Using “responsive regulation” to reduce tax base erosion

Abstract

How can governments get individuals and firms to pay taxes, especially given increasing tax base erosion via tax evasion, tax avoidance, and money laundering? In this paper we discuss the many different perspectives to explain why people pay – and do not pay – their taxes, especially perspectives based on “responsive regulation,” and we use then these perspectives to suggest policies that governments may use to improve tax collections. We first describe an approach that is based on a single individual pursuing a single motivation by choosing a single method (tax evasion) and operating in a single country. This perspective has generated important insights, but it nonetheless has significant limitations. As a result, we then argue that this perspective must be expanded to include additional actors in the field, all pursuing additional motivations. We also expand our discussion to include additional methods of tax base erosion like tax avoidance and money laundering, as well as additional countries. We argue that explaining behavior and then devising appropriate policies requires incorporating all of these additional considerations. We also discuss the likely impact of technological innovations both on the ability of governments to collect taxes and on the ability of private agents to reduce their taxes. An important contribution of our paper is that we simulate the effects of all of these expansions to the basic model using a novel agent‐based model that is fully grounded in theory and calibrated for 33 European economics. We use this model to simulate the impacts over time of various reforms, especially reforms that implement international information‐sharing programs, by comparing tax base erosion in the absence of these reforms to erosion in their presence. Our simulation results demonstrate the importance of using a fully specified theoretical model that goes well beyond the standard economics of crime approach when considering the effects of government policy innovations. We conclude with recommendations that can in principle reduce tax base erosion via evasion, avoidance, and money laundering in the current multi‐dimensional environment as derived from the responsive regulation framework. However, these recommendations require a firm commitment from governments to their tax administrations, and these recommendations also cannot be introduced unilaterally by a single country but require international cooperation, especially via information sharing across borders.

Bilateral responsive regulation and international tax competition: An agent‐based simulation

“…1998; Torgler 2008 and Alm et al . 2020). Auditing and penalizing are often not significant in econometric tests (Frey & Feld 2002).…”

Taxation: A Regulatory Multilevel Governance Perspective

“…Alm et al . (2020) as well as Gerbrands et al . (2021) come to similar conclusions on the basis of agent‐based model simulations.…”

“…Alm et al . (2020) review the tax literature in economics and psychology moving from purely hierarchical to more cooperative and responsive forms of governance. Responsive regulation involves targeting multiple stakeholder groups and making deliberate and flexible (responsive) choices from a menu of regulatory strategies (Braithwaite 2009).…”

Tax evasion, technology, and inequality

“…Most commonly, ATPs occur by the use of tax havens, in which profits are shifted from higher to lower tax jurisdictions via such practices as treaty shopping, debt shifting, strategic location of intellectual property, tax deferral, corporate inversions, and, especially, transfer pricing. SeeAlm (2014) andAlm, Gerbrands, and Kirchler (2020) for a discussion of these types of strategies and of government policies to reduce their use. 4 "Money laundering" is the process of disguising the unlawful source of criminally derived proceeds to make them appear legal, proceeds derived from such sources as illegal arms sales, smuggling, activities of organized crime (e.g., drug trafficking and prostitution), embezzlement, insider trading, bribery, extortion and blackmail, computer fraud schemes, corruption (e.g., "petty" and "grand"), and the like.…”