Tax Gap

Background

The term “tax gap” refers to the difference between the total amount of taxes owed to the government and the amount that is actually paid by taxpayers. It serves as a crucial metric for understanding tax compliance and the effectiveness of a country’s tax system.

Historical Context

The concept of the tax gap has been used by tax authorities such as the Internal Revenue Service (IRS) in the United States and HM Revenue and Customs (HMRC) in the United Kingdom to measure and address the discrepancies between expected and actual tax revenues. It has gained increasing attention over time as governments seek to minimize revenue losses and improve tax compliance.

Definitions and Concepts

• Tax Gap: The difference between the amount of tax that taxpayers are legally obligated to pay and the amount that is voluntarily and timely paid.

• Voluntary Compliance: The degree to which taxpayers meet their tax obligations without enforcement actions such as audits.

• Non-Compliance: Failure to meet tax obligations, which contributes to the tax gap. This can occur through underreporting of income, underpayment of owed taxes, or non-filing of tax returns.

Major Analytical Frameworks

The analysis of the tax gap can be approached from various economic frameworks, each providing unique insights.

Classical Economics

Focuses on the natural law of markets and generally advocates for minimal government intervention, but would acknowledge a tax gap as a barrier to free market functioning due to uneven playing fields.

Neoclassical Economics

Considers the tax gap through the lens of utility and efficiency, emphasizing the need for efficient tax systems that minimize distortions in market behavior.

Keynesian Economics

Views the tax gap as a significant concern for fiscal policy and its influence on aggregate demand, advocating effective tax collection to support government spending and economic stabilization.

Marxian Economics

Analyzes the tax gap in the context of class struggles, where tax compliance issues may be linked to broader issues of economic inequality and power dynamics.

Institutional Economics

Emphasizes the role of legal, organizational, and social institutions in shaping tax compliance and thus influencing the tax gap.

Behavioral Economics

Considers psychological and cognitive factors that influence taxpayer behavior, suggesting targeted interventions to reduce the tax gap by addressing these behavioral aspects.

Post-Keynesian Economics

Looks at the tax gap as a reflection of broader economic uncertainties and bargaining power within the economy, often critiquing neoliberal policy directions that could exacerbate income and tax disparities.

Austrian Economics

Frequently criticizes high taxation and complex tax systems, arguing that simpler tax approaches might partially remedy the tax gap by increasing compliance through lower administrative burden.

Development Economics

Studies the impact of the tax gap on economic development, particularly in lower-income countries where tax compliance and administrative capacity are often limited.

Monetarism

Concerns itself with the efficiency and predictability of revenue collection in maintaining fiscal and monetary stability, emphasizing the detrimental impact of a large tax gap on managing the money supply.

Comparative Analysis

Different countries have varying degrees of tax gaps influenced by the complexity of their tax codes, enforcement mechanisms, and cultural attitudes towards taxation. Comparative analysis helps to identify best practices in tax administration and policy.

Case Studies

• United States: The IRS has documented ongoing efforts to educate taxpayers and implement robust enforcement strategies to minimize the tax gap.
• United Kingdom: HMRC employs sophisticated data analytics and targeted campaigns to enhance voluntary compliance and reduce the tax gap.

Suggested Books for Further Studies

1. Taxing Ourselves: A Citizen’s Guide to the Debate Over Taxes by Joel Slemrod and Jon Bakija.
2. The Economics of Taxation: Principles, Policy, and Practice by Simon R. James.
3. Tax Compliance and Tax Morale: A Theoretical and Empirical Analysis by Benno Torgler.

Related Terms with Definitions

• Tax Avoidance: The use of legal strategies to minimize tax liabilities.
• Tax Evasion: The illegal act of not paying taxes owed, by underreporting income, inflating deductions, or hiding money and interest in offshore accounts.
• Voluntary Disclosure: Programs that allow taxpayers who have not properly reported their tax liabilities to come forward and comply, usually in exchange for reduced penalties.