Rewarding Taxpayers: A Possible Method to Improve Tax Compliance in New Zealand?
Degree GrantorUniversity of Canterbury
Degree NameMaster of Commerce
Traditional tax compliance policy is based on a deterrence approach, whereby compliance is achieved through a tax authority’s threats of penalties and audits. This policy is based on Allingham & Sandmo’s (1972) standard model of tax evasion, which posits that an increase in the probability of detection and punishment will, ceteris paribus, lead to an increase in compliance. However, this model has been criticised for lacking explanatory power for the majority of observed tax compliance behaviour. Consequently, a body of research has developed which attempts to identify the factors which influence compliance behaviour in addition to deterrence measures. This research has focused upon the concept of tax morale; a concept which broadly refers to the attitudes and beliefs of taxpayers which can influence their compliance behaviour. The concept of tax morale has developed into a growing area of research which investigates the potential for utilising the ‘carrot’ to encourage voluntary compliance, and reducing the reliance on the ‘stick’ to coerce compliance (Kornhauser, 2007; Torgler, 2007).
One carrot which has been identified as having the potential to improve tax compliance is the use of rewards for compliant taxpayers. Several theoretical and experimental studies have been undertaken which have investigated the impact of rewards on participants’ tax compliance behaviour, and have indicated that the use of rewards is potentially an effective means of improving compliance behaviour. However, there is an absence of research focused on gaining an understanding of the views and opinions of tax practitioners and taxpayers regarding the potential introduction of a reward system. As such, a qualitative research approach utilising semi-structured interviews was adopted, in which interviews were conducted with five tax practitioners and two small business owners. These interviews covered issues such as the potential effectiveness of using rewards to encourage compliance, the features which should be included in a reward system, and the feasibility of implementing such a system.
The findings from the interviews indicate that the use of rewards could be a more effective means of improving the compliance behaviour of non-compliant taxpayers, as opposed to the sole use of deterrence measures. In addition, it was thought that the use of rewards could also be an effective way of maintaining the compliance of honest taxpayers and reducing the risk of such taxpayers acting opportunistically in the future. Furthermore, it was found that the use of rewards for compliant taxpayers could also reduce the risk of the ‘bomb-crater’ effect occurring.
In regard to the features of a potential reward system, it was found that there was a strong preference for the use of financial rewards, which would be administered in the form of a percentage rebate. However, it was also noted that certain types of non-financial rewards could also be effective, particularly for maintaining the compliance of honest taxpayers. A key finding arising from the research is that in order for a reward system to successfully induce non-compliant taxpayers to become compliant, it is very likely that the reward system would need to be introduced in conjunction with a tax amnesty.
In regard to the feasibility of introducing a reward system in New Zealand, the findings indicated some doubts as to the ability of Inland Revenue’s Information Technology (IT) system to adequately implement a reward system. However, these concerns were tempered by the fact that Inland Revenue is due to receive a $1.5b upgrade of its IT system over the next ten years, which the practitioners expected would be able to competently handle the implementation of a reward system. Furthermore, the findings indicated that it should be relatively straightforward for Inland Revenue to operate such a system. Finally, the findings highlighted several issues and challenges which Inland Revenue would need to overcome in order to successfully implement a reward system, which could impact upon Inland Revenue’s amenability to adopt such an approach.