Canada is joining a number of countries that estimate the amount of tax liability that is not collected, the so-called compliance tax gap. The Canadian Revenue Agency (CRA) released an excellent conceptual paper on the tax gap last year, as well as tax gap analyses of their personal income tax and goods and services tax. Last week, the Canadian Tax Foundation, with the involvement of the CRA, hosted a very helpful conference on the tax gap, with representatives from the US IRS, UK HRMC, Sweden, Denmark, the IMF and OECD.
Similar to tax expenditure budgets, tax gap analyses raise both conceptual and quantification issues. Albeit with many limitations, tax expenditure and tax gap analyses strengthen countries’ tax policy and tax administration. Transparency, increased understanding, and the analytical focus from the modeling and presentation help make tax administrations more effective and efficient, and help tax policy incorporate important tax administration issues.
Tax gap analyses must choose whether to distinguish between illegal tax evasion and legal (but often “aggressive”) tax avoidance. The UK HRMC includes schemes that are contrary to the “spirit of the law.” I like the IMF graphic above that distinguishes between the “compliance” cap and the “policy” gap. International base erosion and profit shifting (BEPS) required coordinated policy measures to close gaps in the international tax rules. In contrast, hidden offshore assets (see new paper by Altstadsaeter, Johannesen and Zucman) are often used for tax evasion.
Another issue is illegal activity, such as money laundering, terrorism financing, corruption, or hiding assets from a business partner or spouse. Tax evasion is a result no matter what the underlying motivation. Initiatives of the international Financial Action Task Force will be important in curtailing such activity in addition to the OECD and G20 initiatives on automatic exchange of information for tax purposes and tighter rules for beneficial ownership information.
If governments do not provide estimates of their compliance tax gaps based on their administrative tax records and research, then outside groups and academics will fill the vacuum with higher-level, more macro-analyses. To address resource limitations, countries’ tax administrations should consider arrangements with academics under strict confidentiality rules so more analysis of compliance and policy gaps are undertaken, similar to programs in a number of countries, and encouraged by the OECD/G20 BEPS Action 11 report.
The OECD and IMF should encourage more countries to undertake compliance tax gap and tax expenditure (policy gap) analyses. Developing a uniform framework will assist countries in their analyses, while also providing comparable estimates. Countries are hesitant to publish tax gap analyses if they appear less compliant because they have taken a more comprehensive approach to the measurement.
I applaud the CRA and CTF for moving forward on increased discussion and analysis of the Canadian tax gap; the IMF in helping countries with VAT tax gap analyses; and the OECD for its tax administration work on measures of tax compliance outcomes and biannual tax administration surveys. Exciting future work will challenge government and academic researchers.