Collecting Taxes Lecture 10 November 8, 2005 PA 546 Constantine Hadjilambrinos

 Noncompliance means lost revenue.  Noncompliance produces a distribution of the cost of government different than what is intended—fairness and equity problems.  Competitive advantage of cheaters—inducement for others to cheat. An effective tax collection system is extremely important.

Why do people (and businesses) pay taxes? PA 546 Constantine Hadjilambrinos Withholding works! Tax collected by employer. Withholding works! Tax collected by employer. Reporting also works! (Interest, dividends, non-salary compensation, etc.) Reporting also works! (Interest, dividends, non-salary compensation, etc.) Overestimation of probability of detection. IRS has fearsome reputation. Overestimation of probability of detection. IRS has fearsome reputation. Low marginal rates—less incentive to cheat. Also makes paying less “painful.” Low marginal rates—less incentive to cheat. Also makes paying less “painful.” Consensus on value of government services. Agreement with government spending priorities Consensus on value of government services. Agreement with government spending priorities Institutional tradition of payment/compliance. Institutional tradition of payment/compliance.

Designing a tax collection system PA 546 Constantine Hadjilambrinos Taxpayer Active: Taxpayer responsible for calculating tax owed. Lowers cost of tax collection. Lowers cost of tax collection. Miscalculation as likely to be to advantage of government. Miscalculation as likely to be to advantage of government. Increases possibilities for cheating. Increases possibilities for cheating.

Designing a tax collection system PA 546 Constantine Hadjilambrinos Taxpayer Passive: Tax collector responsible for calculating tax. Greater cost to tax collector. Greater cost to tax collector. More likely to be accurate. More likely to be accurate. Less likely to encourage cheating. Less likely to encourage cheating. Requires a lot of information be known by tax collector. Requires a lot of information be known by tax collector. Requires a good appeals system. Requires a good appeals system.

Designing a tax collection system PA 546 Constantine Hadjilambrinos Up-to-date roster of taxpayers. Up-to-date roster of taxpayers. Taxpayer ID system (Social Security Number, Taxpayer ID number, Parcel cadastre). Taxpayer ID system (Social Security Number, Taxpayer ID number, Parcel cadastre). Standard forms—often with important information pre-filled. Standard forms—often with important information pre-filled. Information services. Information services. Appeals process. Appeals process.

From Taxpayer Mailroom Validation and batching Deposit Data entry PA 546 Constantine Hadjilambrinos Designing a tax collection system

Enforcement PA 546 Constantine Hadjilambrinos Delinquency control, compliance, and collections 1) Tax owed by taxpayer. Large number of individual compliance—selective enforcement, obligatory tax returns. Large number of individual compliance—selective enforcement, obligatory tax returns. 2) Tax collected by others on behalf of taxpayer. Nonpayment may signal business trouble. Nonpayment may signal business trouble. Balance quick action with expense and trouble of unnecessary action. Balance quick action with expense and trouble of unnecessary action.

Methods for increased compliance PA 546 Constantine Hadjilambrinos Audit—Selective review of tax returns. Audit—Selective review of tax returns. Appeal or Protest—Assure nondiscriminatory application of tax system. Make voluntary compliance more likely. Appeal or Protest—Assure nondiscriminatory application of tax system. Make voluntary compliance more likely. Enforcement—Collects tax from those who fail to pay. Enforcement—Collects tax from those who fail to pay.

Measuring Tax Collection Effectiveness Measure total amount of tax collected. Measure total amount of tax collected. Measure total costs of collection. Measure total costs of collection.  Include costs of collection borne by government as well as costs borne by taxpayers. Measure level of compliance. Measure level of compliance. Determine distribution of tax burden. Determine distribution of tax burden. PA 546 Constantine Hadjilambrinos