Today’s post is by guest blogger Susan Morse, who is an Assistant Professor of Law at the University of Texas School of Law. Professor Morse is a prolific scholar. Her articles reflect a deep understanding of taxpayer and advisor practice and research from many differing disciplines. Prior work includes one of my favorite tax compliance articles, a co-authored qualitative review of evasion in the small cash business economy. An incomplete list of her work includes a paper on the use of tax havens by corporate taxpayers, an analysis of the FBAR penalty regime, a review and critique of FATCA and an analysis of the transition taxation of offshore corporate profits. A link to her SSRN author page is here, where you can review the abstracts and download her articles for free.
The post below is based on her recent article Narrative and Tax Compliance that appeared in the journal FinanzArchiv/Public Finance Analysis. Professor Morse recognizes that for issues where there is limited reporting and withholding, IRS faces significant and persistent error rates. In the article and post below, she argues that despite obstacles, IRS should systematically add the use of storytelling and narrative to its tool kit. Les
Some taxpayers are beyond the reach of tax administrators’ reliable compliance tools. Third-party withholding and reporting cannot cover all transactions. When a tax administrator encounters an elusive taxpayer, such as a proprietorship that conducts a large portion of its business in cash, it cannot realistically say that it will be able to discover an act of tax evasion. Instead, the tax administrator faces the question of how to persuade the elusive taxpayer to pay tax. I argue in Narrative and Tax Compliance that the IRS and other tax administrators should prepare themselves for some storytelling.
Public persuasion is stock in trade for politicians and advertisers. It is no core strength of the IRS, or any other tax administration for that matter. Episodes like the release of an “embarrassing” Star Trek-themed training video justifiably make the IRS reluctant to depart from its same-old, same-old approach to enforcement and compliance.
But sometimes the government cannot escape a problem of persuasion. This is so when other tools such as third-party reporting fail. In this case, a tax administration should at least recognize the problem for what it is and consider persuading its human audience using punishment or prosocial narratives.
read more...A tax administrator might use a punishment narrative to persuade taxpayers that evasion will be discovered (even though the chance of audit is very low). Stories about other taxpayers, similar to target taxpayers, who have gotten caught can help persuade the audience about the likelihood of audit. The U.S. government did a nice job with this with respect to its criminal prosecution of holders of secret offshore accounts. Its strategy was straightforward – it simply wrote press releases that gave some detail about the lives of the individuals who struck plea bargains, for example describing one taxpayer as a retired sales manager for Boeing.
Scholars of narrative, such as Walter Fisher, describe the quality of stories using concepts of “probability” and “fidelity.” Probability means the story’s logic and believability in the context of other stories known to the audience. Fidelity means congruence between the story’s values and audience values.
Stories can be very short. One famous six-word effort is sometimes attributed to Ernest Hemingway: “For sale: baby shoes, never worn.” The IRS offshore account press releases, barebones as they were, gave enough information to permit other taxpayers to fill in the blanks, and make a persuasive story out of the skeleton information. It helps that the offshore account stories targeted a fairly specific kind of tax avoidance. Leigh Osofsky, for example, has written about the promise of a strategy that tailors enforcement efforts for micro-groups of taxpayers.
A tax administrator might use a prosocial narrative to persuade taxpayers, for example, that fellow citizens depend on tax payments from all taxpayers in order to support necessary and valued public goods. Prosocial narratives have drawn some support from lab experiments, but less support from empirical results based on actual tax return filings. For example, the sending of a note stating that “your income tax dollars are spent on services that we … depend on” did not increase tax compliance. Despite these results, continued support exists for prosocial compliance initiatives. For example, David Schizer and Yair Listokin have recently written about the potential of such strategies for tax compliance, and the United Kingdom government’s so-called “Nudge Unit” has embraced the idea of prosocial approaches more generally.
Prosocial and other narrative strategies carry risks for the tax administrator. Challenges include execution risk, cost, the navigation of taxpayer confidentiality rights, and questions about the capacity of a narrative strategy to impact nonautomatic behavior. But sometimes the tax administrator may need narrative, either because it cannot persuade taxpayers without it or because it requires a tool that will effectively counteract the way another party – perhaps the media – shapes a story about the tax administrator’s compliance or enforcement program. Either way, the IRS should be prepared to tell a good story.
How about the Feds telling the truth? Manipulation to collect taxes is a very questionable function of Government.
Although I can certainly appreciate a look at alternative methods for incentivizing tax compliance, I would argue that two factors constitute the major influence: (1) self-interest and (2) perception of burden. I regularly argue, analogous to the underlying premise of the Laffer Curve, that so long as the burden of tax compliance is not such that it distracts the producer of the income from revenue production to direct their talents and ingenuity towards evading the tax – the system will function well as it is viewed simply a “cost of doing business.” When the producer starts feeling the burden overly onerous, it will incentivize the producer to direct his creativity or resources to minimizing the tax obligation.
In the late 90’s I served as Maine’s state revenue department administrator. As noted in this article, there are many communities that are beyond the easy reach of tax departments.(In Maine, our cash economies centered around commercial fisherman, wood cutters and marijuana growers.) Often the best approach is negative publicity. Target a few folks for criminal prosecution in each of those industries and hope the word spreads. The IRS operates much the same way, in fact, I believe it has become one of the nation’s largest PR firms.
Brian Mahany
http://www.mahanyertl.com