Transcript Measuring tax complexity in Canada: application to

Measuring tax complexity in
Canada: application to individual
income tax credits
Marco Lugo
François Vaillancourt
CIRANO/Université de Montréal
Outline
• What is complexity
• What data we use
• What do we find
Complexity
• There is no universal definition
• There is no commonly agreed to
measurement tool
• Tax related work is the most developed area in
law
• Recent work by FV on adequacy of Justice
budget –Québec- proposes a price index
approach to output measurement
Complexity-2
Figure 1 Tax system output/complexity relationship
2.5
2
1.5
tax system output
1
0.5
0
complexity index
Complexity -3
• Policy intent=> # of measures =# tax
expenditures
• Policy into legislation=> # of pages of law
• Policy into action=> # of pages in tax booklet
and lines in tax form =>
• Taxpayer compliance cost
• Complementary measures
Data used
• Survey data (spring 2008) of 2000 individual
Canadian tax fillers for tax year 2007
• Filters for missing values + extreme values=>
1196 useful answers
• Information on 10 specific tax preferences
used :10; 2(∑5each) and 1 used in analysis
• Information on all/ some of these credits from
Tax Statistics (CRA) and Tax Expenditures
(Finance) documents
Five family preferences
Low=1; Medium=2 High=3
Tax preferences
Formal
Complexity is
Complexity complexit complexit
judgment of author
Workload Total
y
y
Education
High
Medium
5
Medical expenses
Low
High
4
Child fitness
Low
Medium
3
Urban transit
Low
Medium
3
Pension income
Medium
Low
3
Five Investment preferences
Low=1; Medium=2 High=3
Tax preferences
Formal
Complexity is
Complexity complexit complexity
judgment of author
Workload Total
y
Natural resources
High
High
6
Stock options
Medium
Low
3
LSVCC
Low
Low
2
Foreign tax credit
Medium
Low
3
Investment credit
Medium
Medium
4
Findings -1
• Probit analysis of use of tax preferences
example of results :
– the presence of children increases the likelihood
of using medical or child fitness preferences;
– the unemployed (students) are more likely to use
educational preferences;
– higher income individuals are more likely to use
investment related tax preferences
Findings-2
• OLS analysis of impact of tax preferences on
TCC
• 10 preferences estimation : only Medical (34$)
and Foreign Investment (141$) significant
• 2 aggregates of preferences : Family= 34$ and
Investment 58$ significant
• 1 aggregate of preferences : 50$ but 1.6
preference on average=>31$ per preference (
24$ and 44$ for each of 2)
Link between complexity and TCC:
gross and net Canada,2007
500
400
300
Net TCC
Gross TCC
Net TCC grouped
200
100
0
-100
2
3
3
3
3
3
4
4
5
6
Some indicators linking policy and tax
preferences
Tax measure
CC 000$
% compliance % users
cost/ Tax Ex
Y > 100 000$
Education
92 709
9,5%
5%
LSVCC
22 762
19,0%
20%
Medical expenses
121 753
13,3%
4%
Child fitness amount
43 594
48,4%
18%
Urban transit amount
43 411
39,5%
6%
Pension income splitting 29 330
3,5%
10%
Foreign tax credit
7,5%
28%
58 587
Conclusion
• No best practice yet for the measurement of tax
complexity.
• The use of TCC is a reasonable choice .
• Our results provide some estimates of the tax
complexity for family preferences and investment
preferences.
• These costs are linked to tax policy indicating that
some measures are more complex than others
but not obviously linked to a simple measure of
complexity or outcome.