Collecting Taxes

1. Collecting Taxes Lecture 10 November 8, 2005

2. Noncompliance means lost revenue. Noncompliance produces a distribution of the cost of government different than what is intended�fairness and equity problems. Competitive advantage of cheaters�inducement for others to cheat.

3. Why do people (and businesses) pay taxes? Withholding works! Tax collected by employer. Reporting also works! (Interest, dividends, non-salary compensation, etc.) Overestimation of probability of detection. IRS has fearsome reputation. Low marginal rates�less incentive to cheat. Also makes paying less �painful.� Consensus on value of government services. Agreement with government spending priorities Institutional tradition of payment/compliance.

4. Designing a tax collection system Taxpayer Active: Taxpayer responsible for calculating tax owed. Lowers cost of tax collection. Miscalculation as likely to be to advantage of government. Increases possibilities for cheating.

5. Designing a tax collection system Taxpayer Passive: Tax collector responsible for calculating tax. Greater cost to tax collector. More likely to be accurate. Less likely to encourage cheating. Requires a lot of information be known by tax collector. Requires a good appeals system.

6. Designing a tax collection system Up-to-date roster of taxpayers. Taxpayer ID system (Social Security Number, Taxpayer ID number, Parcel cadastre). Standard forms�often with important information pre-filled. Information services. Appeals process.

8. Enforcement Delinquency control, compliance, and collections Tax owed by taxpayer. Large number of individual compliance�selective enforcement, obligatory tax returns. Tax collected by others on behalf of taxpayer. Nonpayment may signal business trouble. Balance quick action with expense and trouble of unnecessary action.

9. Methods for increased compliance Audit�Selective review of tax returns. Appeal or Protest�Assure nondiscriminatory application of tax system. Make voluntary compliance more likely. Enforcement�Collects tax from those who fail to pay.

10. Measuring Tax Collection Effectiveness Measure total amount of tax collected. Measure total costs of collection. Include costs of collection borne by government as well as costs borne by taxpayers. Measure level of compliance. Determine distribution of tax burden.