Workshop Forecasting tax revenues Data collection, data quality, data matching, and data sharing Iris Claus 20 April 2016 Apia, Samoa

Three uses of tax data Uses of tax data Tax gap measures Quantifying (non-) compliance Final comment Readily available and reliable data is crucial for detecting taxpayer non- compliance. Data is essential for developing systems and policies that support voluntary compliance … and for identifying compliance risks. Readily available and reliable data is crucial for tax revenue forecasting. Government spending typically involves multi-year programs and projects−requiring medium-term fiscal planning. Data is essential for evaluating and costing tax policy proposals.

Three uses of tax data Uses of tax data Tax gap measures Quantifying (non-) compliance Final comment Readily available and reliable data is crucial for compiling national statistics. Statistics offices heavily rely on administrative tax data to measure the output produced in a country−gross domestic product, GDP. GDP is often used as an indicator of a country’s ability to repay its debt. It can determine how much and at what terms countries can borrow to finance essential infrastructure … for economic development and ultimately improving people’s lives.

Tax gap The tax gap is a concept Uses of tax data Tax gap measures Quantifying (non-) compliance Final comment “Broadly defined, the tax gap is the difference between the taxes that would be paid if all obligations were fully met in all instances, and those that are actually received and collected (voluntary compliance). As a concept, it can encompass revenues lost to tax evasion, taxpayer error, and unpaid liabilities.” Emphasis added. The tax gap is a concept … that, in practice, is not terribly useful. Overall tax gap measures have extremely large margins of error … and they don’t identify the sources of non-compliance.

Tax gap There are data constraints in measuring tax gaps. Uses of tax data Tax gap measures Quantifying (non-) compliance Final comment There are data constraints in measuring tax gaps. E.g. we cannot use consumption from the national accounts to measure the gap in value added tax (VAT) collections … because VAT is a key input into measuring consumption in the national accounts. Tax gap measures from random audits are somewhat more reliable. But random audits are very costly … and yield substantially lower pay-offs than targeted audits.

Tax gap So, when is comes to tax gaps Uses of tax data Tax gap measures Quantifying (non-) compliance Final comment So, when is comes to tax gaps … try to resist the urge or pressure to estimate an overall tax gap … and ministries of finance and treasuries, please, do not consider evaluating the performance of your tax administration based on a tax gap measure!!

Measuring (non-)compliance Uses of tax data Tax gap measures Quantifying (non-) compliance Final comment Industry classification and segmentation of taxpayers is a far more effective strategy for detecting, measuring and treating non- compliance … and hence raising tax revenues. Ideally we forecast how much tax revenue we would expect to collect … and compare actual outturns against forecasts. Any shortfall suggests non-compliance. Any tax collection above forecast suggests a possible improvement in compliance.

Measuring (non-)compliance Uses of tax data Tax gap measures Quantifying (non-) compliance Final comment Compliant taxpayers can provide useful information to detect non-compliance. Large deviations from industry standards or industry norms may raise a red flag. We can monitor economic indicators. E.g. a positive correlation is expected between cement sales or building permits and activity in the construction sector, … exports and VAT refunds, … tourist arrivals and the hospitality sector.

Measuring (non-)compliance Uses of tax data Tax gap measures Quantifying (non-) compliance Final comment As data collection, data quality and capacity to interrogate data improve, we can consider matching taxpayer data to information from external sources. So ensure legislation provides powers to request data from third parties. Consider ways to enhance data sharing across institutions within laws and regulations governing taxpayer confidentiality. E.g. adopt the same industry classification as the statistics office, … provide a confidentialized dataset that does not identify taxpayers to your ministry of finance / treasury.

Final comment Uses of tax data Tax gap measures Quantifying (non-) compliance Final comment Data collection, data management and data use are investments. They require a vision of what is possible … and a strategy for achieving the vision. They will incur an upfront cost. They will require on-going maintenance. The rates of return in terms of additional tax revenue collected can be tremendous.