Transcript Professor John Hudson

Professor John Hudson
University of Bath
www.bath.ac.uk/hssjrh/
These notes will be placed on my web page
BATH UNIVERSITY
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We will look at some resources for you
then two pieces of research in which we
have been involved in
A Model of UK Economy
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www.bized.co.uk/virtual/economy
Allows you to see the impact on unemployment,
growth, government revenue etc of e.g. cutting
tax on income or increasing VAT. Also the impact
on various families of these changes
Has Case studies of these changes
A dictionary of economics
A set of biographies on the great economists
TAXATION COSTS
The first known system of taxation was in Ancient Egypt around
3000 BC - 2800 BC in the first dynasty of the Old Kingdom.[
Records from the time document that the pharaoh would conduct a
biennial tour of the kingdom, collecting tax revenues from the
people. Early taxation is also described in the Bible.
In Genesis it states "But when the crop comes in, give a fifth of it to
Pharaoh. The other four-fifths you may keep as seed for the fields
and as food for yourselves and your households and your children.“
We need tax to fund the state, hospitals, education and so on. But
taxation imposes costs
ADMINISTRATIVE COSTS
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These are the costs incurred by
governments in the collection of taxes.
The costs of tax inspectors, etc.
But there are also costs incurred by people
who pay taxes:
COMPLIANCE COSTS OF TAXATION
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These are the costs on the individual of paying
taxes, e.g. the costs on you of filling in your tax
forms.
For some taxes such as VAT these are
substantial and may amount to say 3% of
revenue collected.
At Bath we did work for the tax authorities on
the compliance costs on firms of collecting
income tax for government:
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The firm – in my case Bath University –
takes, from my salary, tax and a month or
so later gives it to the government.
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We sent questionnaires to several
thousand businesses in the UK and found:
These costs penalise small business more
than large because of economies of scale.
Are particular great for part time, seasonal
workers and firms where workers tend to
change a lot as some leave and new ones
arrive
IMPACT
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Because of this work the UK government is now
committed to minimizing compliance costs and
to make the paying of taxes as simple as
possible.
But doing large questionnaires is expensive and
the results quickly become out of date.
The Dutch have developed a technique based on
what they call the MISTRAL model
First the Dutch….
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This attempts to estimate the costs of e.g. paying VAT
by examining all the actions involved and (i) estimating
the amount of time each action costs and (ii) putting a
money value on this time.
They have done this with every single piece of work
firms have to do for the government – e.g. health and
safety, environmental laws, etc.
And the Dutch government are committed to keeping
the burden on business of compliance with government
activities stay fixed below a certain amount.
…. Then the EU
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The EU as a whole is also taking an interest in
this and soon the approach will spread
throughout the UK including Slovakia.
Andre Nijsen is the person who developed
MISTRAL. He retires next year and I am editing
a book to celebrate his contribution. It will
probably be published in 2008 and will represent
an up to date account of this type of work
across the world
EXCESS BURDEN OF TAXATION
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In economics, the excess burden of taxation,
also known as the distortionary cost or
deadweight loss of taxation, is the economic
loss society suffers as the result of a tax, over
and above the revenue it collects.
Administrative & compliance costs are part of
these but there are more involved with…
Distortions which occur because people or firms
change their behaviour in order to reduce the
amount of tax they must pay.
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The cost of a distortion is usually
measured as the amount that would have
to be paid to the people affected by it, in
order to make them indifferent to its
presence.
The Tax =P3-P2 shifts the supply curve upwards
P3
increasing price from P1 to P2. Government
revenue is the square P2-P3-Q2
P3
But the lost profits to the firm is P3-P2 PLUS their
share of the orange shaded area. (equals the
difference in revenue less the difference in cost)
P3
And for the consumer the cost in terms of having
to change their expenditure plans is P1-P2-Q2
PLUS their share of the orange shaded area
P3
The tax has forced people to change their
behaviour buying less of a product it benefited
both firm to produce and consumer to buy.
P3
Of course the government gains revenue from the
tax, but not as much as firms and consumers have
lost. The DEADWEIGHT LOSS is the range shaded
area
P3
Who Pays Taxes?
Depends on slopes of the curves or
elasticities, here the price rises a lot
and the consumer pays.
But here the firm cannot pass the
price increase on and it is the firm
who pays.
Inelastic supply, elastic demand
TAX EVASION
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Tax evasion is against the law, it is when
people/firms evade paying taxes the law
says they should. They are part of the
‘shadow economy’.
Tax avoidance is not against the law it is
about using the law to pay as little tax as
you have to, by e.g. basing your firm in
Lichtenstein where taxes are low.
Various estimates of the shadow
economy in Selected Countries.
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Year
1999/2000
2002/2003
Country
Bulgaria
36.9% 38.3%
Czech Rep. 19.1% 20.1%
Hungary
25.1% 26.2%
Latvia
39.9% 41.3%
Poland
27.6% 28.9%
Romania
34.4% 37.4%
Slovak Rep. 18.9% 20.2%
Slovenia
27.1% 29.4%
USA
8.7%
8.4%
UK
12.7% 12.2%
Germany
16.0% 16.8%
Sweden
19.2% 18.3%
Phillipines
43.4% 45.6%
Notes: Sources SE: Schneider and Enste (2000), Schneider (2004)
M Orviská, A. Čaplánová, J. Medved & J. Hudson, A Cross
Section Approach to Measuring the Shadow Economy
(2006), Journal of Policy Modeling, Vol. 28, pp. 713-724.
The size of the shadow economy has been investigated by a
number of different methods.
We have developed a method based on the amount of cash
people have in their pocket (people engaged in ths shadow
economy tend not to use banks, but carry cash)
The analysis suggests that the relative figures are:
Slovakia 23.2%
Czech Republic 21.8%
Why People PAY Taxes
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Fear of getting caught
Social Disgrace
Civic Duty
They obey the law
They do not have the opportunity
The Standard Economic Approach
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Is that people pay taxes out of fear of the
consequences of getting caught. In this
sense the fine or penalty you have to pay
if caught is ‘the price of breaking the law’
This seems to narrow and ignores the fact
that people pay taxes for other reasons:
Why People PAY Taxes
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Fear of getting caught
Social Disgrace
Civic Duty
They obey the law
They do not have the opportunity
Think a bit:
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output in Slovakia is about 20% greater than the
official figures.
About the same proportion of taxes are not paid,
meaning all honest citizens have to pay more
and …..
Your schools and health service are not as good
as they should be because the government
cannot fund them as much as if everyone paid
taxes.
Policies to reduce the shadow
economy
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Increased frequency of tax audits and greater fines are
two obvious measures which in many, perhaps most,
countries would be justified.
Targeting audits at the likely participant in the shadow
economy is another. One obvious example would be to
target dishonest citizens, i.e. those who have been found
to have broken the law within some other context
(speeding on the motorway).
Publishing the identity of those found to have
participated in the shadow economy, hence adding the
social costs (your friends know you are a ‘bad person’)
may also be an effective strategy.
AND FINALLY:
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Of course the banks play a part in the
shadow economy; particularly with the
mafia and the laundering of money. The
EU are aware of this and attempting to
deal with it in a number of ways which will
affect all banks in all EU countries.
But that is another story