Collateral Compliance

Abstract

As most of us are aware, the failure to comply with the tax law can lead to tax penalties, which almost always take the form of monetary sanctions. But tax noncompliance has other consequences as well. Collateral sanctions for tax noncompliance — which apply on top of traditional tax penalties and revoke or deny government-provided benefits — increasingly apply to individuals who have failed to obey the tax law. They range from denial of hunting permits to suspension of driver’s licenses to revocation of passports. Further, as the recent Supreme Court case Kawashima v. Holder demonstrates, some individuals who are subject to tax penalties for committing tax offenses involving “fraud or deceit” may even face deportation from the United States. When analyzing sanctions as incentives for tax compliance, tax scholars have focused almost exclusively on the design and implementation of monetary tax penalties. This Article, in contrast, introduces the collateral tax sanction as a new form of tax penalty that does not require noncompliant taxpayers to pay the government money and that does not require the taxing authority to apply it. Drawing on behavioral research and experiments that have been conducted in the tax context and other areas, I argue that collateral tax sanctions can promote voluntary tax compliance more effectively than the threat of additional monetary tax penalties, especially if governments increase public awareness of these sanctions. Governments should embrace collateral tax sanctions as a means of tax enforcement and taxing authorities should publicize them affirmatively.

After considering the effects of collateral tax sanctions under the predominant theories of voluntary compliance, I propose principles that governments should consider when designing collateral tax sanctions. These principles suggest, for example, that initiatives to revoke driver’s licenses from individuals who have failed to pay outstanding taxes or professional licenses from individuals who have failed to file tax returns would likely promote tax compliance. However, whether the sanction of deportation for tax offenses involving fraud or deceit will have positive compliance effects is far less certain. Finally, I suggest how taxing authorities should publicize these sanctions to foster voluntary compliance.

Keywords: collateral consequences, sanctions, tax compliance, tax delinquent, Kawashima, tax enforcement, deterrence

JEL Classification: H20, H23, H24, H25, H26, H29, K34, K14