Niamh HardimanUCD Geary Institute andUCD School of Politics and International RelationsNiamh.Hardiman@ucd.ie

Structural Challenges of the Slovenian EconomyLjubljana, 19 June 2013

Politics, Public Administration, and Performance

Taxation in democracies• Purposes of taxation

– Maximize (non-damaging) revenue– Minimize collection costs– Without evasion (by citizens)– Without corruption (by tax officials)

• Options– A. Extraction through coercion– B. Compliance through consent

• How to move from A to B? – Building ‘trust’

Taxation and democracy: voting

Government

Citizens

Citizens

Citizens

Taxation and democracy: extracting tax

Government

Citizens

Citizens

Citizens

Taxation and democracy: fairness

Government

Citizens

Citizens

Citizens

Taxation and democracy: voluntary compliance

Government

Citizens

Citizens

Citizens

Implications

• Consent and legitimacy• FairnessHOW?• Policy design

– Tax system• Institutional design

– Administrative system

Principles of good tax policy

• Clear rationale• Transparency of

tax collection• Ease of compliance• Not too expensive

to administer

Variations in tax policy preferences

Types of tax• Income

– Personal– Corporate

• Consumption– VAT, excise, water,

carbon, etc.• Property

– Rates, charges, etc.• Wealth

– Assets, gifts, capital gains, inheritance, death duties, etc.

Variations in tax policy preferences

Types of tax• Income

– Personal– Corporate

• Consumption– VAT, excise, water,

carbon, etc.• Property

– Rates, charges, etc.• Wealth

– Assets, gifts, capital gains, inheritance, death duties, etc.

Examples of exemptions and tax expenditures• Basic personal • Business investments

– Capital depreciation allowances

– Innovation, R&D• Incentivize behaviours

– Home ownership– Personal pension

Variation in rates, bands, incidence

• Emergent issues:– Broader base– Fewer rates– Fewer exemptions– Type of income

shouldn’t matter– Redistribution not

only via taxation

• Debates about:– Progressive?– Individuals or

households?– Family type?– Source of income?

Principles of good tax administration

Principles of good tax administration

Common issues

Dealing with tax evasion through smart compliance strategy:

tough auditing…..

…. plus peer pressure and norm building

Tax administration: institutional reform

‘Rebuilding the ship while at sea’

• Leadership• Team-building• Buy-in

Expertise

Technology

Principles of administrative design

• Autonomy in recruitment

• Strict meritocracy

• Operational autonomy from core civil service

Complacency is the enemy

Complacency is the enemy

Some reflections on the Irish experience

Pre-1988:

•Narrow tax base•Late extension of PAYE and PRSI•High rates on taxable income•Evasion and avoidance

•Sustained low corporate tax rate– To incentivize FDI

Tax rates on employee incomes

Source: Hardiman, 2002

Corporate tax rates

Source: Hardiman, 2002

Tax reform, 1988+

• New rules, new regime• Incentives

– Tax amnesty 1988– Regular emphasis on

voluntary compliance

• Sanctions– Tough enforcement– Bailiffs– Heavy penalties and interest

payments– Prosecution: ‘name and shame’, fine, jail

How?• IDEAS

– Commissions on Taxation• 1960, 1985, 2009

– Economic crisis of 1980s

• ACTORS– Revenue Commissioners

• INSTITUTIONAL DESIGN– Extensive internal reform– Operational autonomy

How effective?

TAX ADMINISTRATION HUGELY IMPROVED•Highly efficient online systems•Shadow economy reduced hugely•Voluntary compliance with new self-assessed property tax:

– Over 80% by deadline

Sinn Féin’s Mary Lou McDonald has admitted she has decided to pay the controversial property tax — despite asking families to oppose the new levy.

Likely defaulters have been reminded by Revenue it has full powers in terms of payroll, social welfare and bank accounts to take money. Furthermore, Revenue can charge an additional levy by way of penalty.

Ms McDonald said: “That’s the decision we’ve taken as a family. Obviously, as a citizen, I would always prefer to be fully tax-compliant. I always play by the rules.

“We’re registering and paying this tax very much under protest because we know, for many families, this is a bridge too far.”

The Irish Examiner, 28 May 2013

Cost of tax administration system

http://ec.europa.eu/europe2020/pdf/themes/07_shadow_economy.pdf

Estimated size of the shadow economy,

2012

Schneider, The shadow economy, http://www.economics.uni-linz.ac.at/members/Schneider/files/publications/2012/ShadEcEurope31.pdf

How effective?

TAX POLICY HAS BEEN PROBLEMATIC•Government decisions in 1990s and 2000s to:

– Narrow income tax base – Postpone new sources of tax – Incentivize building – Over-rely on revenue from construction boom

TASC, Failed Design, 2010, p.12

Tougher job now for Revenue Commissioners

• Right mix of

– Incentives

– Deterrents

– Sanctions

There is always…

Thank youNiamh.Hardiman@ucd.ie