Hand-holding, brow-beating, and shaming into compliance: a comparative survey of enforcement mechanisms for tax compliance.

Author:Max, Craig A., IV
 
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ABSTRACT

Tax authorities and policy planners have a variety of tools at their disposal to create mechanisms to encourage and enforce compliance with revenue collection systems. Traditionally, these mechanisms include the possibility of criminal prosecution as well as civil pecuniary sanctions. Despite the dominate role that prosecution and pecuniary sanctions hold internationally, there exists a range of alternative enforcement mechanisms utilized. The United States has recently started to implement nonpecuniary enforcement devices to achieve policy goals, namely the encouragement of participating with the federal taxing system. This Note attempts to take an initial step into exploring the range of international enforcement mechanisms available to policy planners. Then, it contrasts these histories with the more recent development of taxation in the United States. It concludes that given international harmonization, the United States is more likely on the forefront rather than behind the learning curve of enforcement devices. While nonpecuniary devices may hold promise to encourage participation, further research is needed to develop refined devices which live up to that promise.

TABLE OF CONTENTS I. INTRODUCTION II. DEVELOPMENT OF THE TAX COMPLIANCE MECHANISM A. Origins of Taxation and Compliance Efforts B. Enforcement of Tax Provisions: The Theories and Problems of Implementations III. TAX IMPOSITION AND ENFORCEMENT IN VARIOUS COUNTRIES: HISTORICAL AND CURRENT PRACTICES A. India B. China C. Europe, Historically C. United Kingdom, Modern Practice D. Latin America E. Nonpecuniary Enforcement Mechanisms Internationally IV. MULTINATIONAL COLLABORATIVE EFFORTS A. Collaborative Efforts toward Tax Evasion and Enforcement B. Role of Cultural and Normative Differences in Multinational Tax Cooperation V. ENFORCEMENT MECHANISMS IN U.S. TAXATION A. Evolution of the Civil Tax Penalty in the United States B. Tax Reform Act of 1986 and Subsequent Penalty Provisions C. Actuating Principles for the U.S. Tax Penalty System D. Modern Nonpecuniary U.S. Tax Provisions 1. Nonpecuniary Expatriation Provisions 2. Other Forms of Nonpecuniary Enforcement Measures at the Federal Level 3. State Tax Systems Use of Nonpecuniary Enforcement Mechanisms VI. CONCLUSIONS ON NONPECUNIARY ENFORCEMENTS MECHANISMS I. INTRODUCTION

Tax authorities and policy planners have a variety of tools at their disposal to create mechanisms to encourage and enforce compliance with revenue collection systems. Traditionally, these mechanisms include the possibility of criminal prosecution, as well as civil pecuniary sanctions. Despite the dominate role that prosecution and pecuniary sanctions hold internationally, there exists a range of alternative enforcement mechanisms. The United States has recently started implementing nonpecuniary enforcement devices to achieve its policy goal, namely the encouragement of participating with the federal taxing system. This Note attempts to take an initial step into exploring the range of international enforcement mechanisms available to policy planners. Then, it contrasts these approaches with the more recent development of taxation in the United States. It concludes that, given international harmonization, the United States is more likely on the forefront rather than behind the learning curve of enforcement devices. While nonpecuniary devices may hold promise to encourage participation, further research is needed to develop refined devices which live up to that promise.

  1. DEVELOPMENT OF THE TAX COMPLIANCE MECHANISM

    It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold. (1) Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. (2) The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. (3) A. Origins of Taxation and Compliance Efforts

    Tax compliance efforts are naturally derivative of their underlying taxation systems. Definitions of tax have undergone perceivable change over time. This is consistent with the developments in types of taxes, enforcement practices, and the governing systems prevalent across the world. Two definitions from different eras and countries summarize this change.

    England, 1835: Tax is a tribute or imposition laid upon the subject, which being certainly and orderly rated, was wont to be paid into the King's exchequer. (4)

    India, 1940: Rate or sum of money assessed on the person or property of a citizen by government for the use of the nation or state; burdens or charges imposed by the legislative power upon persons or property to raise money for public purposes, and the enforced proportional contribution of persons and property levied by the authority of the state for the support of the government and for all public needs. (5)

    While it is a matter of popular belief that taxes on income and wealth are a recent creation of the state, which is true enough in the United States, there is extensive historical evidence showing that taxes on income in one form or another were levied in primitive and ancient communities. (6) The etymological development of the word tax is particularly telling. "Taxation" wends its way through the centuries to modern English from the Middle English taxen, which was derived from Middle French taxer and Mediaeval Latin taxare. (7) Both the Middle French and Mediaeval Latin stem from Latin tangere: to touch, feel, rate, compute, or censure. (8)

    The selective examples below illustrate the breadth and creativity of pre-modern taxation regimes. These early taxes were often levied on the sale and purchase of merchandise or livestock and were collected in a haphazard manner from time to time. (9) The challenges faced by these early systems echo many of the same difficulties explored today; for example, they provoke questions of ability to pay, equitable valuation, timing consideration, and enforcement mechanisms--the subject of this Note.

    Taxation systems throughout history have been challenged by problems of compliance and enforcement. This had led to innovations both in the nature and extent of taxation imposed and the means for ensuring compliance. Nearly 2000 years ago, Caesar Augustus attempted to levy a tax on the known world. (10) Other governmental executives, perhaps more practically, have used more narrow forms of taxation to help increase compliance. In the Greek, German, and Roman Empires, taxes were levied at times on the basis of turnover and on specific occupations. (11)

    For many centuries, particularly in Feudal Europe, revenue from taxes went to the Monarch. (12) An excellent example of this was the Saladin tithe. An ecclesiastic extraction, as indicated by its description as a tithe, the Saladin tithe was in fact a compulsory tax, which initially was raised to fight the crusades. (13) Contemporaries widely believed that King Henry II of England used the proceeds to fight his own son Richard I and King Phillip II of France, rather than retake Jerusalem. (14) The Saladin tithe was a 10% tax on revenues and personal property. (15) Because of the nominally ecclesiastic nature of the tax, the compulsory tithe was assessed by the dioceses and collected by the local clergy rather than through the shires or by the local sheriffs. (16)

    Even as such a broad tax with a primitive enforcement system, the Saladin tithe was used to encourage state-favored behavior. This policy concern resulted in relatively sophisticated exemptions, perhaps to the chagrin of the progenitors of the modern flat-tax movement:

    This year each man shall give in alms a tenth of his revenues and movables with the exception of the arms, horses and garments of the knights, and likewise with the exception of the horses, books, garments and vestments, and all appurtenances of whatever sort used by clerks in divine service, and the precious stones belonging to both clerks and laymen. (17) The exceptions were for state-favored investment in national defense--i.e., arms and horses. Additionally, anyone who joined the crusade was exempt from the tithe altogether. (18) Again, the exception was driven by the policy concern of motivating people to join the crusade.

    As with modern tax systems, the usefulness of any taxing regime is dependent on a combination of compliance and related enforcement mechanisms for encouraging compliance. Much like its relatively sophisticated exceptions, the enforcement of the Saladin tithe tax was similarly complex. The key enforcement mechanism was a blended criminal penalty and alternative sanction, premised again on the ecclesiastic nature of the tax: all clergy and landowners who did not join the crusade were liable for the assessment. (19) Failure to pay would result in imprisonment (the criminal sanction) or excommunication (the alternative sanction). (20) These enforcement remedies were not mutually exclusive, and a noncompliant taxpayer could be subject to both. (21) While taxes in Mediaeval England were usually collected through the Office of the Exchequer, a separate office with ten tellers was set up to collect the Saladin tithe in Salisbury. (22)

    According to historical records, 130,000 [pounds sterling] was collected from the tithe, which made it the largest tax ever collected in England at the time. (23) A similar tax was levied in France, but Philip II faced significant difficulties in achieving compliance. (24) While the tax was widely loathed in England, the intended purpose was recognized as valuable. (25) In contrast, France lacked the...

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