tax notes international - Tuck School of Business - Dartmouth College

to the dividend repatriation tax — a cost to the competitiveness
of U.S. companies. Two of the United
States’ major trading partners, Japan and the United
Kingdom, are moving away from taxing dividend repatriations,
while a third major partner, the Netherlands,
has few restrictions on income repatriations.
The evidence is overwhelming that the U.S. international
tax system badly needs reform. I believe it is
time for Congress to add the financial reporting and
the competitiveness costs when it considers changing
the tax treatment of the foreign profits of U.S. multinational
corporations.
Cross-Country Differences in Tax Systems
Slemrod, along with coauthor Leslie Robinson of
the Tuck School of Business at Dartmouth College,
took a global view of tax systems. They took advantage
of new OECD information to analyze how variations
in tax systems beyond the tax rate and the tax
base affect real economic behavior. Their study, ‘‘Measuring
the Impact of Tax Systems on Economic Behavior
Using New Cross-Country Data,’’ examined how
variations in tax administration, enforcement, withholding,
and corruption, for example, help explain
variations in economic behavior across countries.
‘‘Tax systems are multidimensional,’’ Robinson explained.
‘‘Ignoring these differences may skew our view
of how tax rates affect economic behavior. Leaving out
important aspects of tax systems may bias estimated
partial effects of tax rates, and/or miss entirely the effects
of other tax system features.’’ For example, while
prior research has shown that countries with high tax
rates tend to have a smaller informal sector, Robinson
noted that the tax rate impact largely disappears once
tax administration is taken into account. Somewhat
counterintuitively, she found that although countries
with high penalty rates have a smaller informal
economy, countries that use extensive withholding systems
have larger informal sectors.
The reason, she suggests, is that withholding systems
make it less attractive to work in the formal sector,
because withholding makes it difficult to avoid paying
taxes. Given that more corrupt countries exhibit
greater use of withholding, that may partially explain
why prior research has found a strong positive association
between corruption and the informal sector.
One main benefit of Slemrod and Robinson’s paper
is that it references a 2006 OECD report 11 that provides
internationally comparable data on the aspects of
tax systems in 30 OECD countries and 14 non-OECD
countries.
11 For the report Tax Administration in OECD and Selected Non-
OECD Countries: Comparative Information Series, see Doc 2006-22140
or 2006 WTD 210-10; for related coverage, see Tax Notes Int’l,
Sept. 25, 2006, p. 1046, Doc 2006-19457, or2006 WTD 180-2.
HIGHLIGHTS
It’s no surprise that tax systems vary significantly
across countries — some countries have effective tax
administrations, while others have weak administrations;
some countries tend to rely on withholding,
while others rely on self-assessment; some countries
have strong debt collection powers, while others have
low ratios of tax administrators per worker.
Until the OECD published its data, researchers had
no comparable cross-country information on how tax
systems varied, other than in their rates and their
bases, and so could not examine the factors that explained
why tax systems varied across countries. Slemrod
and Robinson used the OECD data to show that
tax system differences affect real economic behavior,
because they affect how the taxpayer perceives the expected
tax burden triggered by its actions.
The authors also explore a well-known tax fact:
Rich countries levy more taxes per capita than poor
countries. The OECD data confirm that, but also show
that tax systems in high-income countries tend to share
some characteristics and that there may be underlying
factors about those countries that explain the tax burden.
Relative to low-income countries, high-income countries
impose withholding and reporting on fewer types
of income, have fewer powers to facilitate debt collection,
impose lower penalties, are less likely to use selfassessment
principles, and hire more tax administrators,
but they do not spend significantly more on
administrative costs as a share of income.
For example, Luxembourg, Iceland, and the Netherlands
are in the top per capita income quartile but tend
to fall in the lowest quartiles for penalty rates, withholding
taxes, and information reporting. Chile, China,
and South Africa fall in the lowest income bracket but
tend to fall in the highest brackets for imposing penalties,
levying withholding taxes, and relying on information
reporting.
Those correlations suggest that high-income countries
tend to design their tax systems in ways that explain
why those countries have a relatively high tax
burden. As Robinson noted, an analysis that considers
only tax rates will miss the effect of other factors that
may affect the size of the informal economy and may
bias the estimates of how tax rates affect tax burdens.
Robinson said it might be a variation in tax system
design that is correlated with national income, rather
than national income itself, that affects a country’s tax
burden.
In conclusion, Slemrod emphasized: ‘‘Leaving out
consideration of administrative issues can lead to severely
biased measures of the role of tax rates in the
economy.’’
♦ Joann M. Weiner is a contributing editor to Tax
Analysts. E-mail: jweiner@tax.org
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