Voluntary tax compliance Cooperation between DIAN and Skatteverket Anders Stridh & Lennart Wittberg, 1 – 5 June 2015

Skatteverket and the Swedish culture

Skatteverket Region Stockholm Region Large taxpayer Region West Region East Commissioner Region South Region North Advisory Council Internal auditors IT- department Finance department Administrative department Legal department Tax department Communication department Region Middle employees 170 billion Euros in total tax revenue

Steering structure ParliamentGovernmentMinistry of financeSkatteverket 4 Government agencies in Sweden have a high degree of autonomy

Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people? Baserat på World Value Survey

Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people? Baserat på World Value Survey

Edelman Trust Barometer 2008

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The good society index 9

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From cops against robbers to service for clients in 30 years

EnforcementServiceBalance between enforcement and service Right from the start Trust Taxpayer focus 2010 The development of the Swedish Tax Agency Right from the start Trust Focus on environment

Strategic direction of the Swedish Tax Agency Implemented 2006, updated 2012 Vision A society where everyone is willing to do their fair share Contributions –We nurture the willingness to comply –We earn the trust of the taxpayers –We are working to ensure that all pay the right amount –We make it easier and smoother to comply Helpful Trustworthy Active

Voluntary compliance Enforcement Tax gap + + Theoretical correct tax 90% 1-2% 8-9% Lost taxes Expensive taxes Cheap taxes Voluntary compliance is the goal

Strategy - main content Respect Right from the start Easy to comply and difficult not to comply Prevent, support and automate Cooperation Attractive employer

Högsta ServiceScore 2012, 2013 och 2014 ”Skatteverket är den mest servicevänliga myndigheten - i klass med de bästa privata företagen!” The tax agency is successful in finding hidden income Businesses love the tax man Swedes love the tax agency even with the second highest tax burden in the world, how is that possible? The tax agency has the strongest brand

Trust in some mayor Swedish government agencies Tax Social insurance Migration Employment

21 Private individuals 2012 I trust the tax agency Don’t agree Neither Agree No opnion

Businesses 2013 I am treated well by the staff at the tax agency Don’t agree Neither Agree Don’t agree Agree

“If possible, I would hide income from taxation” 23 Private individuals 2012 I would Neither I would not No opinion

”The tax agency is good at combating tax evasion” Private individuals 2012 No Yes No opinion Neither

Right from the start

BusinessBookkeepingTax returnPayment Right from the start The old focus The new focus Right from the start = early measures

BusinessBookkeepingTax returnPayment Right from the start The old focus The new focus Certified cash registers Staff ledgers Bookkeeping checks Fewer comprehensive field audits

Cash register Introduced 2010 Certified cash registers –All trade with cash for selling of goods and services –Cards (Visa etc) equal cash Spot checks (unannounced) –Check if certified cash register is in place and receipts given to customers –€ 1000 fine if not

Staff ledgers - Restaurants and hair dressers Introduced 2007 All traders must keep a ledger –Employees in/out Spot checks (unannounced) –Check if employees noted in ledger –€ 1000 fine if not

Some milestones in OECD tax compliance work Selection for audit Understand and influence behaviour Right from the start Involving and engaging Dealing mostly with tax returns Dealing with taxpayers’ environment Risk management

Right from the start is: A compliance approach About influencing taxpayers environment About what is happening before the tax return is filed Described in four dimensions: –Acting in real time and up-front –Focusing on end to end processes –Making it easy to comply –Involving taxpayers and other stakeholders

Compliance approach, summary Early measures (more upstream) More system measures One-to-one One-to-many Focus on increasing the willingness to comply Focus on building trust Focus on treating all taxpayers with respect BeforeDuringAfter

Norms

NORMS Personal norms Social norms Descriptive social norms (what others do) Prescriptive social norms (what others think)

Put your Money here Ice-cream in the office!

Ingroup We Outgroup Them

Social norms of ingroup Social norms of ingroup Internalised personal norms Internalised personal norms Behaviour Possible to influence Difficult to influence

Universal principles to influence norms (Cialdini) Reciprocity : People tend to return a favor Commitment : People that commit are more likely to follow through Social proof : People will do things that they see others do Authority : People tend to obey authority figures Liking : People are easily persuaded by people they like

Reminder of towel use in regards to the environment Combined base message with „75% of guests in this hotel reuse their towels ‟ Combined base message with „75% of guests in this room reused their towels ‟ 26% increase 33% increase Base Message What other people do What other people 'like me' do Hotel Re-use of towels Example from research Using social norms to influence behaviour 42

How to use social norms? Always be honest Describe the desired behaviour ('you should pay your taxes on time') Tell what most people do ('most people comply') If you can't use what most people do, then you can describe an increase in positive behaviour. Tell what significant people do (’movie star X or athlete Y comply’) Tell what 'people like you' do ('most people in Bogota comply')

44 Change in social norms in Sweden “I would evade tax if I had the opportunity” Yes Maybe No Don’t know

Why do people comply with rules? Because they want to or because they are forced to?

We can, and should, influence the reason why people obey rules Do we want it to be: 1.Because they believe it is the right thing to do (=personal norms) 2.Because they feel compelled to do it due to external incentives (= sanctions)

Some parents are coming too late More parents are coming too late Even more parents are coming too late Penalty introduced Penalty removed Moral conviction External pressure Nothing Kindergarten

Self interestMoral convictions Exernal pressureGoes with the flow IncentivesNo incentives Want Don’t want Why do we obey rules? Self interest works best

External pressure (incentives) can increase or decrease the individuals own moral convictions. The moral conviction will decrease if the incentives are perceived to be controlling. The moral conviction will increase if the incentives are perceived to be supportive.

Cooperation is the best strategy

Each member of the group receives some money The total sum are multiplied with 3 The new total sum are divided equal between the players Each player invest in a pot (0 – 100 %) How high will the investments be?

Enter punishment Each member of the group receives some money The total sum are multiplied with 3 The new total sum are divided equal between the players Every player invest in a pot (0 – 100 %) If each player has the possibility to punish free-riders

Conclusions It is important to increase the willingness to comply Willingness, own moral conviction, is often a stronger incentive than external sanctions Sanctions and punishment can, but no always, support the willingness to comply Influencing social norms is the best way of influencing peoples own moral convictions

Trust

Fairness Willingness to comply Voluntary compliance

Perceived fairness is crucial for voluntary compliance Distributive fairness. How taxes are paid and spent. Procedural fairness. The handling of cases, not the outcome. Retributive fairness. How non-compliers are being handled. 56

Why trust increases after an audit

ProcedureOutcome Procedural justice The perception of the procedure decides the perception of the outcome Fairness, impartiality and respect are important

Rights, obligations and opportunities Bas: Alla (1.002) Small business study

60 Rights, obligations and opportunities Correlation to trust Bas: Alla (1.002) Negative correlationPositive correlation Small business study

61 Private individuals 2012 I trust the tax agency Don’t agree Neither Agree No opnion

Businesses 2013 I am treated well by the staff at the tax agency Don’t agree Neither Agree Don’t agree Agree

How should the authority act? An authority should treat citizens fairly and respectfully, listening to them and communicating explanations for different actions If those being regulated are treated as trustworthy, they will repay this respect with voluntary compliance with fair rules Reciprocity

Perception is everything Other peoples behaviour Other peoples values Behaviour of tax administration Fairness Trust in tax administration