Information Matters in Tax Enforcement

Most legal and economics scholars recognize both that the government needs information about taxpayers’ transactions in order to determine whether their reporting is honest, and that third-party reporting helps the government obtain that information. Given governments’ reliance on tax funds, it is risky to think that information or third-party reporting is not needed by tax agencies. However, a recent article by Professor Wei Cui asserts that “modern governments can practice ‘taxation without information.’” Professor Cui’s argument rests on two premises: (1) “giving governments effective access to taxpayer information through third parties does not explain the success of modern tax administration” because, he argues, some important taxes, such as the value added tax (VAT), do not involve information reporting; and (2) modern tax administration succeeds because business firms are “sites of social cooperation under the rule of law,” fostering compliance. As this Article explains, the literature demonstrates that both arguments are mistaken. That is, it shows that third-party information reporting is highly effective, information sharing is used to enforce VATs, and firms are not inherently compliant. In fact, where individuals report on firms, firms’ compliance increases, which supports the intuitive notion that third-party reporting increases tax compliance and that information accordingly matters in tax enforcement.