THINKING ABOUT TAX ADMINISTRATION by Michael Keen
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Transcript of THINKING ABOUT TAX ADMINISTRATION by Michael Keen
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THINKINGABOUTTAXADMINISTRATION
MichaelKeenICTDFi:hAnnualMee<ngAddisAbaba,February10,2016
Viewsareminealone
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Un<lrecently
Literatureontaxadministra<onhadfocusedon:
• Measuringadministra<onandcompliancecosts
• Embellishing/puzzlingoverAllingham-Sandmo
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Recentexplosionofempiricalwork
Manyexcellentpapersusingexperiments,naturalorother,toaddressaspectsofcompliance.E.g.:
• ComplianceinVATchains(Pomeranz,2015)
• Lo]eries(Naritomi,2013)
• ‘Nudges’(reviewsinAlm(2014),Lu]merandSinghal(2014))
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Whatdotaxadministratorslearn?
• Implica<onsforenforcingVATchains– Pomeranzresultsseemtoimply“Startattheend”
• Importanceofwithholdingandthirdpartyinforma<onwell-known– Bri<shlandtax1697;andMiltonFriedman’sregret!
• Arelo]eries/nudgesfirstorderimportance?
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Whatdotaxadministratorsthinkabout?(IMF,2015)
• Governancestructures– Movetosemi-autonomousrevenueagencies
• Opera<onalmanagement– Morelater
• Informa<onmanagement– AboutmuchmorethanITsystems
• Stakeholderrela<onships– E.g.“coopera<vecompliance”
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Twoissuesthey(andnowwe)focuson
Keyaspectsofopera<onalmanagement:
• ‘Taxgaps’– Understanding,measuringandintegra<ngcomplianceandpolicygaps
• Par<<oningandsegmenta<onoftaxpayers– Differingtreatmentfordifferenttypes(mostobviouslybysize)
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TAXGAPS
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Whatandwhy?
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DecomposingVATrevenue:C-efficiency’..
CanwriteVATrevenue(inpercentGDP)aswhereVisVATrevenue,YisGDP,τSisthestandardVATrate,Cisconsump<on,andis‘C-efficiency’
CVEs
C
τ≡
⎟⎠
⎞⎜⎝
⎛=YCE
YV c
sτ
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C-efficiencydrovechangesinVATRevenue,2003-2010
-2
-1
0
1
2
3
4
5
6
7
Low income Lower middle Upper middle High income
Change in C/Y
Change in c-efficiency
Change in standard rate
Change in V/Y
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SowhatdrivesC-efficiency?
With V*therevenuethatwouldberaisedifimplementa<onofcurrentsystemwereperfect:wherePisa‘policygap’andΓa‘compliancegap’
)1)(1(*
*Γ−−=⎟
⎠
⎞⎜⎝
⎛⎟⎟⎠
⎞⎜⎜⎝
⎛== P
VV
CV
CVE
SS
C
ττ
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Compliancegap
=Excessoftax(e.g.VAT)theore<callydueoverthatactuallycollected,aspercentofformer
• Anincreasingfocusinmanycountries.E.g.:– UKhasproduced‘VATgaps’forseveralyears– Reckon(2009)andCASE(2013)forEU– RA-GAPprojectatIMF,includingsomedevelopingcountries
• Ideally,combinewithanalysisof‘policygaps’– Similartotaxexpenditures
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Forexample(fromRA-GAP)
Uganda SouthAfrica
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Usesofgapanalysis
Caniden<fy:
• Priori<esforreform:e.g.:– InUganda,keyissueiscompliancegap,halvingitwouldraise3%ofGDP
– ForSouthAfrica,policygapseemsthelargerconcern
• Areasinwhichtoimprovecompliance– Notjusttotalgapthatma]ers
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VATgapsbysector
-40
-20
0
20
40
60
80
100
1 2 3 4 5 6 7 8 9
Bill
ion
R
Potential vs Actual Revenue by Sector – South Africa
Potential revenue Actual collection
Sectors:
1. Agriculture, forestry and fishery 2. Mining and quarrying 3. Manufacturing 4. Electricity, gas and water 5. Construction
6. Wholesale and retail trade, catering and accommodations 7. Transport, storage and communications 8. Financial intermediation, insurance, real estate and business services 9. Community and social services
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AndUKcompliancegap
Fraud Crisis
0
2
4
6
8
10
12
14
2004 2005 2006 2007 2008 2009 2010
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Someanaly<calaspects
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Gemmell-Hasseldinecri<que:
Compliancegapmaynotberecoverable– Becauseraisingeffec<veratethoughenforcementmayreducethebase
Morefundamentallythough….
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Isthecompliancegaptoobigortoosmall?
Pureefficiency:Extendingastandardmodeltoallow(non-)complianceandadministra<oncosts
where
)(),()( rVeCewlTwlU +−−−= α
)()( αAewlTr −−=
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Op<malchoiceoftaxrate,T
• Well-known:Asufficientsta<s<cforbehavioralresponsestotaxratechangesis“elas<cityoftaxableincome”=elas<cityofreportedtaxbaseto(oneminus)taxrate– Higherthisis,theloweristheop<maltaxrate
• Largeempiricalliteratureseekstoes<matethis– Almostallforadvancedcountries
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Op<malchoiceof‘enforcement’,α…
Lessnoted,necessarycondi<ononαgives𝜆= 𝐸↓𝑍,𝛼
where 𝑍denotestaxableincome,is(modified)ra<oofimplementa<oncoststorevenue,and𝐸↓𝑍,𝛼 isthe‘enforcementelas<cityoftaxableincome’
—whichissufficientontheadministra<onside
TZAVC ααα
λ+
≡)'/(
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…impliesanop<malcompliancegap
of,deno<ng𝑔≡ 𝑒/𝑤𝑙 :Soe.g.if 𝐸↓𝑍,𝛼 =0.2,𝜆=5%,op<malgapis25%
.1 ,αλ
λ
ZEgg
+=
−
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If$1moreisneeded,shoulditcomefromhigherrateorstrongerenforcement?
Answerismorelikelytobeenforcement:
• Higheristheelas<cityoftaxableincome– Becausethatmeanshighinefficiency
• Higheristhetaxrate
• Higherisenforcementelas<city
• Lowerareadministra<onandcompliancecosts– Formerespeciallydamagingtocaseforimplementa<on
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Whatweknowabouttheenforcementelas<cit(ies)oftaxableincome?
• EvidencefrompanelofEUcompliancegapssuggests 𝐸↓𝑍 =0.17
• Experimentalevidence– Foraudit, 𝐸↓𝑍 = 0.1-0.2
• Empirically,someIRSwork(Plumley)…– Mainlyconcernedwithchoicebetweenadministra<veinstruments
…suggests 𝐸↓𝑍 forauditof0.6-0.85(?)
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PARTITIONINGANDSEGMENTATION
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Asimplenotchexample(KanburandKeen,2014)
• Individuals/firmsdifferinpoten<alincomeY,distributedF(Y)
• Propor<onaltaxatrateTpayableabovethresholdZ
—thefocusofinterest
• FixedcompliancecostsC,administra<oncostA
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Benchmark—Fixed,observedY
Balancingprivategainfromamarginalincreaseinthreshold,(TZ+C)f(Z) againstnetpublicloss,δ(TZ-A)f(Z),givessimpleruleforop<malthreshold
TCAZ KM
)1( −
+=
δδ
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Nowallowtaxpayersto:
• Declaretruthfullyabovethreshold—typeL
• Adjust,legally,tobelowZ—Adjusters• Becomeghosts/falselydeclareunderZ—Bounders
– Netincome(1-γ)Y• Concealafrac<onoftheirincome—Cads
– Netincome(1-Q(Y))Y
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Forappropriateparameters:
M(icro)A(djusters)B(ounders)C(oncealers)L(arge)
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Adjusters(andbounders?)inprac<ce
Source:Cha]erjeeandWingender(2012)
Ghosts?Non-filers7%allpoten<alUStaxpayers
Source:Onji(2009)
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Towardsatheoryofop<malsegmenta<on…
Op<malthreshold:
• Sethighenoughtoeliminate‘bounders’:Increasingthresholdgives:– NooutputorrevenuelossfromB’swhobecomeA’s– IncreasedoutputofA’s
• Moregenerally,likelyhigherthanZKM
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…withcompliancepa]ernssugges<ng:
Administra<vechallengesarerelatedtosize:
• Fortop:compliancelikelytobegood(!?)—inprac<ce,controlavoidanceandensure<melypayment
• Middlesegment:Concealment
• Bo]omsegment:Concealmentandghosts
ThislooksmuchlikeLTO,MTOsandSTOs….
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CONCLUDING
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Twoviews
“…itis<metoputtoresttheclaimthat[evasion,avoidance,andadministra<on]is…understudied”
SlemrodandYitzhaki,2002
“…thereiss<llonlyarela<velysmallscholarlyliterature[on]taxadministra<on”
Hasseldine,2011
Firstviewhasbecomemorepersuasive—butmuchremains
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IntegrityoftheRegistered
TaxpayerBase
AssessmentandMi8ga8onofRisk
Suppor8ngVoluntaryCompliance
FilingofTaxReturns
PaymentofObliga8ons
EnsuringAccuracyofRepor8ng
TaxDisputeResolu8on
Opera8onalEfficiencyandEffec8veness
Accountabilityand
Transparency
PerformanceOutcomeAreas
RA-FIT:CollectsRAdataandestablishbaselines/benchmarks
TADAT:Assessmenttool
Twoothernewanaly<caltools
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References
Besley,Timothy,AndersJensenandTorstenPersson,2014,“Norms,Enforcement,andTaxEvasion”(London:LondonSchoolofEconomics).Gemmell,NormanandJohnHasseldine,2014,“Taxpayers’BehaviouralResponsesandMeasuresofTaxCompliance‘Gaps’:ACri<queandaNewMeasure,”FiscalStudies,Vol.35,pp.275–96.Kanbur,RaviandMichaelKeen,2014,“Thresholds,InformalityandPar<<onsofcompliance,”Interna9onalTaxandPublicFinance,Vol.23,pp.536–59.IMF,2015,“Currentchallengesinrevenuemobiliza<on:Improvingtaxcompliance”.Ath]ps://www.imf.org/external/np/pp/eng/2015/020215a.pdfLu]mer,ErzoandMonicaSinghal,2014,“TaxMorale,”JournalofEconomicPerspec9ves,Vol.28,pp.159–68.Naritomi,Joana,2013,“ConsumersasTaxAuditors,”Unpublishedpaper,HarvardUniversityPomeranz,Dina,2013,“NoTaxa<onwithoutInforma<on:DeterrenceandSelf-EnforcementintheValueAddedTax,”HarvardBusinessSchool,WorkingPaperNo.19199.AvailableviatheInternet:h]p://www.hbs.edu/faculty/product/43830.Plumley,Alan,1996,“TheDeterminantsofIndividualIncomeTaxCompliance,”InternalRevenueService,U.S.DepartmentoftheTreasury,Publica<on1916(Rev.11-96).