Tax Administration

Tax administration entails the application of tax laws and regulations. This component of government is manifested on three general levels — national, state and municipal — in most national systems. The area of tax administration has evolved considerably over the millennia as commerce has developed. Along with this development have arisen a number of issues. In addition to providing an overview of the evolution of taxation and the management thereof, this paper will examine such issues in two general thematic areas.

Keywords: Adjusted Gross Income (AGI); Earned Income; Exemption; Internal Revenue Service (IRS); Internet Trade Freedom Act (IFTA); Tax Amnesty; Tax Code; Tax Evasion; Uniform Sales Tax; Use Tax; Value Added Tax

Overview

President Lyndon Johnson once commented on the public's popular opinion of taxes. "In 1790," he said, "the nation which had fought a revolution against taxation without representation discovered that some of its citizens weren't much happier about taxation with representation" (www.ThinkExist.com). Indeed, most people find much to disdain about taxes, particularly since so much of life — owning a home and/or a car, shopping or dining out and, of course, worker salaries — is subject to taxation from local, regional or national-level government.

Still, most people will argue that taxes are necessary for the maintenance of critical government programs, such as road repairs, school operations, public assistance programs and national defense. Naturally, much political debate has ensued over the extent and degrees to which taxes should be levied in a given political system. Battles in this arena are constantly fought in legislative circles, brought to an end by the passage of tax legislation into law. Once such legislation becomes law, however, the politics is separated while the new policy is implemented and enforced.

Tax administration entails the application of tax laws and regulations. This component of government is manifest on three general levels — national, state and municipal — in a given national system. This paper will provide an illustration of how tax administration has evolved as well as the issues that coincide with that development and application in the 21st century economy.

Taxation Through History

Taxation is a practice that has been conducted for millennia. In ancient Egypt, pharaohs sent "scribes" to collect taxes on cooking oil, ensuring that the pharoahs' subjects were not exceeding recommended amounts and seeking punishment for those who skirted the laws by using other cooking sources. In early Greece, taxes were imposed universally on citizens to help fund war efforts — when a war was won, the tax would be refunded to the citizens using the spoils of the conflict.

The Roman emperor Caesar Augustus is widely viewed as one of the earliest and most effective tax strategists, able not only to impose a complex system of taxation for the diverse Roman citizenry but an administrative network by which the tax would be collected. The Roman Empire's tax administration system, which would reach across the Empire's domain as far as what are now the British Isles, would become the inspiration for European taxation systems.

As the British Empire grew in its own right, its own territories would become subject to the taxes of the crown — this "taxation without representation" eventually contributed heavily to the American Revolution. After the British were repelled at the end of the Revolution, American leaders implemented taxes to both help the fledgling country pay its war debts and build its government institutions. The American model of taxation would include the first-of-its-kind income tax, implemented during the Civil War era ("A History," 2009).

The examples of ancient Egypt, Greece, Rome, Western Europe and the United States underscore two important points about taxation. First, the need of societies to generate revenues from the citizenry which will be used to fund government endeavors and programs. Second, as the myriad of civilizations has evolved and diversified internally over the last several millennia, so too has the manner by which taxation is administered. Concurrently, the issues surrounding tax administration have become equally diverse during this development.

Further Insights

A Confrontational Relationship

It may be said that the imposition of taxes occasionally creates an adversarial relationship between the government and the private citizens. In the United States, few residents anticipate April 15, for that date is the deadline for reporting federal and state income tax — an often arduous and complex task, particularly for those who are not familiar with accounting and cannot afford the services of a certified public accountant (CPA). Once taxes are filed, many people dread the possibility of an audit, which is usually initiated when discrepancies in personal income tax returns are detected.

In light of the consumer's ingrained desire to protect as much of his or her income as possible, the goal is to minimize one's adjusted gross income (AGI), which is an assessment of a taxpayer's liability based on the aggregate of all income sources, less expenses. By diverting some of their income into tax-free retirement accounts and carefully calculating all business expenses, taxpayers are able to avoid higher tax liability. Unfortunately, minimizing tax liability is often perceived as a daunting and expensive (especially when one must call upon the services of a CPA) task that may exacerbate the often negative attitudes the public has toward government tax administration.

Efforts to Improve Relations

To the end of alleviating the stress that creates a confrontational relationship between taxpayers and the government, many political systems are implementing reforms and improving services. Governments that create opportunities for taxpayers to file returns online using user-friendly software (including ProSystem fx Tax, Lacerte, UltraTax CS, TaxACT, and TurboTax) for example, may see more on-time filings with fewer calls for audits because of the relative simplicity and guiding hand of the software. Consumer stress may also be ameliorated by the quick turnaround time within which refunds checks are received.

In some cases, government tax agencies are going even farther to reach out to customers. In the United States and Norway, for example, tax agencies are not only utilizing modernized information technologies — they are training employees to change their attitudes about taxpayers. Rather than looking at taxpayers as subjects to the tax administration system, employees are learning to treat them as customers, worthy of respect and courtesy (Aberbach & Christensen, 2005). Results of an American Customer Service Index (ACSI) survey published in 2013, however, showed that IRS's website has "consistently ranked below the average" in customer satisfaction compared to websites from other federal agencies and many sectors of the private economy, including banks, Internet retailers, and Internet brokerage firms (GAO Reports, 2013). Despite such shortcomings, however, both the U.S. and Norwegian governments anticipate that adopting consumer-oriented attitudes will help break down barriers between tax agencies and the public.

In times of economic hardship and declining tax revenues, however, that relationship may return to an adversarial and even politically polarizing status. During the tail end of the global recession that began in 2007, for example, President Barack Obama and the Democrat-controlled House and Senate introduced sweeping legislation designed to reform the nation's health care system. (The Patient Protection and Affordable Care Act was subsequently enacted in 2010.) With the federal deficit skyrocketing, the legislation's advocates looked for other revenue sources. One such source was a proposed 40 percent tax on high-cost medical plans (Reuters, 2009). This proposal, considered an important piece of that legislation, immediately met with strong opposition from within Congress and from the public, who saw the measure as an unnecessary burden placed on the current health care system.

Tax Evasion

It comes as no surprise then that there are some who seek to avoid paying their taxes altogether. Although it is difficult to determine the amount of outstanding revenues owed to the government due to privacy laws, it is estimated that 21 percent of US individual tax returns went unpaid in 2008, causing a loss of about $300 billion nationwide (Cauchon, 2009). Because businesses pay a considerably larger share of the tax base, business tax scofflaws (those who refuse to pay taxes), are usually the biggest targets of revenue collections agencies. In times of economic recession or stagnation, the significant loss of tax revenues from evaders can throw entire state budgets far out of balance.

Governments generally take two approaches to this problem. The first is a hard-line approach — if they know who owes large sums of tax monies agencies may identify them in the media and/or initiate prosecutorial measures against them. The other approach is "tax amnesty" — a program by which businesses that are considered tax scofflaws may avoid prosecution and high fines by simply approaching their respective revenue collections agencies and paying what they owe. States and local governments often employ this tactic, and the results are often significant. In 2003, Arizona offered a 45-day amnesty program with the expectation of generating $25 million in revenues to offset a budget shortfall. At the end of the period, the state revealed that it had exceeded its goal, generating about $73 million. Even with administrative expenses for the program totaling $75,000 and the fact that $22 million of that $73 million was expected to be generated through audits and other activities, the net of about $51 million was considered a major success (Peterson & Nakamura, 2004).

The relationship between taxpayers and taxation agencies is as an important part of tax administration. In times of budget shortfalls and economic stagnation, the gulf between the two parties often becomes wider, which can result in fewer revenues and a continued adversarial relationship. It is for this reason that many governments see the need to reach out to taxpayers as well as reform bureaucratic systems to help bridge that gulf.

The relationship between agencies and taxpayers is not the only issue that arises regarding tax administration. The fact that not all tax systems apply charges in an equitable fashion causes considerable confusion among taxpayers and government agencies alike.

Uniformity & Disconnect

As stated earlier in this paper, the practice of tax administration has evolved into a vast and complex series of systems and networks, some of which are interconnected but others of which are independent. This myriad of schemes often causes confusion among taxpayers and governments alike. It is to this issue that this paper will next turn attention.

In general, nation-states define taxation systems that link national, regional/state and local governments. These linkages ensure clarity and uniformity in the law, at least in terms of tax reporting. For example, a citizen of the United States sees a percentage of his or her salary withheld by an employer for federal income taxes and another portion withheld for state income taxes. When April 15 arrives, the taxpayer will often deliver with his or her state income tax return a copy of his or her federal return. Similarly, an individual who purchases a home must pay local property taxes as well as state sales taxes and, but may also be able to apply federal tax breaks and credits to the purchase.

Issues do arise, however, with regard to tax administration when disconnects between the various levels and types of taxation become manifest. One of the areas in which this issue is particularly visible is Internet-based sales. When two or more separate tax systems are utilized for the purposes of Internet sales questions arise as to which rate should be applied. Consumers naturally gravitate toward vendors who offer the least expensive products and items, and Internet stores and sites tend to offer low rates for one major reason — the taxes applied to the sales of such products tend to be lower than those found in a local store (if there are any sales taxes included in the purchase at all). In the United States, some states are able to track their residents' out of state purchases in in order to collect local sales taxes, but those efforts are time-consuming and often cost-prohibitive. The problem is that although sales taxes on such commerce are in place, consumers must voluntarily report their sales but seldom do so within thousands of American tax administration agencies.

Issue

Collecting Internet Sales Tax

The case of Internet taxation provides an interesting example of the challenges facing tax administration agencies. As the Internet continues to grow and generate worldwide commerce, how to collect taxes on such commerce remains a revenue conundrum in light of the diversity of tax agencies in operation.

There are two general approaches to taxing Internet sales. The first is a sales tax, which many states require for in-state sellers to collect upon the sale of goods and services in the same state. Sales taxes are percentages applied based on the price or value of the item sold. Second, and concurrent with the sales tax is the use tax, which is a tax levied on the use of a good or product within the government's jurisdiction, regardless of where it was purchased.

In both of these cases, however, the ability to collect sales taxes on Internet purchases is hampered by an inability to find applicable cases from which to collect. Although the sales tax laws have been presumed to apply to online purchases, questions have lingered for years. Taxing sales that take place in other states, such as mail order purchases, has long been the subject of debate in the U.S. In 1998, the passage of the Internet Tax Freedom Act (ITFA) provided important clarity on this front pertaining to remote sales, but it works against the tax administration agencies. In essence, the ITFA established that the Internet seller was not required to collect taxes from the buyer if the seller does not have a physical store in the jurisdiction. Furthermore, if the seller outsources sales to other companies in a given jurisdiction, that seller is not required to collect taxes from the seller (Reddick & Cogburn, 2007).

The lack of regulation on Internet purchases has caused states like Texas, which houses an Amazon.com distribution facility, to allegedly lose millions of dollars in uncollected revenue even as U.S. states appeal to the federal government to change the laws (Elkind & Burke, 2013).

A more viable approach for states is to create a uniform sales tax, which is a tax rate that is applicable outside of the state by state tax system. Uniform sales taxes are widely considered the most optimal of applicable taxes for Internet sales by those who seek tax revenues for depleted budgets, but the will to fully impose such a tax has not yet come to bear (Swisher, 2001). While Internet marketplaces like eBay (which in 2008 reported $8.5 billion in sales) seem to be tempting targets for revenue-minded tax administrators, in reality, the complexity of the Internet marketplace has made it extremely challenging for monitors to gauge the specific tax rates that might apply to such transactions. eBay, for example, involves not just inter-state transactions but international sales as well (Barlow, 2009).

Adding to the lack of action in this arena is the fear that state and federal pursuit of Internet sales taxation will hurt Internet commerce, one of the most important forms of business in the 21st century global economy (Barlow, 2009). States are also concerned with the probability of reciprocation — that if one state enforces its sales taxes on purchases conducted by its residents in another state, that second state may enforce its own sales taxes, in essence creating a zero-sum gain while expending the resources for the endeavor.

In the European Union, the issue of Internet sales taxation is somewhat different. The EU has already implemented its own regional Internet tax — a value-added tax (VAT). A VAT is an indirect tax, in which a tax is imposed on each stage of production from the point of production to the time of purchase. In the EU, the VAT on online purchasing is about 20 percent. At the present stage, the question of taxation for the EU is not whether or not to impose a tax on online sales, it is whether or not to expand it to the growing inventory of Internet services, such as downloaded music and other services, many of which are based outside of the EU (Brown, 2000). In the US, for example, there is not one single institution for tax collections but literally thousands, from the federal government to municipal governments — to apply a tax on American online companies would mean finding a way to track such sales, which are seemingly innumerable.

Conclusion

The area of tax administration has evolved considerably over the millennia in which commerce has developed. Along with this development have arisen a number of issues. In addition to providing an overview of the evolution of taxation and the management thereof, this paper has examined such issues in two general thematic areas.

First, the application of taxes and tax laws has created a polarizing relationship between taxpayers and the government. This relationship has fostered a desire among law-abiding taxpayers to minimize their tax liability, but has also spurred those who would break the law to hide their assets from the government. Governments are looking to improve this relationship, both in the interest of enticing taxpayers to continue paying their taxes and to collect much-needed revenues during times of economic uncertainty.

Second, the emergence of the Internet as one of the most important commercial vehicles in economic history has raised debates over how to tax the sales it produces. As the example of the EU has provided, even with such taxes in place and operation, its continued growth means ongoing debate on the extent to which it may be taxed. Indeed, the evolution of tax administration as a whole continues, sometimes a step behind that of commercial development but close nonetheless.

Terms & Concepts

Adjusted Gross Income (AGI): An assessment of a taxpayer's liability based on the aggregate of all income sources, less the expenses that person pays.

Internet Trade Freedom Act (ITFA): A 1998 US law that clarifies tax statutes governing Internet sales.

Tax Amnesty: A tax administration program whereby delinquent taxpayers and business may pay their liabilities without additional penalties or prosecution for tax evasion.

Uniform Sales Tax: A sales tax rate that is applicable outside of the state-to-state tax system.

Use Tax: A tax levied on the use of a good or product within the government's jurisdiction, regardless of where it was purchased.

Value Added Tax (VAT): Also known as an indirect tax; a tax that is imposed on each stage of production from the point of production to the time of purchase.

Bibliography

Aberbach, J. & Christensen, T. (2005). The challenges of modernizing tax administration: Putting the public first in a coercive public organization. Conference Papers — American Political Science Association, 2005 Annual Meeting, 1-33.

Barlow, T. (2009, September 8). EBay: Internet sales tax hurts businesses. Daily Finance. Retrieved October 9, 2009 from http://www.dailyfinance.com/2009/09/08/ebay-argues-that-internet-taxes-hurt-business/.

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Cauchon, D. (2008, April 17). Big names owe big-time on taxes. USA Today. Retrieved October 8, 2009 from http://www.usatoday.com/money/perfi/taxes/2008-04-13-Taxcover%5fN.htm.

Elkind, P., & Burke, D. (2013). Amazon's (not so secret) war on taxes. Fortune, 167 , 76. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=87863612&site=ehost-live

Peterson, D.F. & Nakamura, K. (2004). State amnesty programs: The advantages and disadvantages. Retrieved October 9, 2009 from Free Library http://www.thefreelibrary.com/State+tax+amnesty+programs:+the+advantages+and+disadvantages.-a0118041729.

Reddick, C. & Coggburn, J. (2007). E-commerce and the future of the state sales tax system: Critical issues and policy recommendations. International Journal of Public Administration, 30, 1021-1043. Retrieved October 10, 2009 from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=25902209&site=ehost-live.

Smith, D. (2009, October 7). Opposition to insurance tax grows in House. Retrieved October 8, 2009 from Reuters http://www.reuters.com/article/politicsNews/idUSTRE59652Y20091007.

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Suggested Reading

Brock, E. (2006). Tax program seeks uniform collection. American City and County, 121, 16-20. Retrieved October 12, 2009 from EBSCO Online Database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=21976016&sit e=ehost-live

Gleckman, H. (2000, March 27). The great Internet tax debate. BusinessWeek, (3674), 228-236. Retrieved October 12, 2009 from EBSCO Online Database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=2906620&site=ehost-live.

Kiser, E. & Kane, J. (2001). Revolution and state structure: The bureaucratization of tax administration in early modern England and France. American Journal of Sociology, 107, 183-223. Retrieved October 12, 2009 from EBSCO Online Database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=5517013&site=ehost-live.

LeFevre, E. (1935). When in doubt, tax twice. Saturday Evening Post, 207, 27-88. Retrieved October 12, 2009 from EBSCO Online Database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=18228383&site=ehost-live.

Powell, D. (2004). Access denied: Federal preemption of state internet access taxes. Conference Papers — Midwestern Political Science Association, 1-26. Retrieved October 12, 2009 from EBSCO Online Database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=16053804&site=ehost-live.

The case for flat taxes. (2005). The Economist, 375(8422), 59-61. Retrieved October 12, 2009 from EBSCO Online Database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=16781193&site=ehost-live