Tuesday, September 30, 2008

Why are tax penalties so harsh?

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The Australian government is able to borrow money for around 6% per annum, yet around the world government’s charge delinquent tax payers 24-30% per annum. The reason is of course to force taxpayers into compliance. This is pretty courageous policy when you consider that in many countries similar ‘loan shark’ payment regimes have been outlawed by government. I am thinking of Japan, but in other countries as well. Of course the paradox in the case of tax is that people did not ask or invite this, they just couldn’t pay their taxes. Sometimes for ethical reasons, but in other cases due to incapacity.
The reason why punishments are so harsh is because the government has picked up on research by Jensen (1969) highlighting a relationship between the inevitability of legal sanctions and crime rates, and reported evidence of a relationship between perceived risk of legal sanctions and self-reported delinquency in juveniles. These findings have since been interpreted as justification for the premise that ‘individuals will only comply with rules and regulations when confronted with harsh sanctions and penalties’.
Well government didn’t need research to know that. The whip, gun and incarceration have long been used as tools of coercion by all but the most despotic regimes in the world. But what the government needed was a credible sanction for its actions. Well such research gives them a sanction for unethical conduct.
One needs to recognise here that this is not fear of doing wrong, breaking the law. That is a different question, and one the government is not particularly interested in addressing. There is no ethical framework for tax. If they created one it would be subject to criticism, which they want to avoid. The way government works is to:
1. Avoid responsibility – see Aaron Russo’s movie ‘Fascism in America’
2. Avoid defining terms
3. Avoid the need for accountability
4. Avoid discussion
5. Deflect responsibility to the courts – in the case of the USA – discarding the US Constitution

Deterrence research conducted in the tax arena has continued to reveal conflicting results.
While this offers some support to the assertion that fear of detection is an effective deterrent to tax noncompliance (Witte & Woodbury, 1985; Slemrod, Blumenthal & Christian, 2001), it is not a deterrent without costs. The costs include suicide, anxiety and crime. It must be remembered that it might be illegal not to pay tax, but that is not the issue if the government cannot defend its policies. A great many tax laws are unfair, because they are arbitrary, and because the government is so despondent to taxpayers concerns, as they are relatively free of accountability.
There is no evidence to suggest that the severity of penalties or prosecution deters noncompliance in the long-term (Kinsey, 1988; Witte & Woodbury, 1985; Williams, 2001). An Australian study indicates that levels of tax non-compliance for the period 1985-1996 did not change as the severity of statutory fines increased. The same study also indicated that an increase in the number of gaoled tax offenders over this time had no impact (Devos, 2002). Prosecuting non-compliant taxpayers also has been demonstrated to have had limited impact on compliance (Williams, 2001).
Andrew Sheldon www.sheldonthinks.com
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