Using "responsive regulation" to reduce tax base erosion

In: Regulation & governance, Band 16, Heft 3, S. 738-759

Abstract

AbstractHow 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 asingle individualpursuing asingle motivationby choosing asingle method(tax evasion) and operating in asingle 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 includeadditional actors in the field, all pursuingadditional motivations. We also expand our discussion to includeadditional methodsof tax base erosion like tax avoidance and money laundering, as well asadditional 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.