Taxes and trust: voluntary compliance vs. strict enforcement

We write about many nuts-and-bolts tax issues in this blog. From correspondence audits to employment taxes and on and on, there is never a shortage of specific issues to address in our very complicated U.S. tax system.

In this post, let’s take a step back and take a wider look at that system. It is a system, after all, that still largely depends on voluntary compliance. To be sure, tax audits, tax liens and other sticks are there to further enforcement. But most people comply with tax filing requirements not because of threats of punishment, but because they trust that the system is there to serve the common good.

In this post, we will seek insights into the psychological motivations of taxpayers that underlie tax compliance behavior.

A number of theorists who study such motivations believe that there is a complex interaction between trust and power that can be seen in complex systems.

In the context of tax law, trust refers to voluntary compliance by taxpayers. This typically involves a good faith effort to follow what are often very complicated tax code provisions, often with the help of an attorney, tax preparer or other tax adviser.

Of course, compliance with this system is also backed by threats of tax penalties or even criminal tax charges for noncompliance. For most people, though, the motivation to comply is not the power of the state to enforce such threats. It is the trust people have that the system is fair and aimed at legitimate common goals.

When government is too overt in displaying its power, however, the result is less trust on the part of the people. And when there is less trust, there is less voluntary compliance.

A recent study at the University of Vienna documented this phenomenon in the field of tax law. It is food for thought as we continue to look at specific tax issues.