Tax Compliance: Research Findings and Their Applications - Theory, Empiricism, Policy, and Institution Chih-Chin Ho Oct 29, 2009

2 Selected 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 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.

4 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.

5 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.

Searching for ghost: who are the nonfilers and how much tax do they owe?

7 標準 Reporting-Noncompliance 處理模型 源自 Allingham-Samdmo(1972) t = tax rate p = Audit probability (for underreports) Ө = Penalty rate (for underreporting) Y = True income X = Reported Income t, p, Ө - Enforcement parameters (tax rate, detection, penalty) Y-X = Underreported Income = Tax Gap (TP) X* - Choice if X=Y (full compliance) X=0 (full noncompliance)

8 Taxpayers’ Three Potential Choices There is a decision to file a return at all. If the individual should choose to file, he must decide how much to report. In any event (regardless of his filing decision) he must choose how much tax (if any) to prepay.

9 引進 Pre-Payment 的考量

10 引進 Pre-Payment 的考量

11 加入 Non-Filing Option

12 Strategic Option (Filing)

13 Strategic Option (Non-Filing)

14 如果 C=0

15 如果 C=0

16 Isomorphic – Starting Point P/q 相互排斥 p(+) / q(-) Ghost(+) 漏報易被捉 (higher detection risk for underreporting) 乾脆不報, 作 Ghost Ө/f 相互排斥 Ө(+) / f(-) Ghost(+) 漏報罰很重 (greater penalty severity for underreporting) 乾脆不報, 作 Ghost

17 由 c=0, p=q, Ө=f, Isomorphic P/q 相互排斥 (mutually exclusive) q(+) MC(+) Ghost(-) P(-) q(-) MC(-) Ghost(+) P(+) q(-): 不報捉不到, P(+): 漏報易被捉，捉很大 Ө/f 相互排斥 (mutually exclusive) f(+) MC(+) Ghost(-) Ө(-) f(-) MC(-) Ghost(+) Ө(+) f(-): 不報罰很輕, Ө(+): 漏報易被罰，罰很重 C C(+) MC(-) Ghost(+) C(-) MC(+) Ghost(-) C(+): 報很苦

18 由 c=0, p=q, Ө=f, Isomorphic

Participation and Compliance with EITC

20 Specification

21 Observation

22 Filing Decision

23 Preparation Mode Decision

24 Claiming Decision – Eligible (Participation)

25 Claiming Decision – Ineligible (Compliance)

Tax Compliance: Research Findings and Their Applications Theory, Empiricism, Policy, and Institution