When we think of compliance in the private sector it tends to be about checklists and process: meeting standards. In less mature sectors like financial services this is often very legalistic – forms, often designed by lawyers: what could possibly go wrong?
In areas that came from an engineering foundation, quality systems are the way standards are governed: statistical analysis, process engineering and so on. If you get in an aircraft, you want a blame-free quality culture in the team that maintains the machine. But blame free is not something that sits well in our society: look at the backlash against the good people who did all the right things when they thought they may have caught Covid.
We seem to have an innate desire to make things someone (else’s) fault. We hide this in under a veil of ‘accountability’, which is often an excuse to succumb to some of the worst facets of human behaviour. I guess it distracts us from thinking too much about our own failings.
From the regulators perspective compliance is something quite different. I’ve observed many professionals find the transition quite hard. Systems thinking is important, because you are trying to engineer in compliance. That often means the most economically efficient control point lands on a party that may not be the cause of the problem you are trying to fix. In the tax world that often means withholding regimes. The periodic whining about the cost of collecting GST on behalf of the government springs to mind.
One of the effects of this is to make tax agencies wary of stepping into “political” arguments. I’ve long been a proponent of sending every taxpayer in New Zealand a statement each year that showed roughly where each dollar of tax they paid was spent (a bit like you get on your rates bill). So it would say you paid $X of direct (income) tax, plus a modelled estimate of the GST captured (you can take a decent punt based on income and where you live). Then break it down and say $Y went to health, $Z to pay for NZ Super etc. My thinking was that if people realised the vast bulk of their tax went to the top 3 (Health, Super and Education) then they may become more compliant. At worst they would be able to lobby if they didn’t like the balance.
The argument against this idea was that it was too political. I still don’t think that stands up (after all, it was showing what had happened, not judging or proposing). I suspect it’s more about not wanting to get drawn into the discussion, and that it would bring into stark relief the disparity in marginal effective tax rates for those who derive income from capital gains.
But the first duty of any tax agency is compliance, and if behaviour and attitudes are part of that, revenue agencies have a duty to consider it as part of their overall strategy. When I’m working in Africa, agencies have no hesitation in linking tax paid to, say, clean water supplies.
I think we’re beginning to realise that the last 50 years have built a legacy of flawed economic thinking. Even Friedman eventually admitted he’d got it wrong about money supply. And our science is starting to explain why his theories got momentum. The way arguments are presented can be abused to drive irrational outcomes – plenty of examples of that at the moment.
Robert Frank poses a simple explanation of how perceptions can dangerously affect long term behaviour. Many agencies have been including some behavioural analysis in their design for the last 15 years or so. The systems I mention above reside as a set of behaviours among our population. If we are to seriously adopt that type of thinking, we need to understand what makes them tick. And we know it is not economic rationalism.
Maybe we need to be pushing agencies harder, and allowing a bit more leeway in the techniques agencies use, including being a bit more tolerant of experimentation. That’s probably going to need a re-think about leadership and governance capability.
And yes, in the picture at the top, A and B are the same shade.