Power, trust and tax compliance Some trends and developments in The Netherlands

1. Power, trust and tax compliance Some trends and developments in The Netherlands Dr. Sjoerd Goslinga Netherlands Tax and Customs Administration Unit Research & Marketing

2. Introduction Scientific Council for Government Policy (WRR) (2002): ‘The future of the constitutional state’ Court of Audit (ARK): effects Re-evaluation of (enforcement) policy Netherlands Tax and Customs Administration (NTCA): • Introduction and development of new monitoring and enforcement instruments, such as • Enforcement communication • Horizontal Monitoring • More (mutual) trust, shift in responsibility • More persuasion, less coercion • More focus on effects (compliance) • Co-operation with tax intermediaries 2

3. Overview of presentation • Introduction • Tax climate: power, trust and compliance? How do Dutch taxpayers perceive the NTCA and paying taxes? • Relationships between power, trust and tax compliance Do power and/or trust influence compliance? • Horizontal Monitoring Is it related to trust and/or power? • Final remarks 3

4. Power, trust and tax compliance Key elements Power of authorities: How potential of tax authorities to detect and to punish evasion is perceived by taxpayers Trust in authorities: Taxpayers‘ perception of tax authorities as benevolent and working for the common good Compliance: Degree of cooperation by taxpayers Enforced compliance vs. voluntary compliance 4

5. Power, trust and tax compliance “Slippery Slope” Model (Kirchler et al.) Voluntary tax compliance Enforced tax compliance Maximum Compliance Minimum Maximum Maximum Trust in authorities Power of authorities Minimum Minimum 5

6. Tax climate How do taxpayers perceive the NTCA and paying taxes? • Data from Fiscal Monitor (1994 – 2009) • Annual survey research among representative samples of different groups of taxpayers • Private taxpayers, SMEs, tax intermediairies • Power, trust and compliance (opinions, attitudes, intentions) • Power: the probability of detection of tax evasion, the severity of the consequences (fines) when caught • Trust: NTCA is trustworthy, supportive • Compliance: acceptability of tax evasion, probability of evasion, view on paying taxes 6

7. Tax climate: power Source: Fiscal Monitor 7

8. Tax climate: power Source: Fiscal Monitor 8

9. Tax climate: trust Source: Fiscal Monitor 9

10. Tax climate: trust Source: Fiscal Monitor 10

11. Tax climate: compliance Source: Fiscal Monitor 11

12. Tax climate: compliance Source: Fiscal Monitor 12

13. Tax climate: compliance Source: Fiscal Monitor 13

14. Conclusions 1 Tax climate in The Netherlands Taxpayers perceive that the probability of detection of tax evasion is high. This has not changed much over time among SMEs and private taxpayers. Among intermediairies there is more fluctuation • Perceived power of the NTCA is generally high Over time less taxpayers (SMEs) feel that the NTCA should put more effort in detecting evasion 14

15. Conclusions 2 Tax climate in The Netherlands The NTCA is perceived as trustworthy and this has increased in the past years Perceived support is also increasing in the past years, but still leaves room for improvement, especially among intermediairies Feelings about paying taxes and tax compliance attitudes change over time and show a slight positive trend in the last few years, more so among SMEs than among private taxpayers • Is the trend of growing trust related to the positive trend in compliance? 15

16. Relationships betweenpower, trust and compliance Hypotheses (Kirchler, Hoelzl & Wahl, 2007): • High compliance can result both under conditions of strong power as well as strong trust • Compliance increases, under conditions of low trust, with power of the authority to raise audit and detection probabilities and to inflict severe fines • Compliance increases, under conditions of low power, with the degree of trust 16

17. Relationships betweenpower, trust and compliance Data: • SME Monitor: survey among ca. 2.000 SMEs • MGO Monitor: survey among ca. 900 larger companies Multiple item scales for Trust (e.g. “The NTCA is trustworthy”) Power (combines the perceived probability of detection with the perceived severity of the consequences) Noncompliance intention (e.g. “Can you imagine not declaring all income in your tax return”) Importance of compliance (e.g. “How important is it to send in tax returns in time”) 17

18. Trust, power and compliance SME’s Non-compliance intention Source: SME Monitor 2009 18

19. Trust, power and compliance SME’s Importance of compliance Source: SME Monitor 2009 19

20. Trust x power and compliance SME’s Non-compliance intention Low power High power Source: SME Monitor 2009 20

21. Trust x power and compliance SME’s Importance of compliance Low power High power Source: SME Monitor 2009 21

22. Trust, power and compliance Larger companies Non-compliance intention Source: MGO Monitor 2009 22

23. Trust, power and compliance Larger companies Importance of compliance Source: MGO Monitor 2009 23

24. Trust x power and compliance Larger companies Non-compliance intention Low power High power Source: MGO Monitor 2009 24

25. Trust x power and compliance Larger companies Importance of compliance Low power High power Source: MGO Monitor 2009 25

26. Conclusions 3 Both trust and power are related to compliance. Higher levels of trust relate to positive attitudes and intentions to comply • Trust seems to have a stronger effect on levels of compliance than does power Under conditions of low power, trust matters more, but also under conditions of high power is trust important • Low trust seems to lead to reduced levels of compliance, regardless of the level of power • Increasing power without increasing trust will not result in higher compliance 26

27. Horizontal Monitoring The attitude regarding (the developments towards) Horizontal Monitoring is – in general – positive among businesses and tax intermediaries. Horizontal Monitoring means companies accept (more) responsibility for their tax compliance. Companies and the NTCA agree to solve issues in (real) time, before they appear in the tax return. The NTCA promises a swift and final answer and does no elaborate checks afterwards. • Is Horizontal Monitoring related to trust, power and compliance? 27

28. Horizontal Monitoring, trust and power Larger companies Source: MGO Monitor 2009 28

29. Horizontal Monitoring and compliance Larger companies 29

30. Conclusions 4 Horizontal Monitoring is related to levels of trust; companies who signed an agreement or are in contact with the NTCA to do so have slightly more trust in the NTCA than those who are not involved in HM. Horizontal Monitoring is not related to power; companies who are involved in HM perceive the NTCA to be as powerful as the rest. No clear effects of HM on compliance attitudes / intentions 30

31. Final remarks The NTCA is perceived as powerful and taxpayers generally trust the NTCA, with respect to service level/support there is demand and room for improvement -> More ‘service for clients’, fair treatment Trust is related to compliance attitudes / intentions • Shift in strategy, from power (deterrence) to trust-based strategy The power, trust, complaince framework is helpful • As a way of looking at the developments in NL • As a way of organizing data and looking at trends 31

32. Thank you 32