Is it necessary to increase tax penalties?

In an initial reaction that naturally arises from taxpayers, fines concern those taxpayers who do not pay taxes or who do not declare income and expenses together with employees and their salaries at the real level.
A growing discussion has started just a few days after the publication in the media of some of the main points of the Fiscal Package 2023, where the main attention is about the increase of tax fines with several times for diverse topics of offenses against the tax legislation.

In reality, this package should serve as a basis for discussions and proposals not only for the fines and sanctions that are determined to be proposed to be changed, but to make a summary of all the requirements and needs of business and tax-paying individuals, related to the simplification of the system and the adoption of acts that do not allow space to continue and keep the fiscal policy unpredictable.
The considerations of the “reform” of the punishments presented in the current model seem to aim, through prevention, to promote the “intimidation” of the taxpayer for an increase in the level of tax compliance, and this tactic is important. But first some preliminary actions are needed, such as: the analysis of tax administration, where it is necessary to conclude what does not work with the current model of voluntary compliance and the strategy of the administration. After the analysis is carried out, it also guides the logic of the strategic approach and focus, and it would be valuable in this context to reform fines, but as a complementary function of a policy to encourage voluntary compliance and not through increased force.

A well-thought-out policy based on a fiscal feasibility should claim that, applying the assumptions on the prevention of tax avoidance and evasion, where the optimal tax penalty regime should include (a) a rule of strict liability with respect to taxes forced, as well as penalties, and (b) punishment calculated on the basis of a famous formula drawn up by Bentham-Becker [1], which divides the unpaid or underpaid tax by the probability of detection. Such a rule would force taxpayers to make optimal decisions about when, and to what extent, to rely on interpretations of unclear or hasty tax laws.

Under the same assumptions, an error-based approach to tax compliance penalties would also not work, due to the approach’s high administrative costs, its inability to adjust for activity levels, and its uncorrelated distribution. strong with the consequences.

A fiscal policy approach aimed at reducing evasion through high fines, seeing it as a highly effective instrument can promote a higher level of tax compliance. But it all counts within a process where taxpayers are educated and have established a credibility in the uniform application of the law. In conditions where administrative levels are weak and political patronage in the links of the entire fiscal structure is at important levels, then the tax moral of a policy remains detached as an instrument.

A system of tax penalties that properly defines tax compliance, but that should effectively promote it with an added value in tax administration, is not only symbolically valuable, as it is the part that warns of penalties for taxpayers who exceed the limits it has established fiscal legislation.

On the other hand, a system of tax penalties that effectively promotes taxpayer behavior but is not measured against the proper logic of tax compliance as it has been applied for many years is meaningless.

The reformation of penalties policy to determine the proper idea of ​​tax compliance should be the last concern of legislative action in terms of the level of compliance and the model of tax administration.

According to the findings from our analysis and experience with taxpayers, all factors influencing taxpayer behavior play a significant role in influencing taxpayers’ tax compliance behavior.

However, the actions of the administration with an “axe in hand” without having full transparency on its mistakes, completed at exhaustive levels and accountability on policy mistakes and non-implementation of the objectives that the government itself has set for a simple system, honest and efficient, this behavior not only does not support the observance of taxation principles, but also determines the behavior of taxpayers in a wrong direction.

Tax penalties determine the standards of behavior that the law imposes on taxpayers, since they distinguish taxpayers who have tax behavior in voluntary compliance with the law from taxpayers who do not comply and try to avoid or violate the framework of the law in any case. The most important thing that should apply in more than two decades of fiscal reform is the idea of ​​tax compliance in a self-assessment system, which could only consist of the taxpayer being massively encouraged to make best efforts to assess and report his liabilities. accurate taxes.

In fact, the policy in these two decades with the political patronage of the administration, as well as with the wrong fiscal policies of low taxes and tax exemptions has distorted and repeatedly hit the normal functioning as the guardian of the protection of taxation principles [2]

The political commitment over the years to build a tax system based on the 4 principles of taxation would have been effective, if it had guaranteed Albanian taxpayers to trust the tax system to make accurate assessments and reports, not forced by politics coercion with tax controls and fines. Otherwise, the efficiency and political justifications of any government for having an honest self-assessment system fall away.

Penalties provided for under the draft laws published as instruments to be implemented from the beginning of 2023 set much lower standards of conduct.

Both the determinative and the instrumental functions of tax penalties clearly mean that existing penalties must be reformed.

Because the defining function is the more fundamental of the two approaches, it should be the first consideration. Properly determining tax compliance for a self-assessment system requires that taxpayers be held to a standard of assessing and reporting their liabilities based only on legal positions that they are reasonably and in good faith believe to be correct. This high standard requires that taxpayers fulfill their obligations with the primary objective of accuracy. The bill to increase penalties specifically rejects and rejects the unforgivable standard of strict liability for taxpayer error.

However, in the current draft law it is required that the taxpayer base his self-assessment on the best legal position, but it does not forgive any mistake, no matter how small and resulting from carelessness, the lack of documentation culture, as well as from reasons not related to tax evasion.

In general, the deepening of tax penalties several times more requires a more comprehensive and much more well-defined modeling than until now, as it allows quite a large space for abuses by taxpayers and by the institutional culture in general that uses the law even in approaches that do not coincide with the principles of tax administration.

[1] https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2908574_code1075602.pdf?abstractid=2908574&mirid=1
[2] fairness, security, simplicity and efficiency