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INDIVIDUALS TAX COMPLIANCE: A TIME-SERIES REGRESSION USING CANADIAN DATA, 1987-2003. Attah Boame International Conference on Institutional Taxation Analysis, London, U.K. September 21 - 22, 2009. OUTLINE. Background and Objectives Methodology Study Results Areas for Further Research
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INDIVIDUALS TAX COMPLIANCE: A TIME-SERIES REGRESSION USING CANADIAN DATA, 1987-2003 Attah Boame International Conference on Institutional Taxation Analysis, London, U.K. September 21 - 22, 2009
OUTLINE • Background and Objectives • Methodology • Study Results • Areas for Further Research • Questions or Comments?
Background: • The Canadian tax system assumes voluntary compliance and self-assessment by taxpayers. • Personal income taxes are a major source of income for the federal government. • Personal income taxes generated an average of $81.6 billion quarterly from 2000 to 2004 for the federal government. Study Objectives: • To study the macroeconomic factors that influence tax compliance in Canada. • To provide a time-series regression analysis of tax compliance from 1987-2003.
Tax Compliance Defined • Filing required tax forms on time; • Reporting complete and accurate information; and • Paying any amounts due in a timely manner (without enforcement action). The Compliance Measurement Framework (CMF) identifies the following main compliance requirements for individuals:
Operational DefinitionTax Compliance • Filing Compliance Rate – The ratio of tax returns filed on time to the total number of tax returns filed for each tax year. • Reporting Compliance Rate – The ratio of the total tax payable on the initial notice of assessment to the total tax payable assessed by the Canada Revenue Agency (CRA) within two years after the filing deadline for each tax year. • Payment Compliance Rate – The ratio of total taxpayers without arrears/instalment interest charges to the total of all taxpayers who filed tax returns for each tax year.
Data • Sources: Initial Assessment and Reassessment of Individual Taxpayers Tax Returns (T1). • Study period: From 1987 to 2003. • Variables: Aggregate T1 variables and selected macroeconomic variables (e.g., unemployment rate, inflation rate, bankruptcy rate). • Type: Aggregate Time-series data. • Observations: There are 17 years of aggregate time-series data.
Some Caveats • The major constraint is the lack of adequate time-series data. • Data limitations reduced the number of relevant variables in the study (e.g., audit rate and filing methods are excluded from the analysis). • Variables that are linear combinations of other variables are excluded from the analysis (e.g., tax reform dummy). • The results of the analysis should be interpreted noting the above data constraints.
Methodology • Multivariate Analysis • Ordinary Least Squares (OLS) method is used to analyze selected macroeconomic variables that influence filing, reporting, and payment tax compliance from 1987-2003. • Two model specifications: • First difference method. • Log-linear specifications.
Model Specification Tests • Model selection (backward and forward methods). • Stationarity Tests (Phillips-Perron unit root tests). • Diagnostic Tests • Serial correlation (Durbin-Watson, Yule-Walker estimates). • Multicollinearity (Variance inflation factor). • Normality. • RESET and ARCH(p) tests.
Model Specification The baseline regression equation is: TC = f(INF, GDP, U, ETR, PEN, AUD, VDP, FM, TR, BR) TC is tax compliance rate (filing, reporting, and payment); INF is the annual inflation rate; GDP is the annual gross domestic product; U is the annual unemployment rate; ETR is the annual effective tax rate; PEN is the annual penalty rate; AUD is the annual audit rate; VDP is the voluntary disclosures program dummy; FM is the filing method dummy; TR is the tax reform dummy; and BR is the bankruptcy rate.
Reduced Model Specification The reduced regression equation is: TC = f(U, ETR,VDP, BR) TC is tax compliance rate (filing, reporting, and payment); U is the annual unemployment rate; ETR is the annual effective tax rate; VDP is the voluntary disclosures program dummy; and BR is the bankruptcy rate.
Regression Results Notes: t-ratios in parentheses. Significance levels: *p < 0.10; and ***p < 0.01.
Regression Results Notes: t-ratios in parentheses. Significance levels: *p < 0.10; **p < 0.05; and ***p < 0.01.
Conclusions • The effective tax rate: • Has a negative and statistically significant effect on payment tax compliance, that is, changes (an increase) in the effective tax rate might reduce taxpayers’ ability to pay their taxes owing. • Changes (an increase) in the unemployment rate: • Have a positive and statistically significant effect on payment tax compliance. • Have a negative and statistically significant effect on reporting tax compliance.
Conclusions • The Voluntary Disclosures Program (VDP) • Has positive and statistically significant effect on payment tax compliance: • This supports the objective of the VDP. • Has negative and statistically significant effect on reporting tax compliance: • This might be due to the fact that taxpayers would intentionally underreport their income, knowing that they could avoid criminal prosecution by availing themselves of the VDP. • This finding reinforces that of Das-Gupta, Lahiri and Mookherjee (1995) who found that amnesties appear to have negative effects on tax revenues.
Further Research • It might be of interest to revisit this analysis in future when more data are available to revise the estimates in this study. • Use other model specifications besides ordinary least squares (e.g., cointegration method – a long-run relationship between tax compliance and the independent variables).
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