The 3-day 98th Annual Conference on Taxation sponsored by the National Tax Association continues today at the Hyatt Regency, Miami, FL.  For a list of the speakers and their topics, see the program here.  Panels of particular interest to Tax Profs are:

3:30 – 5:00 pm:  Legal Perspectives on Tax Policy Issues

• Moderator: Neil H. Buchanan (Rutgers-Newark)
• Presentations:
  • The Self-Adjusting Penalty, by Alex Raskolnikov (Columbia)
  • Time Consistency and the Choice of a Tax Base, by Kirk J. Stark (UCLA)
  • Substantial Economic Effect and Partners’ Interest in the Partnership, by Darryll K. Jones (Pittsburgh)
  • Cost of Capital and Ownership Effects in International Policy, by Mitchell A. Kane (Virginia)
• Discussant: Neil H. Buchanan (Rutgers-Newark)

5:00 – 5:45 pm:  Student Research Forum

Among the papers to be presented is Developments in Regulating Tax Enforcement, by Sagit Leviner (S.J.D. Candidate, Michigan).  Here is the abstract:

The modern use of economic analysis in the area of tax compliance dates back more than 30 years to Michael G. Allingham and Agnar Sandmo (1972) who extended the criminal law enforcement work of Becker (1968) to taxation, using modern risk theory. Allingham and Sandmo focused on researching tax evasion and presented the issue as a portfolio allocation problem in which taxpayers must decide what portion of their income to invest in a risky activity labeled “tax evasion.”

The traditional Allingham-Sandmo model explains tax evasion decisions through a fairly simple framework in which taxes and penalties are proportional, the tax system is based on income, the taxpayer has a fixed gross income which is subject to tax, the audit rate is constant, time is composed of a single period, and only one form of evasion is available. It is assumed that the taxpayer will follow expected utility theory and make compliance decisions based solely on the consequences for her net income. Being without moral scruples, the taxpayer is seen as someone who is tempted to seize the opportunity of cheating on her taxes whenever it is worth the chance of being caught and bearing the associated penalties. Under this framework, enforcement is essentially reduced to two key considerations: the probability of audit and the penalty rate. In other words, the model suggests that in order to control evasion, audits have to be stepped up and/or penalties need to be increased.

While the Allingham-Sandmo framework generally provides an intuitively appealing and straightforward description of the enforcement problem, real world compliance is much more complex than the model suggests. To begin with, taxpayers are subject to a wide variety of sociological and ethical factors which affect their compliance – but are missing from the model. Furthermore, enforcement policies themselves are more complex than any combination of penalties and audit probabilities. Institutional and procedural factors matter as do the bodies involved in enforcement such as tax administrators and tax courts. Not surprisingly, strategies aimed at improving compliance based solely on auditing probabilities and sanctions have thus far proven to be inadequate at best (Kirchler, 1998; James and Nobes, 1998; Tyler, 1998) and counterproductive at worse (Schwartz and Orleans, 1967; Blumental, Christian and Slemrod, 1998). For tax systems that rely heavily on voluntary self-reporting, the need to understand what underlies (non-) compliant behavior and effective enforcement policies is increasingly urgent.

In an effort to obtain a more thorough understanding of tax compliance, researchers over the last three decades have begun to explore variations of the Allingham-Sandmo model as well as alternative frameworks that, among other things, include more complex forms of evasion, introduce a more detailed tax penalty structure, account for imperfect information and randomness in the audit rate and taxpayers’ true tax liability, look into the implications of the repetitive nature of tax filing, extend the number of items on which taxpayers report, and address the possible impact of morals, social dynamics, and tax practitioners on tax compliance.

This paper will explore the major theoretical developments in the regulation of individual income tax compliance, as found in the tax enforcement literature and related regulatory work. It will investigate the role of economic models in tax policy-making by detailing the different approaches to modeling individual income tax compliance and highlighting the models’ key strengths and shortcomings. A significant portion of the paper focuses on the relevance of the latest reforms in tax administration to the problem of tax enforcement within the United States and abroad. These reforms include, for example, the current emphasis on improving service for taxpayers, such as by respecting taxpayers’ rights and understanding their behavior. Over the past decade, tax administration reform has been undertaken somewhat more systematically in Australia than in other countries, and this process has implications beyond the Australian border. The portion of the paper that will be presented at the NTA Student Research Forum will address the developments in tax enforcement strategies which are emerging as a result of the Australian reform and what we may learn from that experience.