Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

3 - Public > 10 - Tax enforcement > Flashcards

10 - Tax enforcement Flashcards

1
Q

what is the relationship between reported income and
p = probability of audit
pheta = fine

A

w- increases with both

  • so evasion will be less - because reporting higher income
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

why is observed tax evasion levels much lower than the model works out
- when we add in the values for p and pheta

A
  1. unwilling to cheat
  2. unable to cheat
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

what is unwilling to cheat

A
  • social norms
  • morality
  • dont want to cheat
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

what is unable to cheat

A
  • may want to cheat
  • but cant because of institutional features
  • 3rd party reporting - when employer is reporting on your behalf
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

what are the 3 kinds of experimental data that can be used to measure evasion

  • since not observable
A
  1. IRS
  2. lab experiments
  3. field experiments
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

what do IRS studies do
- how do they measure evasion

A
  • carries out random audits to estimate the tax gap
  • checks all their documentation
  • estiamates for population
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

what is the tax gap

A

taxes evaded/taxes owed

what should be paid - what is paid = taxes evaded

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what do IRS find from their audit checks

A
  1. US tax gap = 14%
  2. tax gap concentrated among self-reporting income
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

what is the UK tax gap like
HMRC

A
  • tax gap is declining - 5.1%
  • 1% through PAYE (third party)
  • self assessment has more scope for non-compliance
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

what is the share of tax gap coming from each source in UK

A
  • highest share of tax evasion - in personal taxes = but brings in low revenue
  • second highest share = VAT misreporting = and brings in high revenue
  • within personal taxes - basically all missing revenue is coming from self reported not PAYE
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

so what is the area that UK should target tax enforcement

A

VAT misreporting

and top earners
- out of self employed that are misreporting the top 4% account for 42% of lost revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

what are ways that HMRC can increase tax compliance

A
  1. audit (costly)
  2. direct reporting
  3. third party reporting
  4. behavioural interventions
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Advani (2021)

what do they test
what do they do

A

effects of UK audits on LR compliance behaviour
- does randomly audited a group have any LR effects in the amount they report in the future
- is there a benefit of auditing

  • use admin databases on UK taxes
  • randomised audit program
  • Treatment = given audit
  • Control = no audit
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Advani (2021)

what do they find

A
  • before audit = T and C no difference in reportings
  • after audit = T group tax compliance is higher than control - reports higher incomes for 5 years
  • audits constrain future misreporting
  • audits can be used as threats
  • audits have long lasting effects
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

why is measuring tax evasion through lab experiments bad

A
  • better to look at field experiments
  • lab experiments overestimate tax evasion
  • they do find strong relationship between p and pheta and reduced evasion
  • missing real world aspects
  • games with students arent the same (social norms + 3rd party reporting)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Blumenthal (2001)

what do they do

A
  • use normative appeals to comply
  • T = send non-threating letters to encourage compliance
  • c = no letter
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Blumenthal (2001)

what do they find

A
  • no statistically significant effect of normative appeals on compliance overall
  • these letters dont impact tax compliance
18
Q

Slemrod (2001)

what do they do

A
  • T = send threat of audit letter
  • scare people into compliance
  • C = no letter
19
Q

Slemrod (2001)

what do they find
- downfall of paper?

A
  • statistically significant effect on reported income increase
  • especially among self employed
  • threats = work
  • normative = dont work
  • but small sample
20
Q

what are key descriptive data from Denmark

A
  1. among evaders the most common strategy is to misreport everything

evasion by fraction of income self reported
- 3rd party evasion rate = 0
- evasion rate is 30% for positive fraction of self reported income
- % of income evaded is increasing in the share of self reported income
- below 0.2, misreport all income
- above 0.2, the percentage of income misreported grows slower = get scared

21
Q

Kleven (2011)

what did they do

A
  • Denmark study of 40,000 sample
  • split into 2 groups - 100% audited in 2007 and not audited
  • fiscal year after split into 3 groups - no letter, 100% you will be audited letter, 50% you will be audited
  • followed up with audit in 2008?
22
Q

kleven what did they find
stats

A
  • self employed evasion rate is almost 40%
  • third party evasion rate is 0.3%
  • overall evasion rate is 2.5%
  • because 95% of income is 3rd party reported in denmark (unable to cheat)
23
Q

what are klevens results from
marginal tax rates

  • bunching before and after audit
  • 100% audit group in 2007, before is 2006
A
  • find that most bunching is not due to evasion but avoidance
  • effect of MTR of evasion is small
  • after audit - bunching only decreased by 1/3
  • only 1/3 of people started to report honestly and stopped bunching
  • means 2/3 is explained by something else
  • no change in bunching in stock income = means that all that bunching is driven by avoidance - income shifting, intertemporal
24
Q

what is kleven result from
prior audit effects

A
  • significant effects on reported income increases for 100% audited group compared to 0%
  • driven by self reported items
25
Q

what is kleven result on
threat of audit

A
  • sigificant effects on self reported income increases
  • more increase for people that got the letter then didnt
26
Q

why does the AS model fail

by overestimating tax evasion

A
  • p is very low in real life - and still see low evasion
  • doesnt take into account third party reporting
  • most income is reported this way and it is very hard to evade
  • unable to evade
27
Q

what happens when elasticity of the detection probability wrt undeclared income is

e = 0

A
  • then always evade if p(1+pheta)<1
28
Q

what happens when elasticity of the detection probability wrt undeclared income is

e > 0

A
  • evading more increases risk of being caught on all evaded taxes
29
Q

what is the shape of the
p(w-) function

A

s shape

  • probability jumps to 1 when income starts to include 3rd party reported
  • probability is low for all self reported
30
Q

what is
p(w-)

A
  • detection probability as a function of tax evasion depending on the share of self reported income
31
Q

so how was the simple AS model wrong

A
  • was assuming probability of getting caught was constant
  • p = 1/1+pheta
  • p is a function of w-
  • p = 1/(1+pheta)(1+e)
  • the optimum is just to the left of w-s
32
Q

why is it hard for evasion to happen in third party reporting

A
  1. single employee can unfold the collusion
  2. hard to mess with accounting and payroll records
33
Q

what is
turnover taxes
sales taxes
VAT

  • which is easier to enforce
A
  1. tax all sales - B-B and B-C
  2. B-C sales only - strong incentive of evading
  3. B-B and B-C - only on value added = easy to enforce
34
Q

what is the automatic enforcement mechanism of VAT

A
  • since you only pay taxes on value added (sales - purchases)
  • incentive to make sure the B you buy your inputs from declares those taxes so that you can deduct the inputs from your taxes
  • B-B wants VAT receipt
  • strong incentive to pay taxes on inputs
35
Q

Pomeranz (2015)
what do they do

A
  • randomised experiment in Chile
  • send VAT threat letters to businesses
  • T = get letters
  • C = no letters
36
Q

Pomeranz (2015)
what do they find

A
  • threat letters increase VAT collected - significant
  • increase is driven mainly by final sales compliance = consumers dont have incentive to not evade
  • small impact on intermediate sales = already reporting VAT fully
  • evidence that VAT is self enforcing between B-B, but not B-C
37
Q

Naritomi (2019)
what did they do
what did they want to find

A
  • will giving consumers incentive to make sure firms report final sales increase tax revenue
  • give consumers tax rebates and monthly lottery prizes for consumers that ask for receipts
  • consumers upload the receipt
  • treatment = retail sales
  • control = wholesale sector - no effect on lottery because already reporting VAT fully
38
Q

Naritomi 2019

what did they find

A
  • giving consumers incentive to ensure firms report final sales transactions

increased tax revenue by 9.3%

  • but this is a costly way to enforce VAT so not good for LR
39
Q

how big of an issue is holding wealth offshore

A
  • 8% of global financial wealth of hhs is held in tax havens
  • probability to own an unreported HSBC account increasese by wealth group
  • a lot of missing revenue to gov - because super wealthy are hiding money in tax havens the most
40
Q

what are methods to reduce curbing offshore tax evasion

A
  • require banks to report accounts owned by US persons or face stiff penalties

3 - Public (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions