Education

Contours of compliance

D. MURALI | Updated on October 23, 2011

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A recent paper by Paolo Pellizzari and Dino Rizzi of the Department of Economics in the Ca' Foscari University of Venice ( >www.ssrn.com) adopts a colourful approach to tax evasion, with hues ranging from dark red to bright yellow for depicting the ‘contours of compliance rate.'

That apart, what may interest tax researchers is the reference in the paper to work by Zaklan et al, inspired by the Ising model of ferromagnetism. Taxpayers have “spins” and can be fully compliant (+1) or non-compliant (-1), depending on the state of neighbours and (possibly) on some external force (say, mass media or other biases), reads a snatch from the reference; also that there is a critical ‘temperature,' that is, the degree of social influence, of the system that can trigger phase changes. “In spite of some difficulties in the economic interpretation and some questionable assumptions, the model shows that occasional bursts in the evasion rate are possible even under a harsh enforcement system, provided decisions are influenced by the social temperature.”

An interesting finding in the present paper is that an increase in the tax rate induces more compliance only for low-income taxpayers, and that, on the contrary, high income agents increase their evasion together with the tax rate (for reasonable levels of the tax rate).

“Compliance gets bigger with the tax only when income is low. Indeed, at low tax rates, a low-income agent evades almost all taxes, as the tax and the penalty are small in absolute value and the marginal utility of income is higher than the marginal utility of the exogenously given public expenditure. However, increments in the tax rate raise compliance as fines more adversely impact utility of relatively poor agents…”

Important pointers for tax policy.

Shape tax credit

When repeated health warnings and catchy workout commercials are not seeing any reduction in the obesity levels of people, tax sops may help. That can be a takeaway from ‘ Fitness Tax Credits: Costs, Benefits, and Viability,' a paper by Daniel M. Reach of the Emory University School of Law.

The paper opens with startling statistics, such as an obese person incurs 42 per cent more in medical costs than someone of normal weight; that the direct medical costs related to obesity in the US were estimated as high as $147 billion for 2008, representing 9.1 per cent of total annual medical spending; and that low physical activity uniformly plagues American lifestyles, with less than 50 per cent of Americans attaining the currently recommended 60 minutes a day of physical activity.

The author proposes a new fitness tax credit, the ‘Americans in Shape Tax Credit' (ASTC), which can be used to create effective incentives for healthier exercise habits.

He draws strength from the Children's Fitness Tax Credit (CFTC) in Canada, started in 2007; it permits parents to benefit from a non-refundable tax credit of up to $500 a year for expenses paid to register each child under 16 in an eligible programme of physical activity, one learns.

“In its first year, approximately 1.3 million taxpayers (5.2 per cent of eligible Canadian taxpayers) claimed the credit, and in 2008 this number increased to approximately 1.5 million (5.9 per cent).” Some of the provinces have made the sops more attractive; for example, Saskatchewan allows individuals to claim a credit for the full amount of fees paid up to $150 for an eligible child, rather than a percentage, the paper informs.

A call to celebrate health, if only the FM could tune into it.

Innovation value chain

Tax incentives can be effective in stimulating R&D, argues Mark Parsons, Manager and Senior Economist at PricewaterhouseCoopers LLP.

Though set in the Canadian context, the paper has valuable insights about promoting innovation through the right fiscal policies.

Parsons emphasises that business R&D is strongly linked to measures of innovation output, citing an OECD study showing a strong positive relationship between a country's patent levels and its industry expenditures in R&D.

Another reference to the OECD study is about the total support that governments provide businesses to undertake R&D, directly through grants and indirectly through tax incentives; “among 30 member-countries studied, the OECD found that Canadian governments spend the second highest amount (as a share of GDP) on business R&D after Korea.”

Paradoxically, however, business R&D spending in Canada is sub-par despite the fact that the country offers one of the world's most generous R&D tax regimes, the author frets. He recommends, as antidote, that the Canadian tax policy should be focused on creating a competitive tax environment across the entire innovation value chain, from initial R&D through commercialisation to the development and production of new products and services in Canada.

The current system of tax support, in his view, is front-end loaded, pushing firms to undertake R&D though upfront subsidies.

“Meanwhile, the rewards from R&D and other innovative activities are taxed, often at rates above many of Canada's international competitors, creating a disincentive to commercialise, develop and produce new products and services in Canada.”

Useful source of reference for the innovation advocates closer home.

Emission-based duty

In the domain of environmental taxation, a paper by Jon M. Truby, Lecturer in Law, Qatar University, calls for targeted taxes and incentives on airlines, so as to make the continual improvement of the aviation fleet's environmental efficiencies commercially attractive.

He recommends the levy of an ‘aviation excise duty' based on the certified CO{-2} emissions of an aircraft.

By charging every flight, the proposal would provide an incentive for airlines to reduce unnecessary flights, with the result that longer flights producing greater levels of emissions and with higher levels of fuel usage would be discouraged through cost internalisation, the author foresees.

Truby advises that the revenue from the duties should be earmarked partly or wholly to provide tax credits for airlines renewing older aircraft with the most efficient new aircraft, and for research and development of more efficient aircraft. “Crucially it would be expected that, as a result, tickets for the most efficient aircraft would be consistently less expensive than the least efficient.”

For the eco-avid, who work towards a sustainable future.

Published on October 23, 2011

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