Economics tax ppt

Public Economics Tax Enforcement and economics and taxation pdf
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Published Date:26-07-2017
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230B: Public Economics Tax Enforcement Emmanuel Saez Berkeley 1Tax Enforcement Problem Most models of optimal taxation (income or commodity) as- sume away enforcement issues. In practice: 1) Enforcement is costly (eats up around 10% of taxes col- lected in the US) when combining costs for government (tax administration) and private agents (tax compliance costs) 2) Substantial tax evasion (15% of under-reported income in the US federal taxes). Tax evasion much worse in developing countries Two widely used surveys: Andreoni, Erard, Feinstein JEL 1998 Slemrod and Yitzhaki Handbook of PE, 2002 2ALLINGHAM-SANDMO JPUBE'72 MODEL Seminal in the theoretical tax evasion literature. Uses the Becker crime model Individual taxpayer problem: max (1p)u(ww ) +pu(ww (ww )(1 +)); w  where w is true income, w  reported income,  tax rate, p audit probability,  ne factor, u(:) concave. NoAudit Audit Let c =ww  and c =ww (ww )(1 +) 0 NoAudit 0 Audit FOC in w : (1p)u (c ) +pu (c ) = 0) 0 Audit u (c ) 1p = 0 NoAudit u (c ) p 2 00 NoAudit 2 2 00 Audit SOC)  (1p)u (c ) +p  u (c ) 0 3ALLINGHAM-SANDMO JPUBE'72 MODEL Result: Evasion ww  with p and  Proof of dw =dp 0: Di erentiate FOC with respect to p and w : 0 NoAudit 2 00 NoAudit 0 Audit dpu (c )dw  (1p)u (c ) =dpu (c )+ 2 2 00 Audit dw p  u (c ) 2 00 NoAudit 2 2 00 Audit 0 Audit )dw  (1p)u (c )p  u (c ) =dpu (c )+ 0 NoAudit u (c ) Similar proof for dw =d 0 Huge literature built from the A-S model including optimal auditing rules 4Why is tax evasion so low in OECD countries? Key puzzle: US has low audit rates (p = :01) and low nes (':2). With reasonable risk aversion (say CRRA = 1), tax evasion should be much higher than observed empirically Two types of explanations for puzzle 1) Unwilling to Cheat: Social norms and morality people dislike being dishonest and hence voluntarily pay taxes 2) Unable to Cheat: Probability of being caught is much higher than observed audit rate because of 3rd party report- ing: Employers double report wages to govt (W2 forms), com- panies and nancial institutions double report capital income paid out to govt (US 1099 forms) 5DETERMINANTS OF TAX EVASION Large empirical literature studies tax evasion levels and the link between tax evasion and (a) tax rates, (b) penalties, (c) audit probabilities, (d) prior audit experiences, (e) socio-economic characteristics Early literature relies on observational non-experimental data which creates serious identi cation and measurement issues: (1) Evasion is dicult to measure (2) Most independent variables audits, penalties, etc. are endogenous responses to evasion and also dicult to measure ) Requires to use experimental data or to nd good in- struments: (a) IRS Tax Compliance Measurement Studies (TCMP), (b) lab experiments, (c) eld experiments 6TCMP: IMPACT OF THIRD PARTY REPORTING IRS Tax Compliance Measurement Study (TCMP) is a thor- ough audit of strati ed sample of tax returns done periodically. TCMP shows that: 1) Tax Gap is about 15% 2) Tax Gap concentrated among income items with no 3rd party reporting (such as self-employment income)  tax gap over 50% when little 3rd party reporting consistent with Allingham-Sandmo  Tax Gap very small ( 5%) with 3rd party reporting 7Tax Gap “Map” Tax Year 2006 ( billions) Tax Paid Voluntarily & Timely: 2,210 Total Tax Liability 2,660 Gross Tax Gap: 450 Enforced & Other Net Tax Gap: 385 Late Payments of Tax (Tax Never Collected) (Voluntary Compliance Rate = 83.1%) 65 (Net Compliance Rate = 85.5%) Underreporting Nonfiling Underpayment 28 46 376 Corporation Employment Estate Excise Individual Income Tax Tax Tax Tax Income Tax Individual Individual 67 72 2 235 Income Tax Income Tax 25 36 Corporation Corporation Small Non-Business FICA Income Tax Non-Business Income Tax Corporations Income Tax on Wages Income 4 (assets 10m) 30.6 68 14 Categories of Estimates 19 Employment Employment Tax Tax Large Business Self-Employment Business Actual Amounts 4 Corporations Income Tax Income (assets 10m) 65.3 57 122 Updated Estimates Estate Estate 48 Tax Tax No Estimates Available Adjustments, Unemployment 2 3 Deductions, Tax Excise Exemptions Excise 1 Tax 17 Tax 0.1 Credits 28 Source: IRS (2012) Internal Revenue Service, December 2011Source: IRS (2012) TCMP: IMPACT OF TAX WITHHOLDING 3) Tax Withholding further reduces tax gap: liquidity con- straint e ect is most likely explanation: some taxpayers can never pay the tax due unless it is withheld at source ) wage income withholding is critical for enforcement of broad based income tax and payroll taxes Numbers from TCMP are rough estimates because audits can- not uncover all evasion IRS blows up uncovered evasion by factor 3-4) Thorough audits detect evasion of only about 4% of income 9LAB EXPERIMENTS Multi-period reporting games involving participants (mostly students) who receive and report income, pay taxes, and face risks of being audited and penalized 1) Lab experiments have consistently shown that penalties, audit probabilities, and prior audits increase compliance (e.g., Alm, Jackson, and McKee, 1992) 2) But when penalties and audit probabilities are set at realistic levels, their deterrent e ect is quite small Alm, Jackson, and McKee 1992) Laboratory experiments tends to predict more evasion than we observe in practice Issues: Lab environment is arti cial, and therefore likely to miss important aspects of the real-world reporting environ- ment 3rd party information and social norms 10FIELD EXPERIMENTS 1) Blumenthal, Christian, Slemrod NTJ'01 study the e ects of normative appeals to comply: treatment group receives letter encouraging compliance on normative grounds \support valuable services" or \join the compliant majority", control group no letter ) No (statistically signi cant) e ect of normative appeals on compliance overall 2) Slemrod, Blumenthal, Christian JPubE'01 study the e ects of \threat-of-audit" letters ) Statistically signi cant e ect on reported income increase, especially among the self-employed \high opportunity group" but very small sample size Recently: (a) Hallsworth et al. (2014) show that normative appeals help in collecting overdue taxes but small quantitatively, (b) Bott et al. 2014 for a randomized experiment in Norway on foreign income threat of audit more e ective than normative appeal, (c) see survey Luttmer-Singhal '14 11Do Normative Appeals Affect Tax Compliance? TABLE 2 CHANGE IN REPORTED EEDERAL TAXABLE INCOME AND MINNESOTA TAX LIABILITY IN TREATMENT AND CONTROL GROUPS Letter 1 Federal Taxable Income MN Tax Liability Treated Control Treated-Control Treated Control Treated-Control 1994 26,947 26,940 7 1,943 1,954 -11 1993 26,236 26,449 -.213 1,907 1,934 -26 1994-1993 711 491 220(352) 35 20 15(29) % with 94-93 increase 54.1 53.9 0.2 52.6 52.3 0.3 n 15,613 15,624 15,613 15,624 Letter 2 Federal Taxable Income MN Tax Liability Treated Control Treated-Control Treated Control Treated-Control 1994 26,906 26,940 -34 1,949 1,954 -4 1993 26,457 26,449 8 1,930 1,934 -3 1994-1993 449 491 -42(299) 19 20 -1(25) % with 94-93 increase 54.6 53.9 0.7 53.1 52.3 0.8 n 15,536 15,624 15,536 15,624 Either Letter Federal Taxable Income MN Tax Liability Treated Control Treated-Control Treated Control Treated-Control 1994 26,927 26,940 -14 1,946 1,954 -8 1993 26,346 26,449 -103 1,919 1,934 -15 1994-1993 580 491 89(270) 27 20 7(22) % with 94-93 increase 54.3 53.9 0.4 52.8 52.3 0.5 n 31,149 15,624 31,149 15,624 Notes: Number in parentheses is the standard error. The mean of "Treated-Control" may differ from the mean of "Treated" minus the mean of "Control" due to rounding error. ceived either letter, and for those who ence-in-difference for FTP was 220, or served as controls.' Consistent with the those receiving the letter increased their random assignment of cases to experi- report, on average, by 220 more than did mental groups and a lack of attrition bias, the controls. While the result suggests a Source: Blumenthal et al. (2001), p. 131 the 1993 treated and control means are not successful moral persuasion, equal to significantly different. For Letterl (Sup- about 0.8 percent of average income, it is port Valuable Services), the mean differ- not statistically significant. For Minnesota ' We have excluded two Letterl recipients whose reported income and taxes over the period were inconsistent: one reported 73 percent less FTI but only 35 percent less MnTx while the other reported 1.4 percent less FTI but 25 percent less MnTx. The preliminary analysis which included them yielded regression coefficients for the MnTx and FTI equations which were of widely varying proportions (i.e., the MnTx coefficients ranged from -10 to 134 percent of the FTI coefficients, while the state marginal tax rate varied only between 6 and 8.5 percent). Excluding these two treated recipients, the two sets of coefficients are more uniformly proportional. The data contain two sources of FTI observations, one from the Minnesota return and, in 1993 and 1994, one from the federal return. In the analyses which follow, we use the Minnesota FTI data, except for those cases in which it is missing on the state return but available from the federal return. 131466 J. Slemrod et al. / Journal of Public Economics 79 (2001) 455 –483 Table 4 Average reported federal taxable income: differences in differences for the whole sample and income and opportunity groups Whole sample (weighted) Treatment Control Difference 1994 23,781 23,202 579 1993 23,342 22,484 858 94293 439 717 2278 S.E. 464 %w/increase 54.4% 51.9% 2.5% n 1537 20,831 Low income High opportunity Low opportunity Treatment Control Difference Treatment Control Difference 1994 7473 3992 3481 2397 2432 235 1993 971 787 183 788 942 2154 94293 6502 3204 3298 1609 1490 119 S.E. 2718 189 %w/increase 65.4% 51.2% 14.2% 52.2% 50.2% 2.0% n 52 123 381 4829 Source: Slemrod et al. (2001), p.466TAX AUDIT EXPERIMENT FROM DENMARK Kleven-Knudsen-Kreiner-Pedersen-Saez '11 analyze bigger Dan- ish income tax auditing experiment strati ed sample 40,000 Overall detected evasion no adjustment is around 2.5% but: 1) Evasion rate for self-reported items is almost 40% 2) Evasion rate for third party reported items is only 0.3% 3) Overall evasion rate is so low because 95% of income is third party reported in Denmark Role of 3rd party reports information structure seem to trump social factors and economic factors: Evade = + Self ReportedIncome + SocialFactors +" i i i i 14Self-Reported vs. Third-Party Reported Income Pre Pre-audit audit n net et income income Under Under-reporting reporting of of income income Self- Self- To Tot ta al l Third Third-party party To Tot ta al l Third Third-party party reported reported Amount 206,038 195,969 10,069 4,255 536 3,719 (2,159) (1,798) (1,380) (424) (80) (416) Percent 98.38 98.57 38.18 8.39 1.72 7.28 (0.09) (0.08) (0.35) (0.20) (0.09) (0.19) Source: Kleven et al. (2010)Determinants of the Probability of Audit Adjustment: Social, Economic, and Information Factors Socio- Information Social factors All factors economic factors factors Constant 14.42 (0.64) 11.92 (0.66) 1.44 (0.25) 3.98 (0.62) Female -5.76 -4.45 -2.05 (0.43) (0.45) (0.41) Married 1.55 (0.46) -0.36 (0.48) -1.64 (0.44) MMb ember off chhurchh -1 19 .98 8 -226 .677 -11 1.199 (0 (0.59) 59) (0 (0.58) 58) (0 (0.54) 54) Copenhagen -0.29 (0.67) 1.20 (0.67) 1.00 (0.62) Age above 45 -0.37 (0.45) -0.35 (0.45) 0.10 (0.42) Home Home ow owner ner 5.96 5.96 (0.48) (0.48) -0.35 0.35 (0.46) (0.46) Firm size below 10 4.43 2.97 (0.82) (0.76) Informal sector 3.25 (0.86) -0.99 (0.79) Self-Reported Income 9.47 9.72 (0.53) (0.54) Self-Reported Income 20K 17.46 (0.91) 17.08 (0.92) Self-Reported -10K 14.63 (0.72) 14.53 (0.72) Audit Flag 15.48 15.32 (0.59) (0.60) R-square 1.1% 2.1% 17.1% 17.4% Adjusted R-square 1.0% 2.1% 17.1% 17.4% Source: Kleven et al. (2010)A. Histogram Evaded Income/Self-Reported Income 0 .5 1 1.5 Ratio Evaded Income / Self-Reported Income B. Evasion by Fraction Income Self-Reported 45 degree line Fraction evading Fraction evaded (evaders) Third-party evasion rate 0 .2 .4 .6 .8 1 Fraction of income self-reported Figure 3. Anatomy of Tax Evasion Panel A displays the density of the ratio of evaded income to self-reported income (after audit adjustment) among those with a positive tax evasion, using the 100% audit group and population weights. Income is defined as the sum of all positive items (so that self-reported income is always positive). Panel A shows that, among evaders, the most common is to evade all self-reported income. About 70% of taxpayers with positive self-reported income do not have any adjustment and are not represented on panel A. Panel B displays the fraction evading and the fraction evaded (conditional on evading) by deciles of fraction of income self-reported (after audit adjustment and adding as one category those with no self- reported income). Panel B also displays the fraction of third-party income evaded (unconditional). Income is defined as positive income. In both panels, the sample is limited to those with positive income above 38,500 kroner, the tax liability threshold (see Table 1). Evasion rate Density 0 .2 .4 .6 .8 1 0 2 4 6A. Histogram Evaded Income/Self-Reported Income 0 .5 1 1.5 Ratio Evaded Income / Self-Reported Income B. Evasion by Fraction Income Self-Reported 45 degree line Fraction evading Fraction evaded (evaders) Third-party evasion rate 0 .2 .4 .6 .8 1 Fraction of income self-reported Figure 3. Anatomy of Tax Evasion Panel A displays the density of the ratio of evaded income to self-reported income (after audit adjustment) among those with a positive tax evasion, using the 100% audit group and population weights. Income is defined as the sum of all positive items (so that self-reported income is always positive). Panel A shows that, among evaders, the most common is to evade all self-reported income. About 70% of taxpayers with positive self-reported income do not have any adjustment and are not represented on panel A. Panel B displays the fraction evading and the fraction evaded (conditional on evading) by deciles of fraction of income self-reported (after audit adjustment and adding as one category those with no self- reported income). Panel B also displays the fraction of third-party income evaded (unconditional). Income is defined as positive income. In both panels, the sample is limited to those with positive income above 38,500 kroner, the tax liability threshold (see Table 1). Evasion rate Density 0 .2 .4 .6 .8 1 0 2 4 6TAX AUDIT EXPERIMENT FROM DENMARK Kleven et al. '11 also provide experimental causal e ects of: 1) Marginal tax rates: use bunching evidence before and after audit: Most bunching not due to evasion but avoidance ) E ect of MTR on evasion is modest 2) Prior-audit e ects: compare next year outcomes of 100% audit group and a 0% audit group as audited tax lers may update upward beliefs on p ) Find signi cant e ects on reported income increases, con- centrated among self-reported items nothing on 3rd party in- come: Extra tax collected through this indirect e ect is about 50% of extra taxes collected due to base year audits 3) Threat-of-audit letters: Find signi cant e ects on self- reported income increases as in Slemrod et al. and letter prob matters 18

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