Mind the (Tax) Gap! It is Bigger and More Complex than You Think

52 Pages Posted: 3 Aug 2020

Date Written: July 7, 2020

Abstract

Historically, national revenue agencies have relied largely on trends in aggregate revenue collections along with reporting on compliance yields as the central element of their performance reporting, together with a few efficiency-related measures. Generally, trends of increasing revenue collections (ahead of budget) and rising compliance program outputs have been seen as indicators of a successful revenue agency and a healthier tax system. But is this necessarily the case? Do such indicators properly and adequately reflect the health of the tax system?

In an effort to answer these questions, a relatively small but growing number of national tax agencies have over the last decade or so sought to better understand the health of their tax system by turning their attention to the concept of the ‘tax gap’— the difference between the estimated amount of tax legally payable for each tax administered and what is actually collected in practice. This interest has brought a focus to better understanding tax gap estimation methods, the introduction of comprehensive tax gap research programs, and the public dissemination of tax gap findings to increase community awareness and draw attention to the fact the revenue agency is serious about the tax gap as a long-term performance measure. This development constitutes a new frontier in the management of government revenue systems. And as these agencies often have administrative responsibility for more than just taxes (e.g. student loan repayments and superannuation contributions), these tax gap estimates can have implications beyond just taxes. In the case of the individuals income tax, this must also mean that related tax gap estimates pose a frontier challenge to government agencies administering income-related transfers (e.g. pensions and unemployment benefits) and service entitlements (e.g. health care cards).

This paper builds on recent tax gap research findings published by the Australian Taxation Office (ATO) and examines what they mean for the main types of individuals income tax non-compliance, the main perpetrators, the behaviours underlying this non-compliance, and possible policy and administrative responses. The analysis is made by allocating the ATO’s individuals income tax gap estimates to its 2% individuals sample file of taxpayers in 2016-17 and reviewing the results by sources of tax gap and how they differ across various socio-economic and demographic groupings. The paper also examines what these results might mean for the repayment of income-contingent Study and Training Support Loans (STSL) and for the payment of means-tested government transfers. Finally, the paper presents a menu of potential reforms to address key weaknesses in individuals income tax policy design and administration.

Keywords: Tax Gap, Taxation, tax compliance

JEL Classification: H2, H24, H25, H26

Suggested Citation

Warren, Neil and Highfield, Richard, Mind the (Tax) Gap! It is Bigger and More Complex than You Think (July 7, 2020). UNSW Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3644857 or http://dx.doi.org/10.2139/ssrn.3644857

Neil Warren (Contact Author)

UNSW Business School ( email )

Sydney, NSW 2052
Australia

HOME PAGE: http://www.business.unsw.edu.au/our-people/neilwarren

Richard Highfield

UNSW Sydney ( email )

High Street
Kensington
2052
Australia

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