Tax Compliance:Research Findings and Their Applications -Theory, Empiricism, Policy, and Institution

Chih-Chin Ho

March 29, 2010

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Selected Tax Compliance Research

Measuring the Income Tax Compliance Continuum,

Erard and Ho(2003, 2004). "Mapping the U.S. Tax Compliance Continuum," Taxing the Hard-to-Tax Lessons from Theory and Practice

"Explaining the U.S. Income Tax Compliance Continuum,“ The e Journal of Tax Research

Searching for Income Tax Nonfilers,

Erard and Ho(2001). "Searching for Ghosts: Who Are the Nonfilers and How Much Do They Owe?" Journal of Public Economics

Evaluating Participation and Compliance within Refundable Credit Programs,

Blumenthal, Erard, and Ho(2005). "Participation and Compliance with the Earned Income Tax Credit," National Tax Journal

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Income Tax Nonfilers

Searching for Ghosts, Erard and Ho(2001). Nonfiling heavily concentrated among informal suppliers and certain

other service occupation categories. Average unpaid tax amount about twice as large for nonfilers as for

filers. There is substantial persistence in filing behavior. Thus, once a ghost is

brought into the system, he is likely to remain in the system. Initiatives that reduce the burden of filing, such as existing taxpayer

assistance programs and simplified tax returns, may encourage individuals with relatively low incomes to file.

To the extent that the failure to file is due to an ignorance of the tax low, or even of potential tax refund opportunities, programs to educate individuals about filing requirements may be useful.

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Income Tax Compliance Continuum

Erard and Ho(2003, 2004) developed a micro-simulation database from random IRS audits of tax returns.

Tax Compliance falls along a continuum from fully compliant to fully noncompliant.

Compliance tends to be substantially lower among those occupations with little income subject to third party information reporting.

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Refundable Tax Credit Programs

Examined the U.S. Earned Income Tax Credit (EITC) Program, Blumenthal, Erard, and Ho(2005).

A refundable credit targeted mainly to lower income families with children.

Noncompliance in the program in rather high, but this may be the price of having a less intrusive and relatively cost-efficient delivery system compared to traditional welfare programs.

Eligible households with self-employment income are relatively less likely to file a return, and hence receive the credit, while those with prior filing experience or with income subject to information reporting are relatively more likely to file.

Searching for ghost: who are the nonfilers and how much tax do they owe?

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標準 Reporting-Noncompliance 處理模型 源自 Allingham-Samdmo(1972)

t = tax ratep = Audit probability (for underreports)Ө = Penalty rate (for underreporting)Y = True incomeX = Reported Incomet, p, Ө - Enforcement parameters (tax rate, detection, penalty)Y-X = Underreported Income = Tax Gap (TP) X* - Choice if X=Y (full compliance) X=0 (full noncompliance)

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Taxpayers’ Three Potential Choices

There is a decision to file a return at all. If the individual should choose to file, he must

decide how much to report. In any event (regardless of his filing decision)

he must choose how much tax (if any) to prepay.

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引進 Pre-Payment 的考量

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引進 Pre-Payment 的考量

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加入 Non-Filing Option

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Strategic Option (Filing)

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Strategic Option (Non-Filing)

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如果 C=0

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如果 C=0

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Isomorphic – Starting Point

P/q 相互排斥 p(+) / q(-) Ghost(+)

漏報易被捉 (higher detection risk for underreporting)

乾脆不報 , 作 Ghost Ө/f 相互排斥 Ө(+) / f(-) Ghost(+)

漏報罰很重 (greater penalty severity for underreporting)

乾脆不報 , 作 Ghost

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由 c=0, p=q, Ө=f, Isomorphic

P/q 相互排斥 (mutually exclusive)

q(+) MC(+) Ghost(-) P(-)

q(-) MC(-) Ghost(+) P(+)

q(-): 不報捉不到 , P(+): 漏報易被捉，捉很大 Ө/f 相互排斥 (mutually exclusive)

f(+) MC(+) Ghost(-) Ө(-)

f(-) MC(-) Ghost(+) Ө(+)

f(-): 不報罰很輕 , Ө(+): 漏報易被罰，罰很重 C

C(+) MC(-) Ghost(+)

C(-) MC(+) Ghost(-)

C(+): 報很苦

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由 c=0, p=q, Ө=f, Isomorphic

Participation and Compliance with EITC

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Specification

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Observation

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Filing Decision

Variable Estimate

1987 Filing 1.94*

IRP Income

Schedule C

1.60*

-0.42*

Supervisor

Helper

0.31*

-0.38*

Filing Burden

New Filing Threshold

Burden-Threshold

-0.01

-0.05

-0.03*

Credit Amount 0.58*

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Preparation Mode Decision

Variable Estimate

Schedule C

Schedule F

Unemployment Income

H.M.I. Deduction

-0.57*

-0.59*

0.14*

-0.34*

Age 65

Single

0.37*

0.13*

Filing Burden

New Filing Threshold

Burden*Threshold

0.07*

-0.11*

0.02*

EITC Eligible 0.19*

ρ FP 0.16*

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Claiming Decision – Eligible (Participation)

Variable Estimate

Credit Amount 0.67*

Preparation Assistance -0.66

ρ PCE 0.61*

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Claiming Decision – Ineligible (Compliance)

Variable Estimate

Pass – Income Test

Pass – Child-at-home Test

Income*Child

1.42*

0.66*

0.96*

Age 65

Single

Married

-0.72*

-0.15*

0.32*

Preparation Assistance

ρ P CNE

0.54*

-0.31*

Tax Compliance:Research Findings and Their Applications

Theory, Empiricism, Policy, and Institution