Tax+compliance


 * Tax compliance **

**What is tax compliance? ** Tax compliance is defined as the act when “the tax payer files all required tax returns at the proper time and that the returns accurately report tax liability”. This should be done in accordance with the valid regulations and court decisions.

**Why is tax compliance important? ** Tax compliance has huge impacts on the well-being and success of society. The public service, infrastructure and legal system that protect the proprietary right from theft, are dependent on tax compliance. Furthermore, tax compliance counteracts inequalities in wage and income. Taxation and tax compliance can guarantee all members of society human basic rights. These factors can be seen as justifying the ethical side of taxation.

The other extreme of tax compliance is tax noncompliance. It implies tax avoidance and tax evasion. Tax noncompliance is a world-wide problem. Governments of several countries have tried to decrease the tax gap, in order to further fulfill public needs. In the United States the cost of noncompliance have been estimated to $400 billion per year according to Internal Revenue Service in the US. Furthermore, in Australia 60% of the large companies do not pay enough taxes, according to research. However, approximately only 1% of all individual tax returns are audited and the penalties are seldom bigger than the amount of the unpaid taxes.
 * Tax noncompliance **

 **What affects an individual’s decision of tax compliance? ** The economics-of-crime model of Becker has been applied to a lot of research on tax compliance. It emphasizes the idea that the rational individual aims to maximize the expected utility of tax evasion. This is done by weighing the benefits of cheating against the risk of detection and punishment. The conclusion is that an increase in the probability of detection and in the penalty rate result in an increase in declared income, i.e. tax compliance is dependent on enforcement. This has been confirmed in research; the perception of a risk of being audited increases tax compliance. However, current research has called attention to the fact that the individual perceptions of ethics have to be taken into account. It has a crucial effect on an individual’s tax compliance. An example is the concept of a social norm of tax compliance, which affects the individuals decision. If the social norm is that noncompliance is acceptable the result is more undeclared work. Furthermore, the perception of the effects of one’s decision of tax compliance on the social welfare of society can be central in the decision making process. Tax compliance will be present as long as it is perceived as the right thing to do in the society. Another factor that influences tax compliance is trust in society, e.g. in the political institutions and government. Furthermore, tax compliance is higher in democratic societies with less corruption.   **Tax compliance in firms ** Tax compliance is also relevant in the context of firms. According to research, factors that affect the tax compliance of firms are cultural and institutional. Furthermore, tax compliance is lower among firms with higher levels of tax-related unofficial payments, because of both economic and institutional perspectives. Tax compliance of firms also depend on the existence of effective competition and collusion among the firms in the industry.

Several suggestions on how to increase tax compliance have been presented. One of them refers to the implementation of three paradigms; the enforcement paradigm, the service paradigm and the trust paradigm. The enforcement paradigm emphasizes oppression of illegal behavior through frequent audits and hard penalties. The service paradigm emphasizes the role of the tax administration as a facilitator and a service provider to taxpaying citizens. The trust paradigm emphasizes the importance of ethics in tax compliance, i.e. the role of morality and social norms. Furthermore, also tax education is presented as a solution to increase tax compliance.
 * Future solutions to increase compliance **