See No Evil

John Garnaut has a piece in today’s SMH on tax evasion. I’m quoted on one of my pet peeves – that Australia has never conducted a randomised audit of all taxpayers. We’ve done random audits of particular industries – such as the building sector – but never of all taxpayers. Why? I think it’s because our politicians are scared of what they might find, but I’m open to hearing alternative explanations.

As a result of never having done a random audit study, we don’t know something as simple as whether tax evasion (as a fraction of income) is higher for the rich or the poor, the young or the old, urban taxpayers or rural taxpayers. And the answers could go either way. Garnaut cites findings from a NBER working paper by Joel Slemrod and Shlomo Yitzhaki on the US random audit program in the 1980s, which found that on a proportionate basis, tax evasion was higher at the bottom end.

The 1988 audit – the last one before the program was banned by Congress – found taxpayers earning over $US100,000 ($136,000) reported 96.6 per cent of their true income, while those earning less than $US25,000 reported 85.9 per cent.

Wanted: an Australian politician who understands randomised trials. Apply here.

This entry was posted in Uncategorized. Bookmark the permalink.

4 Responses to See No Evil

  1. Don says:

    “Australia has never conducted a randomised audit of all taxpayers… Why? I think it’s because our politicians are scared of what they might find…”

    I’m sure there are lots of studies that you could have conducted but never did. Surely the right way to think about this is to look at what the ATO and the government want to achieve and then to ask whether an audit like this would have helped them do any of those things.

  2. And those 3/4% of naughty higher income person would cost the nation less or more than the 14.1% of poor people?

    Tax evasion if you are poor involves a bit of fibbing about the $20 a week you earn by cash lawnmowing or cleaning or month you got the dole after you started work on $15 an hour. Tax Avoidance on the other hand is a legal wealthy people only activity involving million$.

  3. Andrew Leigh says:

    Don, from a public finance standpoint, this is a no-brainer. We want to maximise the amount of additional revenue brought in by doing one more audit. Knowing precisely who’s avoiding is the best way of ensuring this.

  4. I suspect that there are legislative requirements that require government officials to have good reasons before they audit a particular person.

    A few years back I was pulled over for grilling by customs at Sydney airport (including a quick quiz on the contents of my conference paper – surprisingly hard to do under duress).

    I asked them if it was a random audit and the customs official replied that, no, they weren’t allowed to do purely random audits. It turned out that the custom official’s ‘good reason’ in my case had something to do with my over-indulgence of Norwegian conference food!

Comments are closed.