Total Tax Liability Research Articles

Fiscal illusion at the individual level

AbstractThis study uses a survey experiment to test for fiscal illusion—the idea that taxpayers systematically misperceive their tax liabilities and contributions to public services. To date, the voluminous literature on fiscal illusion has not analyzed how better information on personalized total tax liabilities and contributions to public services would influence fiscal preferences. This is the first study to inform participants of their individual fiscal balance sheets comprising all major taxes regularly paid by taxpayers and their allocation to public services, thus comprehensively covering both sides of the fiscal account. This aim is achieved by embedding a novel personalized fiscal calculator in an online survey experiment administered to a representative sample of UK employees. The experiment finds evidence of fiscal illusion: providing personalized fiscal information reduces support for higher taxes and spending and increases support for lower taxes and spending. These findings indicate that taxpayers underestimate both their tax liabilities and the costs of public services.

THE EFFECT OF PROFITABILITY, LEVERAGE, AND LIQUIDITY ON TAX AVOIDANCE

Tax avoidance is a business practice that uses accounting techniques that comply with tax rules by exploiting legal loopholes to reduce their total tax liability. The purpose of this study is to gather empirical evidence on the relationship between tax avoidance and accounting profitability, leverage, and liquidity. Using a sample of banking organizations registered in the IDX for the years 2018-2022, the study was carried out statistically. A linear multiple analysis is utilized in the analytical method. Partial research findings show that profitability factors affect while leverage and liquidity have no effect on tax avoidance, but simultaneously profitability, leverage, and liquidity affect tax avoidance.

The effect of late payment penalties on the payment timing of owed taxes

This paper studies the effectiveness of a policy designed to influence the timing decision for payments of owed taxes. Owed taxes arise when the sum of the foregoing tax year’s preliminary tax payments falls short of the total tax liability. In 2009 the Danish tax authority (SKAT) introduced an annualised penalty rate of 4.6%. Using administrative tax data, I show that the penalty rate introduction led to a 50-day advancement of payments.

The Influence of Profitability, Taxes, and Foreign Ownership on Transfer Pricing (An Empirical Study on Manufacturing Companies Listed on the Indonesia Stock Exchange from 2015-2021)

The main point of this study is that transfer pricing, which is used by multinational companies to settle prices and transactions between divisions, allows businesses to reduce internal prices for commodities, services, and unwanted or excessive assets. The purpose of transfer pricing is to manage transfer prices between businesses with the specific goal of increasing the total tax liability within the company. The study population consisted of 143 manufacturing companies listed on the Indonesia Stock Exchange (BEI) between 2015 and 2021. For the quantitative research type, 15 companies were selected using purposive sampling as the research sample. The information used was secondary data, namely the companies' financial records obtained from www.idx.co.id. Descriptive statistics, classical assumption tests, multiple regression analysis, outliers, F-statistics tests, and F-statistics tests were the data analysis techniques used. Transfer Price, the dependent variable of the study, was represented by RTP (Related Party Transaction). Profitability, Taxes, and Foreign Ownership were the independent variables used. Multiple regression analysis using SPSS 20 was the analytical approach employed in this research. According to the findings of this study, Profitability, Taxes, and Foreign Ownership do not simultaneously impact Transfer Pricing. The findings in this research explain that foreign ownership and taxes do not influence transfer pricing, nor do profits or taxes have any relationship with transfer pricing.

Loss-averse tax manipulation and tax-preferred savings

Using administrative data from Canada linked to a financial capability survey, I show that tax-deductible savings plans are often used to manipulate final balances owed to the central tax authority during tax season. This finding implies a strong avoidance motive for saving, where tax filers manipulate final balances rather than total tax liabilities, consistent with loss-aversion. The magnitude of this effect is economically significant. For example, each $100 owed increases the likelihood of contributing by about half a percentage point. There is suggestive evidence that the behavior is driven by tax filers with low financial literacy who make disproportionately large contributions in the last 60 days before the annual deadline.

The VAT gap in relation to the quality of governance in selected CEE countries

The objective of this paper is to examine the value-added tax gap in relation to the quality of governance in selected Central and Eastern European countries. The tax gap is caused mainly by tax evasion and tax avoidance of the value-added tax (VAT) and is calculated as a share, in percent, of VAT total tax liability. The Worldwide Governance Indicators are used to represent quality of governance, and all six comprehensive dimensions of governance have been used: a) voice, accountability; b) political stability, absence of violence or terrorism; c) effectiveness of government; d) quality of regulation; e) the rule of law; and f) control of corruption. The results section shows the proven relationships between the VAT gap and the WGI indicators in the analyzed countries using statistical application methods (correlations) and data from 2000 to 2019. The most significant factor related to the VAT gap is the control of corruption, thus encouraging governments to enhance the anti-corruption measures.

Tax Evasion in the Housing Market: Identification and Exploration

The real estate market is recognized as a fertile ground for tax violations. Specifically, reporting a price lower than the true transaction price in order to avoid tax payments is a prevalent technique. We propose an empirical method for identifying housing transactions that are suspected of under-reporting. Based on all reported housing transactions in Israel over the period 1998–2015, we conclude that about 8% of the transactions are under-reported, with an average price report of 30% below the projected true price. Also, the likelihood to under-report is positively associated with the total tax liability and positively (negatively) associated with the crime rate in (the socioeconomic level of) the area in which the transaction occurs. Compared to single unit owners, real estate investors are less likely to engage in under-reporting. Our empirical approach may serve tax enforcement authorities in promoting tax collection in the real estate market.

Study and Reports on the VAT Gap in the EU-28 Member States: 2020 Final Report

This Study contains Value Added Tax (VAT) Gap estimates for 2018, fast estimates using a simplified methodology for 2019, the year immediately preceding the analysis, and includes revised estimates for 2014-2017. It also includes the updated and extended results of the econometric analysis of VAT Gap determinants initiated and initially reported in the 2018 Report (Poniatowski et al., 2018). As a novelty, the econometric analysis to forecast potential impacts of the coronavirus crisis and resulting recession on the evolution of the VAT Gap in 2020 is reported.In 2018, most European Union (EU) Member States (MS) saw a slight decrease in the pace of gross domestic product (GDP) growth, but the economic conditions for increasing tax compliance remained favourable. We estimate that the VAT total tax liability (VTTL) in 2018 increased by 3.6 percent whereas VAT revenue increased by 4.2 percent, leading to a decline in the VAT Gap in both relative and nominal terms. In relative terms, the EU-wide Gap dropped to 11 percent and EUR 140 billion. Fast estimates show that the VAT Gap will likely continue to decline in 2019.Of the EU-28, the smallest Gaps were observed in Sweden (0.7 percent), Croatia (3.5 percent), and Finland (3.6 percent), the largest – in Romania (33.8 percent), Greece (30.1 percent), and Lithuania (25.9 percent). Overall, half of the EU-28 MS recorded a Gap above 9.2 percent. In nominal terms, the largest Gaps were recorded in Italy (EUR 35.4 billion), the United Kingdom (EUR 23.5 billion), and Germany (EUR 22 billion).The Policy Gap and its components remained stable. For the EU overall, the average Policy Gap level was 44.24 percent. Of this, in 2018, 10.07 percentage points were due to the application of various reduced and super-reduced rates (the Rate Gap) and 34.17 were due to the application of exemptions without the right to deduct.The results of the econometric analysis show that the VAT Gap is influenced by a group of factors relating to the current economic conditions, institutional environment, and economic structure as well as to the measures and actions of tax administrations. Out of a broad set of tested variables, GDP growth and general government balance appeared to explain a substantial set of VAT Gap variation across time and countries. Within the control of tax administrations, share of IT expenditure proved to have the highest statistical significance in explaining the size of the VAT Gap. In addition, the VAT Gap appeared to be inter-related with the values of risky imports of goods, indicating the role of fraud in driving the overall share of the VAT Gap.Since the COVID-19 recession will likely have a dire impact on the EU economies, the VAT Gap in 2020 is forecasted to increase. If the EU economy contracts by 7.4 percent in 2020 and the general government deficit jumps as forecasted in the Spring Forecast of the European Commission, the Gap could increase by 4.1 percentage points year-over year up to 13.7 percent and EUR 164 billion in 2020. The hike in 2020 could be more pronounced than the gradual decrease of the Gap observed over the three preceding years. Moreover, a return to the VAT Gap levels observed in 2018 and 2019 will take time and require significant action from tax administrations.This Report has been written for the European Commission, DG TAXUD, for the project TAXUD/2019/AO-14, “Study and Reports on the VAT Gap in the EU-28 Member States”, and is a follow-up to the seven reports published between 2013 and 2019.

Alternative method to measure the VAT gap in the EU: Stochastic tax frontier model approach.

In this paper, we pursue an alternative method to measure the Value Added Tax gap in the European Union using the stochastic tax frontier model. We use the Value Added Tax total tax liability as the input to estimate the optimal frontier of the Value Added Tax, as well as to predict technical inefficiency. Using the latest innovations of the stochastic frontier approach, we aim to obtain the accurate size of the Value Added Tax gap in the EU-26 countries and contrast them with extant estimates. The obtained estimates of the Value Added Tax gap using the stochastic tax frontier model are different from the estimates produced by the top-down method to calculate the Value Added Tax gap in the EU. Moreover, the stochastic tax frontier approach allows us to disentangle the Value Added Tax gap, which is time dependent, from the persistent Value Added Tax gap, which is country specific. The stochastic tax frontier model allows us to test the effect of exogenous factors on the technical inefficiency of the Value Added Tax and propose appropriate policy recommendations.

Who are “The Taxpayers”?

AbstractWho are the taxpayers? In political rhetoric, the taxpayer is often the hardworking counterpoint to the undeserving welfare recipient, or the long-suffering victim of government corruption and ineptitude. And yet, despite its potency as a political symbol, we know little about who is understood by the public to be among the taxpaying class. New survey data reveal that there is a large discrepancy between the population of self-described taxpayers and the population of perceived taxpayers; about 93% of US adults describe themselves as taxpayers, but they imagine that only about 69% of their peers pay taxes. In the control condition, Republicans had lower estimates of the taxpaying population, were more concerned that low-income people do not pay enough in taxes, and low-income Republicans were more likely to doubt their own status as taxpayers. After receiving information about the substantial total tax liability of low-income people, Republicans and Democrats’ views of the taxpaying population converged. However, in the condition that focused on low-income Americans as net beneficiaries of the federal tax system, partisans had opposite responses. Low-income Democrats become less likely to describe themselves as taxpayers while low-income Republicans become more likely to assert their status as taxpayers. The results have implications for how and why the parties talk about tax policy, and suggest that the identity of “the taxpayer” has both an economic and a political resonance worthy of greater scholarly scrutiny.

Study and Reports on the VAT Gap in the EU-28 Member States: 2018 Final Report

This Study serves as the Final Report for the DG TAXUD TAXUD/2017/DE/329, “Study and Reports on the VAT Gap in the EU-28 Member States”, which is a follow-up to the five reports published between 2013 and 2017. In this Report, the Authors present the new Value Added Tax (VAT) Gap estimates for 2016, as well as updated estimates for 2012-2016. In addition to the analysis of the Compliance Gap, this Report examines the Policy Gap in 2016 as well as the contribution that reduced rates and exemptions made to the theoretical VAT revenue losses. Moreover, the Report contains an econometric analysis of VAT Gap determinants, which is a novelty introduced from this year’s Study. In 2016, most European Union (EU) Member States (MS) saw positive tailwinds with a combined real GDP growth of 2.0 percent. As a result of a growing base and increasing VAT compliance, VAT revenue increased in all MS with three exceptions. Most pronounced is the case of Romania, where VAT revenue decreased in response to reduction of the standard rate by four percentage points. In nominal terms, in 2016, the VAT Gap in EU-28 MS fell below EUR 150 billion and amounted to EUR 147.1 billion. In relative terms, the VAT Gap share of the VAT total tax liability (VTTL) dropped to 12.3 percent from 13.2 percent in 2015, and is the lowest value in the analysed period of 2012-2016. Denoted at the share of GDP, the VAT Gap in 2016 amounted to 0.99% compared to 1.05% in 2015. Of the EU-28, the VAT Gap share decreased in 22 countries and increased in six—namely, Romania, Finland, the UK, Ireland, Estonia, and France. The biggest declines in the VAT Gap—of over five percentage points—occurred in Bulgaria, Latvia, Cyprus, and the Netherlands. The smallest Gaps were observed in Luxembourg (0.85 percent), Sweden (1.08 percent), and Croatia (1.15 percent). The largest Gaps were registered in Romania (35.88 percent), Greece (29.22 percent), and Italy (25.90 percent). Overall, half of EU-28 MS recorded a Gap below 9.9 percent. The Policy Gaps and its components remained stable. The average Policy Gap level was 44.8 percent, out of which 9.95 percentage points are due to the application of various reduced and super-reduced rates (the Rate Gap). Countries with the most flat levels of rates in the EU, according to the Rate Gap, are Denmark (0.93 percent) and Estonia (2.97 percent). The Exemption Gap, or the average share of Ideal Revenue lost due to various exemptions, is, on average, 35 percent in the EU, whereas the Actionable Policy Gap—a combination of the Rate Gap and the Actionable Exemption Gap—is, on average, 16.5 percent of the Notional Ideal Revenue. The econometric analysis can be considered a successful first attempt at inferring the impact of various determinants. Firstly, it can be observed that the productive structure of the economy exerts an impact on the VAT Gap. The share of retailers has the strongest impact on the VAT Gap; however, telecommunications, industry, and art also have a positive impact. Secondly, liquidity constraints and the productive structure of the economy also play a role in determining VAT compliance. The most interesting results have to do with the impact of the variables under the direct control of the tax administration. We show that the impact of the size of the tax administration and the VAT Gap is concave. On the contrary, in the case of IT expenditure, the impact is convex, albeit small, until productivity vanishes when IT expenditure is about 9.8 percent of the total expenditure of the tax administration.

Tax Fraud in the Housing Market: Identification and Exploration

The real estate market is recognized as a fertile ground for tax violations. Specifically, reporting a price lower than the true transaction price in order to avoid tax payments is a prevalent technique. We propose an empirical method for identifying housing transactions that are suspected of under-reporting. Based on all reported housing transactions in Israel over the period 1998–2015, we conclude that about 8% of the transactions are under-reported, with an average price report of 30% below the projected true price. Also, the likelihood to under-report is positively associated with the total tax liability and positively (negatively) associated with the crime rate in (the socioeconomic level of) the area in which the transaction occurs. Compared to single unit owners, real estate investors are less likely to engage in under-reporting. Our empirical approach may serve tax enforcement authorities in promoting tax collection in the real estate market.

Whose Child Is This? Shifting of Dependents Among EITC Claimants Within the Same Household

Using a panel of household level tax data, we estimate the degree to which dependents are "reassigned" between tax units within households, and how these reassignments affect combined tax liabilities. Reassigning dependents reduces combined tax liabilities on average, suggesting some household level coordination. Additionally, when EITC benefits expanded in 2009, reassignments increasingly involved adding a third child to tax returns to claim these new benefits. However, the subgroup reassigning towards three child tax units actually increased total household tax liabilities, suggesting that some taxpayers may prioritize minimizing their own tax burden or focus on particularly salient aspects of tax policy.

Multinational diversification and performance: a re-evaluation of the evidence

Expanding upon prior studies, firms with foreign operations are segmented by three different schemes: the percentage of foreign tax liability to total tax liability; the percentage of foreign sales to total sales; the percentage of foreign assets to total assets. We evaluate whether the degree of foreign participation affects the risk-return profile of the firms by categorising firms with foreign participation into quintiles. The research indicates significant differences exist between domestic firms and multinational firms. The study suggests that the extent of multinational diversification does not provide incremental economic benefit. The advantages enjoyed by multinational corporations appear to have disappeared over time owing to an increasing integration of the global economy.

Multinational diversification and performance: a re-evaluation of the evidence

Expanding upon prior studies, firms with foreign operations are segmented by three different schemes: the percentage of foreign tax liability to total tax liability; the percentage of foreign sales to total sales; the percentage of foreign assets to total assets. We evaluate whether the degree of foreign participation affects the risk-return profile of the firms by categorising firms with foreign participation into quintiles. The research indicates significant differences exist between domestic firms and multinational firms. The study suggests that the extent of multinational diversification does not provide incremental economic benefit. The advantages enjoyed by multinational corporations appear to have disappeared over time owing to an increasing integration of the global economy.

Study and Reports on the VAT Gap in the EU-28 Member States: 2016 Final Report

This analysis serves as the Final Report for the DG TAXUD Project 2015/CC/131, “Study and Reports on the VAT Gap in the EU-28 Member States”, which is a follow up to the reports published in 2013, 2014, and 2015. In this report, we present estimates of the VAT Gap and the Policy Gap for the year 2014, as well as revised estimates for the years 2010-2013 due the transmission of Eurostat national accounts from the ESA95 to the ESA10. This update covers Croatia, which was not included in the previous updates. While it was hoped that the update would also cover Cyprus, it has not been possible due to incomplete national accounts data.The VAT Gap is a measure of VAT compliance and enforcement that provides an estimate of revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies, as well as miscalculations. It is defined as the difference between the amount of VAT collected and the VAT Total Tax Liability (VTTL), which is expressed in the report in both absolute and relative terms. The VTTL is the theoretical tax liability according to tax law, and is estimated using a “top-down” approach. As the capacity and willingness to pay taxes is affected by economic cycles, the reviving 2014 economic situation in the European Union (EU) has, therefore, provided good conditions for narrowing the VAT Gap in EU Member States. The year 2014 saw numerous changes in tax enforcement and monitoring, such as anti-smuggling measures, electronic reporting functionalities, limits on cash transactions and the extension of lists of goods applicable to the reverse VAT charge mechanism. On the other hand, only three EU Member States implemented significant changes in their VAT regimes. Positive economic tailwinds, stable VAT regimes, and measures introduced against tax non-compliance led to a decrease in the relative size of the VAT Gap. In nominal terms, in 2014, the VAT Gap in the EU-27 Member States amounted to EUR 159.5 billion. The VTTL accounted for EUR 1,136.3 billion, whereas the revenue was EUR 976.9 billion. Expressed as a percent of VTTL, the VAT Gap reached 14.06 percent. As a result, the overall VAT Gap as a percent of the VTTL marked its first decrease since 2011. The EUR 2.5 billion decline of the VAT Gap in 2014 compared to 2013 was equivalent to the decrease of the ratio of the Gap and the VTTL by approximately 0.69 percentage point (in the EU-26).The smallest Gaps were observed in Sweden (1.24 percent), Luxembourg (3.80 percent), and Finland (6.92 percent). The largest Gaps were registered in Romania (37.89 percent), Lithuania (36.84 percent), and Malta (35.32 percent). Overall, half of the EU-27 Member States recorded a Gap below 10.4 percent.

Electoral Cycle and Tax Policy – Determination of Income Tax Variables: Case of the Czech Republic

The paper deals with the issue of the relationship between results of examination of the influence of political business cycle on the basis of the choice of input variables. There were used nominal and effective tax rates, total tax liability, total tax collection in case of individual income tax setting in the Czech Republic in the time period 1993−2014. The results of analysis of the effects the electoral cycle on the tax policy determination may differ in relation to the specification of input data and the choice of dependent variables.

Factors Affecting Taxpayers’ Decisions in Saving Tax by Investing in Tax Saving Bonds: A Study in U.P. State, India

While enabling oneself eligible for deduction from the partial or total tax liabilities, choosing the best investment is one of the most important decisions a taxpayer in India can make. One of the alternative investment avenues, tax saving bonds in India is considered as an option to serve any investor with two purposes

Multinational Diversification and Performance: A Reevaluation of the Evidence

The purpose of this research is to re-examine the benefits (if any) that could apply to US based corporations through increased international investment. Design, Methodology, Approach: Expanding upon prior studies, firms with foreign operations are segmented by three different schemes: the percentage of foreign tax liability to total tax liability; the percentage of foreign sales to total sales, and the percentage of foreign assets to total assets. We evaluate whether the degree of foreign participation affects the risk-return profile of the firms by categorizing firms with foreign participation into quintiles. Findings: The research indicates significant differences exist between domestic firms and multinational firms. The extent of multinational diversification does not provide incremental economic benefit. The advantages enjoyed by multinational corporations appear to have disappeared over time due to an increasing integration of the global economy. Originality/Value: The study suggests that the extent of multinational diversification does not provide incremental economic benefit. The advantages enjoyed by multinational corporations appear to have disappeared over time due to an increasing integration of the global economy.

Business Model with Central Entrepreneur and Transfer Pricing: A Czech Case Study

The authors evaluate the impact of the business model consisting of a central entrepreneur with different forms of a manufacturing subsidiary distributing its own products through distributing subsidiaries in the form of commissionaires, on the total tax liability of a group operating in the manufacturing industry. The authors also identify the most suitable business model that optimizes the tax base with respect to the applied transfer pricing policy.