Tax evasion, inequality, and progressive taxes : a political economy perspective

The standard approach to tax compliance applies the economics-of-crime methodology pioneered by Becker (1968): in its first application, due to Allingham and Sandmo (1972) it models the behaviour of agents as a decision involving a choice of the extent of their income to report to tax authorities, given a certain institutional environment, represented by parameters such as the probability of detection and penalties in the event the agent is caught. While this basic framework yields important insights on tax compliance behavior, it has some critical limitations. Specifically, it indicates a level of compliance that is significantly below what is observed in the data. This thesis revisits the original framework with a view towards addressing this issue, and examining the political economy implications of tax evasion for progressivity in the tax structure. The approach followed involves building a macroeconomic, dynamic equilibrium model for the purpose of examining these issues, by using a step-wise model building procedure starting with some very simple variations of the basic Allingham and Sandmo construct, which are eventually integrated to a dynamic general equilibrium overlapping generations framework with heterogeneous agents. One of the variations involves incorporating the Allingham and Sandmo construct into a two-period model of a small open economy of the type originally attributed to Fisher (1930). A further variation of this simple construct involves allowing agents to initially decide whether to evade taxes or not. In the event they decide to evade, the agents then have to decide the extent of income or wealth they wish to under-report. We find that the ‘evade or not’ assumption has strikingly different and more realistic implications for the extent of evasion, and demonstrate that it is a more appropriate modeling strategy in the context of macroeconomic models, which are essentially dynamic in nature, and involve consumption smoothing across time and across various states of nature. Specifically, since deciding to undertake tax evasion impacts on the consumption smoothing ability of the agent by creating two states of nature in which the agent is ‘caught’ or ‘not caught’, there is a possibility that their utility under certainty, when they choose not to evade, is higher than the expected utility obtained when they choose to evade. Furthermore, the simple two-period model incorporating an ‘evade or not’ choice can be used to demonstrate some strikingly different political economy implications relative to its Allingham and Sandmo counterpart. In variations of the two models that allow for voting on the tax parameter, we find that agents typically choose to vote for a high degree of progressivity by choosing the highest available tax rate from the menu of choices available to them. There is, however, a small range of inequality levels for which agents in the ‘evade or not’ model vote for a relatively low value of the tax rate. The final steps in the model building procedure involve grafting the two-period models with a political economy choice into a dynamic overlapping generations setting with more general, non-linear tax schedules and a ‘cost-of evasion’ function that is increasing in the extent of evasion. Results based on numerical simulations of these models show further improvement in the model’s ability to match empirically plausible levels of tax evasion. In addition, the differences between the political economy implications of the ‘evade or not’ version of the model and its Allingham and Sandmo counterpart are now very striking; there is now a large range of values of the inequality parameter for which agents in the ‘evade or not’ model vote for a low degree of progressivity. This is because, in the ‘evade or not’ version of the model, low values of the tax rate encourages a large number of agents to choose the ‘not-evade’ option, so that the redistributive mechanism is more ‘efficient’ relative to the situations in which tax rates are high. Some further implications of the models of this thesis relate to whether variations in the level of inequality, and parameters such as the probability of detection and penalties for tax evasion matter for the political economy results. We find that (i) the political economy outcomes for the tax rate are quite insensitive to changes in inequality, and (ii) the voting outcomes change in non-monotonic ways in response to changes in the probability of detection and penalty rates. Specifically, the model suggests that changes in inequality should not matter, although the political outcome for the tax rate for a given level of inequality is conditional on whether there is a large or small or large extent of evasion in the economy. We conclude that further theoretical research into macroeconomic models of tax evasion is required to identify the structural relationships underpinning the link between inequality and redistribution in the presence of tax evasion. The models of this thesis provide a necessary first step in that direction.

Fundamental Tax Legislation 2013

Fundamental Tax Legislation 2013 contains the essential provisions from the primary legislation that affects Australia’s taxation system. Updated and expanded for 2013, this volume is an indispensable reference for undergraduate and postgraduate students of taxation. New in 2013 is a revised Year in Review section, which summarises the legislative developments in taxation over the previous 12 months, a listing of the passage of tax-related legislation during the last year and the inclusion of reference statistics (such as CPI quarterly figures and individual tax rates for residents and non-residents). Also, new for 2013 is a Tax Rates and Tables section which contains an accessible summary of the main tax rates and tables that students will need to refer to for their tax studies.

Fundamental Tax Legislation [22nd Edition]

This edition includes a revised Year in Review section, which summarises the legislative developments in taxation over the previous 12 months, a listing of the passage of tax-related legislation during the last year and the inclusion of reference statistics (such as CPI quarterly figures and individual tax rates for residents and non-residents). A Tax Rates and Tables section which contains an accessible summary of the main tax rates and tables that students will need to refer to for their tax studies

Fundamental Tax Legislation [23nd Edition]

Fundamental Tax Legislation 2015 contains the essential provisions from the primary legislation that affects Australia’s taxation system. Updated and expanded for changes which occurred in 2014, this volume is an indispensable reference for undergraduate and postgraduate students of taxation. The Year in Review section has been updated to summarise the main legislative developments in taxation over the previous 12 months, a listing of the passage of tax related legislation during the last year and the inclusion of reference statistics (such as CPI quarterly figures and individual tax rates for residents and foreign residents). Also fully updated and revised to reflect the changes in 2014 is the Tax Rates and Tables section, which contains an accessible summary of the main tax rates and tables that students will need to refer to for their tax studies.

The dilemma of international capital tax competition in the presence of public capital and endogenous growth

Using an OLG-model with endogenous growth and public capital we show, that an international capital tax competition leads to inefficiently low tax rates, and as a consequence to lower welfare levels and growth rates. Each national government has an incentive to reduce the capital income tax rates in its effort to ensure that this policy measure increases the domestic private capital stock, domestic income and domestic economic growth. This effort is justified as long as only one country applies this policy. However, if all countries follow this path then all of them will be made worse off in the long run.

Company taxation and tax spillovers: Separate accounting versus formula apportionment

It is observed in the real world that taxes matter for location decisions and that multinationals shift profits by transfer pricing. The US and Canada use so-called formula apportionment (FA) to tax corporate income, and the EU is debating a switch from separate accounting (SA) to FA. This paper develops a theoretical model that compares basic properties of FA to SA. The focal point of the analysis is how changes in tax rates affect capital formation, input choice, and transfer pricing, as well as on spillovers on tax revenue in other countries. The analysis shows that a move from SA to FA will not eliminate such spillovers and will, in cases identified in the paper, actually aggravate them.

Measuring tax efficiency: A tax optimality index

This paper introduces an index of tax optimality that measures the distance of some current tax structure from the optimal tax structure in the presence of public goods. This index is defined on the [0, 1] interval and measures the proportion of the optimal tax rates that will achieve the same welfare outcome as some arbitrarily given initial tax structure. We call this number the Tax Optimality Index. We also show how the basic methodology can be altered to derive a revenue equivalent uniform tax, which measures the tax burden implied by the public sector. A numerical example is used to illustrate the method developed, and extensions of the analysis to handle models with multiple households and nonlinear taxation structures are undertaken.

Fundamental Tax Legislation [24th Edition]

Fundamental Tax Legislation 2016 contains the essential provisions from the primary legislation that affects Australia's taxation system. Updated and expanded for changes which occurred in 2015, this volume is an indispensable reference for undergraduate and postgraduate students of taxation. The Year in Review section has been updated to summarise the main legislative developments in taxation over the previous 12 months, a listing of the passage of tax related legislation during the last year and the inclusion of reference statistics (such as CPI quarterly figures and individual tax rates for residents and foreign residents). Also fully updated and revised to reflect the changes in 2015 is the Tax Rates and Tables section, which contains an accessible summary of the main tax rates and tables that students will need to refer to for their tax studies.

The impact of taxes on optimal portfolio choice : an Australian study

Taxes are an important component of investing that is commonly overlooked in both the literature and in practice. For example, many understand that taxes will reduce an investment’s return, but less understood is the risk-sharing nature of taxes that also reduces the investment’s risk. This thesis examines how taxes affect the optimal asset allocation and asset location decision in an Australian environment. It advances the model of Horan & Al Zaman (2008), improving the method by which the present value of tax liabilities are calculated, by using an after-tax risk-free discount rate, and incorporating any new or reduced tax liabilities generated into its expected risk and return estimates. The asset allocation problem is examined for a range of different scenarios using Australian parameters, including different risk aversion levels, personal marginal tax rates, investment horizons, borrowing premiums, high or low inflation environments, and different starting cost bases. The findings support the Horan & Al Zaman (2008) conclusion that equities should be held in the taxable account. In fact, these findings are strengthened with most of the efficient frontier maximising equity holdings in the taxable account instead of only half. Furthermore, these findings transfer to the Australian case, where it is found that taxed Australian investors should always invest into equities first through the taxable account before investing in super. However, untaxed Australian investors should invest their equity first through superannuation. With borrowings allowed in the taxable account (no borrowing premium), Australian taxed investors should hold 100% of the superannuation account in the risk-free asset, while undertaking leverage in the taxable account to achieve the desired risk-return. Introducing a borrowing premium decreases the likelihood of holding 100% of super in the risk-free asset for taxable investors. The findings also suggest that the higher the marginal tax rate, the higher the borrowing premium in order to overcome this effect. Finally, as the investor’s marginal tax rate increases, the overall allocation to equities should increase due to the increased risk and return sharing caused by taxation, and in order to achieve the same risk/return level as the lower taxation level, the investor must take on more equity exposure. The investment horizon has a minimal impact on the optimal allocation decision in the absence of factors such as mean reversion and human capital.

An examination of recent taxation amendments, corporate law reforms and Queensland legislative reforms affecting nonprofit organisations

There is a tax amendment bill which will be debated. The Government has promised to outline its plan for the reform of the taxation system sometime this year. The plans appear to go beyond the mere introduction of some sort of goods and services tax to reform of the whole taxation system including fiscal relations with the States. Not for profit organisations will find their taxation environment will change. Governments are reluctant to permit exemptions to a GST style arrangements. GST trade offs such as reduced income tax rates and abolishing indirect taxes are useless to nonprofit organisations, as many are already exempt from such imposts. Administrative changes to tax collections may also have an impact. If the government decides to make an individual PAYE taxpayer return optional in exchange for no or standard deductions, this may have an effect on fundraising. The FBT and salary packaging schemes that not for profit organisations use will be under intense scrutiny. A regionalisation of the ATO along the successful model of the ASC would see discrete areas such as not for profit exemptions being centralised in one regional office for the whole of Australia. For example the Tasmanian ASC Office has the responsibility for much work in respect of corporate charities and not for profit companies.

The game of clones and the Australia tax : divergent views about copyright business models and the willingness of Australian consumers to infringe

It is often said that Australia is a world leader in rates of copyright infringement for entertainment goods. In 2012, the hit television show, Game of Thrones, was the most downloaded television show over bitorrent, and estimates suggest that Australians accounted for a plurality of nearly 10% of the 3-4 million downloads each week. The season finale of 2013 was downloaded over a million times within 24 hours of its release, and again Australians were the largest block of illicit downloaders over BitTorrent, despite our relatively small population. This trend has led the former US Ambassador to Australia to implore Australians to stop 'stealing' digital content, and rightsholders to push for increasing sanctions on copyright infringers. The Australian Government is looking to respond by requiring Internet Service Providers to issue warnings and potentially punish consumers who are alleged by industry groups to have infringed copyright. This is the logical next step in deterring infringement, given that the operators of infringing networks (like The Pirate Bay, for example) are out of regulatory reach. This steady ratcheting up of the strength of copyright, however, comes at a significant cost to user privacy and autonomy, and while the decentralisation of enforcement reduces costs, it also reduces the due process safeguards provided by the judicial process. This article presents qualitative evidence that substantiates a common intuition: one of the major reasons that Australians seek out illicit downloads of content like Game of Thrones in such numbers is that it is more difficult to access legitimately in Australia. The geographically segmented way in which copyright is exploited at an international level has given rise to a ‘tyranny of digital distance’, where Australians have less access to copyright goods than consumers in other countries. Compared to consumers in the US and the EU, Australians pay more for digital goods, have less choice in distribution channels, are exposed to substantial delays in access, and are sometimes denied access completely. In this article we focus our analysis on premium film and television offerings, like Game of Thrones, and through semi-structured interviews, explore how choices in distribution impact on the willingness of Australian consumers to seek out infringing copies of copyright material. Game of Thrones provides an excellent case study through which to frame this analysis: it is both one of the least legally accessible television offerings and one of the most downloaded through filesharing networks of recent times. Our analysis shows that at the same time as rightsholder groups, particularly in the film and television industries, are lobbying for stronger laws to counter illicit distribution, the business practices of their member organisations are counter-productively increasing incentives for consumers to infringe. The lack of accessibility and high prices of copyright goods in Australia leads to substantial economic waste. The unmet consumer demand means that Australian consumers are harmed by lower access to information and entertainment goods than consumers in other jurisdictions. The higher rates of infringement that fulfils some of this unmet demand increases enforcement costs for copyright owners and imposes burdens either on our judicial system or on private entities – like ISPs – who may be tasked with enforcing the rights of third parties. Most worryingly, the lack of convenient and cheap legitimate digital distribution channels risks undermining public support for copyright law. Our research shows that consumers blame rightsholders for failing to meet market demand, and this encourages a social norm that infringing copyright, while illegal, is not morally wrongful. The implications are as simple as they are profound: Australia should not take steps to increase the strength of copyright law at this time. The interests of the public and those of rightsholders align better when there is effective competition in distribution channels and consumers can legitimately get access to content. While foreign rightsholders are seeking enhanced protection for their interests, increasing enforcement is likely to increase their ability to engage in lucrative geographical price-discrimination, particularly for premium content. This is only likely to increase the degree to which Australian consumers feel that their interests are not being met and, consequently, to further undermine the legitimacy of copyright law. If consumers are to respect copyright law, increasing sanctions for infringement without enhancing access and competition in legitimate distribution channels could be dangerously counter-productive. We suggest that rightsholders’ best strategy for addressing infringement in Australia at this time is to ensure that Australians can access copyright goods in a timely, affordable, convenient, and fair lawful manner.

A time series analysis of presentations to Queensland health facilities for alcohol-related conditions, following the increase in 'alcopops' tax

Objective: In response to concerns about the health consequences of high-risk drinking by young people, the Australian Government increased the tax on pre-mixed alcoholic beverages ('alcopops') favoured by this demographic. We measured changes in admissions for alcohol-related harm to health throughout Queensland, before and after the tax increase in April 2008. Methods: We used data from the Queensland Trauma Register, Hospitals Admitted Patients Data Collection, and the Emergency Department Information System to calculate alcohol-related admission rates per 100,000 people, for 15 - 29 year-olds. We analysed data over 3 years (April 2006 - April 2009), using interrupted time-series analyses. This covered 2 years before, and 1 year after, the tax increase. We investigated both mental and behavioural consequences (via F10 codes), and intentional/unintentional injuries (S and T codes). Results: We fitted an auto-regressive integrated moving average (ARIMA) model, to test for any changes following the increased tax. There was no decrease in alcohol-related admissions in 15 - 29 year-olds. We found similar results for males and females, as well as definitions of alcohol-related harms that were narrow (F10 codes only) and broad (F10, S and T codes). Conclusions: The increased tax on 'alcopops' was not associated with any reduction in hospital admissions for alcohol-related harms in Queensland 15 - 29 year-olds.

Powering innovation through tax concessions: The changing research & development tax incentives

The changes to the R&D tax concession in 2011 were touted as the biggest reform to business innovation policy in over a decade. Three years later, as part of the 2014 Federal Budget, a reduction in the concession rates was announced. While the most recent of the pro-posed changes are designed to align with the reduction in company tax rate, the Australian Federal Government also indicated that the gain to revenue from the reduction in the incentive scheme will be redirected by the Government to repair the Budget and fund policy priori-ties. The consequence is that the R&D concessions, while designed to encourage innovation, are clearly linked with the tax system. As such, the first part of this article considers whether the R&D concession is a changing tax for changing times. Leading on from part one, this article also addresses a second question of ‘what’s tax got to do with it’? To answer this question, the article argues that, rather than ever being substantive tax reform, the constantly changing measures simply alter the criteria and means by which companies become eligible for a Federal Government subsidy for qualifying R&D activity, whatever that amount is. It further argues that when considered as part of the broader innovation agenda, all R&D tax concessions should be evaluated as a government spending program in the same way as any direct spending on innovation. When this is done, the tax regime is arguably merely the administrative policy instrument by which the subsidy is delivered. However, this may not be best practice to distribute those funds fairly, efficiently, and without distortion, while at the same time maintaining adequate government control and accountability. Finally, in answering the question of ‘what’s tax got to do with it?’ the article concludes that the answer is: very little.

Inefficient tax slugs all homebuyers

Housing affordability is more than just house prices. It also includes ready access to public transport, schools, good road networks, and of course access to all the basic utilities. However, local governments don’t have the money to build all the infrastructure new housing estates need. So developer charges were introduced as a “user pays” method of funding new urban infrastructure. These charges are levied on property developers by local authorities at the time of planning approval. Some think these costs are passed back to the original land owner by way of lower land prices. But property developers claim these charges are instead added on to new house prices, with a negative impact to housing affordability. When new house prices increase, existing house prices are also dragged up, extending the housing affordability issue throughout the community. However, new research by QUT has uncovered evidence that these costs are not merely passed on to homebuyers, but are passed on at significantly over-inflated rates. In an Australian first, the study empirically examines the impact of developer charges on housing affordability, providing evidence that developer charges are passed on to all homebuyers in the community. So while policy makers think they are charging developers for the provision of infrastructure in new communities, the cost is really being borne by all homebuyers.