Does tax enforcement reduce voluntary tax compliance by taxpayers? The answer to this question can have significant implications for tax compliance efforts by the IRS and other tax administrations. Recently, a number of scholars have argued that the answer to this question is yes – that tax enforcement and deterrence negatively affect tax compliance by “crowding out” preexisting intrinsic motivations to comply with the tax laws. However, Leandra Lederman’s new work provides compelling evidence to the contrary. Relying on empirical literature, Lederman’s article challenges this assertion and concludes that tax enforcement does not reduce voluntary tax compliance. In fact, enforcement generally fosters tax compliance.
The work begins by explaining the crowding-out theory and its potential application in several non-tax contexts. Although some existing literature predicts that rewards or punishment can, in some cases, reduce intrinsic motivation to engage in a desired behavior, Lederman determines that it is hard to draw firm conclusions from existing studies and, ultimately, these results are not directly helpful in answering the question of whether enforcement reduces voluntary compliance in the tax context.
The work then turns to the tax world and analyzes empirical research, such as laboratory experiments and field studies, that consider the deterrence effects of tax enforcement. For instance, numerous studies described in the article provide evidence that audits and the threat of an audit generally have a positive direct and indirect effect on tax compliance. Other studies, focusing on the effect of penalties, suggest that penalties or sanctions can also improve tax compliance, although to a lesser extent than audit threats. On the other hand, the results of several lab experiments, which examine the effect of audits on the compliance rate of the audited taxpayers themselves, suggest that non-compliance by the audited taxpayers may increase for a period of time immediately following the audit. Several field experiments indicate that this increase in tax evasion may be more likely to occur among individual taxpayers found to be compliant during audit, as opposed to taxpayers found to be non-compliant.
What does all of this mean? Lederman argues that this empirical evidence is overall consistent with the deterrence model and collectively demonstrates that tax enforcement does not reduce voluntary compliance. These studies generally show that compliance rates increase with an increase in audit rates, and to a lesser extent, an increase in penalty rates. Improving intrinsic motivations to comply with the tax rules, or tax morale, is more likely a complement to tax enforcement, rather than a substitute for tax enforcement measures. Moreover, any increase in non-compliance by audited, but compliant, individuals is likely attributable to that individual perceiving a reduced likelihood of future audit and a reduced threat of penalty, rather than a reduced tax morale. Thus, the empirical research indicates that “deterrence does not crowd out intrinsic motivation to pay taxes.”
IThis informative and well-reasoned article is worth the read. The author’s analysis of the empirical research is persuasive in dispelling the notion that tax enforcement is counter-productive and has important implications for how the IRS may make more efficient use of scarce resources to better focus compliance efforts. For instance, as Lederman suggests, information reporting and an increased audit rate are both measures that are highly effective at improving compliance. Perhaps, new uses of technology that implement data analytics and artificial intelligence can also provide a cost-effective way to maximize the use of both of these tools. The work also provides an insightful synthesis of numerous studies and experiments that have been conducted in the field of enforcement and its impact on the subject’s behavior, which may prove valuable in other contexts as well. Finally, the work highlights gaps in existing studies, which will hopefully encourage further study that evaluates enforcement measures and can ultimately improve compliance strategies.