Abstract

People pay their taxes for many different reasons. Some try to game the system, paying only when the cost of noncompliance outweighs its benefits. Others comply out of habit, a sense of duty or reciprocity, a desire to avoid feelings of guilt or shame, and so on. Our tax enforcement system has ignored this variety of taxpayer motivations for decades. It continues to rely primarily on audits and penalties, at least where information reporting and withholding are impossible. These policy instruments work well for those rationally playing the tax compliance game, but are wasteful or even counterproductive when applied to others. The shortcomings of the current one-size-fits-all approach to tax enforcement are well understood. They also appear to be insurmountable. This Article argues that it is possible to design a more tailored regime. The idea is to separate all taxpayers based on their taxpaying motivations by creating two different enforcement environments and inducing taxpayers to choose one when they file their returns. Once the separation is accomplished, the government can target enforcement by matching enforcement policies to taxpayer types. Those who try to game the system will be deterred by higher penalties in one regime. All others will be induced to comply by cooperative enforcement measures in the other environment. If successful, separation and targeted enforcement can improve tax compliance without raising its social cost, or keep the level of compliance unchanged while making tax administration more efficient.