Responsive Regulation, Risk, and Rules: Applying the Theory to Tax Practice

John Braithwaite’s seminal work on responsive regulation has been taken up and developed by tax authorities around the world. It has had a major impact on methods of tax administration. This approach has some limitations and difficulties, however, including constitutional objections. This article discusses two particular problems, together with possible responses, which could help to appease the critics of responsive regulation in the tax arena. The first problem relates to the extent to which persuasion is a legitimate device for seeking to control behaviour that is not universally accepted to be non-compliant, because there is more than one arguable view. The second area of difficulty relates to the relationship between responsive regulation and risk management. These issues and the general challenges posed by responsive regulation to tax administration are discussed in the context of changing relationships between revenue authorities and large businesses, using a UK case study. In conclusion it is suggested that the theory of responsive regulation has great value in tax administration, but also the potential for misfiring in this area unless applied and used only where appropriate legal safeguards are provided. Legally enforceable safeguards are required to maintain the rule of law and provide a clear framework of objectives. This is not inconsistent with a theoretical approach that rests upon mutual trust; rather a sensible legal framework can provide an appropriate background for a relationship of trust. Such a legal framework is necessary not only to protect taxpayers but also revenue authorities. Building trust and involving interest groups in “regulatory conversations” are important parts of the answer, but in a tax context this must be supported by legal structures and be subject to administrative safeguards or it will not be perceived to be fair, in which case responsive regulation will fail.