THINKINGABOUTTAXADMINISTRATION

MichaelKeenICTDFi:hAnnualMee<ngAddisAbaba,February10,2016

Viewsareminealone

Un<lrecently

Literatureontaxadministra<onhadfocusedon:

•  Measuringadministra<onandcompliancecosts

•  Embellishing/puzzlingoverAllingham-Sandmo

Recentexplosionofempiricalwork

Manyexcellentpapersusingexperiments,naturalorother,toaddressaspectsofcompliance.E.g.:

•  ComplianceinVATchains(Pomeranz,2015)

•  Lo]eries(Naritomi,2013)

•  ‘Nudges’(reviewsinAlm(2014),Lu]merandSinghal(2014))

Whatdotaxadministratorslearn?

•  Implica<onsforenforcingVATchains– Pomeranzresultsseemtoimply“Startattheend”

•  Importanceofwithholdingandthirdpartyinforma<onwell-known– Bri<shlandtax1697;andMiltonFriedman’sregret!

•  Arelo]eries/nudgesfirstorderimportance?

Whatdotaxadministratorsthinkabout?(IMF,2015)

•  Governancestructures– Movetosemi-autonomousrevenueagencies

•  Opera<onalmanagement– Morelater

•  Informa<onmanagement– AboutmuchmorethanITsystems

•  Stakeholderrela<onships– E.g.“coopera<vecompliance”

Twoissuesthey(andnowwe)focuson

Keyaspectsofopera<onalmanagement:

•  ‘Taxgaps’– Understanding,measuringandintegra<ngcomplianceandpolicygaps

•  Par<<oningandsegmenta<onoftaxpayers– Differingtreatmentfordifferenttypes(mostobviouslybysize)

TAXGAPS

Whatandwhy?

DecomposingVATrevenue:C-efficiency’..

CanwriteVATrevenue(inpercentGDP)aswhereVisVATrevenue,YisGDP,τSisthestandardVATrate,Cisconsump<on,andis‘C-efficiency’

CVEs

C

τ≡

⎟⎠

⎞⎜⎝

⎛=YCE

YV c

sτ

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

SowhatdrivesC-efficiency?

With V*therevenuethatwouldberaisedifimplementa<onofcurrentsystemwereperfect:wherePisa‘policygap’andΓa‘compliancegap’

)1)(1(*

*Γ−−=⎟

⎠

⎞⎜⎝

⎛⎟⎟⎠

⎞⎜⎜⎝

⎛== P

VV

CV

CVE

SS

C

ττ

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

Forexample(fromRA-GAP)

Uganda SouthAfrica

Usesofgapanalysis

Caniden<fy:

•  Priori<esforreform:e.g.:–  InUganda,keyissueiscompliancegap,halvingitwouldraise3%ofGDP

– ForSouthAfrica,policygapseemsthelargerconcern

•  Areasinwhichtoimprovecompliance– Notjusttotalgapthatma]ers

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

AndUKcompliancegap

Fraud Crisis

0

2

4

6

8

10

12

14

2004 2005 2006 2007 2008 2009 2010

Someanaly<calaspects

Gemmell-Hasseldinecri<que:

Compliancegapmaynotberecoverable– Becauseraisingeffec<veratethoughenforcementmayreducethebase

Morefundamentallythough….

Isthecompliancegaptoobigortoosmall?

Pureefficiency:Extendingastandardmodeltoallow(non-)complianceandadministra<oncosts

where

)(),()( rVeCewlTwlU +−−−= α

)()( αAewlTr −−=

Op<malchoiceoftaxrate,T

•  Well-known:Asufficientsta<s<cforbehavioralresponsestotaxratechangesis“elas<cityoftaxableincome”=elas<cityofreportedtaxbaseto(oneminus)taxrate– Higherthisis,theloweristheop<maltaxrate

•  Largeempiricalliteratureseekstoes<matethis– Almostallforadvancedcountries

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+

≡)'/(

…impliesanop<malcompliancegap

of,deno<ng𝑔≡ 𝑒/𝑤𝑙 :Soe.g.if 𝐸↓𝑍,𝛼 =0.2,𝜆=5%,op<malgapis25%

.1 ,αλ

λ

ZEgg

+=

−

If$1moreisneeded,shoulditcomefromhigherrateorstrongerenforcement?

Answerismorelikelytobeenforcement:

•  Higheristheelas<cityoftaxableincome– Becausethatmeanshighinefficiency

•  Higheristhetaxrate

•  Higherisenforcementelas<city

•  Lowerareadministra<onandcompliancecosts– Formerespeciallydamagingtocaseforimplementa<on

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(?)

PARTITIONINGANDSEGMENTATION

Asimplenotchexample(KanburandKeen,2014)

•  Individuals/firmsdifferinpoten<alincomeY,distributedF(Y)

•  Propor<onaltaxatrateTpayableabovethresholdZ

—thefocusofinterest

•  FixedcompliancecostsC,administra<oncostA

Benchmark—Fixed,observedY

Balancingprivategainfromamarginalincreaseinthreshold,(TZ+C)f(Z) againstnetpublicloss,δ(TZ-A)f(Z),givessimpleruleforop<malthreshold

TCAZ KM

)1( −

+=

δδ

Nowallowtaxpayersto:

•  Declaretruthfullyabovethreshold—typeL

•  Adjust,legally,tobelowZ—Adjusters•  Becomeghosts/falselydeclareunderZ—Bounders

– Netincome(1-γ)Y•  Concealafrac<onoftheirincome—Cads

– Netincome(1-Q(Y))Y

Forappropriateparameters:

M(icro)A(djusters)B(ounders)C(oncealers)L(arge)

Adjusters(andbounders?)inprac<ce

Source:Cha]erjeeandWingender(2012)

Ghosts?Non-filers7%allpoten<alUStaxpayers

Source:Onji(2009)

Towardsatheoryofop<malsegmenta<on…

Op<malthreshold:

•  Sethighenoughtoeliminate‘bounders’:Increasingthresholdgives:– NooutputorrevenuelossfromB’swhobecomeA’s–  IncreasedoutputofA’s

•  Moregenerally,likelyhigherthanZKM

…withcompliancepa]ernssugges<ng:

Administra<vechallengesarerelatedtosize:

•  Fortop:compliancelikelytobegood(!?)—inprac<ce,controlavoidanceandensure<melypayment

•  Middlesegment:Concealment

•  Bo]omsegment:Concealmentandghosts

ThislooksmuchlikeLTO,MTOsandSTOs….

CONCLUDING

Twoviews

“…itis<metoputtoresttheclaimthat[evasion,avoidance,andadministra<on]is…understudied”

SlemrodandYitzhaki,2002

“…thereiss<llonlyarela<velysmallscholarlyliterature[on]taxadministra<on”

Hasseldine,2011

Firstviewhasbecomemorepersuasive—butmuchremains

IntegrityoftheRegistered

TaxpayerBase

AssessmentandMi8ga8onofRisk

Suppor8ngVoluntaryCompliance

FilingofTaxReturns

PaymentofObliga8ons

EnsuringAccuracyofRepor8ng

TaxDisputeResolu8on

Opera8onalEfficiencyandEffec8veness

Accountabilityand

Transparency

PerformanceOutcomeAreas

RA-FIT:CollectsRAdataandestablishbaselines/benchmarks

TADAT:Assessmenttool

Twoothernewanaly<caltools

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).