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The history of the state is closely entwined with war. For example, Mann (1980: 197) estimates that between 1130 and 1815, the English state spent somewhere between 75 and 90 percent of its financial resources on the acquisition and use of military force. Today, although the nonmilitary responsibilities of governments have vastly expanded, war making and national defense remain a central responsibility of most governments. That military activities use resources is well known. What has been less studied is the extent to which popular wars may build social identity and thereby reduce the cost of government mobilization of resources and the extent to which unpopular wars may do the opposite.
This chapter explores the relationship between citizens' willingness to comply voluntarily with tax obligations and the perceived military threat to a country, as well as the relationship between citizens' willingness to comply and their attitudes toward ongoing military action. To the extent that military threats lead individuals to identify with their government, society, and country, the tax authority can reduce enforcement efforts because the citizens' willingness to voluntarily comply acts as a substitute for the threat of detection and penalties. Taxpayer consent to taxation at a particular moment would therefore be due, in part, to the accumulation of conflicts and their nature over time. As Eisaku Ide and Sven Steinmo argue in Chapter 7, taxpayer consent hinges in part on those aspects of a nation's history that determine the collective willingness to sacrifice.
Alan J. Auerbach, Robert D. Burch Professor of Economics and Law, Director of the Burch Center for Tax Policy and Public Finance, and former Chair of the Economics Department University of California, Berkeley,
James R. Hines, Richard A. Musgrave Collegiate Professor of Economics in the department of economics and Professor of Law in the law School University of Michigan,
Joel Slemrod, Paul W. McCracken Collegiate Professor of Business Economics and Public Policy Stephen M. Ross School of Business at the University of Michigan; Director of the Office of Tax Policy Research, an interdisciplinary research center housed Ross School
Modern governments have taxed income earned by corporations for as long as they have taxed income earned by individuals, yet the economic effects of corporate income taxation remain shrouded in mystery, and the appropriate role of corporate income taxation in generating significant government revenue is as unclear now as it ever was. At the onset of the 21st century, governments continue to rely on corporate income taxes as important revenue sources, the product of uneasy compromises between some forces that would reduce, and others that would increase, the tax burden on corporations.
The ability, and evident willingness, of corporations to locate and structure their activities to avoid corporate income taxes is always an important consideration in the design of corporate tax policy. Governments in an increasingly competitive world face pressures to reduce their tax rates, lest corporations relocate their activities elsewhere in search of more hospitable tax climates. Quite apart from their relocation incentives, high corporate tax rates encourage firms to undertake transactions designed to reduce taxes rather than stimulate productivity and may also have the undesired effect of discouraging business formation and expansion. In most countries, corporate income may be taxed twice – first when earned by corporations and second when received as dividends by taxable individual shareholders – which, in the eyes of some, is unfair, inefficient, and just cause for significant reduction of either corporate- or shareholder-level taxation.
We appreciate guidance on data questions from Richard Denesha, Donald Lee, John Miller, and Dick Teed. We are grateful for comments on a presentation of preliminary results received from Charles Brown, James Hines, and other members of the University of Michigan public finance workshop and for comments received at the conference from discussants Joe Bankman and Brian Erard, and several other participants.
The Internal Revenue Service (IRS) provided confidential tax information to one of the authors pursuant to provisions of the Internal Revenue Code that allow disclosure of information to a contractor to the extent necessary to perform a research contract for the IRS. None of the confidential tax information received from the IRS is disclosed in this chapter. Statistical aggregates were used so that a specific taxpayer cannot be identified from information supplied by the IRS. Information in this chapter that identifies specific companies was not provided by the IRS and came from public sources, such as reports to shareholders.
Introduction and motivation
This chapter examines the extent and nature of corporate tax noncompliance using previously undisclosed Internal Revenue Service (IRS) operational audits and appeals data merged with confidential tax return data. The extent of tax noncompliance is primarily measured as the level of proposed tax deficiencies under IRS audit, although we also investigate the amount of the proposed deficiencies that are upheld after taxpayer appeals.
This book was first published in 2007. Most countries levy taxes on corporations, but the impact - and therefore the wisdom - of such taxes is highly controversial among economists. Does the burden of these taxes fall on wealthy shareowners, or is it passed along to those who work for, or buy the products of, corporations? Can a country with high corporate taxes remain competitive in the global economy? This book features research by leading economists and accountants that sheds light on these and related questions, including how taxes affect corporate dividend policy, stock market value, avoidance, and evasion. The studies promise to inform both future tax policy and regulatory policy, especially in light of the Sarbanes-Oxley Act and other actions by the Securities and Exchange Commission that are having profound effects on the market for tax planning and auditing in the wake of the well-publicized accounting scandals in Enron and WorldCom.
The consequences of taxation matter for the optimal design of the tax
system. Those consequences depend on behavioral responses to taxation, as
summarized by the elasticity of taxable income. Although this elasticity
depends on characteristics of preferences, such as the elasticity of
substitution between goods and leisure, it also depends on the avoidance
technology, and on the response of government to avoidance behavior. It
depends on the size of states, and the amount of tax coordination and
harmonization. To some degree the elasticity of response can be affected
by government policies, and the government need not accept it passively,
but rather should put in place policies that optimally determine it.
Over the past half century, the academic analysis of taxation has become more technical, increasingly involving sophisticated mathematics and statistics. For this reason, its language and reasoning have become less and less accessible to those outside academia. Academics hoping to influence the policy process have to think carefully about how to “translate” what they know into what can be convincing and useful for policy. Even those who think carefully about this translation have, I suspect, often been greeted by a dismissive reply that begins, “Yes, but in the real world …”
What is it about the real world, or about the modern analysis of taxation, that reduces the potential contribution of academics to the policy process? I can think of four problems.
(1) The real world is more complicated than highly stylized economic models allow.
(2) The models are too complicated to be of use in the real world.
(3) A real-world tax system needs to be administered and enforced, and some tax systems that look promising on paper fail on these practical grounds.
(4) The tax system is forged within a political process that constrains what can be accomplished.
The purpose of the Symposium section of the National Tax Journal, which debuted in the June 1993 issue, is to bridge the gap between academics and those who live in the trenches of the real world. For each Symposium, experts—both scholars and practitioners—were commissioned to write nontechnical papers on the leading policy issues of the day, or to reflect on what first principles should inform the policy process.
Tax professionals are not inclined to replace the graduated income tax as the backbone of the federal tax system or abandon the property tax and sales tax as important features of the local and state revenue systems. They do, though, on average favor some significant reforms of the federal tax system, such as integration of the corporate and individual income tax, comprehensive inflation indexing, and elimination of the mortgage interest deduction. With regard to state and local taxes, a majority favor extending the sales tax to services, increasing reliance on user fees, and eliminating homestead exemptions from the property tax.
These are a few of the results of a tax policy opinion survey sent out on April 28, 1994 to the 1309 American and Canadian individual members of the National Tax Association (NTA). Of the 1309, 521 were academics, 406 were employed by a government or international agency, and 382 were in the private sector. There were 503 responses received before the cutoff date, representing an overall response rate of 38 percent, which is on the high side for mail surveys, especially ones for which there was no follow-up notice sent to those who did not respond promptly. The response rate was 45, 32, and 28 percent, respectively for academics, government, and the private sector. Although the response rate was relatively high, the nonresponse rate is certainly high enough to leave open the possibility that those who responded are not representative of the NTA membership.
Leading economists and scholars discuss and debate current tax policy issues in non-technical language, illustrating how the principles of tax analysis can be applied to real-world issues. Among the topics addressed are the practical feasibility of consumption tax alternatives to the current income tax, the rationale and implications of devolution of fiscal responsibilities to state and local governments, the effect of tax policy on economic growth, and the value of local tax incentives designed to attract and retain business. This volume collects articles from the Symposium series of the National Tax Journal from 1993 to 1998.