Page 7 - Working Paper (Tax Policy Options during Economic Downturn)

DDTC Working Paper 1315
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Brondolo where he analyzed deeply on the Table 2: Greater risk of Non-Compliance 16
challenges and policy options of collecting
taxes during an economic crisis. In the No Possible Scenarios
paper, he elaborated that tax administration
1 During tight credit conditions, taxpayers
encounters growing compliance risks may be tempted to use tax evasion and
involving such issues as tax arrears, loss- withheld from their customers or employees
reporting business, and tax withholding, as an alternative source of financing for their
operations
and growing shadow economy. At the
same time, tax administration requires 2 As the probability of bankruptcy imminent,
taxpayers perceive the downside risks of tax
to provide taxpayers with additional
evasion to be minimal compared with the
support and assistance to help them cope potential upside gains (avoiding bankruptcy).
with their obligations. While a decrease
3 Shifting in structure of the economy from
in compliance during the slowdown may formal to informal where compliance is likely
have some countercyclical effects on the to decline and hard to monitor.
economy, tolerating noncompliance is not an 4 Taxpayers’ believe that during the crisis,
appropriate response to the crisis because tax administration to be less stringent in
enforcing the tax laws and making it less
it is distortionary, inequitable, and perhaps
risky or more socially acceptable to evade tax.
most importantly, hampers the rebuilding of
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tax bases over the medium-term .
Brondolo encourages tax agencies to During an economic stress, many
develop a tax compliance strategy that firms face severe financial difficulty that
is structured around several objectives may harm their businesses and probably
in responding to the crisis: (i) expanding resulting in permanent business shut
assistance to taxpayers; (ii) refocusing down. Tax administration may help keeping
enforcement on the highest revenue risks; alive firms through several measurements
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(iii) introducing legislative reforms that including advance payments , accelerating
facilitate administration; and (iv) improving tax refunds, tax payment installment and
communication and outreach programs. payment extensions. In terms of tax refunds,
Some measures such as tax amnesties and some countries recently introduced reforms
moratoria on audits are counterproductive that can be done more quickly. Tax laws
and should be avoided as he mentioned. in many countries stipulates that allow
finally distressed taxpayers to install their
Additionally, he recommended tax
tax liabilities payments. The installments
administration in one’s country to keep in
typically range from one to two years during
mind a number of key points. First, early
with time interest accrues but late payments
warning of emerging compliance risks
penalties are most likely waived. However, it
is crucial for their mitigation. Second, a
is important to scrutinize the performance
high-level group needs to be established
of each business during this economic stress
within the tax agency to coordinate the
before they can join into this installment
development of the crisis strategy. Third,
program.
government support for tax administration
is more important than ever during a crisis. Furthermore, during the crisis some
Finally, tax agencies should align their near- tax administrations provide assistance
term compliance strategies and medium- to taxpayers. Two good examples of this
term modernizations plan. Table 2 below approach are the Australian Taxation
describes reasons of an increased risk of Office (ATO) small business program and
noncompliance during the crisis. the IRS volunteer income tax assistance
program. The ATO helps business filling
tax registration and comply with their
tax obligation and improve their business
record keeping. During the crisis, ATO also

16. Previous studies linked a negative correlation between taxpayers’
filling and reporting compliance with the unemployment rate. There
was also a study shows that corporate income tax evasion is negatively
correlated with access to credit, suggesting that compliance can be
expected to decline when an economic donwturn is combined with tight
credit conditions.
14. Brondolo, John (2009),”Collecting Taxes during and Economic Crisis: 17. Advance payments are calculated not on the basis of the previous
Challenges and Policy Options”, IMF Staff Position Note. year’s tax liability but estimates based on current year revenues and
15. Brondolo, John, ibid. expenses.