I discussed tax gaps at the academic meeting I am attending in Prague yesterday and suggested new approaches to the study of the issue. In the process it was suggested I was trying to push boundaries, which point I accepted. But, I argued, our current view that the tax gap is the difference between the amount of tax that would be collected in a jurisdiction if the laws of that state were complied with as it is believed its parliament intended and the actual amount of tax that the domestic tax authority of that jurisdiction is actually able to collect in a period using the resources made available to it, need not be the only definition used for this fundamental measure that has such a massive impact on the economic well-being of a country because of its consequences for macro economic policy.
Back in 2006, before this current idea was embedded in the minds of most of those addressing the issue I speculated that their might be at least twenty tax gaps. For the record, I might not come up with the same list, with the same description now, but these were the gaps I described back then, and I see no reason why this broader thinking cannot be embraced now:
Absolute gaps
1. The Revenue Gap The difference between what a tax authority expects to raise in tax given current levels of economic activity, and what it actually raises in taxation revenues. This Gap can, of course, be broken down between different taxes e.g. income taxes, company taxes, value added taxes, and so on.
2. The Proportionate Gap The difference between the proportion of income paid in tax by the best off in a society, and the proportion of income paid in tax by the worst off in a society. This is a measure of how progressive the tax system is.
3. The Poverty Gap The difference between the after tax incomes of the rich and the poor in a society (to which taxation policy contributes). This is a measure of social justice within a society.
Corporate Gaps
4. The Reporting Gap The difference between the information that a reasonable user of the accounts of a corporation needs to appraise the tax it pays and the information they actually get. This Gap is a measure of how well a company accounts for its activities.
5. The Expectation Gap The difference between the headline or declared tax rate for companies, and the rate of tax they actually pay. This Gap is a measure of the difference between the contribution society expects business to make by way of tax paid, and what is actually paid. Taxpayer Gaps
6. The Responsibility Gap The difference between the duty of care towards a country that a tax payer is expected to show when declaring their taxation liabilities, and the duty they actually display in their actions. This is a measure of the attitude taxpayers take towards their duty to pay tax and is likely to indicate the scale of both tax avoidance and evasion in an economy.
7. The Trust Gap The difference between the actual levels of trust that exist between tax payers and taxation authorities and the level of trust which would benefit both parties in the management of their mutual obligations. This measure is important because taxation is ultimately always levied with the consent of those who pay it. If that trust breaks down, less tax is paid.
Taxpayer gaps
8. The Transparency Gap The difference between the information the taxpayers in a country think they need to be able to understand what their government does with the money paid to it and the information they actually receive. This Gap measures the accountability of governments.
9. The Corruption Gap The difference between the tax that taxpayers think they pay to a government and the amount that the government actually has paid to it. This gap measures the corruption present in any tax collection system, whether that corruption is undertaken by politicians, government officials or others e.g. within banks.
10. The Efficiency Gap The difference between the benefit that could be obtained if all government revenues were spent in pursuit of its policies and the actual sum spent having allowed for waste, inefficiency and corruption. This is a measure of both the management inefficiency of governments and the corruption that occurs in their spending programmes. The measures overlap because very often it is difficult to differentiate the reasons for the loss.
International Gaps
11. The Competitive Gap The difference between the tax rates offered by different countries as an incentive to attract inward investment into their economies. This is a measure of tax competition.
12. The Resource Gap The difference between the resources countries are able to allocate to ensuring that the international aspects of their taxation affairs are properly managed. This is a measure of the gap in resources between developed and developing countries. Many developing countries do not have the resources available to them to pursue enquiries about tax liabilities that may be due in their territories if they are not voluntarily declared.
13. The Multinational Gap The difference between the tax rate paid by companies who operate internationally and the tax rate paid by companies who only operate in one country. This is a measure of the taxation benefit companies who operate internationally obtain over their domestic rivals.
14. The Haven Gap The gap between what is considered reasonable behaviour in tax havens and what is considered reasonable behaviour elsewhere. This is a measure of both the difference in tax rates on offer in tax havens and elsewhere and the difference they offer in defining taxable income, which in many cases is the way in which they avoid charging individuals and companies to tax.
15. The Mobility Gap The difference between the way those who are internationally mobile are taxed in a country and the way those who live there permanently are taxed. This is a measure of the advantages the tax system of a country offers to those people who are internationally mobile compared to those who are normally resident in their country.
The National Gaps
16. The Corporate Gap The difference between the tax rate paid by corporations on a profit and the tax rate an individual might reasonably be expected to pay on the same profit. This is a measure of the taxation benefit companies are given in a society.
17. The Large / Small Gap The difference between the tax rate suffered by large companies and the tax rate suffered by small companies. This is a measure of the benefit large business gets in a society, largely because of its lobbying power, when compared to small business. It is measured by the difference in the average actual tax rate suffered when similar rules are apparently applied to each type of company.
18. The Social Security Gap The difference between the tax (including social security charges) due on average earnings in a country if earned from employment, and the tax due on the same level of income if earned from other sources. This is a measure of the total additional tax charges levied upon earnings derived from human endeavour when compared with the tax charges levied on similar income from any other source.
19. The Administration Gap The difference between the administrative burden suffered by government with regard to tax and that it imposes on business. This is a measure of the burdens a tax system imposes which are not directly measured as part of the tax charge.
20. The Direct / Indirect Gap The proportionate difference between the amount of tax a country collects from direct and indirect tax. This is a measure of the difference between the tax charged on earnings in a country and the tax charged on consumption in a society. It is a good measure of the degree of regressiveness within a tax system since those on lower levels of earnings tend to spend much higher proportions of their income on consumption than do those on higher levels of income, who have a capacity to save.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
A net has been described as a lot of holes fastened together with string.
Not a lot of string here is there ?
Richard Well thought out. A very comprehensive list.
21. FInancial tax gap. If that’s ever rolled out the difference between nics and the amount raised by the ftt? Due possibility of further bleed into cash only transactions?
You forget how cash is dying
And could simply go
In not too distant future there may be no such thing
I wouldn’t rely on that assumption, Richard.
You are keenly aware of initiatives to get rid of high denomination notes (eg. $100 US, €500) in order to fight money laundering. Every time these initiatives appear there is a public furore. Ironically, the furore doesn’t generally come from the holders of high denomination notes. It comes from a cross section of the public who unthinkingly (and quite insistently) choose to to see it as a first step toward enforcing a cashless economy.
A lot of these people (left, right and centre) seem to be anticipating an enforced move to cashlessness and are determined to resist that because they see it as an attempt by corporations to monitor and control consumers, or by government to monitor and control everyone, or both.
The high denomination notes will eventually go but given the resistance to that seemingly reasonable outcome I would imagine that cash will be here (and everywhere) for a very long time.
Time will tell
I observe the cashless young all the time and see it as inevitable
I like this post, a lot. I like it because the importance of semantics becomes increasingly clear to me over time. What I mean by that is that it is easier to address a problem or issue if you can give it an appropriate name and a name that will catch on. That saves the trouble of having to describe the issue every time one mentions it. If or when the name catches on it also helps to establish the concept as one that is recognised.
What we have here (above) is 20 appropriate names for 20 recognisable concepts, which is great. When I say ‘appropriate name’ I mean truly appropriate as opposed to some of the appalling euphemisms that we find elsewhere.
Of the 20, if I was to choose just one as a personal bugbear it would be #11, the Competitive Gap because the reality of this race-to-the-bottom stupidity is premised on the absurd suggestion that countries need to compete for foreign investment. In a world that is awash with an excess of investment funds the real shortfall is in consumer demand. With historically low interest rates and trillions hoarded in near-zero interest rate accounts it has become clearly apparent that there is no scarcity of investment funds. According to the indicators the reality is that additional foreign investment is unnecessary and foreign investors are perfectly expendable. They need to be reminded of that loud and clear. Given that is so the Competitive Gap is a measure is of corporate lobbying power as that is the only verifiable influence that is driving “tax competition”.
As for those that seek Foreign Direct Investment for Current Account and currency appreciation purposes. That’s a bit like selling the family silver (worse actually) as most of it adds nothing to capacity. It merely represents an increased foreign ownership of existing national assets. So you get a fast hit of capital flowing in with the foreign purchase and a long slow stream of repatriated profits flowing out over time. Long term, its a current account negative.
BTW Richard,
A 2-year long push in federal Australian Labor Party to establish a ‘Buffett Rule’ is becoming insistent and gathering strength. Measures to strengthen multinational compliance are now unanimous. Also worth noting there; opponents of the Buffett rule have proposed an alternative of by way of a $3000 limit on the amount that anyone claim as an expense for managing tax their affairs. Which is not a satisfactory alternative but interesting in its own right.
I don’t what contacts you might have in Australia but given that Australia’s conservative coalition government is hopelessly unpopular, Labor will take power at the next election and possibly become the first G20 nation with a Buffett rule (?). Given your profile and expertise in this area I am sure that some of the progressive proponents in the ALP’s debate would welcome any contribution that you might offer.
http://www.afr.com/news/politics/australian-labor-party-backs-warren-buffettinspired-35-per-cent-tax-on-the-rich-20150723-gijglz (2015)
http://www.abc.net.au/news/2017-05-03/labor-debates-buffet-rule-minimum-tax-on-wealthy-australians/8493698 (2017)
https://www.theguardian.com/business/grogonomics/2017/may/25/buffett-rule-labor-party-tax-debate-chris-bowen (2017)
Marco
I’ll take a read
I have already suggested such a tax for companies
Richard
Oh I agree. I use my NFC phone to pay so convenient. But less use generally may not translate into no cash. Also, and anecdotally, I often see see payments from large wads of cash.
And I admit I hardly ever do I now
Very informative Richard! Thank you!