Over Compliant

8^th December 2006
The Malta Independent - Friday Wisdom

 

Is it just an impression or are we really changing, and from a laissez-faire society we are fast turning into an over-compliant one? Are we becoming Swiss in the Mediterranean, giving up our sense of improvisation and turning into a regimented society?

What sparked off this strange thought was an experience I had last Monday evening. Just before six in the evening while at my office, my scheduler set off an alarm reminding me that I had to pick up my son from a football nursery at St Andrews.

I rushed for the usual road towards St Julian’s and when it was too late to turn I realised that I had put myself into a traffic bottleneck due to works started on the Manwel Dimech Bridge, which reduced this main thoroughfare to a one-lane road. Notices with deviation signs had sprung all over the place and warnings have been duly issued to avoid this traffic juncture while works were going on. I could only blame myself for negligently forgetting about these warnings.

I drove on and could not believe my eyes when I managed to sail through the tunnel approach and the tunnels themselves in a one-lane stream without any problems. My trip to St Andrews proved much smoother than usual when traffic arrangements are normal.

Evidently so many cars had followed the deviation routes that driving through the feared congestion proved totally smooth and effortless.

The conclusion can only be that when we were made to perceive compliance as less burdensome than non-compliance, irrespective of the real thing, perceptions prevail and people willfully comply. Nobody forced anybody to take the deviation. But warnings were duly given that if the normal route is chosen the congestion delay could exceed the delay for following a divergent route. And it worked so well that the feared congestion did not result at all.

Can we transfer this analogy to other areas where compliance is still deficient? How can we use it to achieve better compliance in our tax systems?

This is an area where compliance is important not just to ensure that the burden of financing the working of society is carried as intended by the tax planner, but also because a high degree of tax compliance is essential to ensure that social transfer payments are made on the basis of real needs. Unless we achieve a fairly high degree of tax compliance, many of the means-tested social benefits go to those that do not really need them and are denied to others who have a genuine claim for such social assistance.

Tax compliance obviously depends on the quality of the enforcement mechanism. Human nature being what it is, people generally try to avoid paying taxes if they see that the enforcement mechanism is lax.

In a lax enforcement scenario the cost of compliance is perceived to be higher than the cost of non-compliance and those who have a choice opt for the cheaper route.

However it is realised that enforcement needs resources and could become quite expensive in deviating a large amount of scarce resources to enforce taxes rather than to create wealth. It is not in the national interest to do so.

So before enforcement can be upgraded we need to find a natural balance where the marginal tax rate is low enough to tip the balance of choice. It has to be a rate where the cost of compliance is perceived to be equal to or less than the cost of non-compliance.

Once this fine balance is achieved the compliance ratio increases so much that the scarce enforcement resources could be applied vigorously onto the much smaller residual base that continue to avoid compliance. This would reinforce the culture of compliance as it increases the cost of non-compliance.

I know this is easier said than done. There are all sorts of implications that need to be taken into consideration but one must at least have a sense of destination of where we have to go with our tax systems. And I have no doubt in my mind that we need to arrive at the destination of creating a frame of mind similar to the one created for the traffic deviation system of the Manwel Dimech bridge. A frame of mind where tax compliance is perceived less taxing than non-compliance.

A frame of mind where tax-compliance is cheap enough to permit compliance so that we can use our traditional creativity and flair for improvisation for the proper use, both for consumption and investment, of the bigger residual value of the tax paid earnings, rather than to avoid tax and having to stash the tax liable funds idly under the mattress.