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13. Administration and compliance costs of taxation

Summary

Operating costs are a necessary part of raising revenue. The issue is what the appropriate level of operating costs should be. Operating costs are justified where the costs of raising the tax (including efficiency costs) are outweighed by the net benefits.

There have been few truly comparative international operating cost studies. The main reason for this is that cross-country comparisons are difficult to conduct and need to be treated with caution. Researchers have commented that international comparisons in this particular area are ‘more likely to mislead than enlighten’ (Sandford 1995, p 405).

As a result of these difficulties no summary is made of the various studies that estimate operating costs across countries. Instead, the focus of this chapter is to provide a discussion on operating costs and to highlight some of the difficulties in making international comparisons.

The report notes that the Board of Taxation has commenced a scoping study of tax compliance costs facing the small business sector in Australia, which will be presented to the Treasurer during the second half of 2006.

13.1 Introduction

The various measures of tax burden outlined in the previous chapters do not provide a complete picture of the impact of taxes on society or the economy. Collecting taxation revenue generates two types of costs: efficiency costs and operating costs. Efficiency costs refer to costs arising from distortions in the allocation of resources owing to the imposition of the tax, while operating costs refer to both:

  • administration costs, which are the costs to the government of collecting revenue; and
  • compliance costs, which are the costs (both monetary and non-monetary) incurred by taxpayers in meeting their tax obligations.

Chart 13.1 provides a schematic representation of the types of costs incurred in raising revenue. Previous chapters have focused on tax design features of the revenue system — each of which include aspects of efficiency. The focus of this chapter is on operating costs.

Chart 13.1: A breakdown of tax transaction costs

Chart 13.1:  A breakdown of tax transaction costs

Source: Oliver and Bartley (2005).

Operating costs are a necessary part of raising revenue. The issue is what the appropriate level of operating costs should be. Operating costs are justified where the costs of raising the tax (including efficiency costs) are outweighed by the net benefits.

Compliance costs cover a range of both monetary and non-monetary costs. They include the costs of: acquiring the necessary knowledge of relevant aspects of the tax system; compiling records; acquiring and maintaining tax accounting systems and completing tax return forms; evaluating the tax effectiveness of alternative transactions or alternative methods of complying with the requirements of the law; and collecting and remitting taxes levied on employees and turnover. Monetary costs are those which are incorporated into a businesses’ financial performance and are likely to be reflected in business profits. Non-monetary costs are less tangible costs that are less likely to be reflected in short term profits, but which may impact on short-term incentives and longer-term performance.

Compliance costs may also be either mandatory or voluntary. Mandatory costs are those that taxpayers must incur to meet their statutory obligation such as reporting particular types of income or being able to substantiate deductions claimed. Voluntary costs are additional costs that the taxpayer may choose to incur to determine or minimise their tax liability. For example, taxpayers may choose to evaluate alternative methods of complying with the law to determine which produces the most favourable tax outcome. They may also seek advice to identify tax effective ways to structure transactions.

Administration costs form part of the costs of the public sector and cover the costs of implementing tax policy, and revenue collection by the revenue authority (for example, the Australian Taxation Office). They include the costs of collecting taxation revenue and providing assistance and guidance to taxpayers.

Although recognition of the existence and impact of tax operating costs is not new, research into determining the level of operating costs, and compliance costs more specifically, has emerged only over the past 20-25 years. Two major studies of taxpayer compliance costs have been conducted in Australia, both focused at the ‘macro’ level. These studies are, the 1997 ATAX study, for the Australian Taxation Office (ATO) by Evans, Ritchie, Tran-Nam and Walpole (1997, 1998), which is based on the 1994-95 fiscal year, and earlier studies by Pope et al (1990, 1991, 1992, 1993, 1994). There has been no major study in Australia following the introduction of The New Tax System.

 

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