To lingo-lovers, a recent paper of value is Pat Oglesby's “‘Tax Repatriation Holiday': Choosing Words Strategically,” which opens by stating that tax policy turns on terms. The paper is about ‘Freedom to Invest Act' of 2011 (H.R.1834), a title that the author finds appealing. So how about a “Freedom to Spend Act,” imposing just a nominal tax on fully taxable amounts locked up in traditional IRAs (individual retirement accounts), he asks, and informs that a somewhat different version, S. 1671, has a title with more description and less spin, the “Foreign Earnings Reinvestment Act.”
Oglesby begins with the word ‘repatriation,' which surrounds the proposal with a ‘warm glow,' because ‘repatriation' sounds patriotic! But repatriation, in ordinary non-tax usage, means “the act of returning to the country of origin,” he reasons. “US law already provides that capital sent abroad may be repatriated – may come back home – tax-free. Foreign source profits, like the proverbial bacon, may be brought home, but you can't bring back home what never was home before.” His anguish is about tax lingo clumsily extending the term “repatriation” beyond return of capital to return on capital, that is, to profits.
Arguing that “extraction” is more accurate than “repatriation,” he suggests “Income Extraction Holiday,” as a start. “But Ouch! It reminds us of the dentist's chair.”
A more accurate label for H.R. 1834, in Oglesby's view, is ‘Retroactive Territoriality,' because a territorial system imposes no or little tax on foreign source income. H.R. 1834 would do exactly that, but only for earnings already accumulated and now trapped offshore, he adds. Conceding that ‘Retroactive Territoriality' is technical, and a mouthful, the author reminds that because it is non-countable (like ‘Helium' or ‘Honesty'), “we can't say ‘Another retroactive territoriality'; we have to say something awkward like ‘Another grant of retroactive territoriality.'”
A bigger issue with ‘Retroactive Territoriality' is whether the US wants to follow so many VAT-reliant countries to an income tax that is explicitly territorial, or to tax worldwide income currently and take away opportunities to game the system and an incentive to export capital, he highlights. “Or, best of all, to adopt formula apportionment of the type many states used effectively – the worldwide unitary method.”
Wish experts closer home too retold our taxation laws, by reading between the words.
Hidden taxes in China
China-watchers among the tax professionals may find it useful to read the inaugural issue of the ‘Journal of Chinese Tax & Policy,' from the University of Sydney Business School. The first paper in the journal, by Bin Yang and Eva Huang, speaks of formal taxes, sundry levies, and hidden taxes coexisting in China.
Examples of the first category are individual income tax and enterprise income tax, legislated by the National People's Congress (NPC). Other formal taxes include those legislated by the State Council, and its Ministry of Finance, the State Administration of Taxation, the General Administration of Customs, the Ministry of Human Resources and Social Security, and the Ministry of Environmental Protection, through regulations, circulars or decrees, the paper instructs.
Then come the levies that exhibit ‘tax characteristics,' though called by a variety of names such as fees, funds, charges, and so on, levied through regulations, departmental decrees, administrative regulations, rulings or circulars by the departments of central government, or even departments of different-level local governments, the authors explain.
An example of the ‘hidden tax' that the paper discusses is the ‘indirect' tax on farmers. “In a system where important agricultural goods such as grains are purchased and sold centrally, and farming equipment is allocated by plan, the government may deliberately raise the price of farming equipment and sell it to farmers above its value. At the same time the government would deliberately lower the price of agricultural goods such as grains. This creates what is termed a price ‘scissors difference'.”
The ‘hidden tax' system, in operation from 1953 to 1985, resulted in the Chinese government collecting RMB600 billion from farmers, which was six times the amount of agricultural tax and equalled the total industrial investment capital of the State-owned enterprises of the time, one learns. “Some scholars are therefore of the view that China's initial industrial capital accumulation came mainly through depriving farmers. In order to achieve this deprivation, China has a strict population register system, dividing the population into two worlds – urban and rural…”
Insights of import.
Lab study of tax evasion
Tax evasion may not be as old as the original sin, but it is reasonable to presume that tax evasion must be at least as old as the first tax. However, it was not until 1972 that Allingham and Sandmo presented the first economic model of tax evasion behaviour based on Gary Becker' economics-of-crime approach, inform Fangfang Tan and Andrew Yim, of Max Planck Institute for Tax Law and Public Finance, Munich, and Cass Business School, City University London, respectively, in a paper titled ‘Can Strategic Uncertainty Help Deter Tax Evasion? – An Experiment on Auditing Rules' (www.ssrn.com).
They note that the Allingham-Sandmo framework, while being simple and intuitive, neglects the potential impact of social interactions among taxpayers. “Recent tax evasion studies argue from an economic psychology perspective that compliance decisions are affected by personal, social and societal norms [Kirchler (2007)].”
That is, the compliance decisions of taxpayers do not merely depend on their isolated assessments of economic variables such as income, audit probability and fine, but also on their beliefs about what they should do and what others would do, the authors explain. “Given the limited audit resources of a tax authority for a fixed period of time, a taxpayer's belief regarding the compliance decisions of others may affect his own compliance decision and consequently the ex-post probability of being audited. This could lead to distinctive tax evasion dynamics and equilibria across societies.”
Interestingly, the paper is based on observing evasion behaviour directly in a laboratory environment that induces ‘strategic uncertainty' among taxpayers. The authors create the strategic uncertainty by informing the taxpayers of the maximum number of audits to be carried out, instead of telling them directly what the audit probability is.
Among the findings is this surprise: “Players who have spent more years studying economics are more likely to underreport. This result seems to suggest that training in economics results in behaviour more in line with the predictions made by game theory.”