This does sound like one part of what could become an earnst attempt at a solution. But, it definately needs refinement and more components.
Rewards & Deterrants
There are already rewards for reporting most criminal activity.It is definately fair to argue that the amount of these rewards are not substantive enough to encourage most wintnesses to come forward.
The question is how much would the rewards have to be increased, and if the amount of the reward is increased then how much information does the informant need to supply?
Tipping off the police about a possible murder is in ethical terms more valuable than tipping off police about a money laundering scheme, but under a proceeds of criminal activity theory, it would be more beneficial to the informant to tip off on the money laundering. (No, of course in realithy these activites do not take place in separate vacuums).
The other problem is that the judicial system has argued that rewards for tipping cannot be so high that informants are significantly deterred from giving testimony.
Many people see anonymous tip lines as a clear solution to crime problems. However the difficulty with anonymous tip lines is two fold.
1) In many cases witnesses are required for testimony, anonymous testimony is rarely upheld in court.
2) Many possible informants simply do not believe that anonymous testimony is a reality.... even if the police or judiciary does not disclose the identity of the informant, many informants believe that those they accuse would be able to trace back the tip.
Culture of Fear?
Creating a culture of fear such that people are overwhelmingly self-interested in reporting innocent people as criminals is, I think, a long way off and not particularly plausible in this situation.
To create an environment where people are willing to turn false tips on any significant scale so that it would be a problem you need to create and over incenting climate either monetary or by political force. In Germany, or the Stalist Russia it was mainly political self-interst and self-preservation that caused people to report against neighbours. We are hardly in that political climate, and I doubt increasing rewards would in itslef create a large problem.
That being said, we do have a problem of a culture of fear, where people are currently afraid to report crimes they have seen and do know of becuase they believe there is neither the political will nor the police ability to protect them if they do report the activity.
If people can be offered no assurity that they will be protected against violent retaliation from criminals they accuse (or the accused associates) then people will not report.
The arrests in September of almost 20 gang members and subsequent release of most of them within the next 48 hours did a lot to convince Toronto communitites that the gangs hold more power than the police, and that it is not in the best interest of people living in these communities to report the gang members in their area because there will be ample opportunity for those gang member to retaliate against the community.
Deterrance and Prevention
Deterrance and prevention are not the same thing. No matter the level of deterrance (higher jail time, more hostile condiditons in jail, toughter sentences, death sentences), deterrence itself does not prevent crime.
This does not mean that deterrence should not be part of the equation of a real solution.
If we concentrate only on root causes then we send a message that criminal behaviour will be tolerated because of social failings, and that message cannot be sent.
But, likewise if we only concentrate on deterrance we will never be able to maintain a basic democratic level of freedom and we will forever be increasing deterrance in response to people who see it as more valuable and viable to enter crime than to be responsible citizens.
Without excusing those who choose crime, we do need to seek to understand why it is more viable to enter crime when we see an increased trend towards crime in particular areas.
Example:
Both Parkdale and Melvurn were extremely violent areas in 1991 (which had a higher gun crime rate than 2005). One statement still echoed is that in these communities it was easier to get a gun than a job.
Community programs, youth centres, and job creation in these communities has improved them... yes, they still need work, but it is better.
Solutions require prevention in addition to deterrance. Neither one will work alone.