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Tax Compliance and Enforcement NBER WORKING PAPER SERIES TAX COMPLIANCE AND ENFORCEMENT Joel Slemrod Working Paper 24799 http://www.nber.org/papers/w24799 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 July 2018 I am grateful to Garrett Anstreicher and Tejaswi Velayudhan for excellent research assistance and to the students in my Ph.D. class on government revenues at the University of Michigan for stimulating conversations. Helpful comments on an earlier draft were received from Claudio Agostini, Miguel Almunia, Alan Auerbach, Anne Brockmeyer, Wei Cui, Brian Erard, Christian Gillitzer, John Guyton, Michael Hallsworth, Anders Jensen, Paul Michael Kindsgrab, Ben Meiselman, Gareth Myles, Alan Plumley, Daniel Reck, Carlos Scartiscini, Christian Traxler, David Weisbach, and Eleanor Wilking, as well as from the JEL editor and referees. The author has an unpaid contractual relationship with the Internal Revenue Service to make research use of de-identified tax-return data; the views expressed here are not necessarily held by the IRS, the U.S. Department of the Treasury, or the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2018 by Joel Slemrod. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Tax Compliance and Enforcement Joel Slemrod NBER Working Paper No. 24799 July 2018 JEL No. H20,H26 ABSTRACT This paper reviews recent economic research in tax compliance and enforcement. After briefly laying out the economics of tax evasion, it focuses on recent empirical contributions. It first discusses what methodologies and data have facilitated these contributions, and then presents critical summaries of what has been learned. It discusses a promising new development, the analysis of randomized controlled trials mostly delivered via letters from the tax authority, and then reviews recent research using various methods about the impact of the principal enforcement tax policy instruments: audits, information reporting, and remittance regimes. I also explore several understudied issues worthy of more research attention. The paper closes by outlining a normative framework based on the behavioral response elasticities now being credibly estimated that allows one to assess whether a given enforcement intervention is worth doing. Joel Slemrod University of Michigan 701 Tappan Street Room R5396 Ann Arbor, MI 48109-1234 and NBER [email protected] Policy attention in developed countries to tax evasion and enforcement ramped up significantly after the financial crisis of 2008, the Great Recession, and the large deficits that followed. Particular scrutiny to high-income individuals and corporations accompanied heightened attention to income and wealth inequality. In the United States this momentum led to a major initiative aimed at reducing income tax evasion via unreported foreign accounts, albeit in the context of a shrinking IRS budget. In the United Kingdom, former Chancellor of the Exchequer George Osborne announced an ongoing crackdown on tax avoidance, tax evasion, and “imbalances” in the tax system that would bring in £5 billion in additional revenue each year. In developing countries, tax evasion is a long-standing policy concern. The IMF (2015, p. 6) recently stated that “Long a central concern in developing countries, strengthening compliance has become a greater priority in many advanced and emerging economies since the financial crisis…Improving compliance has long been a core development objective, both to enhance revenue and as essential to building strong, trusted public institutions.” Academic research into the determinants of tax evasion and the effectiveness of enforcement initiatives has also vastly expanded in the past decade, perhaps inspired by the heightened policy interest and certainly facilitated by expanded access of academics to administrative tax-return data and an increased willingness of tax authorities to partner with researchers on randomized controlled trials that hold the promise of compelling identification of the causal impact of alternative enforcement strategies. In this paper I review this new wave of empirical research. Most of this scholarship postdates the other broad surveys about tax evasion and enforcement, including one in this Journal,1 and so 1 Andreoni, Erard, and Feinstein (1998), Slemrod and Yitzhaki (2002). A much shorter, and more policy-oriented, version of this paper was published as Slemrod (2017). Chalfin and McCrary (2017) review the literature on criminal deterrence, but do not address tax evasion. Mascagni (2018) surveys the experimental literature on tax compliance. 2 a fresh look is appropriate. Because this new wave of empirical research shows no sign of abating, it is particularly timely to take stock of what has been learned in order to assess and guide the direction of future research. Although this survey is wide-ranging, it is somewhat selective in its coverage of both topic and method. It touches only tangentially on some substantive issues such as multinational companies’ tax compliance and the role of bureaucratic incentives and the behavior of tax officials,2 and it does not address some methodological approaches such as lab experiments and macroeconomic measures of the informal economy.3 The rest of the paper is organized as follows. After section 1 briefly lays out the economics of tax evasion, the paper turns to the recent empirical contributions, with section 2 discussing what methodologies and data have facilitated these contributions. Section 3 focuses on the magnitude and nature of evasion. Section 4 assesses one prominent new development, randomized controlled trials mostly delivered via letters from the tax authority. The next sections discuss the principal enforcement policy instruments, audits in section 5, information reporting in section 6, remittance regimes in section 7, with other enforcement initiatives addressed in section 8. Section 9 explores several understudied issues worthy of more research attention and outlines a normative framework based on the behavioral response elasticities now being credibly estimated that allows one to assess whether a given enforcement intervention is worth doing. Section 10 concludes. 1. THE ECONOMICS OF TAX EVASION Discussion of tax administration, compliance, and enforcement fits naturally into what Slemrod and Gillitzer (2014) call a “tax-systems” framework. A tax system is defined as a set of rules, regulations, and procedures with three aspects. First, it defines what events or states of the 2 On the former, see, for example, Clausing (2009); on the latter, see for example, Khan, Khwaja, and Olken (2016). 3 On the former, see Alm and Jacobson (2007); on the latter, see Slemrod and Weber (2012). 3 world trigger tax liability--for example the earning of income, the ownership of a residence that might be subject to property tax, or the sale of a capital asset—and the rate schedule to be applied to these bases. Although this first aspect, tax bases and rates, is the principal object of modern tax analysis, it is only one part. A tax system also must specify who or what entity must remit the tax liability and when, which we might call remittance rules. For example, under most income tax systems, it is the employer that remits—actually sends to the government—an approximation of what tax their employees owe on that income. Although standard analysis often dismisses this as irrelevant, recent research suggests that, at least in some circumstances, it matters a lot. Third, a tax system details procedures for ensuring compliance, including the provision of third-party information-reporting requirements and the consequences, including penalties, of not remitting legal liability; these are the enforcement rules. This review focuses on the second and, especially, the third aspect of a tax system, but clearly there is substantial overlap among the three issues: for example, the tax base and the remittance system can have a profound effect on the enforceability of taxation, and the enforcement regime can affect the impact of tax rates on taxpayer decisions that determine the tax base. 1.1 Why Tax Evasion Matters Tax evasion4 is an important issue because it affects both the resource cost of raising taxes and the distribution of the tax burden—the bread-and-butter concerns of public economics. If tax evasion could somehow be costlessly eliminated, the additional money collected could be used to 4 I will use the terms evasion and noncompliance interchangeably, although in some countries evasion has a particular legal meaning. I will also conform to standard usage in which evasion refers to illegal actions to reduce tax liability, while avoidance refers to legal actions to reduce tax, recognizing that in many situations the dividing line is blurry. Slemrod and Yitzhaki (2002) distinguish further between real (and legal) behavioral responses to taxation, such as reducing labor supply, which they call real responses, and actions that reduce tax liability without substantively altering one’s consumption basket, such as re-characterizing a given action as tax-preferred R&D or delaying an asset sale with a taxable capital gain by a day to a lower-tax-rate year, for which they reserve the term avoidance.
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