Tax Compliance: How Trust in Government Can Increase Federal Tax Revenues
Problem
A 2013 report by Statistics Canada found that $45.6 billion was lost due to cheating on taxes, representing 2.4 percent of GDP. A problem exists where the federal government relies on taxes to operate, while a large portion of taxpayers are not discouraged by threats of punishment. Efforts have been made to close the tax gap without avail. The reasons behind this lack of compliance are numerous, but one factor in particular is vital and often overlooked - trust in government itself.
What is trust in government? Broadly defined, trust in government is government performance less expectations. The most common method of measurement is by perception surveys, where respondents are asked questions similar to, “how much do you trust the government in Ottawa to do what is right?” Clearly there is a large degree of subjectivity between respondents. Nevertheless, perception forms behavior - the outcome that solutions will seek to modify.
Relationship between trust and taxes
Various studies have shown a high degree of correlation between an individual’s trust in government and their willingness to pay taxes. Kucher and Götte analyzed Switzerland, finding that, even in the absence of enforcement mechanisms, compliance for paying taxes was heavily influenced by an individual’s trust in government. The degree of the increase in compliance is also notable. Following the analysis of perception survey data in the United States, Sholz and Lubell found that as levels of trust increased, the probability of full compliance drastically rose - even reaching close to unanimous levels. This relationship presents a massive opportunity for the federal government to increase tax revenues.
How can the federal government increase the perception of trust in itself that is so strongly linked to tax compliance? To answer this question, we must first find what damages trust, and then work to correct it.
What damages trust? There are two factors of special importance:
· Perception of corruption
· Low levels of engagement
The perception of corruption constitutes the largest predictor of trust in remote political institutions directly. Paying taxes is an unpleasant activity, and when coupled with political considerations, it creates an atmosphere ripe for the appearance of corruption. The mere appearance of impropriety is enough to affect an individual’s perception of government, even if none has taken place. Once trust is lost it is difficult to gain back.
The relationship between citizen engagement and trust in government can be traced back to Alexis de Tocqueville who wrote that,
It is well known that uninvolved and disengaged citizens view the government in more negative terms. The opportunity for people to become involved in decision making, even if government decisions ultimately do not align with their choices, increases their trust in government.
Solutions
Trust in the federal government is comprised of trust in its institutions. Regarding tax collection, the most important is the Canada Revenue Agency (CRA). They have the most frequent contact with taxpayers, making them a natural starting point for implementing trust building measures.
Remedies:
· Appearance standards
· E-participation opportunities
Appearance standards treat the appearance of impropriety as an offence, even if none has taken place. For example, a standard where employees must disclose expenses, even if no improper spending has happened. The purpose is to address the perception component so important in the appearance of corruption.
The CRA has a serious image problem.
The Chief Service Officer, introduced in 2018, conducted consultations and found that 83 percent of respondents had experiences that did not meet their needs. A common theme was that experiences went poorly due to rude or unhelpful behavior by employees. Many cited agents being aggressive, unfriendly and indifferent. These are major concerns, eroding trust for the largest taxpayer institution.
Appearance standards should be added on top of existing measures. Standards that enforce the tone used by employees with the public should be used. Behavior and language that appears rude, such as aggression or sarcasm, must be removed. Enforcement of these standards could be done by managers, such as in the CRA call centre, with punishments for employees who display improper tone - even if interactions ultimately ended positively.
E-participation incorporates computer-based interactions that reach citizens who would otherwise not engage or participate in government. In addition, it bolsters engagement among those already participating. Engagement leads to increased trust, resulting in increased tax revenue.
The CRA should engage participants via its website. Respondents, including taxpayers and non-taxpayers, will share their views. Consultation will identify areas that require a policy (such as rude language) and help monitor existing policies as a form of feedback. Valuable personal data and general information will be collected.
Involving citizens in the CRA’s policy process will increase levels of engagement that are so important in building trust.
Billions of dollars of federal tax revenue are lost each year due to individuals cheating on their taxes. Trust in government is a very strong predictor of compliance. In addition, maximizing levels of trust - even when they are not low - greatly boosts tax compliance. Unfortunately, little attention is given to the matter. A lucrative opportunity exists for the federal government and the CRA to boost tax revenue, without the need for costly enforcement mechanisms and punishments.
About the author: Rob Chwyl is an MPP graduate from the University of Calgary. He has worked in communications and engagement for a number of startup companies in Calgary. Rob’s research interests include political communications, philosophy and social psychology.