[! sources: htts://www.youtube.com/watch?v=tT6f54IxIRU&t=1064s / Taxes in America (with L.E. Burman, Slemrod's first Ph.d student) !]
Summing up
- “ policy change without administrative change is nothing” (Richard
Bird)
- putting firms into Taxation
theory (1)
 |
| Tax bases and rates are only the roof of the Tax system. Tax administration is the foundation. |
Key concepts
1. A tax
system has three aspects:
- tax bases (triggering tax liability) and rates
- remittance rules (who or what entity
must remit that tax and when [e.g. withholding taxes by large firms]);
- enforcement
rules (e.g. audits, third-party information-reporting, penalties, targeting the cash economy, crackdown on offshore bank accounts)
2. Tax
administration plays a crucial role in tax system:
- we really don't know anything about the tax system
if we know only the rates/bases and don't know how it's administered/enforced. (2)
3. Is there a role for morality?
From tax enforcement's point of view:
- acceptance that deterrence is not the whole story and that non-deterrence factors, such as duty and social
norms, explain differences in noncompliance across individuals and
businesses.
- but: on the one hand we must consider that no government can announce a modern tax system relying only on taxpayers' sense of duty to remit what is owed (3), on the other hand we must consider that civic virtue/ sense of duty is more "absolute" than a cost-benefit calculation driven by possibility of an audit et similia .
- it's not a moral issue the fact that IRS Whistleblower office pays people who identify persons who fail to remit the tax they owe: it's enforcement.
From public opinion's point of view
- IRS is a bureaucratic apparatus like the others, with the same problems of cost efficiency [i.e. dollars of tax revenue generated by every dollar of administrative cost; e.g. information reporting increases the deterrence (risk of detection) at low cost to the tax authority];
- progressive taxation is not class warfare: simply all societies must determine how to assign the burden of how to pay for governement and how much to weigh fairness in this determination
4. Importance
of “concrete approaches”.
E.g.:
- Although the core part of many tax reform is the cutting of the number of tax brackets, the complicated part of income tax is figuring out one's taxable income.
- The limits of enforcement: a) only a certain portion of the tax gap could be collected with more enforcement; b) auditing literaly "everyone" would be too costly (e.g. many countries exempt small businesses, explicitly by law or implicitly by law enforcement. With perfirm fixed cost element of the tax authority dealing with firms, it can be appropriate to exempt some smaller firms because the potential revenue from these firms is small relative to the compliance and administrative costs savings); c) as mentioned above, civic virtue/ sense of duty is more "absolute" than a cost-benefit calculation driven by possibility of an audit et similia.
- Is there a recompense for the compliance costs (4) incurred? Usually compliance costs are considered like other business expenses (deductible from taxable income) and/or costs that ultimately are passed on to customers, workers and others. A few countries provide explicit compensation to income tax withholding agents (e.g. some american states offer "vendor discounts" to retailers who remit retail sales tax).
- Public disclosure of tax return information improves policy transparency and helps enforcement. If I can look up and see what my neighbour declares his or her income to be, and I notice they have a BMW parked in the garage, I might have some information that might be of use to the tax authority. If people understand this dynamic, they might be less inclined to understate their income. Opponents decry the invasion of privacy (e.g. use of the infromations by the “wrong people.
- An old study in Minnesota: the content of letters sent to taxpayers
was varied randomly, providing different sets of information such as an audit
threat or an appeal to social conscience.
The taxpayers’ behaviour subsequent to receiving the letter was analysed
and compared.
- Does the separated reporting of the the sales tax eliminate the "fiscal illusion" of not paying it? No, it doesn't. Most retail stores/ e-tailing sites remind us of the sales tax only when we arrive at the cash register/ at the very end of the transaction. The sales promotion "we pay your sales tax" means higher pre-tax prices.
- Do you want to raise the rate of the sales tax? Pay attention: this rise would provide a huge incentive to move sales underground, especially in sectors like grocery stores where gross margins are often 1 or 2.
Present situation
1. Negative
consequences of the Modern (/pure) theory of taxation
In the Modern theory of taxation (starting around 1970), the
analysis of taxation became rigorous/ mathematical, but rigorization comes at a
cost, because the models used to analyse taxation are stylized: they have to
focus on particular features of taxation and make simplifying assumptions
about how the real world works.
E.g.:
a) unduly close focus on tax rates and bases (5), although the government has a vast array of other tax policy instruments such as enforcement tools.
 |
| Thales of Miletus, while observing tax rates and tax bases. |
E.g. should Greece raise revenue to meet its bailout conditions by increasing tax rates or by cracking down on tax evasion? Well, the standard tax analysis doesn’t look at more auditing/information reporting and similar instruments.
b) no meaningful role for firms.
The standard modern analysis of taxation has no meaningful role for firms (and their heterogeneous dimensions). Related to the invisibility of firms, in the standard toolkit there is no concern with the details of “tax remittance”.
Actually, the compliance rate in income taxation is very high only in the presence of withholding taxes/ information reportings. The presence of large firms (i.e. of their accounting system + withholding taxes) allows the IRS to concentrate on a small number of large entities (instead of on a larger number of employees), reducing its cost for the public budget (4)(6).
Again: in models of optimal commodity taxation, what matters is consumer choices, but consumption taxes are collected from (retail) firms (in no actual consumption tax system are consumption taxes remitted by individual consumers).
c) no meaningful role for tax preparers
On the contrary, tax preparers'number (an entire industry), the problem of their professional competence's level and their role (helpful for tax compliance or for tax cheating?; anyway,the number of tax returns filed with the help of paid tax preparers is impressive) make them a relevant gear for tax administration (6).
d) no meainigful role for public opinion
On the contrary, "What does the public know about taxes" and "What does the public think about taxes" are two essential questions.
e) an inefficient efficiency for the IRS, a.k.a the other side of the cost-to-revenue ratio
The low cost-to-revenue ratio of the IRS by itself is not particularly informative about the efficacy of the tax administration: a low ratio could simply mean that the task of collecting taxes is carried out poorly on some important dimension, such as deterring evasion, so that revenue is collected in a capricious and inequitable manner [e.g. the audit rate is much higher for those (individuals or corporations) who/which report higher income].
See also (2).
2. Justifications?
3. The
paradox of developing countries
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(1) It's the title of an article ["Putting Firms into Optimal Tax Theory", American
Economic Review (2006), Kopczuk and Slemrod ].
(2) http://www.journalofaccountancy.com/news/2017/mar/irs-2016-data-book-201716368.html
https://www.wsj.com/articles/irs-audits-of-individuals-drop-for-5th-straight-year-1487794717
(3) "Cheating Ourselves: The Economics of Tax Evasion." Journal of Economic Perspectives (2007), Slemrod.
(4) the costs of collecting taxes is made up of administrative costs (i.e. the cost of IRS) + compliance costs (borne by taxpayers, especially by the large organizations that have the burden of withholding; e.g. costs of recordkeeping, researching the law, completing the returns, etc. ): more withholding taxes equals less costs for IRS.
(5) 90% of
the analysis is usually about tax rates and tax bases. The paradox is that
there is a core point in common between the Modern taxation theory and the Tax
administration: the importance of
information's observability.
(6) we can say that withholders/reporters/tax preparers are like "hidden IRS employees"
