Domestic Institutions and the Taxing of Multinational Corporations

Nathan M. Jensen, in a new published paper

After controlling for parent firm and foreign affiliate–level factors, I find that democratic countries generate as much as 26% more tax revenues from multinational corporations relative to authoritarian countries.

Tax Evasion: Lottery Ticket Reward Policy

In this paper we discuss a complementary tool to the traditional deterrence approach to tax evasion recently adopted by some Asian and Latin-American countries, the Lottery Ticket Reward Policy (onward LTRP). The idea of LTRP is to provide direct incentives to individual customers to request the emission of the sales receipt associated with a business transaction to their counterparts. In many countries a sales receipt is the proof of the existence of a monetary transaction and it contains information relative to the amount of due tax payment. Once emitted the receipt, for business owners becomes difficult if not impossible to hide information regarding business volume and taxable income. Hence a key strategy adopted by business owners in evading sales taxes is to avoid printing the receipt of a business transaction. In fact, as we discuss more in details in section 3, absent any policy intervention, customers have virtually no benefits asking for the business transaction receipt, while they could face high social and moral cost.

The author adds

Implementing LTRP, a central government institutes a lottery and links the participation to this lottery to the possession of sales receipts of business transactions. Specifically, a serial number is printed on any sales receipt and the individual owning the receipt with the number corresponding to the lottery extraction is entitled to claim the prize. 

The author looks at some evidence in different countries, including China. A policy like that one can have important side-effects, but I find it intriguing and the author says it could be useful in certain contexts.  

The paper is by Marco Fabbri and it is titled "Increasing Private Provision of Public Goods Through a Lottery Policy: An Application to Sales Tax Evasion."

Tax compliance (Chile)

In a working paper Agostini and Martínez (2012) say:

Diesel in Chile receives a different tax treatment depending on its use. If diesel is used in industrial activities the diesel taxes paid can be fully used as a credit against VAT, but if it is used in freight or public transportation (basically trucks and buses) only a fraction of diesel taxes paid can be used as a credit against VAT. As a result of this different tax treatment firms have incentives to use “tax exempted” diesel in activities requiring “non tax exempted” diesel. This tax wedge therefore generates and opportunity for tax evasion. In this paper we analyze the impact of a tax enforcement program implemented by the Chilean IRS, where letters requiring information about diesel tax credits were sent to around 200 firms in 2003. Using different empirical strategies to consider the non-randomness of the selection of firms, we find that firms receiving a letter decreased their diesel tax credits by around 11%.  

They explain: 

The results are consistent with other results in the literature showing that just receiving a letter from the IRS has an impact on tax compliance because it causes a substantial increase in the perceived detection risk.

HT: Maximo Rossi

Tax morale

Some countries are trapped in an equilibrium where people don't pay taxes and the government is corrupt. High corruption and high tax avoidance (or tax evasion) might reinforce each other. As a consequence the amount and quality of public goods is low. Of course corruption depends on many variables, not only on low tax collection. Tax avoidance (or tax evasion) might also depend on many variables. 

I have not seen much research on the broad topic of "tax avoidance", but it seems I have not looked in the right places. There is interesting research in the literature. Probably not much under "tax avoidance" or "tax evasion" but on "tax compliance." The paper "Tax Morale and Tax Compliance from the Firm's Perspective" by Alm and McClellan (Kyklos 2012) is a good example. From the conclusions:

Given that our results show that foreign firms and state owned firms engage in more reporting and less tax evasion than domestic owned firms, government should concentrate its audit efforts on domestic firms. However, our results also show that enforcement efforts (even if better focused) seem to have relatively little impact on reporting. Other policies that have a greater (and positive) impact on reporting include reducing various obstacles to compliance, especially corruption and complexity, thereby providing better taxpayer services and making it easier for firms to pay their taxes. 

Of perhaps most importance, our results indicate the crucial role of tax morale in firm compliance: improvements in tax morale have a significant – and positive – impact on reporting. Although specific government policies to improve tax morale remain somewhat elusive, other work (Alm,2011) has shown that such policies for individuals include: emphasizing that paying taxes is the “right” thing to do, publicizing cheaters, stressing the link between the payment of taxes and the receipt of government services, encouraging greater participation in the process by which the use of taxes is determined, addressing perceived inequities in tax treatment, and avoiding policies that suggest that cheating is morally acceptable. A main lesson of our work is that tax morale considerations apply to both individuals and firms, so that policies directed to individuals should have similar effects on firms. In particular, if tax audits are the “stick” of tax enforcement, then these alternative approaches could be the complementary “carrot” used to improve tax compliance.

The "sample size is approximately 8,500 with firms from 34 separate countries."

Culture and tax evasion?

Using confidential IRS audit data, we show that corporations with owners from countries with higher corruption norms engage in higher amounts of tax evasion in the U.S. This effect is strong for small corporations and decreases as the size of the corporation increases.

That is from the paper "Importing Corruption Culture from Overseas: Evidence from Corporate Tax Evasion in the United States" by DeBacker, Heim, and Tran.

To be sure, I do not like these results at all (I am all for free immigration). But here the paper is for your consideration. Immigration has to be judged considering many variables (through the lenses of general equilibrium). 

HT: Catalina Granada Carvajal.

Graphs for the day: Tax morale, corruption, and shadow economy

Key elements to enforce tax compliance and tax morale:

[A]ccountability, democratic governance, efficient, and transparent legal structures and therefore trust within the society. 

That is from the new paper: "Tax Morale and Compliance: Review of Evidence and Case Studies for Europe" by Benno Torgler. 

The paper concludes:

A failure of a country‘s legal system undermines tax morale and tax compliance . . . Social norms or social capital are key factors in understanding the motivation for compliance in transition countries and other regions . . .

The tax morale index is based on the following:

From the The World Values Survey

―Please tell me for each of the following statements whether you think it can always be justified, never be justified, or something in between: ... Cheating on tax if you have the chance‖. The question leads to a ten scale index of tax morale with the two extreme points ―never justified‖ and ―always justified.

Latinobarómetro

―On a scale of 1 to 10, where 1 means not at all justifiable and 10 means totally justifiable, how justifiable do you believe it is to: Manage to avoid paying all his tax‖.

International Social Survey Programme (ISSP)

―Do you feel it is wrong or not wrong if a taxpayer does not report all of his or her income in order to pay less income taxes? (1= not wrong, 2= a bit wrong, 3= wrong, 4=seriously wrong).