COLLECTING TAXES

1. WHY PEOPLE PAY TAXES THE CORE FUNCTIONS OF TAX COLLECTION ORGANIZING TO COLLECT TAXES COLLECTING TAXES

2. WHY PEOPLE PAY TAXES -- View 1a Rational tax theory -- THE COMPLIANCE GAMBLE • The Taxpayer won’t pay if the expected gain from tax evasion is positive, given the probability of being caught and the severity of punishment. • As the probability of being caught and the severity of punishment is increased, evasion declines.

3. WHY PEOPLE PAY TAXES -- View 1b THIS VIEW DOES NOT FIT THE EVIDENCE VERY WELL. • Given actual audit rates and punishments, many fewer people should pay taxes

4. WHY PEOPLE PAY TAXES -- View 2a Co-production Theory -- PEOPLE PAY TAXES WHERE THEY ARE MOTIVATED AND IT IS CONVENIENT TO DO SO Taxpayers will pay if: • they know what is expected of them, • paying isn’t onerous, • they value the benefits they get from get from government AND • they are encouraged in the habit of compliance.

5. WHY PEOPLE PAY TAXES -- View 2b • Evasion is lower where people know precisely what is expected of them -- passive systems work better than active ones in that respect. • Evasion is lower where tax rates are relatively low. • Evasion is lower where there is consensus on what government uses taxes for and the need for taxes to provide the money (perceived burdens are proportional to perceived benefits).

7. WHY PEOPLE PAY TAXES -- View 2c • Evasion is lower where people aren’t required to make large payments. Withholding works! • Evasion is lower where people are in the habit of paying taxes. IT IS PROBABLY WISE TO ADOPT TAXES ACCORDING TO THE LOGIC OF UNAVOIDABILITY, RAISING AND EXPANDING THEM INCREMENTALLY.

8. Taxpayer Active vs. Taxpayer Passive Tax Regimes I • Taxpayer active systems require taxpayers to figure out what they owe.

9. Taxpayer Active vs. Taxpayer Passive Tax Regimes I • Taxpayer active systems require taxpayers tofigure out what they owe. Advantages: • the taxpayer can more easily be made to see himself as a full partner in the process; • It’s cheaper for the state

10. Taxpayer Active vs. Taxpayer Passive Tax Regimes II • Taxpayer passive systems compute taxpayer obligations.

11. Taxpayer Active vs. Taxpayer Passive Tax Regimes II • Taxpayer passive systems compute taxpayer obligations. Advantages: • less costly to taxpayer • evasion is lower • tax system must be highly transparent or people will not trust govt’s tax claims.

13. CORE FUNCTIONS OF TAX COLLECTION • Taxpayer registration • Preparation of tax roll • Identification of taxable flows • Declaration/Assessment • Tax accounting • Revenue accounting -- recording and depositing payment to appropriate accounts • Taxpayer accounting -- posting information to individual taxpayer accounts

14. CORE FUNCTIONS OF TAX COLLECTION (cont.) • Delinquency control, compliance, and collections • Audit • Appeal or protest • Enforcement

16. ADMINISTRATIVE STRUCTURES Organizational structure describes how work is decomposed into tasks, activities, or role and then grouped into organizational units based on geography, function, or program • By function • By tax type

17. COLLECTION COSTS • To Government • To Taxpayers • To both

18. Think Again.