Evans, Chris --- "Studying the Studies: an overview of recent research into taxation operating costs" [2003] eJlTaxR 4; (2003) 1(1) eJournal of Tax Research 64

Studying the Studies: An overview of recent research into taxation operating costs

Chris Evans[∗]

Abstract

Studies into the operating costs of taxation – compliance costs for taxpayers and administrative costs for revenue authorities – have flourished in recent years. This paper provides an overview of these studies, and reveals both the breadth and the depth of the research in this area. The paper focuses upon studies that have taken place in the last 20 years or so, although the paper also briefly considers the broader historical context, including the reasons why research into tax operating costs has apparently flourished after some initial neglect.

A summary of most of the major (and some minor) administrative and compliance cost studies that have been published (and some that have not been published) since 1980 is contained in an appendix. This summary highlights the geographical spread of operating cost research, the variety of taxes and aspects of tax systems that have been studied, and the range of methodologies employed. The outcomes of the research are also summarised.

A key thesis of the paper is that tax law design should not take place without clear recognition of the impact of the proposed changes on the operating costs of the tax system. Sensible tax law design must be informed by an understanding of the impact that design will have on the burden that taxpayers will face and the administrative costs that the revenue authority will be required to carry.

I. INTRODUCTION

Recognition of the existence and impact of tax operating costs[1] is not the recent phenomenon we sometimes assume it to be. As long ago as the eighteenth century, the latter three of Adam Smith’s four well-known maxims of good tax practice (equity, certainty, convenience and economy) emphasised the impact of tax operating costs on the tax system (Smith, 1776, pp. 361-362). And literature contains many historical references to the burden imposed upon taxpayers as a result of their taxation obligations. For example, half a century after Smith’s discourse, William Cobbett noted that farmers not only faced the cost of paying tax of “2d in the pound” for growing hops, but that “...in all such cases, there falls upon the consumer the expenses attending the paying of the tax...[such as] the trouble it gives him, and the rules he is compelled to obey in the drying and bagging, and which cause him great expense” (Cobbett, 1826, pp. 148-149).

But if recognition is not new, research into those operating costs is a more recent development. Administrative costs, as a part of the cost of the public sector, have naturally been subject to some degree of measurement by governments throughout, though the standard and comprehensiveness of that measurement has varied

considerably over time and between governments. But very little was done in the way of assessing and measuring compliance costs until well into the twentieth century.

Since then, however, this has been an area of taxation research that has flourished – arguably too much so in the view of some: see, for example, James (2003, pp. 69-70). There have been more than 100 published studies into either compliance costs or administrative costs (or sometimes both) since Haig’s tentative first modern study (1935) in the US; and more than 60 of those have occurred since 1980. Studies have now occurred in most developed and many transitional and developing countries, have utilised most of the research methodologies that are available and have encompassed the full range of taxes and tax issues.

The principal objective of this paper is to make available in a single source an overview of recent research into tax operating costs. In so doing it should help interested readers and prospective researchers to gain an initial feel for the breadth and depth of studies in this area. It also signifies an ambition, on the part of the author, to prepare a comprehensive register of operating cost studies as part of a longer-term project.

This paper focuses upon studies that have taken place in the last 20 years or so, although the next section briefly considers the broader historical context, including the reasons why research into tax operating costs has apparently flourished. The third section focuses upon the scope of the taxes and taxpayers that have been the subject of the research, while an analysis of the different methodologies employed in the studies is dealt with in Section 4. The major outcomes of the studies are summarised in Section 5, and the concluding section suggests future directions and patterns for research, including the need for that research to feed into the tax law design process.

A summary of most of the major (and some minor) administrative and compliance cost studies that have been published[2] since 1980 that I have been able to trace is contained in the appendix to this paper. I have attempted to make the list as comprehensive as possible, although it is inevitable that some studies will have been missed. The focus is upon empirical research into operating costs, so commentaries – for example the review of the VAT evidence undertaken by Cnossen (1994) and the more general review of the research into operating costs conducted by Evans (2001) – are not included.

In addition the summary confines itself to business taxpayers and to individual taxpayers who are not in business (for example, employees and those who are retired and/or receive investment income). The operating costs of the public sector, “not for profit”, “charity” or related sectors of the economy may be significant, but they are excluded from this paper and its appendix.

The choice of 1980 as a starting point for the summary of studies in the appendix is somewhat arbitrary but can be defended on two major grounds. In the first place it provides a comprehensive review of most studies (by reference to geographical scope, type of taxes and taxpayers, methodology employed, and major compliance and administrative cost outcomes) over a period of more than 20 years. This period is considered to be more than adequate as a representative sample. And secondly it picks up where other excellent summaries (for example, Sandford, Godwin and Hardwick, 1989, pp. 224-230; Allers, 1994, pp. 241-250) have left off, though ensuring there are no major omissions by duplicating some of the later studies summarised in their appendices. Thus a complete picture emerges from this summary in combination with those earlier summaries.

The appendix identifies over 60 studies in the period since 1980. Only one of these (General Accounting Office, 1993) was solely concerned with administrative costs. Roughly 25% of the studies considered both administrative and compliance costs, though more often than not the primary focus in these studies was upon compliance costs. The balance of the studies were only concerned with compliance costs and did not specifically address issues relating to administrative costs.

The appendix has been compiled on the basis of the geographical location of each of the studies, and these have been categorised by reference to four major regions – North America, Europe, Australasia/Southeast Asia and finally the rest of the world (including multi-country studies).

Tran-Nam and Evans (2002, p. 393) have noted that the early quantitative studies of tax compliance costs in the 1930s to 1960s took place in North America. Those early studies were undertaken by researchers from diverse academic backgrounds, including management science, business studies, accounting and economics. They used a range of methodologies, and identified many of the features that regularly crop up in more recent studies (for example, the regressive nature of compliance costs and the potential trade off between administrative and compliance costs) (Tran-Nam and Evans, 2002, p. 393). North American studies into operating costs have not been quite so prolific in the last 20 years compared to those earlier time periods, but there have still been a number of major studies in both the USA and Canada in recent years (for example, Vaillancourt, 1989; Blumenthal and Slemrod 1992), and evidence that interest is being re-ignited (for example, Slemrod and Venkatesh, 2002; Stavrianos and Greenland, 2002).

Some compliance costs studies took place in Europe at about the same time as the early North American wave, but they tended to be small scale and low key (for example, Hofstra, in the Netherlands in 1943-4). This has been a region, however, where a great deal of activity has taken place in the last 20 years (for example, Sandford, Godwin and Hardwick, 1989; Allers, 1994; Diaz and Delgado, 1995; Collard, Green, Godwin and Maskell, 1998; Hasseldine and Hansford, 2002). Interestingly, despite this widespread recent activity, only a small number of different countries (the UK, Ireland, Germany, the Netherlands, Sweden and Spain) feature in the section devoted to European studies.

Before 1990 there were no published operating cost studies in Australasia or Southeast Asia. Since then, the floodgates have opened, with published studies in Australia (Pope, Fayle and Duncanson, 1990; Pope, Fayle and Chen, 1991; Pope, 1992; Pope, Fayle and Chen 1993a, 1993b, 1994; Wallschutzky and Gibson, 1993; Evans, Ritchie, Tran-Nam and Walpole, 1996, 1997; Rametse and Pope, 2002; Tran-Nam and Glover, 2002), New Zealand (Sandford and Hasseldine, 1992; Prebble, 1995), Singapore (Ariff, Loh and Talib, 1995; Ariff, Ismail and Loh, 1997), Malaysia (Loh, Ismail, Shamsher and Ali, 1997) and Hong Kong (Chan, Cheung, Ariff and Loh, 1999).

Finally, there is a small but growing list of studies from countries as diverse as Tanzania (Shekidele, 1999), Brazil (Bertolucci, 2002) and India (Chattopadhyay and Das-Gupta, 2002), as well as evidence of interest from supra-national bodies such as the OECD (Cordova-Novion and De Young, 2001) in the production of comparative compliance costs studies. These studies are listed in the fourth part of the appendix.

II. HISTORICAL CONTEXT

Sandford, Godwin and Hardwick (1989, pp. 27-34) postulate three broad phases in attempts to identify and measure operating costs – a North American phase lasting from the 1930s to the 1960s; a European phase in the 1960s and 1970s; and a worldwide phase from the 1980s onwards.

Haig’s 1935 study involved a postal survey of the taxation compliance costs encountered by over 1,500 large firms in the USA. This triggered a series of small-scale compliance cost studies, often lacking in rigour, in North America in the period through to the late 1960s. The methodology involved included case study approaches (for example, Edelmann, 1949; Oster and Lynn, 1955; Yocum, 1961; Johnston, 1963) and postal surveys (for example, May and Thompson, 1950; Bryden, 1961; Wicks, 1965 and 1966).

During the same period there were relatively fewer academic studies of the administrative costs of taxation, although Reynolds (1937), Maloon and Oster (1957) and Wicks and Killworth (1967) studied these costs in a variety of States and local government authorities in the USA. Reynolds conducted his research through a review of the literature, and the latter two used surveys and questionnaires.

Since 1970, the volume, scope and geographical locations of operating costs studies have grown considerably, particularly in the UK following the early studies of Sandford and others (Sandford 1973, Sandford, Godwin, Hardwick and Butterworth, 1981). Allers (1994, pp. 243-247) identifies 41 separate compliance cost studies, ranging across nine separate countries[3], in the period from 1970 to 1993. The studies employed a variety of methodologies, including surveys (telephone, postal and magazine), case studies, diary studies and interviews. Some merely involved “guesstimates”. During the same period the number of administrative cost studies also grew considerably, with Allers able to identify seven such studies in the Netherlands, five in the UK, two in both the USA and Ireland, and one each in France, Canada and West Germany (1994, pp. 248-250).

Hence by the early 1990s literature on the operating costs of the tax system was burgeoning, and the period since then has been no less prolific. This growth in the literature relating to operating costs over the last 20 years or so has been matched by an increased awareness of the issue by governments around the world. Much of the earlier research preceded government interest, but, from the 1980s or so, research and government interest have often gone hand in hand, and many recent studies have been government financed (for example, Evans, Ritchie, Tran-Nam and Walpole, 1996, 1997 in Australia; Plamondon, 1997 in Canada; Collard, Green, Godwin and Maskell, 1998 in the UK; and Stavrianos and Greenland, 2002 in the USA).

An important factor contributing to the growth of interest (but also reflecting that growth) by both researchers and governments has been a series of conferences and symposia held on the topic in the last two decades. The International Fiscal Association made the administrative and compliance costs of taxation a main subject for their 1989 conference, and the cahiers listed studies of varying size and rigour in nine countries (Argentina, Belgium, Canada, Germany, Netherlands, Sweden, Switzerland, UK and USA). In 1994 a major symposium was convened at St John’s College, Oxford, attracting most of the world’s major researchers in the area, and the ensuing publication (Sandford, 1995) showed that many of those countries had undertaken further studies. In addition, Australia, Spain and New Zealand were added to the list of countries which were undertaking major studies.

More recently (April 2000), a follow up symposium was convened in Sydney, Australia. The conference publication (Evans, Pope and Hasseldine, 2001) identified further large-scale studies in Canada (Plamondon, 1997), Australia (Evans, Ritchie, Tran-Nam and Walpole, 1996 and 1997), and the United Kingdom (Collard, Green, Godwin and Maskell, 1998), as well as smaller studies in Singapore and Malaysia (Ariff, 2001). Other studies extended the scope of tax compliance costs to particular features, such as appeals tribunals (Copp, 2001) and psychological costs (Woellner, Coleman, McKerchar, Walpole and Zetler, 2001). And many other research projects relating to the operating costs of the tax system were also noted as being under way.

This increased research and government interest and involvement in issues relating to taxation operating costs can be attributed to a number of factors. Sandford (1995, pp. 4-7) identifies six:

III. THE SCOPE OF THE STUDIES

It is a difficult task to summarise on any systematic basis the taxes that were the subject of research in the studies listed in the appendix, as many of the studies were not focused upon one particular tax, but embraced a variety of taxes or tax related matters. For example, the study of employer related taxes in Australia by Pope, Fayle and Chen (1993a) covered specific taxes such as Fringe Benefits Tax (FBT) and payroll taxes, as well as tax collection or reporting mechanisms such as PAYE and the Prescribed Payment System (PPS). At least five other studies identified in the appendix are concerned with similar areas.

Roughly a dozen of the studies focused solely on Personal Income Taxes (PIT), and about the same number considered just Corporate Income Taxes (CIT). Eight other studies (for example, Arthur D Little Inc, 1988; Evans, Ritchie, Tran-Nam and Walpole, 1997) considered all federal taxes, whether business or personal. Indirect taxes are also well represented in the appendix, with seven Value Added Tax/Goods and Services Tax (VAT/GST) and four sales tax and excise duty studies identified.

The balance of the studies are spread across a range of tax and tax related areas, including tax expenditures (Gunz, Macnaughton and Wensley, 1995), Petroleum Revenue Tax (Sandford, Godwin and Hardwick, 1989) and road tolls (Friedman and Waldfogel, 1995).

Just as the types of taxes that have been the subject of study over the last 20 years is diffuse, so is the nature of the taxpayer. As in previous periods (see Tran-Nam and Evans, 2002, p. 393), there has inevitably been a greater emphasis on business taxes and taxpayers. But despite this emphasis, very few types of taxpayer have escaped scrutiny over this period. Taxpayers not in business (employees, the retired) have been included in many of the studies (Slemrod and Sorum, 1984; Allers, 1994; Evans, Ritchie, Tran-Nam and Walpole, 1997; Chattopadhyay and Das-Gupta, 2002), but usually only as part of a broader survey. They rarely feature as the central part of the study (though see Satvrianos and Greenland, 2002, which focused entirely on individuals with wage and investment income). In contrast, employers have been the sole or primary focus of the research in at least six studies (Leonard and O’Hagan, 1985; Sandford, Godwin and Hardwick, 1989; Vaillancourt, 1989; Pope, Fayle and Chen, 1993; Plamondon, 1997; Collard, Green, Godwin and Maskell, 1998).

Where the research has been into the operating costs of business taxpayers, studies are more or less equally split between those that have specifically targeted small businesses (Wallschutzky and Gibson, 1993; Plamondon, 1993, 1995; Yellow Pages 1996; Rametse and Pope, 2002; Tran-Nam and Glover, 2002; CPA Australia 2003) and those that have specifically targeted the large corporate sector (Pope, Fayle and Chen, 1991; Prebble, 1995; Ariff, Loh and Talib, 1995; KPMG, 1996; Slemrod and Blumenthal, 1996; Erard, 1997; Bertolucci, 2002, Slemrod and Venkatesh, 2002). Most studies into business operating costs are not specific to any one sector, however, but embrace all business segments, large and small.

The vast majority of the studies look at the costs incurred by taxpayers. In contrast, very few studies (for example, Green, 1994; Evans 2003) consider the perspective of the practitioner, even though practitioner costs have always been a very significant component of the compliance costs incurred by business and non-business taxpayers.

It is also slightly surprising how few truly international comparative studies have taken place over the last 20 years. Some of the national studies contain comparative sections where the outcomes for one country are compared with those in others (for example, Evans, Ritchie, Tran-Nam and Walpole, 1997, pp. 58-83). But the dangers of international comparisons are well known to most researchers. Sandford (1995, pp. 405-408) identifies a number of reasons why such comparisons are more likely to mislead than enlighten, and, in an earlier piece (1994) the same author offered the advice that “comparisons of ... operating costs should be used sparingly, with the greatest care and with a comprehensive statement of their limitations”.

One relatively early study and two more recent studies have countered the trend for studies to be national rather than international. Bannock and Albach (1989) compared VAT compliance costs in Germany and the UK. More recently, Cordova-Novion and De Young (2001) undertook a multi-country survey of business tax compliance costs in eleven different countries for the OECD, and Evans (2003) has completed a comparative study of the operating costs of taxing personal capital gains in Australia and the UK.

In summary, studies in the last 20 years have considered most of the different types of tax and most of the different types of taxpayer. The level of coverage has varied – some taxes and taxpayer types have received very comprehensive coverage while others have been relatively under-researched. The analysis now turns to the manner in which that research has been conducted.

IV. RESEARCH METHODOLOGIES

Research literature has typically categorised the study of human and social phenomena by reference to two broad camps – the quantitative (or traditional, positivist, empiricist) and the qualitative (also referred to as the constructivist, naturalistic, interpretive, post-positivist or post-modern). The quantitative paradigm is the more traditional approach to research and typically adopts a deductive approach. In contrast the qualitative approach relies upon an inductive logic. Theories develop through the study rather than being established at the outset, and the methodology is also likely to emerge as part of the process of research rather than being predetermined.

Studies into tax operating costs borrow from both traditions, though there is a far greater emphasis on quantitative techniques. The studies use a variety of specific research methodologies to research into aspects of compliance costs. These include surveys (invariably using questionnaires) conducted through commercial polling organisations (Allers, 1994), or by mail (Green, 1994), email (Bertolucci, 2002) and telephone (Yellow Pages, 1996, CPA Australia, 2003), other interview-based methodologies (Plamondon, 1993; 1995; 1997), diary and case study approaches (Wallschutzky and Gibson, 1993), and documentary analysis (Arthur Andersen & Co, 1985) and estimating/simulating techniques (Thompson, 1984). Often the studies employ a combination of these approaches (Collard, Green, Godwin and Maskell, 1998).

Postal surveys feature most prominently in the appendix, with nearly two thirds of the studies using this methodology wholly or in part. Roughly one quarter of the studies used interviewing techniques, usually on a face-to-face basis and with a structured survey instrument or script built into the process. The labour intensive diary and case study approaches tended to be the least used methodology.

The appendix shows that response rates for postal surveys into compliance costs have varied considerably. At the one end of the scale there are studies that failed to achieve a response rate of 10%. For example, Vaillancourt (1989, p 47) reported a response rate of only 9.2% based on a distribution of 4,196 questionnaires to Canadian employers, and Arthur Andersen & Co (1985, Chapter 3, pp. 4-5) achieved just 7% response rate in a survey of 600 small businesses. At the other end of the scale, Evans, Ritchie, Tran-Nam, and Walpole (1996, p. 35) achieved a response rate of 50% in an Australian postal survey of 1,867 personal taxpayers. This high response rate[5] reflected a number of factors. These included:

The summary in the appendix confirms Sandford’s observation that the “norm” for response rates of such studies is probably around 30% (1995, p. 379).

Administrative costs have primarily tended to be identified through analysis of relevant documentary evidence. Surprisingly, there is very little evidence that researchers have considered other possible methodologies, such as structured or in depth interviews or case studies, in attempts to assess administrative costs.

V. MAJOR OUTCOMES

The major outcomes summarised in the appendix suggest that compliance costs are highly significant for the main central government taxes such as PIT, CIT, VAT/GST. They are high however measured – whether in absolute money terms or relative to tax yield, GDP or administrative costs. For example, the studies suggest that compliance costs of such taxes are typically anywhere between 2% and 10% of the revenue yield from those taxes; up to 2.5% of GDP; and usually a multiple (of between two and six) of administrative costs.

The research also points strongly to the regressivity of compliance costs of such taxes, particularly where VAT type taxes are involved. The size of the business is a key factor in determining compliance costs, and most of the studies confirm that smaller businesses carry disproportionately higher compliance costs.

In contrast, compliance costs for property taxes are low in absolute and relative terms, as are compliance costs of some excise duties in developed countries (for example, tobacco and petrol) where the sales are high and the number of businesses involved are low. Compliance costs for excise duties in developing countries appear to be significantly higher than those in developed countries, though the evidence is somewhat thin at the moment (Shekidele, 1999).

The evidence from the studies also points to the fact that compliance costs are perceived to be a very significant issue for most business taxpayers and many non-business taxpayers, as well as for practitioners. They are an on-going cause for concern, and the problem is not perceived as improving over time (Blumenthal and Slemrod, 1992; Evans, 2003), despite attempts by governments (ostensibly) designed to reduce the burden faced by taxpayers. Complexity of legislative provisions together with the frequency of legislative change are identified as prime causes of high compliance costs (Green, 1994, Evans, 2003).

The studies in the appendix also suggests that administrative costs are absolutely and relatively less burdensome than compliance costs. Those studies that do address administrative costs suggest that they rarely exceed 1% of revenue yield, and more usually come in well below 1%.

VI. CONCLUSIONS

In summary, therefore, the initial neglect of this area of research has now long passed. The last 20 years have seen issues relating to tax operating costs shift from the periphery to a more central position. As a result, there is now an extensive and varied literature available which can provide a useful reference point for studies relating to the regulatory burden.

Using a variety of methodologies researchers have identified and quantified both compliance and administrative costs, and are now exploring a number of related and more qualitative issues. As Evans, Pope and Hasseldine note in their concluding chapter (2001, pp. 409-417), future operating cost research is likely to both “drill down” (seeking depth by looking at “hot spots” and politically sensitive areas) and “reach out” (broadening the scope of the research to embrace new countries, more comparative work, other disciplines and fresh methodologies).

The operating costs literature will clearly continue to develop over the next 20 years, and it is to be hoped that the fruits of operating cost research will continue to be evident in the policy-making process. There is an obvious interconnection between tax law design and implementation. Tax law design should not take place without clear recognition of the impact of the proposed changes on the operating costs of the tax system. Sensible tax law design must be informed by an understanding of the impact that design will have on the burden that taxpayers will face and the administrative costs that the revenue authority will be required to carry. The greatest contribution that research into operating costs can make in the future is to ensure that those who formulate and implement legislative change are properly informed as to the operating cost implications of their actions. This will not always be (and indeed does not need to be) the decisive factor; but it cannot be ignored in the way that it so often has in the past.

Pope identified a number of possible stages in the awareness of compliance costs (Pope, 1992, pp. 2-7). These ranged from initial neglect, through recognition by professionals (tax advisers etc), quantification (usually by academics), policy recognition, effective policy measures resulting in lower compliance costs, and finally to continual monitoring of compliance costs.

Many of the developed countries that have undertaken the studies summarised in the appendix have clearly passed through the first four of these stages, and in some of them there is even lip-service paid to the need to take operating costs into account when policy is formulated (see, for example, Evans and Walpole, 1999, pp. 38-77). But there is still a long way to go before any of the countries can truly claim that its tax laws are designed with a clear focus on the implications that design will have on the operating costs of the tax system.

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APPENDIX SUMMARY OF MAJOR PUBLISHED STUDIES OF TAXATION OPERATING COSTS SINCE 1980 BY REFERENCE TO GEOGRAPHICAL LOCATION

North American Studies

European Studies

Australasian and South East Asian Studies

International Studies and Studies from the Rest of the World

[∗] Associate Professor of Taxation, Faculty of Law, The University of New South Wales.

[1] These comprise administrative costs incurred by the public sector (usually, but not exclusively, revenue authorities) and compliance costs incurred by taxpayers. Note, however, that the terminology sometimes varies. Stiglitz, for example, uses the term administrative costs to embrace both compliance and administrative costs (1988, pp. 393-395).

[2] And some that have not yet been published.

[3] The Netherlands, West Germany, USA, UK, Ireland, Switzerland, Canada, Australia, and New Zealand.

[4] Since 1995, Australia has also introduced a GST.

[5] But note that it is by no means the highest response rate for a postal survey. The appendix indicates that the Arthur D Little Inc study in the USA (1988) achieved a 62% response rate in its survey of 6,200 individuals, and Malmer (1995) achieved 67% in Sweden in a postal survey of 12,000 individuals.