what do we know about the compliance costs of the tax system? arindam das-gupta
TRANSCRIPT
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What Do We Know About the What Do We Know About the
Compliance Costs of the Tax System?Compliance Costs of the Tax System?
Arindam Das-Gupta
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OutlineOutlineThe cost of collecting taxesWhat are compliance costs (CCs)?Why do CCs matter?CCs: International evidenceRecent estimates for IndiaDeterminants of CCsHow to reduce CCs?How to estimate CCs?
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The cost of collecting taxesThe cost of collecting taxes
Include “welfare costs, opportunity costs, psychic costs, social costs and so on” (Evans and Walpole, 1997)
Costs of taxation (Yitzhaki-Slemrod).– Excess burden of taxes– Excess burden of tax evasion– Tax administration costs (substitute)– CCs and avoidance costs.
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What are CCs?What are CCs?
Citizen’s costs of meeting tax obligationsExcludes actual taxes paid and excess
burdens.Includes avoidance (“tax planning”) and
evasion costs.Includes costs if taxpayers, non-filers,
third parties (banks, tax withholders, helping others)
Components:
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What are CCs? - 2What are CCs? - 2
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Types of CCsTypes of CCs
Mandatory versus voluntary… ...and quasi-voluntary costs In-house versus external Gross versus net
– Cash flow benefits– Tax deductibility
Private versus social– Bribes– Tax deductibility
OVERALL versus from SPECIFIC provisions or procedures
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Administration costs versus CCsAdministration costs versus CCs
SubstitutesOther things equal, social cost
considerations should dictate the choice between compliance requirements and administration responsibilities– EG: Official versus self-assessment
Other things may not be equal…– Documents enclosed with tax returns– Desk versus field audits
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Why look at CCs?Why look at CCs?
Three of Adam Smith’s canons of taxation relate to CCs: ‘Certainty’, ‘Convenience’, and ‘Economy’.
Policy uncertainty and complexity lead to higher CCs
Raises the effective tax rate… without any revenue benefits
Induces non-compliance and raises administration costs
CC Assessments now mandatory in some countries
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International evidence: Individual income taxInternational evidence: Individual income tax
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International evidence: Business income taxesInternational evidence: Business income taxes
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Estimates for India - Individual ITEstimates for India - Individual IT
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Estimates for India - Individual IT - 2Estimates for India - Individual IT - 2
Legal compliance costs as a percentage of gross income
0
2
4
6
8
10
12
14
16
Rs 50,000 orless
Rs 50-100thousand
Rs 100-200thousand
Rs 200-300thousand
Rs 300-400thousand
Rs 4,00,000and above
Perc
ent
Non-Salaried Salaried
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Estimates for India - Corporation ITEstimates for India - Corporation IT
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Features of individual CCs in IndiaFeatures of individual CCs in India
Time costs: Non-salaried: 88 hours; Salaried: 28 hours; plus 3-4 hours helping others.– Approx. 11 hours (USA); 27 hours (NZ)– “Conservatively” valued in cost estimates
Monetary costs: Even if time compliance costs are excluded monetary compliance costs are large compared to other studies– Median % of tax paid: 52% (non-sal); 1.6% (salaried)
Advisor’s are used more to deal with tax uncertainty and administrative procedures rather than tax planning.
Incidence of bribe payment and bribe quantum are high, especially so for non-salary earners.– Refunds, clearances and permissions
Harassment of assessees is widespread.– Delayed refunds, PAN cards
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Features of company CCs in IndiaFeatures of company CCs in India
62% benefit from compliance requirements: income statements & balance sheets are better prepared.
50% find audit requirements helpful in detecting dishonesty.
Scrutiny assessment and accounting requirements are major cost items.
70%, especially small companies use external assistance.
External costs: 39%. Voluntary costs: 19% to 43% of gross CCs Typical company has 12 to 14 open assessment years.
– 10 to 11 assessment years locked in disputes.– Each extra disputed year raises legal compliance costs
by 5.7%
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CCs and indicators of company sizeCCs and indicators of company size
Book Value of Assets (Log Scale)
Com
plia
nce
Cos
ts (
Log
Sca
le)
Tax Paid Index (Log Scale)
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““Hot spots”Hot spots”
Legal requirements– Audit requirements – Tax deduction at
source– International tax
provisions– Loss carry forward and
set off– Valuation of perquisites
to employees– Others:export concession claims;
non-resident withholding; inconsistencies with Companies Act, depreciation provisions, free trade zone reporting; Minimum Alternate Tax
Administrative procedures– Refunds– Scrutiny assessment
procedures– Accounting for TDS– Appeals and
litigation– Completion and filing
corporation tax return
– Obtaining IT clearances and approvals
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How to reduce CCs? FrameworkHow to reduce CCs? Framework
Overall CCs only show if broad tax reform is needed
CCAs of specific administration procedures or legal provisions can suggest specific reforms
MECF framework
.expinalargMbenefit.exp.govtinalargM
revenueinalargmNETCCsburdenexcessinalargM
MECF
• Applied in Poapongsakorn et. al. to taxpayer surveys
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How to reduce CCs of the individual IT?How to reduce CCs of the individual IT?
Tax policy process reform to reduce instability and uncertainty
Tax structure simplification– More presumptions?
Simpler administrative procedures– Improved taxpayer services
Institutional reform of tax administrationIf this does not reduce compliance
costs…abolish Individual IT?
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Reducing corporation tax CCsReducing corporation tax CCs
Net private CCs can be reduced, on average, to zero, if refunds delays and associated corruption are tackled – Strengthen penalties for IT officials– Institutional reform as for Individual IT
Reduce complexity and ambiguity of tax law. Reform procedures for international transactions Streamline clearances and permissions. Streamline dispute resolution Alleged bribe taking by appellate authorities to
give favourable judgments?
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How to estimate CCs and their impact?How to estimate CCs and their impact?
Questionnaires/interviews neededQuestionnaires cannot be longSo clarity about objective crucial
– Overall CCs - interesting but not so useful?– Impact of recent reform?– Tax reform or administrative reform?– Specific provisions and procedures?
CCAs for specific items most promising
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How to estimate CCs and their impact? -2How to estimate CCs and their impact? -2
Taxpayer (individual, or business) sample– Random sample of taxpayers– Use (short!) questionnaires for taxpayers– PRETEST PRETEST PRETEST 2-3 versions for clarity and
length…and focus groups– 3 questionnaires:
• Canvassed/mailed with no evasion or bribe questions• Anonymous mailing for non-compliance and bribes with
a few extra questions to match samples• Canvassed “bridge” questionnaires
Canvassed/mailed questionnaires from a sample of third parties
Tax practitioners sample on costs and activities Data from tax administration on enforcement,
detected non-compliance and disputes if needed
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Thank youThank you