Drafting a regulation without being aware of the problem it is intended to solve usually creates more problems than solutions. Therefore, the first step that a government must take before considering regulating is to determine what is the problem? Followed by what behaviors do we want to encourage or discourage? And finally what benefits do we want to create?

We must admit that this is a common mistake in developing countries, which often copy and implement foreign legislation without first studying the effect it may have on the society in which it will be applied. Local conditions are vitally important to consider when regulating; therefore, the level of education, culture, behavior of the population, and their eventual conscious or unconscious response to a rule must be evaluated prior to regulating. It is necessary, then, to determine what effects the new rule may have within the society in which it will be implemented and whether those are in fact the desired effects.

With an example

For example (because examples make everything easier to understand), let’s take the case of taxes and the local culture of (not) paying them. Usually, the government considers a single option when thinking of increasing tax revenues: raising taxes. The problem, if we think about it correctly, is the lack of monetary resources suffered by the government, and what is obviously desired is to obtain more revenue for the treasury. To solve this problem, I can think of multiple solutions that do not necessarily involve raising taxes and that actually address the problem to produce the desired solution. I should clarify that I am not a tax specialist and that we are only using this situation as an example of the use of regulations to encourage certain behavior among the population.

In this sense, no matter how high the tax is, people will not be more motivated to pay it. In fact, culturally speaking, whenever there is a way to avoid paying such a tax, in principle, it will be avoided. The point is that only if the eventual fine is higher in monetary terms than paying the tax will people be incentivized to pay; otherwise, they will not. In other words, if the tax is 30% of a salary of $10,000.00, i.e., $3,000.00, a person will not pay the tax unless they know that the fine for non-payment will be more than what they owe in tax (at least $3,000+1); of course, provided that the probability of being detected is considerable.

Faced with this situation, we must ask ourselves: Does the government have an effective way of collecting this fine? As is well known, a fine that is not collected is a non-existent fine in practical terms and does not fulfill the deterrent and persuasive purposes it is intended to serve. If the answer to the above question is “no,” then that fine is not the regulatory solution that will solve the problem. If the government does not have the structure to enforce payment of the tax, no matter how high it is, no additional revenue will be obtained. We must therefore consider that perhaps the government is not using its resources appropriately and, even more importantly, is not addressing the problem correctly.

Let us return, then, to the root of the problems we have identified, which, in my opinion, are twofold: a lack of resources on the part of the government, combined with a lack of incentives for the population to pay taxes. The solution sought must therefore address both problems. Has the government considered why the population does not see paying taxes as something positive or beneficial for them? Perhaps starting by changing the population’s perception of the action (which can be achieved by changing the behavior of the public administration with regard to the use of public funds) could bring more benefits in the long term than simply increasing taxes.

The correct approach to the problem is essential for obtaining a correct legislative or regulatory solution, which in some cases is not necessarily legislation.

*Originally published in Spanish: Acento