Taxation and Democracy: Building Trust for Fair and Effective Tax Policy

1. Politics, Public Administration, and Performance Niamh Hardiman UCD Geary Institute and UCD School of Politics and International Relations Niamh.Hardiman@ucd.ie Structural Challenges of the Slovenian Economy Ljubljana, 19 June 2013

2. Taxation in democracies • Purposes of taxation • Maximize (non-damaging) revenue • Minimize collection costs • Without evasion (by citizens) • Without corruption (by tax officials) • Options • A. Extraction through coercion • B. Compliance through consent • How to move from A to B? • Building ‘trust’

3. Government Taxation and democracy: voting Citizens Citizens Citizens

4. Government Taxation and democracy: extracting tax Citizens Citizens Citizens

5. Government Taxation and democracy: fairness Citizens Citizens Citizens

6. Government Taxation and democracy: voluntary compliance Citizens Citizens Citizens

7. Implications • Consent and legitimacy • Fairness HOW? • Policy design • Tax system • Institutional design • Administrative system

8. Principles of good tax policy • Clear rationale • Transparency of tax collection • Ease of compliance • Not too expensive to administer

9. Variations in tax policy preferences Types of tax • Income • Personal • Corporate • Consumption • VAT, excise, water, carbon, etc. • Property • Rates, charges, etc. • Wealth • Assets, gifts, capital gains, inheritance, death duties, etc.

10. Variations in tax policy preferences Types of tax Examples of exemptions and tax expenditures Basic personal Business investments Capital depreciation allowances Innovation, R&D Incentivize behaviours Home ownership Personal pension • Income • Personal • Corporate • Consumption • VAT, excise, water, carbon, etc. • Property • Rates, charges, etc. • Wealth • Assets, gifts, capital gains, inheritance, death duties, etc.

11. Variation in rates, bands, incidence • Debates about: • Progressive? • Individuals or households? • Family type? • Source of income? • Emergent issues: • Broader base • Fewer rates • Fewer exemptions • Type of income shouldn’t matter • Redistribution not only via taxation

12. Principles of good tax administration

13. Principles of good tax administration NOT THIS!

14. Common issues

15. Dealing with tax evasion through smart compliance strategy: tough auditing…..

16. …. plus peer pressure and norm building

18. Tax administration: institutional reform ‘Rebuilding the ship while at sea’ • Leadership • Team-building • Buy-in

19. Expertise

20. Technology

21. Principles of administrative design • Autonomy in recruitment • Strict meritocracy • Operational autonomy from core civil service

22. Complacency is the enemy

23. Complacency is the enemy

25. Some reflections on the Irish experience Pre-1988: • Narrow tax base • Late extension of PAYE and PRSI • High rates on taxable income • Evasion and avoidance • Sustained low corporate tax rate • To incentivize FDI

26. Tax rates on employee incomes Source: Hardiman, 2002

27. Corporate tax rates Source: Hardiman, 2002

28. Tax reform, 1988+ • New rules, new regime • Incentives • Tax amnesty 1988 • Regular emphasis on voluntary compliance • Sanctions • Tough enforcement • Bailiffs • Heavy penalties and interest payments • Prosecution: • ‘name and shame’, fine, jail

29. How? • IDEAS • Commissions on Taxation • 1960, 1985, 2009 • Economic crisis of 1980s • ACTORS • Revenue Commissioners • INSTITUTIONAL DESIGN • Extensive internal reform • Operational autonomy

30. How effective? TAX ADMINISTRATION HUGELY IMPROVED • Highly efficient online systems • Shadow economy reduced hugely • Voluntary compliance with new self-assessed property tax: • Over 80% by deadline

31. Sinn Féin’s Mary Lou McDonald has admitted she has decided to pay the controversial property tax — despite asking families to oppose the new levy. Likely defaulters have been reminded by Revenue it has full powers in terms of payroll, social welfare and bank accounts to take money. Furthermore, Revenue can charge an additional levy by way of penalty. Ms McDonald said: “That’s the decision we’ve taken as a family. Obviously, as a citizen, I would always prefer to be fully tax-compliant. I always play by the rules. “We’re registering and paying this tax very much under protest because we know, for many families, this is a bridge too far.” The Irish Examiner, 28 May 2013

32. Cost of tax administration system

33. Estimated size of the shadow economy, 2012 http://ec.europa.eu/europe2020/pdf/themes/07_shadow_economy.pdf

34. Schneider, The shadow economy, http://www.economics.uni-linz.ac.at/members/Schneider/files/publications/2012/ShadEcEurope31.pdf

35. How effective? TAX POLICY HAS BEEN PROBLEMATIC • Government decisions in 1990s and 2000s to: • Narrow income tax base • Postpone new sources of tax • Incentivize building • Over-rely on revenue from construction boom

36. TASC, Failed Design, 2010, p.12

37. Tougher job now for Revenue Commissioners • Right mix of • Incentives • Deterrents • Sanctions

38. There is always… Thank you Niamh.Hardiman@ucd.ie