Collateral compliance.

Author:Blank, Joshua D.
Position:Promoting tax compliance using combination of monetary and nonmonetary penalties - II. Why Collateral Tax Sanctions Promote Compliance B. Collateral Tax Sanctions and Motivations of Compliance 5. Collateral Tax Sanctions Bolster Confidence Among Taxpayers Motivated by Feelings of Reciprocity through Conclusion, with footnotes, p. 762-800
  1. Collateral Tax Sanctions Bolster Confidence Among Taxpayers Motivated by Feelings of Reciprocity

    Collateral tax sanctions are more likely than monetary tax penalties to promote compliance by individuals who pay their taxes because they believe that other taxpayers are doing so as well--in effect, reciprocating their good behavior. (232) Reciprocity theory hypothesizes that individuals are inclined to pay their taxes only if they believe that other individuals are reciprocating their compliant behavior. (233) For "reciprocator" taxpayers, it is essential that the government appears to detect and punish freeriders--individuals who fail to comply with the tax system. (234) The federal government's strategic publicity of its own tax enforcement actions, for example, reveals that its officials are well aware of the basic concept of reciprocity theory. (235) One former head of the U.S. Department of Justice Tax Division has commented, "People who pay what the law requires deserve the assurance that those who don't, and those who promote or facilitate tax evasion, will not get away with it." (236) For several reasons, collateral tax sanctions can enable the government to provide this assurance more effectively than the threat of monetary penalties or strategic publicity of its tax enforcement efforts.

    1. Publicity

      Collateral tax sanctions generate significant amounts of media attention. For example, California's enactment of the driver's license revocation provision in 2011, (237) the U.S. Senate's debate over the revocation of passports in 2012, (238) and the Louisiana legislation that empowered the state to rescind hunting licenses from tax delinquent individuals (239) were featured in dozens of stories in newspapers, radio and television reports, and blog posts. This media attention is attributable to the high salience of the government benefits and services that collateral tax sanctions confiscate and the controversy that often surrounds the enactment of these measures. Further, because federal and state legislatures rarely implement dramatic changes to the monetary tax-penalty structure, (240) the introduction of collateral tax sanctions presents an opportunity for journalists to write entertaining and digestible news stories about tax developments. This heightened media coverage can thus cause reciprocator taxpayers to develop the perception that the government is focused on preventing tax noncompliance.

    2. Observability

      Collateral tax sanctions can also strengthen feelings of reciprocity by causing the public to observe specific examples of the government's success in detecting and punishing tax-noncompliant individuals. Under federal and state law, tax-return information is protected by broad taxpayer privacy rules. (241) As a result of these protections, the general public cannot determine whether a particular taxpayer has been audited or required to pay a monetary tax penalty. Even tax liens are not easily observable because individuals must search court records to discover them, and with the exception of celebrities, the media does not report on most individuals' tax liens. (242) Scholars have argued that the "non-observability" of the compliance or noncompliance of other taxpayers poses a "serious problem" to attempts to apply reciprocity theory to taxpayer behavior. (243)

      Collateral tax sanctions, however, can force some noncompliant taxpayers who have been caught and punished to appear in front of the curtain of taxpayer privacy. For example, the owner of a restaurant would feel confident about the government's tax enforcement capabilities if he were to observe a forfeiture-of-liquor-license sign in the window of one of his competitors who failed to pay its outstanding tax liability. Likewise, when a physician learns that a fellow doctor has forfeited his medical license as a result of engaging in tax evasion, he would feel that few of his colleagues would likely be willing to engage in similar acts, given the significance of the resulting penalty. Collateral tax sanctions thus can provide reciprocator taxpayers with specific examples of the government's tax enforcement successes, whereas the use of monetary tax penalties results in anonymous and therefore much less memorable tax-enforcement statistics. (244)

    3. Peer Group Examples

      In addition to generating specific examples, collateral tax sanctions can also apply to members of a reciprocator taxpayer's peer group. As tax compliance scholars have noted, the cooperative behavior posited by reciprocity theory most likely occurs when an individual believes that "other members of one's in-group" are cooperating as well. (245)

      The media often publicizes instances where an individual taxpayer receives a criminal sanction for failing to comply with the tax law. (246) As the federal government wins nearly all criminal tax cases, it attempts to maximize this publicity by prosecuting high-profile individuals where possible and by timing these prosecutions and guilty pleas to coincide with time periods when individuals are focused on preparing their individual tax returns. (247) During the 2006 criminal trial of Wesley Snipes, for instance, the public learned that the movie star had filed millions of dollars in fraudulent refund claims, adopted the "861 position" (a tax protester argument) and even signed fabricated tax return forms. (248) While Snipes was ultimately convicted for willfully failing to file tax returns, (249) it is possible that some reciprocator taxpayers viewed his conviction as an indication that only extreme acts of tax evasion committed by tax protestors are the types of offenses that result in detection and prosecution by the taxing authorities.

      Because collateral tax sanctions result in specific examples of enforcement and can affect a diverse group of taxpayers, however, they can further increase reciprocator taxpayers' confidence in the government's ability to ensure that their peers are paying their fair share of taxes. For example, when a prominent attorney at a New York City law firm forfeited his law license in 2012 as a result of his failure to file tax returns or pay taxes for several years, (250) he appeared in a public court and the press covered his story extensively. (251) Upon hearing this news, another New York City law firm partner, who has dutifully filed her tax returns in the dozens of jurisdictions in which her firm conducts business, may have felt relief that she has not acted like a "chump" by engaging in burdensome tax return preparation and making sizeable tax payments while her colleagues at other firms, or even the same firm, simply ignored their tax obligations. (252)

      For reciprocator taxpayers, observable punishments for tax delinquency are especially important. If reciprocator taxpayers perceive that the taxing authority is not capable of detecting blatant acts of tax delinquency, they may doubt whether the authority possesses the ability to attack far more sophisticated forms of tax avoidance and evasion. By generating media attention and, in some cases, exposing specific tax offenders who have been detected and punished, collateral tax sanctions can more effectively preserve or enhance reciprocator taxpayers' beliefs that the government is capable of controlling the growth of tax noncompliance than traditional monetary tax penalties.

  2. Collateral Tax Sanctions Reinforce Tax Compliance as a Duty of Citizenship

    A final oft-discussed motivation of individual tax compliance is that some individuals feel that paying taxes is an important duty of citizenship. (253) As Justice Oliver Wendell Holmes famously proclaimed, "I like to pay taxes. With them I buy civilization." (254) The growing use of collateral tax sanctions may thus have positive impacts on tax compliance by individuals who feel a similar patriotic obligation to pay their taxes.

    Scholars have long argued that the government can preserve, and perhaps even improve, tax compliance among patriotic taxpayers by convincing them that their tax dollars provide valuable government benefits and services. As economist Richard Bird has phrased this objective, an "essential institutional feature" of tax administration is the government's demonstration of clear "expenditure-revenue links" between tax payments and the services and benefits they fund. (255) Numerous studies have confirmed that, as taxpayers increasingly perceive that the government is using their tax dollars to provide public goods, their willingness to cooperate with the state and to pay their taxes out of a duty of citizenship--often described as "tax morale"--rises as well. (256)

    The challenge is that the link between tax revenues and government expenditures is not always apparent to taxpayers. As a result, several scholars have offered proposals that would increase positive publicity of the government benefits and services that tax dollars provide. For example, Yair Listokin and David Schizer have argued that the government should "trumpet" its use of taxpayer dollars in "signs about 'your tax dollars at work'" and "in press releases from politicians about benefits secured for constituents," just as charitable organizations rely heavily on the use of print and electronic media to inform their donors and potential donors of the specific initiatives that their contributions support. (257) Similarly, Joshua Rosenberg has argued that the government should produce advertisements featuring projects and services such as "[b]rief shots of hospitals, schools, roads, jetfighters, people eating wholesome food, taking safe drugs, etc." to enhance positive associations toward tax payments. (258) Outside the United States, several national governments have deployed television and radio advertisements similar to these proposals. (259)

    Collateral tax sanctions offer another approach for enhancing tax morale. By rescinding benefits and services from individuals who have failed to pay their...

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