Tax morality through stories

D. MURALI | Updated on October 02, 2011

If oxytocin is the source of human reciprocity, then perhaps storytelling that evokes close human relationships is the key to using reciprocity to further tax compliance – Thus reads the abstract of a recent paper in, titled Tax Compliance and the Love Molecule, by Susan C. Morse of UC Hastings College of the Law. She refers to Paul J. Zak's new book, The Moral Molecule, due out in 2012. His lab discovered in 2004 that oxytocin allows us to determine who to trust, informs “His current research is showing that oxytocin is responsible for virtuous behaviours, working as the brain's ‘moral molecule.' This knowledge is being used to understand the basis for civilisation and modern economies, improve negotiations, and treat patients with neurologic and psychiatric disorders…”

Oxytocin is relevant to tax policy because it affects people's decisions to contribute to the funding of public goods, a basic goal of taxation, argues Morse. She bets on the theory that it may be possible to use stories and narratives to frame the duty of paying taxes as a gift that you give someone who is fairly close to you, like your neighbour or your grandchild. “This links to research on the possible warm glow that donors experience on the occasion of their charitable donations – typically given to institutions with which the donor has a personal connection that is more intimate than mere membership in the general citizenry.”

Among the recent tweets of Zak are about the huge success of ‘love night NYC,' what with ‘nearly 100 hugs' given; and about the participation in ‘sound meditation with resonant gongs and Tibetan bowls blindfolded in middle of NY City at #BGLab.'

Time the taxman hugged the payers, without waiting for the latter to take the initiative.

Research records

Businesses and governments acknowledge that research is the general route to innovation and non-linear growth, but the problem can be with the taxman. Research tax credits are difficult for the US Internal Revenue Service (IRS) to audit, writes Kreig D. Mitchell, a Tax Attorney in Denver, Colorado. IRS employees have expertise in evaluating accounting and similar records, but they do not have experience in evaluating research documents and other technical evidence, adds Mitchell in The Research Tax Credit: Accounting for Nexus. Even if they did have the expertise, reviewing these other types of evidence is time consuming for the IRS, he reasons. “It takes a lot longer to review a myriad of documents and to interview the taxpayer's employees than it does to spot-check a listing of expenses in an accounting record.”

And that perhaps explains why the IRS is keen on unleashing the ‘nexus' idea to impose heightened recordkeeping requirement; research tax credit is sought to be made contingent on whether the taxpayer creates and keeps project-based records, the author informs. The author traces ‘nexus' to an IRS document titled, ‘Research Tax Credit Claims Audit Techniques Guide,' which describes how qualified research expenses (QREs) are matched with research activities in contemporaneous business records.

Wonder if our officers engage in a more detailed research, in comparison.

Haven guide

A recent paper from the CESifo Group is Money at the Docks of Tax Havens: A Guide by Shafik Hebous. Rather than say that tax havens are good or bad, the author presents a synthesis of academic contributions on the roles and effects of tax havens in the world economy, raises a number of questions, answers some, and underlines those that have not yet been fully answered in the literature.

Hebous analyses English-language news reports published in the last decade that contained in the title or the lead paragraph the phrase “tax haven” (or “tax havens”), and observes that there was a clear peak of news on tax havens in the first half of 2009, following the global economic crisis, in particular in the months from February to June. An earlier peak was in the second quarter of 2002, coinciding with the publication by the OECD (Organization for Economic Cooperation and Development) of a report listing jurisdictions not committed to internationally agreed tax standards. It should be interesting to know from the essay that the first documented practice of offering lax regulation of incorporation was in the late 19th century in the US states of New Jersey and Delaware. “In the 1920s, the practice was imitated and brought to Europe – in particular, first to the canton of Zug in Switzerland, and then to Zurich and Liechtenstein.”

OECD's main weapon

One of the questions discussed in the paper is on measures taken to fight tax havens' operations. Such as, the treaties signed to forestall further tax evasion and avoidance; for, the OECD's main weapon is the blacklist, as the author points out. “This might subject income reported in these countries to different regulations reducing their attractiveness. A tax haven can avoid such a list by signing bilateral tax information exchange agreements. For a haven, the magic number needed to meet the international standard is 12 treaties.”

Educative material on tax havens.

Timing amnesty

Tax evaders can respond to a tax amnesty, even if enforcement activities do not change, if it is timed to coincide with liberalisation and rising incomes, say Pinaki Bose, and Michael Jetter in Liberalisation and Tax Amnesty in a Developing Economy.

The intro acknowledges that while tax amnesties have been used as a policy tool to increase revenue collection by many governments, they have generated mixed results: some have failed while others have succeeded. “Why would a rational individual accept an amnesty and pay past dues? Unless the amnesty is accompanied by an increase in the expected cost of non-compliance (due to greater fines or audits or a combination of both) a delinquent taxpayer should have no incentive to revert to paying taxes.” But, as the authors remind, if the success of an amnesty has to be sustained by increased (and costly) enforcement activities, it somehow defeats the purpose – insofar as an amnesty is to be a cheaper (and more easily manageable) alternative to increasing tax revenues rather than higher levels of enforcement.Following the observation that often successful amnesties have taken place in times of transition to prosperity, the authors seek to provide a theoretical justification of this link. They cite Uchitelle (1989) for the finding that Ireland and Colombia are cases of successful amnesties – in each case these took place in times of significant growth and trade liberalisation. “Ireland shows steady growth in terms of GDP during theamnesty time and also big surpluses in their trade balance in the two years before the amnesty. Colombia records rapid growth with imports increasing by 30 per cent between 1986 and 1989.”Useful input that the Delhi babus toying with the ‘amnesty' idea should evaluate.

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Published on October 02, 2011

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