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Presentations – Jonathan Shaw
© Institute for Fiscal Studies Incorporating implementation concerns into tax policymaking Jonathan Shaw (IFS and TARC)
© Institute for Fiscal Studies Coming up Background How to incorporate implementation concerns into tax policy evaluation Empirical estimates and determinants of costs Strategies for effective tax implementation Conclusion
© Institute for Fiscal Studies Background
© Institute for Fiscal Studies 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 governments pocket Tasks involved Law-making Record-keeping Information gathering Decision-making Calculation Communication
© Institute for Fiscal Studies 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 isnt 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
© Institute for Fiscal Studies How to incorporate implementation concerns into tax policy evaluation
© Institute for Fiscal Studies Costs of taxation Lost purchasing powerThe revenue collected by the tax authority Distortion costsCosts that arise because taxes change relative prices and so distort decisions over e.g. how much to work and what to buy Administrative costsCosts incurred by tax authority in running tax system Compliance costsCosts incurred by taxpayers in complying with their tax obligations
© Institute for Fiscal Studies 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
© Institute for Fiscal Studies 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
© Institute for Fiscal Studies Empirical estimates and determinants of costs
© Institute for Fiscal Studies 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 TaxMarginal deadweight loss Income tax (top 1%)>100% Corporation tax £10k threshold40% £300k threshold9% VAT- © Institute for Fiscal Studies Notes: Estimates for UK taxes Sources: 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 TaxNon-compliance (% true liability) Income tax, NICs and CGT5.5% Self assessment18.1% SMEs1.0% Corporation tax8.8% VAT10.1% © Institute for Fiscal Studies Notes: Average figures for UK taxes in 2010/11 Source: HMRC (2012) Key determinants Probability of detection Size of penalty Tax morale
Compliance costs: scale CountryTaxCompliance costs (% revenue) Administrative burdens (% revenue) UKPAYE/NICs1.3%0.4% UKCorporation tax2.2%1.9% UKVAT3.7%1.1% IrelandPAYE/PRSI4.6%0.3% IrelandSelf employed-7.4% IrelandCorporation tax-1.0% IrelandVAT-2.5% © Institute for Fiscal Studies 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 relevant Sources for compliance costs: Sandford et al (1989), Inland Revenue (1998) and Leonard and OHagan (1985). authors calculations Sources for administrative burdens: HMRC (2012), Revenue Commissioners (2012)
Administrative costs: scale CountryTaxAdministrative costs (% revenue) UKIncome tax0.97% UKCorporation tax0.76% UKVAT0.60% IrelandAll taxes0.85% © Institute for Fiscal Studies Notes: Average administrative costs as percentage of net revenue collected Sources: HMRC (2012), Revenue Commissioners (2013)
© Institute for Fiscal Studies 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
© Institute for Fiscal Studies Strategies for effective tax implementation
© Institute for Fiscal Studies 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
© Institute for Fiscal Studies 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
© Institute for Fiscal Studies 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
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