Individual Income Tax Compliance: U.S. Research Findings and Their Applications in Taiwan Chih-Chin Ho Dec. 19, 2008

2 Selected U.S. Tax Compliance Research Measuring the Income Tax Compliance Continuum, Erard and Ho(2003, 2004). "Mapping the U.S. Tax Compliance Continuum," Taxing the Hard-to-Tax Lessons from Theory and Practice "Explaining the U.S. Income Tax Compliance Continuum,“ The e Journal of Tax Research Searching for Income Tax Nonfilers, Erard and Ho(2001). "Searching for Ghosts: Who Are the Nonfilers and How Much Do They Owe?" Journal of Public Economics Evaluating Participation and Compliance within Refundable Credit Programs, Blumenthal, Erard, and Ho(2005). "Participation and Compliance with the Earned Income Tax Credit," National Tax Journal

3 Income Tax Compliance Continuum Erard and Ho(2003, 2004) developed a micro-simulation database from random IRS audits of tax returns. Tax Compliance falls along a continuum from fully compliant to fully noncompliant. Compliance tends to be substantially lower among those occupations with little income subject to third party information reporting.

4 Occupational Groups along Income Tax Compliance Continuum

5 Tax Reporting Gap within Income Source

6 Informal Suppliers IRS Definition “Individuals who provide products or services through informal arrangements which frequently involve cash-related transactions or ‘off the books’ accounting practice.” Examples Self-employed domestic workers Street side vendors Moonlighting tradesmen Informal Sector Informal sector includes all types of market economic activity that are potentially under-measured in the National Accounts owing to the vendors’ informal business style Characteristics File a Schedule C return (report of self-employment income) Report a principal industrial activity (PIA) that was closely aligned with one of 14 categories of informally supplied goods and services. Made no claim for certain types of business expenses (taxes, rents, insurance, etc.) that informal suppliers are not believed to typically incur.

7 Income Tax Nonfilers Searching for Ghosts, Erard and Ho(2001). Nonfiling heavily concentrated among informal suppliers and certain other service occupation categories. Average unpaid tax amount about twice as large for nonfilers as for filers. There is substantial persistence in filing behavior. Thus, once a ghost is brought into the system, he is likely to remain in the system. Initiatives that reduce the burden of filing, such as existing taxpayer assistance programs and simplified tax returns, may encourage individuals with relatively low incomes to file. To the extent that the failure to file is due to an ignorance of the tax low, or even of potential tax refund opportunities, programs to educate individuals about filing requirements may be useful.

8 Refundable Tax Credit Programs Examined the U.S. Earned Income Tax Credit (EITC) Program, Blumenthal, Erard, and Ho(2005). A refundable credit targeted mainly to lower income families with children. Noncompliance in the program in rather high, but this may be the price of having a less intrusive and relatively cost-efficient delivery system compared to traditional welfare programs. Eligible households with self-employment income are relatively less likely to file a return, and hence receive the credit, while those with prior filing experience or with income subject to information reporting are relatively more likely to file.

9 Possible Data Sources for Compliance Research in Taiwan Operational audit data Need to control for non-random selection Surveys linked to administrative data Used in U.S. to examine compliance among informal suppliers (University of Michigan’s special survey on Consumer Expenditure) and nonfiling (IRS “exact match” studies) Small random audit samples Used in some countries to estimate compliance rates (TCMP, NRP) Combined random and operational audit samples

Individual Income Tax Compliance: U.S. Research Findings and Their Applications in Taiwan Thank you and have a nice day.