Regulating More Effectively: The Relationship between Procedural Justice, Legitimacy, and Tax Non‐compliance

AuthorKristina Murphy
Published date01 December 2005
Date01 December 2005
ISSN: 0263-323X, pp. 562±89
Regulating More Effectively: The Relationship between
Procedural Justice, Legitimacy, and Tax Non-compliance
Kristina Murphy*
In recent years, a significant number of middle-income taxpayers have
been making use of aggressive tax planning strategies to reduce tax. In
many cases, it is unclear whether these are designed and used by tax-
payers to minimize tax legally or to avoid tax illegally. Those that are
designed to exploit loopholes in tax law need to be dealt with in a way
that restores faith and equity to the system. But how can tax authorities
best manage taxpayers who may have inadvertently become involved in
such illegal tax planning practices? Using longitudinal survey data, it
will be shown that attempts to coerce and threaten taxpayers into
compliance can undermine the legitimacy of the Tax Office's authority,
which in turn can affect taxpayers' subsequent compliance behaviour.
Responsive regulation, which is based on principles of procedural
justice, will be discussed as an alternative enforcement strategy.
Each year many taxpayers consider how they can best arrange their tax
affairs. This may simply involve making use of strategies that allow one to
legally minimize tax. For example, in countries such as Australia, this may
include increasing superannuation contributions, or negative gearing an
investment property. Alternatively, there are strategies that may involve non-
compliant or fraudulent activity that are most appropriately described as tax
evasion. For example, these strategies may include creating false expenses or
concealing offshore income. There is also a third type of strategy used by
some taxpayers that falls somewhere between these two extremes. These are
the tax avoidance strategies that tax authorities around the world commonly
refer to as aggressive tax planning strategies (also known as abusive tax
ßCardiff University Law School 2005, Blackwell Publishing Ltd, 9600 Garsington Road,
Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
*Centre for Tax System Integrity, Regulatory Institutions Network,
Research School of Social Sciences, The Australian National University,
Coombs Building Extension, Fellows Road, Canberra, ACT 0200, Australia
shelters). They are `aggressive' because they seek to exploit deficiencies or
uncertainty in the law.
Aggressive tax planning by its very nature involves
finding ways to accomplish compliance with the letter of the law while
totally undermining the policy intent or spirit behind the legislation.
Aggressive tax planning used to be primarily reserved for the very
wealthy. In recent years, however, many middle-income taxpayers have been
cashing in on this new form of financial planning.
For example, the Internal
Revenue Service (IRS) recently reported that there had been a proliferation
of abusive tax schemes in the United States during the mid 1990s.
Australia during the 1990s, scheme-related tax deductions were found to
increase from $54 million in 1994 to over $1 billion in 1998 (mostly due to
42,000 middle-income Australians becoming involved).
Both the Australian Taxation Office (ATO) and the IRS take aggressive
tax planning very seriously. Since 1998, for example, the ATO has actively
moved to penalize taxpayers involved in abusive tax shelters. They have also
moved to change legislation to enable them to pursue the promoters of illegal
tax schemes (at the time of writing this article, this legislation had not yet
been enacted). The IRS's Criminal Investigation Unit has also developed a
nationally coordinated programme to combat abusive tax schemes. Their
primary focus is on the identification and investigation of those who play a
substantial or integral role in facilitating, aiding, assisting, or furthering
abusive tax schemes. Secondarily, but of equal importance to the IRS, is the
investigation of i nvestors who knowi ngly participate i n abusive tax
Tax authorities from around the world have also recently joined
forces to try to combat aggressive tax planning on an international scale. In
2004 Tax Commissioners from Australia, Canada, the United Kingdom, and
the United States signed a Memorandum of Understanding to establish a
joint task force to better coordinate information about aggressive tax
planning. Hence, tax authorities worldwide are adopting a tough stance
towards those who become involved in such practices.
However, one issue that needs to be considered seriously by tax
authorities when tackling aggressive tax planning is how they should best
regulate and punish taxpayers involved in such activities.
Given aggressive
tax planning is now being more widely marketed to middle-income tax-
payers, it is perhaps not surprising to see an increase in the number of naive
1 Australian Taxation Office, Annual Report 1998±1999 (1999).
Australian Taxation Office, Annual Report 1999±2000 (2000); Internal Revenue Service,
Overview ± Abusive Tax Schemes (2004) .
3 id.
4 K. Murphy, `Procedural justice and the Australian Taxation Office: A study of
scheme investors', Centre for Tax System Integrity Working Paper 35 (2002).
5 IRS, op. cit., n. 2.
6 For a discussion of how the United Kingdom Inland Revenue currently deals with tax
fraud, for example, see J. Roording, `The punishment of tax fraud' (1996) Crim. Law
Rev. 240.
ßCardiff University Law School 2005

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT