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COLLECTING TAXES

WHY PEOPLE PAY TAXES

THE CORE FUNCTIONS OF TAX COLLECTION

ORGANIZING TO COLLECT TAXES

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WHY PEOPLE PAY TAXES -- View 1a

Rational tax theory -- THE COMPLIANCE GAMBLE

• The Taxpayer won’t pay if the expected gain from tax evasion is positive, given the probability of being caught and the severity of punishment.

• As the probability of being caught and the severity of punishment is increased, evasion declines.

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WHY PEOPLE PAY TAXES -- View 1bTHIS VIEW DOES NOT FIT THE

EVIDENCE VERY WELL.• Given actual audit rates and

punishments, many fewer people should pay taxes

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WHY PEOPLE PAY TAXES -- View 2a

Co-production Theory -- PEOPLE PAY TAXES WHERE THEY ARE

MOTIVATED AND IT IS CONVENIENT TO DO SO

Taxpayers will pay if: 1. they know what is expected of them,2. paying isn’t onerous, 3. they value the benefits they get from get

from government AND 4. they are encouraged in the habit of

compliance.

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WHY PEOPLE PAY TAXES -- View 2b

• Evasion is lower where people know precisely what is expected of them -- passive systems work better than active ones in that respect.

• Evasion is lower where tax rates are relatively low.

• Evasion is lower where there is consensus on what government uses taxes for and the need for taxes to provide the money (perceived burdens are proportional to perceived benefits).

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WHY PEOPLE PAY TAXES -- View 2c

• Evasion is lower where people aren’t required to make large payments. Withholding works!

• Evasion is lower where people are in the habit of paying taxes.

IT IS PROBABLY WISE TO ADOPT TAXES ACCORDING TO THE LOGIC OF UNAVOIDABILITY, RAISING AND EXPANDING THEM INCREMENTALLY.

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Taxpayer Active vs. Taxpayer Passive Tax Regimes I

• Taxpayer active systems require taxpayers to figure out what they owe.

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Taxpayer Active vs. Taxpayer Passive Tax Regimes I

• Taxpayer active systems require taxpayers to figure out what they owe.

Advantages: • the taxpayer can more easily

be made to see himself as a full partner in the process;

• It’s cheaper for the state

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Taxpayer Active vs. Taxpayer Passive Tax Regimes II• Taxpayer passive systems

compute taxpayer obligations.

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Taxpayer Active vs. Taxpayer Passive Tax Regimes II• Taxpayer passive systems

compute taxpayer obligations. Advantages:

• less costly to taxpayer• evasion is lower• tax system must be highly

transparent or people will not trust govt’s tax claims.

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CORE FUNCTIONS OF TAX COLLECTION• Taxpayer registration

1. Preparation of tax roll

2. Identification of taxable flows

• Declaration/Assessment• Tax accounting

1. Revenue accounting -- recording and depositing payment to appropriate accounts

2. Taxpayer accounting -- posting information to individual taxpayer accounts

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CORE FUNCTIONS OF TAX COLLECTION (cont.)• Delinquency control,

compliance, and collections• Audit• Appeal or protest• Enforcement

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ADMINISTRATIVE STRUCTURESOrganizational structure describes

how work is decomposed into tasks, activities, or role and then grouped into organizational units based on geography, function, or program

• By function• By tax type

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COLLECTION COSTS• To Government• To Taxpayers• To both

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Think Again.