncertainty through information increases voluntary compliance

Through a lab experiment, Alm, Cherry, Jones & McKee (2010) looks into differences in compliance between a classic “enforcement” paradigm and a revised “service” paradigm, where participants are offered various kinds of assistance or “services” to help them figure out their tax liabilities. While the risk of being audited is constantly present, the experiment shows that uncertainty reduces the degree of both filing and reporting compliance while information provided by the tax authority to reduce uncertainty has a positive impact on both.

McKee, Siladke & Vossler (2018) also investigates effects of reducing uncertainty through tax administration assistance and services in the lab. In this experiment, variations in both the level of liability uncertainty and the cost and quality of information services are tested on a diverse set of participants comprising both students and non-students (whereas most social science lab experiments rely on students only). Results show a strong and positive effect of information services on tax compliance, and that without information services, being audited actually means reporting a lower tax liability afterwards.

Information reduces unintentional mistakes and compliance costs

Taking the study of information effects to the field, Kosonen & Ropponen (2015) shows that providing information about the tax code significantly helps firms to avoid making unintentional mistakes in their tax filing. They do so via a survey experiment, where information about VAT rules are mixed in between attitude questions in the version sent to the treatment group, while the control group receives the same survey only without these pieces of information.

Using survey data, Eichfelder & Kegels (2014) study how authority behavior affects the burden of firms in complying with tax regulations. They find that the most cost-relevant aspect seems to be the timely provision of helpful information – more so than problems with contact or contradictory statements from officials. And most importantly, they find that a customer-unfriendly administration increases the burden of complying with the tax law by about 27%.