presentations – jonathan shaw. © institute for fiscal studies incorporating implementation...

Presentations – Jonathan Shaw

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Incorporating implementation concerns into tax policymakingJonathan Shaw (IFS and TARC)

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Coming up

• Background• How to incorporate implementation concerns into tax

policy evaluation• Empirical estimates and determinants of costs• Strategies for effective tax implementation• Conclusion

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Background

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What does tax implementation include?

Anything related to how policy is going to work in practice• Enacting laws and creating institutions• Calculating how much taxpayers owe• Getting tax liability into government’s pocket

Tasks involved• Law-making• Record-keeping• Information gathering

• Decision-making• Calculation• Communication

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Importance of tax implementation

• What we care about is ‘social welfare’ not national income:– Distribution of income matters as well as its total level– Income isn’t the only thing that matters

• Implementation likely to be key for increasing output and welfare– Constrains what is feasible– Determines resources wasted on unproductive tax minimisation

activities– Affects success of reforms and need for remedial intervention

• But few robust causal estimates of importance of implementation

• Most would agree implementation needs to be integral to policymaking process

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How to incorporate implementation concerns into tax policy evaluation

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Costs of taxation

Lost purchasing power The revenue collected by the tax authority

Distortion costs Costs that arise because taxes change relative prices and so distort decisions over e.g. how much to work and what to buy

Administrative costs Costs incurred by tax authority in running tax system

Compliance costs Costs incurred by taxpayers in complying with their tax obligations

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Raising revenue efficiently

• Tax authority has some flexibility over instruments used– Types of tax– Tax rates and thresholds– Enforcement regime

• Not all instruments impose the same costs• Objective: raise revenue fairly and at minimum cost• Optimal policy: equalise ‘marginal efficiency cost of

funds’ (MECF) of each tax instrument

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Implications of optimal policy

1. Evaluations of policy reforms need to include all costs of taxation

2. What matters for incremental policy changes are marginal costs not average costs

3. Administrative costs should receive a higher weight than compliance costs

4. Optimal setting of tax instruments are interdependent

5. Increasing enforcement until revenue equals marginal administrative cost is unlikely to be optimal

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Empirical estimates and determinants of costs

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Current state of play

• Governments recognise importance of some or most costs– Shadow price of public funds used to appraise spending

projects

• But necessary empirical estimates often lacking for setting individual tax policy parameters– Not calculated at all, or– Not calculated on appropriate basis for assessing reforms

Distortion costs: scale and determinants

UK Tax Marginal deadweight loss

Income tax (top 1%) >100%

Corporation tax

£10k threshold 40%

£300k threshold

9%

VAT -

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Notes: Estimates for UK taxesSources: Brewer et al (2010), HMRC (2012), Devereux et al (2012)

Key determinants• Elasticity of taxable

income• Marginal tax rate

• Level of income

Evasion: scale and determinants

UK Tax Non-compliance(% true liability)

Income tax, NICs and CGT

5.5%

Self assessment

18.1%

SMEs 1.0%

Corporation tax 8.8%

VAT 10.1%

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Notes: Average figures for UK taxes in 2010/11Source: HMRC (2012)

Key determinants• Probability of detection• Size of penalty

• Tax morale

Compliance costs: scaleCountry

Tax Compliance costs

(% revenue)

Administrative burdens

(% revenue)

UK PAYE/NICs 1.3% 0.4%

UK Corporation tax

2.2% 1.9%

UK VAT 3.7% 1.1%

Ireland PAYE/PRSI 4.6% 0.3%

Ireland Self employed - 7.4%

Ireland Corporation tax

- 1.0%

Ireland VAT - 2.5%

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Notes: Averages for various years. Administrative burdens are based on Standard Cost Model methodology, covering businesses and excluding costs such as tax planning, dealing with change and understanding which obligations are relevantSources for compliance costs: Sandford et al (1989), Inland Revenue (1998) and Leonard and O’Hagan (1985). author’s calculationsSources for administrative burdens: HMRC (2012), Revenue Commissioners (2012)

Administrative costs: scale

Country Tax Administrative costs(% revenue)

UK Income tax 0.97%

UK Corporation tax

0.76%

UK VAT 0.60%

Ireland All taxes 0.85%

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Notes: Average administrative costs as percentage of net revenue collectedSources: HMRC (2012), Revenue Commissioners

(2013)

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Administrative and compliance costs: determinants

• Complexity of tax– Number of rates, reliefs and boundaries

• Level of tax rates• Characteristics of tax base• Complexity of tax

– Size, mobility and registration

• Existence of optional schemes• Stability• Responsibility for assessment• Responsibility for remittance• Availability of help and guidance

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Strategies for effective tax implementation

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Implementation strategies

• Taxing market transactions– Tend to be better documented and involve arms-length

prices

• Information reporting– Requirement to tell tax authority about transactions

incurring tax– Often means coordination is required if evasion is not to be

detected

• Withholding– Tax liability remitted by someone other than the statutory

bearer– Safeguard against no tax being remitted

• Relying on firms– Takes advantage of existing systems and economies of

scale

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Implementation strategies (2)

• International cooperation– Information sharing– Coordination of tax regimes

• Exploiting IT– Cuts cost of processing– Reduces risk of errors– Helps expose non-compliance– May cut amount of information to collect

• Exploiting media channels– Advertising– Name and shame

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Conclusions

• Effective implementation is crucial for a well-functioning tax system

• Implementation concerns can be incorporated into standard tax policy evaluation framework

• Empirical estimates of necessary parameters often lacking

• But available estimates suggests they are quantitatively important

• Wide range of strategies for effective implementation