WHY FUNDAMENTAL TAX
REFORM?
There are three major arguments for fundamental
tax reform:
Increase tax compliance
Make the code simpler
Improve efficiency
Why fundamental tax reform?
Improving tax compliance
The first motivation for fundamental tax reform
relates to compliance.
Tax compliance
are efforts to reduce the evasion
of taxes.
Tax evasion
is illegal nonpayment of taxation.
This differs from tax avoidance, which are legal
means (such as giving to charity) to lower one’s tax
bill.
Tax evasion
Tax evasion
The distinction between evasion and avoidance is
sometimes a fine one, but it is not always the rich
who evade taxes.
For example, for many years taxpayers wanting to
claim tax exemptions for dependents were only
required to fill in their name on the tax form.
TRA 1986 also required the Social Security number
for dependents over age five.
6 million dependents suddenly disappeared.
A
ppl
ic
a
tio
n
A
ppl
ic
a
tio
n
Tax evasion
Tax evasion
In 1988, the tax law started requiring that the Social
Security numbers of child care providers be listed
before a worker could claim the child care credit.
2.6 million child care providers disappeared.
A
ppl
ic
a
tio
n
A
ppl
ic
a
tio
n
Why fundamental tax reform?
Improving tax compliance
The simplest theory of evasion weighs the marginal
benefits from underreporting $1 income (evasion)
against the marginal costs.
The marginal benefit is the saved tax.
The marginal cost is the marginal penalty per dollar
evaded, multiplied by the probability of getting
caught.
Figure 1
Figure 1 illustrates this.
50¢
Dollars
Evasion
MB
1
MC
1
E
1
MC
2
MB
2
E
2
E
3
60¢
Figure 1
Initially, choose evasion level
E
1
where MB
1
= MC
1
.
Increasing enforcement raises
the marginal cost and lowers
evasion. Evasion level E
2
where MB
1
= MC
2
.
Increasing tax rate raises the
marginal benefit and raises
evasion. Evasion level E
3
where MB
2
= MC
1
.
Why fundamental tax reform?
Improving tax compliance
In this case, as the marginal tax rate rises, the
marginal benefit curve shifts upward and more
evasion occurs.
As the expected penalty rises (either the penalty per
dollar or the probability of getting caught), the
marginal cost curve shifts upward and less evasion
occurs.
Why fundamental tax reform?
Improving tax compliance
The most recent evidence in the U.S. suggests that the “tax
gap” is $280 billion, or 16.3% of tax revenue.
In an interesting experiment, Slemrod, Blumenthal, and
Christian (2001) randomly sent letters to taxpayers before
taxes were due, either threatening audit or appealing to
people’s consciences to be honest.
The audit threats increased reported income for low and
middle income taxpayers.
They lowered reported income among upper class families,
who perhaps believed the letter was an opening round in a
negotiation, and their reported income was a “first offer.”
The 1997 IRS hearings
The 1997 IRS hearings
and their fallout for tax collection
and their fallout for tax collection
A
ppl
ic
a
tio
n
A
ppl
ic
a
tio
n
In September 1997, the Senate Finance Committee
held a week of hearings to investigate IRS abuses.
The committee heard all sorts of damning testimony,
much of which actually painted a skewed picture of
the IRS operations.
In 1998, President Clinton signed the “Taxpayer Bill
of Rights” which created some protections for
taxpayers.
The 1997 IRS hearings
The 1997 IRS hearings
and their fallout for tax collection
and their fallout for tax collection
A
ppl
ic
a
tio
n
A
ppl
ic
a
tio
n
As a result of this legislation, the IRS’s enforcement
capabilities have been severely impaired.
Number of field examiners fell by two-thirds.
Number of collection cases fell by one-half.
Number of evasion cases pursued fell by two-thirds.
Audit rates for self-employed fell from 4% to 2%.
IRS has identified $30 billion in underpayments, but
does not have the resources to pursue them.
Không có nhận xét nào:
Đăng nhận xét