Tax Compliance Costs: Research Methodology and Empirical … · 2019. 4. 11. · Tax Compliance Costs 229 National Tax Journal Vol. LIII, No. 2 Abstract - The issue of tax compliance

Tax Compliance Costs

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National Tax JournalVol. LIII, No. 2

Abstract - The issue of tax compliance costs continues to attractpublic attention throughout the OECD. This is particularly truein Australia, where major tax reforms are taking place. This paperreports on an ongoing research project on federal tax compliancecosts conducted by a research team from the Australian TaxationStudies Program (ATAX) of the University of New South Wales.The focus of this paper is on the methodology of estimating taxa-tion compliance costs. Some aggregate empirical findings, basedon several large-scale mail surveys of over 10,000 personal andbusiness taxpayers, will be reported. Major differences between theAustralian and U.S. tax systems, as well as comparison with re-sults obtained in previous UK and U.S. studies, will also be high-lighted.

INTRODUCTION

The imposition of taxes represents a transfer of resourcesfrom households and businesses to the government. This

transfer generates three broad types of social costs: efficiency,administrative, and compliance. Efficiency costs (alternativelyreferred to as deadweight losses or excess burdens), arisingfrom tax-induced changes in relative prices, distort consumerand producer choices, and cause losses in overall output.1

Administrative costs are the costs to the government of col-lecting taxes; and compliance costs are the value of resourcesexpended by taxpayers in meeting their tax obligations. Thesum of administrative and compliance costs is often referredto as the operating costs of a tax system. Operating costs of atax system are conceptually analogous to transaction costs ofmarket activities. The modern principle of tax simplicity, firstexpounded by Adam Smith (1776; Book Five, Chapter II) asthe certainty, convenience, and economy canons of good taxpolicy, seeks to minimize the operating costs incurred in rais-ing a given level of tax revenue.

Unlike efficiency costs, compliance costs have for a longtime been treated as ‘hidden costs’ of taxation. The first at-tempt to measure tax compliance costs (Haig 1935) only took

Tax Compliance Costs: ResearchMethodology and Empirical

Evidence from Australia

Binh Tran-Nam,Chris Evans, &Michael WalpoleAustralian TaxationStudies Program(ATAX), University ofNew South Wales,Sydney, NSW 2052,Australia

Katherine RitchieBusiness School,Manukau Institute ofTechnology, Auckland,New Zealand

1 In the presence of a negative externality, a Pigouvian tax may be efficiencyimproving.

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place a little over 60 years ago, in spitethe fact that the issue of tax compliancecosts was explicitly discussed at the birthof modern economics. There are severalreasons for this relative neglect:

• tax compliance costs have beenthought to be insignificant

• there is no neat and formal modelfor compliance cost minimization

• tax compliance cost estimates typi-cally require painstaking research in-volving collection of large amountsof data not available from publishedsources.

However, there has been a steadygrowth of international interest, particu-larly among OECD countries, in tax com-pliance costs, both by academic research-ers and by governments. Sandford (1995)identifies a number of reasons for thegrowth in interest in compliance costs.These include:

• changes in technology (facilitatinglarge-scale computer driven sur-veys)

• the introduction of value added tax(VAT) regimes in a number of coun-tries (with high and visible compli-ance costs)

• the growth of enterprise cultures in-volving the small business sector(where compliance costs are particu-larly onerous)

• the increasing complexity of tax sys-tems.

In the past few years, new research hasbeen conducted in the U.S., the UK,Canada, Germany and the Netherlands,while empirical studies have recently been

undertaken for the first time in Ireland,Switzerland, Australia, New Zealand,Spain, Sweden2 and, more recently,Singapore (Ariff, Loh, and Talib, 1995).

The empirical findings suggest that taxcompliance costs are quite significant,tend to be highly regressive, and showgreat variation among different types oftaxes. As international competition forforeign investment intensifies, it is alsoexpected that there will be a rapidly grow-ing interest in tax compliance costs amongnewly developed and developing Asiancountries (Heij 1995).

The new wave of studies has stimulatedconsiderable public interest, particularlyfrom the business sector, which appearsto bear most of the burden of tax compli-ance. In response to this public awarenessand concern, the governments of the UK,Australia, and New Zealand have allagreed to accompany new tax legislationwith some form of compliance cost impactstatement (CCIS).3 For example, Recom-mendation 26 of the Australian ParliamentJoint Committee of Public Accounts (1993,p. xxvii) requires that “all future tax leg-islation be supported by a Taxation Im-pact Statement which details the impacton taxpayers of the legislation, includingtotal compliance costs . . .” In response tothis recommendation, the Revenue Analy-sis Branch (RAB) of the Australian Taxa-tion Office (ATO) commissioned a re-search team from the Australian TaxationStudies Program (ATAX) to conduct a na-tional study of tax compliance costs.

The ATAX team was initially commis-sioned by the ATO to report upon incre-mental compliance costs of taxes collectedby the ATO. At the outset of the project,the objectives of the research were statedby the ATO as follows:

2 For a summary of recent studies on tax compliance costs please refer to Vaillancourt (1987), Allers (1994,Appendix B) and Sandford (1995, Parts III and IV). Vaillancourt and Sandford summarize international stud-ies published in English only while Allers considered many non-English studies as well.

3 See Sandford (1995, p. 3). In the UK these are now termed Regulatory Impact Appraisals. The term Tax Regu-lation Impact Statement is used in Australia, and Compliance Cost Impact Report in New Zealand. For areview of the use and usefulness of such statements in the OECD see Evans and Walpole (1999).


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• to provide advice on the RAB’s pro-posed methodology to estimate thecost of taxpayer compliance tochanges in the taxation field

• to provide appropriate values andinformation to use in calculating thecost of taxpayer compliance.

Thus, a primary aim of the researchwas to identify the variables that causetax compliance costs to change as aresult of legislative amendments. Thefull results of the incremental cost study,based on three large-scale mail surveys,were made public in Australia in 1996(Evans, Ritchie, Tran-Nam and Walpole1996).

The team was asked to estimate themagnitude and incidence of total compli-ance costs in Australia during the 1994–5financial year, and to compare those costswith those encountered in other OECDcountries. When the report on the totalcompliance costs was officially released inearly 1998 (Evans et al. 1997), it generatedconsiderable interest among academic re-searchers as well as business people. Thiswas mainly due to the concern for tax sim-plification by the Australian businesscommunity and the impact of the Coali-tion Government’s proposed Goods andServices Tax (GST)4 on tax compliancecosts. More recently, the ATO has againcommissioned the ATAX team to conductan annual updating of total tax compli-ance costs in Australia for the fiscal years1997–8 to 1999–2000.

This paper is concerned with the ATAXresearch on total tax compliance costs. Thestudy has refined and implemented manyof the world’s best ideas and practices inthe tax compliance cost area. It has alsotaken the practice forward by developingthe methodology for estimating costs andestablishing some offsets that should betaken into account when compliance costsare calculated (such as the value of cash

flow benefits and the tax deductibility ofcertain compliance costs). The focus of thispaper is on the methodology of estimat-ing taxation compliance costs. Some ag-gregate empirical findings and compari-son with previous studies in the UK andU.S. will be reported. Some major differ-ences in the Australian and U.S. tax sys-tems affecting compliance costs will alsobe highlighted.

There are now a variety of approachesto, and numerical estimates of, tax com-pliance costs in the literature. Likeany other economic or accounting mea-sures, accurate and dependable numeri-cal estimates of tax compliance costsmust be based upon a sound and consis-tent conceptual basis, a proper frame-work for quantification, and availabilityof appropriate and reliable data. Thesethree issues will be discussed laterin this paper. We will also present somebroad estimates of tax compliancecosts in Australia during the 1994–95 financial year, together with somerelevant international comparisons.Some concluding remarks will then begiven.

Note that the paper focuses on compli-ance costs. Compliance and administra-tive costs together define the operatingcosts of the tax system. Although thesecosts tend to be analyzed separately inempirical studies, it is well known inthe literature that there is considerablescope for transfer between them(Sandford et al. 1989). For example, a gov-ernment may place responsibility forsome aspects of tax collection on either theprivate sector or its own tax authority.Also, individual income tax may be partlyor wholly self-assessed or revenue-assessed. While this paper concentrateson compliance costs, their interdepen-dence with administrative costs shouldnot be overlooked in future research in thearea.

4 As in the case of New Zealand and Canada, Australia’s GST is a VAT.


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SOME CONCEPTUAL ISSUES

Social versus Taxpayer Compliance Costs

The term ‘tax compliance cost’ is ca-pable of different interpretations; a con-sensus as to the precise meaning and mea-surement of compliance costs only beganto emerge in the literature about25 years ago. According to the mostauthoritative source, tax compliance costsare defined as those costs “incurredby taxpayers, or third parties such asbusinesses, in meeting the requirementslaid upon them in complying witha given structure and level of tax”(Sandford, Godwin and Hardwick, 1989,p. 10). In the same source, the cost of taxcompliance is also referred to as a privatesector cost.

An important convention in this veinof literature, which is relevant to this pa-per, is the distinction between gross andnet compliance costs where net compli-ance costs are equal to gross compliancecosts minus the value of tax compliancebenefits. The main quantifiable form of taxcompliance benefit is the cash flow advan-tage which arises when businesses havethe use of tax revenues for a period be-fore they must be remitted to tax authori-ties (Sandford et al., 1989, pp. 13–14). Itmay thus be written as

[1] Net compliance costs ≡ Gross compliance

costs – Cash flow benefits

The problem with the above approachis that it does not clearly distinguish be-tween social compliance costs (i.e. costs tothe economy) and taxpayer compliance costs(i.e. costs directly borne by taxpayers). Itis easy to see that tax compliance activi-ties undertaken by taxpayers generatesome offsetting benefits to them.5 Thesebenefits include the following.

Managerial benefits

Managerial benefits provide a basis forimproved business or individual decisionmaking. These can be brought about bythe need to have stringent record keepingin order to comply with the requirementsof the tax laws. These benefits theoreticallyexist but are difficult to quantify, and aretypically omitted in empirical studies.Important exceptions include Sandfordet al. (1981) and National Audit Office ofthe UK (1994), which suggest the valuesof managerial benefits can be quite con-siderable.

Cash flow benefits/costs

Cash flow benefits arise:

(1) when income is not taxed (either atall or in sufficient amount) and re-mitted at the point at which it is re-ceived, and taxpayers (both indi-viduals and firms) have the use ofthe tax revenue for a period beforethe tax is paid to the tax authority

(2) from the lawful delay in the remit-tance of tax revenues collected bybusinesses on behalf of the govern-ment (e.g. PAYE or sales tax).

Note that cash flow benefits to taxpay-ers can be negative if taxpayers eitheroverpay their income tax liabilities dur-ing the tax year or have to remit tax rev-enue to the tax authority before collection.The idea of cash flow benefits as an off-setting benefit of tax compliance to busi-ness taxpayers was first popularized bySandford and others in the early 1980s(Sandford et al. 1981, pp. 75–89). This ideahas become quite established in the litera-ture and been applied in many empiricalstudies outside the UK (Allers 1994;Hasseldine 1995; and Pope, Fayle andChen 1994).

5 By the same reasoning, the administrative activities undertaken by tax authorities also generate managerialbenefits and improved data for the construction of national accounting to the government.


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In Australia, the magnitude of cash flowbenefits/costs to taxpayers can be quitesubstantial, as will be shown later. In theU.S., these benefits/costs are minimizedby the estimated tax payment (ETP) forboth individuals and corporations. Gen-erally the ETP system requires taxpayersto estimate their tax liabilities for the cur-rent tax year and make quarterly pay-ments which are equal to at least 100 per-cent of their tax liabilities in the previousyear or 90 percent of their liabilities in thecurrent year. Taxpayers who do not meetthese conditions and fail to pay ETP bydue dates are subject to interest penalties.

Cash flow benefits enjoyed by taxpay-ers can be viewed as costs to tax authori-ties. This may be written as:

[2] Cash flow benefits to taxpayers

= Cash flow losses to tax authorities

Equation 2 means that cash flow benefitsto taxpayers represent a transfer within theeconomy, which reduces the compliancecosts to taxpayers, but not the economy.6

Tax deductibility benefits

The income tax systems in most devel-oped countries recognize some tax com-pliance cost activities as a source of legiti-mate tax deductible expenses. The benefitsof the tax deductibility of compliance ac-tivities to taxpayers were considered insome detail in an early study by Johnston(1963). However, his distinction betweenbefore- and after-tax compliance costs hasbeen virtually neglected until the 1990s.

This neglect, particularly by the NorthAmerican researchers (Slemrod andSorum 1984; and Vaillancourt 1989), is notsurprising. Like cash flow benefits, taxdeductibility benefits represent a transferwithin the economy, which does not re-duce the social compliance costs,7 andeconomists typically focus on the oppor-tunity costs to the society as a whole.

Tax deductibility may thus be written as:

[3] Tax deductibility benefits to taxpayers

= Revenue losses to tax authorities

In Australia, personal (individual non-business) taxpayers can deduct the costsof paid tax advisers and tax-related inci-dental expenses from their taxable income.In the U.S., after the Tax Reform Act of 1986,if individual taxpayers itemize their deduc-tions, then they can deduct from their tax-able income the portion of their miscella-neous expenses account (including taxpreparation fees, safe deposit box rental,custodial accounting fees, etc) exceeding 2percent of their adjusted gross income. Asa result, very few individual taxpayers inthe U.S. meet these stringent conditions.

Combining equations 2 and 3 we maynow write:

[4] Social compliance costs (SCC)

≡ Direct monetary outgoings incurred

by taxpayers + Imputed costs of time

and resources spent by taxpayers

on their tax affairs – Managerial

benefits to taxpayers

6 Strictly speaking, equation 2 holds if and only if taxpayers and tax authorities face the same rate of interest.Sandford et al. (1989, p. 23) noted that “whilst the total cash flows cancel, the benefits and detriments may notprecisely cancel because of the different terms on which public and private sectors can borrow and lend.”

7 This is based on the assumption that if tax compliance is costless, then the taxable resources previously em-ployed in tax compliance can easily and fully move to other productive uses in the long run. Otherwise, taxdeductibility benefits to taxpayers do not cancel out the revenue losses to the tax authority. For example,deductible expenses typically include fees paid to professional tax advisers. While these deductible expensesreduce taxpayers’ tax liabilities, they at the same time increase tax advisers’ tax liabilities by a correspondingamount. If tax advisers can find work elsewhere in the absence of tax compliance activities, then tax deduct-ibility benefits to taxpayers and the corresponding revenue losses to the tax authority will cancel out. Other-wise, the losses of tax revenue will equal the allowable tax deductions multiplied by the difference in themarginal tax rates of the taxpayers and tax advisers.


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[5] Taxpayer compliance costs (TCC)

≡ Social compliance costs – Cash flow

and tax deductibility benefits to

taxpayers

Note that cash flow and tax deductibil-ity benefits to taxpayers reduce tax rev-enue and can thus be regarded as costs totax authorities. The loss in tax revenue re-duces government expenditure or resultsin higher taxes or borrowing and will thusaffect taxpayers and non-taxpayers alike.

Equations 4 and 5 provide the concep-tual framework for measuring tax com-pliance costs in the ATAX study. In adopt-ing this conceptual framework, the ATAXresearchers were attempting to incorpo-rate as comprehensive a categorization aspossible into their model. However, it isaccepted that even this framework doesnot embrace all aspects involved. For ex-ample, to be comprehensive, the modelwould need to take into account whathave been referred to as psychic costs(stress, anxiety, frustration, etc experi-enced by taxpayers, especially the elderly)in complying with their tax obligations.To date, no studies have managed to suc-cessfully incorporate psychic costs, al-though research in this area is taking place(Woellner et al. 1998).

A tax may also cause an additionalelement of social costs in the form of in-convenience and cost to the public. Forexample, when a higher VAT rate on a nar-row range of products was introduced inthe UK, some retailers discontinued sell-ing the goods subject to the higher rate tokeep their tax affairs simpler. This reducedavailability meant that some buyers hadto travel further to get them. It is felt thatthese costs provide an example of a bor-derline between compliance and effi-ciency costs where high compliance costsmay induce taxpayers to change theirbehaviour. Once again, the ATAX researchhas not attempted to incorporate thesedistortionary costs in its model.

In view of equations 4 and 5, it canbe seen that while gross compliance costscan be taken to mean the social compli-ance costs, the net compliance costs de-fined in equation 1 correspond to neithersocial nor taxpayer compliance costs. Infact, the net compliance costs provide anunderestimate of the social compliancecosts and an overestimate of the taxpayercompliance costs. Unfortunately, as men-tioned previously, equation 1 has beenapplied in a number of recent empiricalstudies. An example is a research on com-pliance costs of companies’ income taxa-tion in Australia for the 1990-91 financialyear by Pope, Fayle and Chen (1994).In this study, despite being aware of taxdeductibility benefits, they subtractedcash flow benefits from the gross compli-ance costs to arrive at the net compliancecosts.

Allers (1994) appeared to be the firstto take account of both tax deductibilityand cash flow benefits in his calculationof the compliance costs for Dutch businesstaxpayers in 1989. However, he didnot provide a general treatment of thelegal incidence of tax compliance costsand did not apply the same idea to taxcompliance costs of Dutch individualtaxpayers in 1990. The ATAX researchis, to the best of our knowledge, thefirst study to provide clear and con-sistent conceptual and estimating frame-works for social and taxpayer compliancecosts.

The distinction between social andtaxpayer compliance costs has morethan pedagogic relevance. It gives rise toa divergence of views between tax re-searchers and tax policy makers. Most taxresearchers, especially public financeeconomists, would consider the socialcosts of tax compliance as relevant forpolicy considerations while, from the taxauthorities’ narrower perspective, it isquite legitimate for them to regard the tax-payer compliance costs as appropriate forCCISs.


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Computational versus Tax Planning Costs

Compliance costs are sometimes di-vided into computational (unavoidable orinvoluntary) and tax planning (avoidableor voluntary) costs. This distinction, firstmade in the literature by Johnston (1963,pp. 67–70), has caused a controversywhich has not yet been (and possibly willnever be) fully resolved in the tax com-pliance literature. Many tax lawyers andpolicy makers continue to insist that onlycomputational costs constitute legitimatemeasures of tax compliance costs thatshould be included in CCISs.

The ATAX research team belongs to themajority of tax researchers who prefer acomprehensive definition of tax compli-ance which includes both computationaland tax planning costs. Our view is thatthe line between avoidable and unavoid-able costs will always be blurred and itwould be impossible to fully distinguishactivities and costs related to tax planningfrom those related to satisfying the com-pliance demands of the tax system. Bothsorts of expenses are legitimately incurredby taxpayers in complying with legisla-tive requirements.8

Tax planning is undertaken by taxpay-ers because the costs of tax planning arepresumably lower than the resulting reduc-tions in their tax liabilities (assuming thattaxpayers are rational maximising agents).Thus, the equation for taxpayer compliancecosts should be modified slightly to reflectthe benefits of tax planning to taxpayers:

[5’] Taxpayer compliance costs (TCC)

≡ Direct monetary outgoings incurred

by taxpayers + Imputed costs of time

and resources spent by taxpayers on

their tax affairs – (Managerial benefits

to taxpayers + Cash flow benefits to

taxpayers + Tax deductibility benefits

to taxpayers) – Reduction in tax

liabilities due to tax planning

Note, however, that tax planning iswasteful from the societal viewpoint, astax-planning benefits to taxpayers will bematched by a reduction of the same mag-nitude in government tax revenue, so thatequation 4 remains valid. Reliable esti-mates of the reduction in taxpayers’ taxliabilities due to their tax planning activi-ties are extremely difficult, if not impos-sible, to obtain. So although we haveadopted a relatively comprehensive defi-nition of tax compliance costs, equation 5has been used to estimate taxpayer com-pliance costs, keeping in mind that suchpractice will overestimate the true mag-nitude of taxpayer compliance costs.

Commencement versus Recurrent Costs

Compliance costs can also be divided intocommencement (once-only) and recurrent(regular) costs (Sandford et al., 1989, pp. 16–17). Since tax legislation tends to changecontinuously, both commencement and re-current costs exist simultaneously for thetax system as a whole. The presence of com-mencement costs complicates the analysisof tax compliance in two different ways.

First, compliance costs are not unlikeproduction costs and have to be treatedsimilarly. Economic theory and account-ing practice suggest that some commence-ment costs, particularly the costs of du-rable assets (e.g. a new computer or cashregister), should be spread over a num-ber of periods, rather than be treated asa cost solely at the time incurred. Inpractice, it is extremely problematic toidentify commencement costs, let alone al-locate such costs over time. Secondly, com-mencement costs make intertemporalcomparisons of tax compliance costs dif-ficult. A researcher may well overestimatecompliance costs if they investigate them

8 The scope of tax planning should be, in principle, broad enough to cover tax avoidance activities. However, thesocial compliance costs should exclude tax evasion activities as these do not comply with the tax legislation.


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during a period when a new tax is intro-duced or an existing tax is amended sig-nificantly, as costs will decrease in futureperiods.

In practice, we are not aware of any aca-demic studies that report on empirical es-timates of commencement and recurrentcosts separately. Like all previous studies,the ATAX research does not distinguishbetween commencement and recurrentcompliance costs of ATO taxes during the1994-95 financial year. The ATAX study isconcerned with the Australian federal taxsystem as a whole, and the resources re-quired for measuring commencement andrecurrent costs of the Australian federaltax system would simply be prohibitive.However, such an effort may be justifiedin a future study that focuses on a par-ticular type of tax or tax collection mecha-nism.

DEVELOPING AN ESTIMATINGMODEL

In order to translate the above concep-tual framework into an estimating model,it is necessary to:

• derive precise formulae for comput-ing SCC and TCC

• obtain sample data• generalize on the basis of sample

data obtained.

The collection of data is further dis-cussed in the next section, and some ofthe outcomes are reported in the final sec-tion. This section gives some details aboutthe development of an estimating modelthat was sufficiently robust to provide areasonable estimate of compliance costsarising from the federal tax system. Theseinclude:

• components of tax compliance costs• components of tax compliance ben-

efits• tax coverage

• disaggregation of taxpayers• accounting/taxation overlap• valuation of time spent on tax activi-

ties.

Each of these determinants will be dis-cussed in turn.

Components of Tax Compliance Costs

The three major areas of opportunitycosts applicable to tax compliance activi-ties are:

• time spent by taxpayers, unpaidhelpers and (internal) paid employ-ees

• (external) paid tax advisers• non-labor costs (i.e., tax-related per-

sonal incidental expenses or businessoverhead costs) such as equipment,computers, stationery, photocopy-ing, postage, telephone, facsimile,electricity, specific travel, etc.

Some of these costs are explicit, involv-ing direct payments (e.g. paid employeesor external tax advisers and non-laborcosts) while others are implicit (e.g. tax-payers’ own time and that of unpaid help-ers).

The treatment of non-labor costs ofbusiness taxpayers represents one of themost difficult and neglected areas of taxcompliance cost research. It has been sug-gested in Sandford (1995, p. 396) that thesecosts can be practically ignored in studiesinvolving only small business taxpayers.However, omission of non-labor costs willunderestimate compliance costs of largebusiness taxpayers. In the ATAX study, anattempt was made to collect data on thetax-related incidental costs for personaltaxpayers. It was, however, felt that itwas too difficult to disentangle overheadcosts relating to taxation complianceand, consequently, no attempt was madeto collect data on non-labor costs oftax compliance for business taxpayers.


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This omission is an area which requiresfurther consideration in future empiricalstudies.

Components of Tax Compliance Benefits

As has already been noted, the offset-ting benefits of tax compliance to taxpay-ers include managerial benefits, cash flowbenefits and tax deductibility benefits.

Managerial benefits (both to personaland business taxpayers) have proved toodifficult to quantify, and typically havebeen excluded in empirical studies.

Cash flow benefits/costs (cash flowbenefits may be negative for some indi-vidual taxpayers, in which case they arereferred to as cash flow costs) are a criti-cal component in arriving at an estimateof taxpayer compliance costs. The relativeimportance of cash flow benefits/costs totaxpayers depends crucially on the taxsystem under consideration. In Australia,cash flow benefits/costs are significantand arise from a number of taxes:

• cash flow benefits to personal tax-payers: provisional tax and tax debitassessment (personal taxpayers whohad not had sufficient taxes de-ducted from their income during theyear in which it is derived)

• cash flow benefits to business tax-payers: provisional tax, tax debit as-sessments, company tax instalments,superannuation fund tax install-ments, Fringe Benefits Tax (FBT),Wholesale Sales Tax (WST), PAYE,Prescribed Payments System (PPS)and Reportable Payments System(RPS)9

• cash flow costs to personal andbusiness (mostly sole trader) tax-payers: tax refunds (taxpayers whooverpay tax during the course of thefinancial year).

Note that in Australia, taxpayers do notnormally pay interest or penalties on taxunderpayments within a financial year.(However, some provisional taxpayersmay have to pay a penalty tax if their ownestimated taxable income is ultimatelymore than 15 percent below their actualtaxable income for that year.) Similarly, theATO does not pay interest on tax overpay-ments within a financial year by taxpay-ers. Very recently, the ATO has begun toconsider paying interest on overpaymentsduring the tax year.

In estimating cash flow benefits/coststo personal taxpayers, the ATAX study hasbuilt on the work of Sandford et al. (1989,pp. 76–7). The value of cash flow benefits/costs to taxpayers depends on the amountof tax revenue involved, the average du-ration of cash flow benefit/cost period,and the average rate of interest (which inturn depends on how cash flow benefits/costs are assumed to be used/financed).

While the amounts of tax revenue fordifferent types of tax involved and theaverage interest rates can be obtainedfrom published sources, it is necessary tomake appropriate assumptions regardingthe average duration of the cash flow ben-efit/cost periods for different tax types.The full list of assumptions is given byEvans et al. (1997, pp. 14–15).

Tax deductibility benefits also need tobe taken into account in determining tax-payer compliance costs. The tax deduct-

9 FBT is a tax imposed on employers for providing employees with non-cash benefits (e.g., the use of a car).WST is a federal, single-stage sales tax imposed at the wholesale level on a small number of goods (notservices). Its tax base is narrow and its rates are variable. It is to be replaced, from 1 July 2000, with a GST. ThePPS is designed to ensure that the persons making ‘prescribed payments’ in certain industries (e.g., construc-tion) deduct tax from those payments at source, before paying balance to the payees. PPS thus perform ananalogous function to those self-employed persons to that which the PAYE performs for employees. The RPSis a supplement to the PPS which requires payers of ‘reportable income’ to deduct tax at the highest rate (48.5percent) from those payees who do not quote their tax file numbers.


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ibility of some compliance activities drivesa wedge between SCC and TCC. Yet veryfew studies have explicitly taken it intoaccount. The methods of estimating taxdeductibility benefits in the pioneeringwork of Johnston (1963) and in a laterstudy by Allers (1994) were rather crudeand some refinements were introduced inthe ATAX research. The underlying as-sumption of tax deductibility benefits isthat taxpayers are optimising and well-informed so that they will always claimthe full amount of allowable tax deduc-tions in order to minimize their incometax liabilities. Under this assumption, thevalue of the tax deductibility benefit totaxpayers depends upon:

• the portion of taxpayers’ compliancecosts which is tax deductible

• the taxpayers’ marginal income taxrates

• whether taxpayers are income tax-able or not.

In Australia, professional tax adviserfees and incidental expenses incurred bypersonal taxpayers are tax deductible. Forbusiness taxpayers, all tax compliancecosts incurred (with the exception of timespent on business tax affairs by self-em-ployed owners and unpaid helpers) areregarded as legitimate business expensesand are therefore tax deductible in prin-ciple. The ATAX team recognized that tax-payers face variable income tax rates andconsequently disaggregated personal tax-payers by reference to their income lev-els, and business taxpayers by referenceto their size and legal forms in order toobtain an accurate dollar estimate of taxdeductibility benefits to taxpayers.

It is easy to see that businesses withpositive taxable income can fully benefitfrom the tax deductibility of compliance

costs. Non-taxable businesses introducesome complications to the calculation oftax deductibility benefits. For example,many non-taxable businesses are not, infact, in loss. They are in the position of noprofit or loss, as the accounting surplusfor the year has been entirely paid out (asearnings or otherwise) to directors/pro-prietors. Such firms will therefore havereceived the benefit of tax deductibility inrespect of their tax compliance costs. Someloss-making businesses can still benefitfrom part of the deductibility of their com-pliance costs if, excluding tax compliancecosts, they have positive taxable income.Alternatively, since loss-making busi-nesses can carry their losses into the fu-ture, some will eventually benefit from taxdeductions provided that they will bemaking some profits in the future. (Evenso, their tax deduction benefits will notbe as high as profit-making businesses asbusiness losses are not indexed.)

Faced with all these possibilities fornon-taxable businesses, and in the absenceof appropriate information upon which tobase more precise calculations, the ATAXstudy conservatively assumed that busi-nesses that were not taxable were able toderive an estimated 50 percent of the fullbenefit of tax deductibility.

Tax Coverage

The ATAX study is unique in its attemptto capture the compliance costs of thewhole Australian federal tax system (asadministered by the ATO) in one studyrelating to the same financial year. Thetaxes under consideration are income tax,Capital Gains Tax (CGT), FBT, Superan-nuation Guarantee Charge (SGC) andWST, and various tax collection mecha-nisms such as PAYE, provisional tax, PPSand RPS.10 In Australia, State Govern-

10 SGC is a tax levied on employers who fail to provide their employees with ‘minimum’ level of superannua-tion support. Various excises (such as those on tobacco, alcohol and petroleum) have recently been trans-ferred from the Australian Customs Service to the ATO. Under Australian Federal Government’s tax propos-als, the ATO will be responsible for collecting GST as well as excises.


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ments do not impose income or generalsales tax. They rely on a range of narrow-based indirect and land taxes, and thepayroll tax is one of their main sources ofrevenue. Previous research investigateddistinct aspects of the tax regime, ratherthan the whole, although Pope’s five sepa-rate surveys (1995) and the Bath surveyprogram directed by Professor Sandford(Godwin, 1995) come close to providing acomprehensive picture over the course ofa number of years. Other studies in theUK have covered the whole tax system ina series of related studies which were thenadjusted to relate to a single financial year(Sandford et al., 1989). The ATAX studyof all federal taxes collected by the ATOthus takes into account the fact that dif-ferent tax types are often too interrelatedto be successfully examined in isolation.

Disaggregation of Taxpayers

The ATAX study breaks taxpayersdown into two main categories—personaltaxpayers and business taxpayers. A per-sonal taxpayer is an individual taxpayerwhose greatest single source of income isderived either from employment (wagesand salaries, and with income from othersources of less than $1,000) or from prop-erty income (and with no business, trustor partnership income). These taxpayersare sometimes referred to as ‘individualsnon-business’ by the ATO.

Business taxpayers comprise the bal-ance of taxpayers, and include sole trad-ers (individuals with business income orloss who are not salary and wage earnersor property income recipients), partner-ships, companies, trusts, and superannua-tion funds. Government trading enter-prises have been included in the researchas a result of the operation of tax equiva-lent regimes.11 However, the budget sec-

tor of federal, state, and local governmentshas been excluded, as have non-profit or-ganizations. This is not to suggest thatsuch entities do not have taxation com-pliance costs through, for example, theoperation of aspects of the tax system suchas PAYE or FBT. However, such entitiesare not part of what might usually betermed the business taxpayer community.

Previous studies of income tax compli-ance costs have typically considered indi-vidual taxpayers as a whole. One of the in-novations of the ATAX study is to separateindividual taxpayers into personal andbusiness taxpayers. (Note that personal tax-payers and sole trader taxpayers togetherconstitute the entire population of indi-vidual taxpayers.) This is based on twomain considerations. In the first place, in-dividual business taxpayers face a range offederal, state, and local taxes in the conductof their businesses. In 1994–95, Australianpersonal taxpayers spent, on average, 8.5hours on their tax affairs while individualbusiness taxpayers (sole traders) spent 90hours of their time (not counting the timeof paid helpers) on their own tax affairs(Evans et al., 1996, pp. 59 & 146). Secondly,individual business taxpayers are entitledto a range of tax deductible expenses whichare usually not available to individual non-business taxpayers. This creates a differencein the calculation of the TCC for individualbusiness and non-business taxpayers.

Another feature of the ATAX study isits secondary classification of both per-sonal and business taxpayers:

• personal taxpayers are further clas-sified on the basis of their gross in-come levels (‘low’ (annual incomeunder $20,000), ‘medium’ ($20,000 to$49,999) and ‘high’ ($50,000 ormore)), use of paid tax agents, andlocation of residence

11 The State Governments in Australia have developed a tax equivalent regime under which tax equivalentpayments mirror as closely as possible those federal taxes which would apply were the Government TradingEnterprises owned by the private sector, i.e., corporate income tax and sales tax.


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• business taxpayers are classified byreference to their legal form (soletrader, partnership, company, trust,and superannuation fund) and sizeof business (‘small’ (annual turnoverless than $100,000), ‘medium’ (be-tween $100,000 and $9,999,999), and‘large’ ($10,000,000 or over)).

The above stratification is based on botha priori reasoning and empirical evidence.Such diasaggregation permits the selec-tion of more homogenous groups of tax-payers and more accurate estimation ofcompliance costs.

The Accounting/Taxation Overlap

In the area of business compliance costs,the lists of costs that one might attribute toaccounting and those which one might at-tribute to taxation is not free from debate.There exists a continuous spectrum ofviews regarding the accounting/taxationoverlap. At one polar, there are taxpayers(especially small businesses) who regard allthe costs involved in the preparation of ac-counting records as compliance costs, be-cause taxation is the only reason that theyhave, or at least recognize, for performingthose activities. The other extreme mightbe expressed by describing tax as no morethan a by-product of accounting such thatthe information relevant to taxation is a fi-nal step in an ordinary accounting function.

The ATAX team rejected both of theseextreme views. In adopting an intermedi-ate position concerning the accountingtaxation overlap, we attempted to designappropriate questions that helped taxpay-ers to separate non-taxation accountingcosts from the taxation compliance costs.This will be further discussed in the nextsection.

Valuation of Time Spent on Tax Activities

Labor time spent on various tax activi-ties constitutes the most significant

component of taxation compliance costs,and aggregate compliance costs are verysensitive to the value attributed. Variousissues arise from the valuation of labortime, excluding external paid tax advis-ers. These have been discussed in detailin the literature, and will not be repeatedhere. However it must be stressed that thisis a contentious and inevitably subjectivearea, and the following sections identifythe rationale for the adoption of themeasure of taxpayer time that has beenused in calculating average compliancecosts.

Valuing personal taxpayers’ time

Although a number of alternative valu-ations of personal taxpayer time havebeen proposed in the literature (Sandfordet al., 1989, p. 37), the two most popularmeasures in practice are the before- andafter-tax wage rates. Blumenthal andSlemrod (1992, p. 200) argued that the af-ter-tax wage rate should be used if com-pliance activities substitute for leisure, andthe before-tax wage rate if complianceactivities substitute for work.

The ATAX team takes the view that per-sonal tax compliance activities substitutefor leisure, and uses the after-tax wage ratein the measurement of both SCC and TCC.There are two candidates for wage rate:published wage rates or surveyed wagerates obtained directly from taxpayers.Since personal taxpayers may be em-ployed, unemployed or not in the laborforce, the ATAX team decided to use theafter-tax surveyed wage rates (whichrange from $11 to $20 per hour, depend-ing on the level of income of the taxpayerconcerned).

The value of time expended by unpaidhelpers on behalf of personal taxpayers(usually a spouse or family member) alsoneeds to be factored into the equation. Inthis case, the ATAX team used taxpayers’valuations of their unpaid helpers’ time,ranging from $11 to $14 per hour after tax(Evans et al., 1996, p. 73).


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Valuing business taxpayers’ time

When tax activities are carried out byemployees of a business, the labor costscan be satisfactorily valued at the prevail-ing before-tax market salary/wage ratesfor the different levels of personnel (i.e.partners/trustees/directors, lawyers, ac-countants, computer analysts, clerks etc.).It is worth noting that an appropriate al-location of the total wage bill (includingan element of on-costs, such as superan-nuation contributions by employers andpayroll taxes, which may add approxi-mately 20 percent to the nominal wagesbill) should be the basis for valuation(Sandford, 1995, p. 398). In the ATAXstudy, the wage rate for personnel in me-dium- and large-sized businesses who arelikely to be wholly involved in the tax af-fairs of the business was increased accord-ingly to reflect the total cost to the em-ployer including on-costs, rather thanmerely reflecting the before-tax wage rate.

Valuing time spent on tax activities bysole traders is more problematic. It wasconsidered that the appropriate wage ratefor sole traders in small businesses shouldequal the before-tax surveyed wage formedium income personal taxpayers ($19per hour). A report commissioned by theSmall Business Deregulation Task Force(Yellow Page Australia, 1994, p. 16) as-sessed the wage rates applicable to own-ers and partners in small businesses to be$20 per hour, which supports the valueadopted by the research team. For soletraders in medium-sized businesses, theATAX team took the view that the appro-priate value of time should be $29 perhour, which represents the mid-point forpersonal taxpayers in the medium andhigh categories ($19 to $39). There wereno sole traders in the large business cat-egory, and so it was not necessary to allo-cate a value for such taxpayers’ time.

Unpaid helpers are involved mostly inrelatively small businesses that may notrequire tax specialist skills. The ATAX

team adopted the approach of valuingbusiness taxpayer unpaid helpers’ time atthe same rate as the average overall re-ported value for time spent by the unpaidhelpers of personal taxpayers ($12 perhour).

To summarize, in the case of personaltaxpayers, the relevant tax is the Austra-lian federal income tax, and taxpayers aredisaggregated by their income level forestimation purposes. For business taxpay-ers, calculation covers a full range of fed-eral taxes and tax collection mechanisms,and disaggregation is on the basis of thelegal form and annual turnover. Socialcompliance costs are thus equal to theaverage social compliance costs per tax-payer multiplied by the number of tax-payers in a particular sub-population,summed over all sub-populations of tax-payers. Taxpayer compliance costs areequal to social compliance costs minus theaggregate tax deductibility of certaintypes of costs and the aggregate cash flowbenefits/costs that derive from certainaspects of the tax system. For full detailsof various computational formulae referto Evans et al. (1997, pp. 17 & 31).

COLLECTION OF DATA

The discussion in the previous sectionindicates that three separate sources ofdata are required for estimating tax com-pliance costs. They are:

• macro statistics on the cross distri-butions of taxpayers (e.g. personaltaxpayers by gross and taxable in-come, or business taxpayers by le-gal form and annual turnover) anddistributions of tax revenues by vari-ous characteristics

• information about taxpayers’ taxcompliance costs, such as time spenton personal tax affairs, time spent byunpaid helpers, actual or perceivedwages, time spent by different lev-els of personnel on different tax


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activities or tax types, fees paid to taxadvisers, etc.

• other information, such as marketwages for different occupations andinterest rates.

The first and third types of dataare normally available from publishedsources. With regard to the first source ofdata, the ATAX team was able to gain ac-cess to the ATO’s full database known asthe ATO Tax Return Database (Super-CROSS). The access to this database, notnormally available to the public, gave theATAX study an immense advantage overprevious Australian studies. The thirdtype of data was derived from publica-tions of the Australian Bureau of Statis-tics (1997), Reserve Bank of Australia(1995), and Cullen Egan Dell (1995), aleading remuneration and human-re-source consulting firm in Australia.

A number of strategies for collecting thesecond type of data have been proposedand used in the compliance cost researchliterature. They include:

• large-scale mail survey• log-book case study• face-to-face or telephone interview• archival/document analysis.

The most popular method of collectingdata for compliance cost research is large-scale mail surveys. The ATAX team de-cided to collect the necessary primary databy means of three separate, large-scalesurveys of just over 10,000 personal, soletrader and other business taxpayers,which were conducted during Septem-ber–November, 1995. The decision to usemail surveys was based on the need togather new and detailed data on a nationalscale over a short timeframe.

There are many problems with usingsurvey data in this kind of research. This

section explains how the ATAX study at-tempted to deal with these problems byutilizing many of the world’s best ideasand practices in the survey data gather-ing.

The Pilot Study

A pilot study involving 99 personal tax-payers and 408 business taxpayers wasundertaken in July, 1995 to verify the sur-vey questionnaires, to test the responserate, to determine the likely representa-tiveness of the respondents, and to obtaincomments from international experts. Thepilot study respondents were invited tocomment (on a separate evaluation sheet)on difficult or ambiguous questions andwere asked if any omissions were appar-ent. Australian and overseas experts werealso approached to provide comments onthe pilot study questionnaire, and a num-ber of refinements and additions weremade as a result of this exercise.12 The pi-lot study provided useful inputs for themain surveys. It confirmed many aspectsof the initial conceptions about the mainsurveys, but also caused reassessments ofother aspects. One particular outcome ofthe pilot study was the need for a sepa-rate, shorter, form specifically designedfor sole traders, in addition to the personaland other business survey forms.

Sample Selection

The sample selection was accomplishedwith the assistance of the ATO. There werethree separate samples: personal, soletrader, and other business. For each stra-tum, taxpayers were chosen by the pro-portional, random, systematic samplingmethod, although superannuation fundswere not stratified by industrial sector forobvious reasons and a small number ofvery large listed companies were added

12 The pilot questionnaires were sent to some leading Australian and overseas experts and useful commentswere received from Allers, Hasseldine, Malmer, Sandford, Sawyer, Vaillancourt, and Wallschutzky.


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to the other business sample in order toincrease the number of large business tax-payers. Details of the sample selection aresummarized in Table 1.

The ability to use the tax authority’sdatabase instead of commercial mailinglists or electoral rolls represents a signifi-cant improvement from most of the pre-vious studies, especially those undertakenin Australia. In particular, the ATAXsample is more representative of taxpayerpopulations (in terms of various demo-graphic and economic characteristics)than samples obtained in previous stud-ies. The ATAX researchers recognized thatusing a sample drawn from the taxauthority’s own records would have theeffect of automatically excluding non-filers from the survey, and that samplesdrawn from telephone or voting recordsmay appear to have the advantage ofpotentially including some non-filers.However, they felt that the definite advan-tages of drawing from a database capableof ensuring a random systematic stratifiedsample far outweighed the possible (butunlikely) advantages of a few non-filersdeciding to participate. Nonetheless,future empirical work in this area shouldseek to establish whether high compliancecosts may themselves be one of the majorcauses of non-filing and other non-compliant behaviour.

Questionnaire Design

The questionnaires sought qualitativeand quantitative information on demo-graphic/legal, economic, and tax charac-teristics of taxpayers. In designing thequestionnaires, the ATAX team endeav-oured to make them comprehensive, userfriendly, and administratively simple.Although the surveys were anonymous,respondents were offered the option ofidentifying themselves if they wished toparticipate in follow-up studies.

Double counting

Double counting of taxes was avoidedbecause, in the case of business taxpay-ers, a full list of federal taxes and tax col-lection or reporting mechanisms wasgiven to survey participants as a part ofthe questionnaire. Respondents were re-quired to allocate the time spent by vary-ing classes of personnel on complianceactivities by reference to that list.

Of course, many businesses, for reasonssuch as limitation of legal liability, secu-rity, financial planning, and tax planning,choose to use several business vehicles ina single business entity. Thus, there werejust less than one million separate busi-nesses giving rise to about two and a halfmillion business taxpayers in Australia in1994–5.13 In the business surveys, the in-

13 According to the ATO’s database there were over 2.4 million business taxpayers (including 0.95 million soletraders) in 1994–5.

TABLE 1SAMPLE SELECTION

Total population

Stratified by

Original sample size

Population coverage (%)

1,206,294

Size, legalform, and

industrial sector

5,402

0.42

Other Business

7,134,129

Income, use oftax agent,

and location

1,996

0.03

Personal

719,314

Size andindustrial

sector

2,997

0.42

Sole Trader

9,059,737

10,035

0.11

Total

Source: Evans et al. (1996, p. 36).


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structions given to respondents were toinclude the expenditure (time, money,etc.) only of the taxpayer to which/whomthe survey had been mailed. The post-sur-vey telephone interview, the helpline que-ries (see below) and the written responsesin the qualitative section of the surveyforms all suggest that in many cases thetaxpayersurveyed was only peripherallyinvolved in the business. As a result, thedata in the response did not reflect all ofthe costs and activities of the business,only of the taxpayer surveyed.

Accounting/taxation overlap

In relation to the overlap between taxa-tion and accounting, business taxpayerswere requested to separately identify thoseactivities that were required solely for taxpurposes and those accounting activitiesthat were beneficial to their business inother ways (e.g., stock control). In this way,the impact of purely accounting compli-ance costs on the survey results (as opposedto tax compliance costs) was marginalized.

Checking for internal consistency

There were a number of questionsaimed at checking for internal consistencyof respondents’ answers. Those respon-dents who gave incompatible answers andwho had indicated that they were willingto participate in a follow-up study werecontacted for clarification.

Response Rates

Mail surveys are known to generate lowresponse rates generally. In order to maxi-mize response rates the ATAX study em-ployed a number of measures. These in-cluded:

• sending the questionnaires fromATAX, part of the University of NewSouth Wales, to emphasize the inde-pendence of the research

• accompanying the questionnaireswith a covering letter by the Com-missioner of Taxation to stress theimportance of the study and the ano-nymity of the surveys

• using personalized letters• providing reply-paid envelopes• giving an incentive for the sample

population to respond (a prize drawof a Personal Computer valued atover $3,000. The computer was do-nated by a major accounting body,and the prize draw sheet also con-tained a letter from the President ofthe Tax Center of that body encour-aging taxpayers to respond. WesternAustralian state laws prevented re-spondents from that state enteringthe prize draw and this exclusionseemed to suggest that the use of theincentive increased the level of re-sponses in other states for personaltaxpayers, but not business taxpay-ers (Evans et al., 1996, p. 37)

• issuing two reminders (a postcardand a full package)

• generating publicity by media andprofessional organizations to createa ‘climate of acceptance’ within thetaxpaying community.

As a rule of thumb, a response rate ofabout 30 percent is generally regarded assatisfactory. The ATAX study generated re-sponse rates of 50.1, 26.6, and 36.4 percentfor the personal, sole trader, and other busi-ness surveys, respectively (Evans et al.,1996, p. 35). These rates far exceed thoseobtained in previous Australian studies.14

Representativeness ofObserved Samples

One major problem with mail surveysis concerned with the representativenessof the observed sample. The sample ob-

14 For example, the response rates of Pope’s surveys of individual taxpayers, public companies, employmentrelated taxation, WST, and companies were 16.3, 16.0, 27.2, 24.0, and 33.5 percent, respectively.


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served in the personal taxpayer surveypassed this test easily. There were statisti-cally significant agreements between theobserved sample and the population dis-tributions in terms of all three stratifica-tion factors (income level, location and useof tax agent). Further, the observed samplewas also representative in terms of demo-graphic variables such as gender andmarital status. There was, however, a highpercentage of university graduates amongrespondents, but this is not surprising,since taxpayers in this category would feelmore inclined and confident to participatein the survey. Similarly, the business sur-veys yielded samples that were represen-tative of their corresponding populations,with one or two minor and inconsequen-tial exceptions (Evans et al., 1996, p. 103–5). For example, the retail trade industrywas slightly under represented in the re-sponses, and the entertainment industryover represented.

Non-response Bias

Another problem concerns the percep-tion of tax compliance costs of respondentsversus non-respondents. There is a realdanger that those who choose to responddistort the survey outcomes because theyhave a particular perception of compliancecosts compared to those who do not re-spond. This was tested by giving surveyedtaxpayers the option of answering a singlequestion instead of the full questionnaire.A comparison of full-questionnaire andsingle-question respondents showed thatthere was an acceptable aggregated corre-spondence of views (Evans et al., 1996, pp.65 & 105–6). Combining this with the rea-sonably high response rates obtained, itcan be concluded that non-response biaswas not a problem in the ATAX study.

Helpline

In order to provide respondents withevery possible assistance, the four mem-

bers of the ATAX team staffed (on a rotat-ing basis) a telephone helpline through-out the survey period (approximately twomonths). Any queries were dealt withimmediately and consistently. Between 50and 100 callers used the helpline, thoughit was often to inform the ATAX team thatthe person being surveyed was unavail-able (for example because they were over-seas or recently deceased/in liquidation).

Post-survey Data Verification Interview

Following the coding and preliminaryanalysis of data, data verification tele-phone interviews (based on a preparedquestionnaire) were conducted with re-spondents who indicated their willing-ness to participate in follow-up studies.Different questionnaires were used fordifferent categories of respondents, de-pending on whether they belonged in thepersonal, sole trader or business category.The aim of this telephone survey was toseek further explanations for outliers (i.e.excessively low or high values) to someof the key variables and inconsistencies.A list of survey respondents who recordedsuch outliers or inconsistent answers wasdrawn from those who were willing toassist with the study further.

A total of 146 respondents—out of amuch larger number of persons contactedat random from the above list—completedlengthy interviews from January to April1996. It was concluded from this exercisethat respondents had made a fair and ac-curate attempt at the questionnaire andthat the data derived was substantially re-liable. Caution is necessary in applyingthe data derived in relation to time spenton specific taxes. The level of computeruse in the business (other than sole trad-ers) group may be understated. In the caseof the personal taxpayer survey, the useof the trimmed mean (the mean obtainedafter deleting the bottom 5 percent and thetop 5 percent in the sample) was appro-priate in certain cases.


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In summary, as a result of being able touse and refine examples of best practiceculled from earlier Australian and overseasstudies, and due to the assistance of theATO, the ATAX study was able to obtainquality data which has not been availableto similar previous research in Australia.

EMPIRICAL RESULTS

Summary of Main Findings

Some major findings of the ATAX studyare summarized in Table 2.

As discussed previously, SCCs andTCCs are grossed up using the averagesocial compliance costs per taxpayer in aparticular category (based on sampledata) multiplied by the number of taxpay-ers in that category (based on macro data),summed over all relevant categories. Thecategories are low, medium, and high forpersonal taxpayers and small, medium,and large for business taxpayers.

Note that Australian personal taxpay-ers suffer cash flow costs because theytend to, on average, overpay their tax li-abilities during the year. This is mainlybecause, in contrast to the ETP system inthe U.S., the Australian PAYE system doesnot take into account a range of tax de-ductions and rebates that reduce taxableincome of salary and wage earners.

Table 2 indicates that Australian taxcompliance costs, when viewed at the so-cietal level (SCC), represent about 2.29

percent of Australian gross domesticproduct (GDP) in 1994–5. At the taxpayerlevel, compliance costs (TCC) are about1.36 percent of GDP. For comparison, itwas estimated by the UK’s Tax Law Re-view Committee that in 1986–87, compli-ance costs in the UK were approximately1 percent of GDP (Godman, 1998, p. 15).It is not clear whether the UK reference isto social compliance costs, or to socialcompliance costs less cash flow benefits,and it is also dangerous to make interna-tional comparisons on the basis ofreference to differing countries’ GDPs.Nonetheless, it is clear that Australiancompliance costs are higher than those en-countered in the UK.

Strict comparison with results obtainedin previous U.S. research is not possible,simply because recent U.S. studies(Slemrod and Sorum, 1984; Blumenthaland Slemrod, 1992; and Slemrod andBlumenthal, 1996) have focused exclu-sively on the income tax system. Using asurvey of Minnesota taxpayers, Slemrodand Sorum (1984, p. 461) found that theresource costs of income tax compliancewere between 5 to 7 percent of the rev-enue raised by the combined U.S. federaland state income tax systems. This tenta-tively suggests that the U.S. tax compli-ance costs relative to revenue raised arelower than the relative compliance costsin Australia (about 12 percent of tax rev-enue in Australia).

TABLE 2SOCIAL AND TAXPAYER COMPLIANCE COSTS IN AUSTRALIA,

1994–5

SCC (A$m)SCC as a % of tax revenueSCC as a % of GDPTax deductibility (benefits)(A$m)Cash flow (benefits) costs (A$m)TCC (A$m)TCC as a % of tax revenueTCC as a % of GDP

10,41711.862.29

(2,657)(1,580)6,1817.001.36

AllTaxpayers

1,5444.000.34(211)201

1,5344.000.34

PersonalTaxpayers

8,87417.901.95

(2,446)(1,781)4,6479.301.02

BusinessTaxpayer

Source: Evans et al. (1997, p. ix).


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Compared with previous studies, theSCC minus cash flow benefits as a percent-age of tax revenue in the ATAX study (10.0percent) is lower than the similar estimateby Pope et al. (1994) (12.1 percent) byabout 20 percent, but is much higher thanthe UK estimate obtained by Sandford(1995) (2.8 percent) (Evans et al., 1997, pp.82–3). This confirms that Australian com-pliance costs are high when comparedwith the UK estimates.

The table also shows that compliancecosts are more significant as an issue forbusiness taxpayers compared to personaltaxpayers. Business taxpayers carry about85 percent of all compliance costs whenmeasured at the social level, and about 75percent when TCCs are considered.

Personal Taxpayers

Table 3 presents the estimated compli-ance costs per personal taxpayer by levelof income.

Note that the separation of income lev-els into low, medium, and high is not avery sensitive breakdown; other studieshave employed finer divisions. The col-umn headed “Overall” is weighted bypopulation distributions of personal tax-payers (3 220 684, 3 546 149, and 582 138for low-, medium- and high-income per-sonal taxpayers, respectively). It is inter-esting to note that cash flow benefits/costsincrease the regressivity of personal tax-payer compliance costs. As is the case withbusiness taxpayers, personal taxpayers

in the low-income groups carry dispro-portionately high compliance costs com-pared to those personal taxpayers in themedium- and high-income groups.

The study also shows that time costs(the time that taxpayers and their unpaidhelpers spend on their personal tax affairs)are by far the most significant componentof individual taxpayer compliance costs,comprising about 70 percent of all socialcompliance costs. This is comparable withearlier Australian research conducted byPope et al. (1994). By way of contrast,Sandford et al. (1989) estimated that timecosts for UK individual taxpayers wereabout 46 percent of the total, while in theU.S., Blumenthal and Slemrod (1992) con-sidered time costs to be 84 percent of allcompliance costs encountered by indi-vidual taxpayers. The relatively low pro-portion of time costs in the UK is mainlybecause the majority of UK taxpayers didnot file income tax returns in the year ofstudy. This will be further elaborated later.

To compare ATAX results with thosegenerated in previous international stud-ies on individual taxpayers’ compliancecosts (i.e., Sandford et al., 1989); Slemrodand Sorum, 1984; and Slemrod, 1995), itwill be necessary to aggregate personaland sole trader taxpayers in the ATAXstudy. In Table 4, all monetary values havebeen converted to Australian dollars at themid point of the fiscal year involved, andupdated in line with the Australian CPIto 31 December 1994 (the mid point of thefiscal year of the ATAX research).

TABLE 3ESTIMATED AVERAGE PERSONAL TAXPAYER COMPLIANCE COSTS BY INCOME LEVEL,

AUSTRALIA, 1994–5

Number of tax payers in sampleSCC per taxpayer ($)SCC per $100 of incomeValue of tax deduction($)Cash flow benefits ($)Cash flow costs ($)TCC per taxpayer ($)TCC per $100 of income

Overall

3231321.30(11)(7)34

1481.45

Low

5012300.73(38)(13)47

2260.72

Medium

Source: Evans et al. (1996, p. 50; and 1997, p. 27) and further calculations.

HighIncome Level

795170.67(76)(86)84

4390.57

9032100.81(28)(16)44

2090.81


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The compliance costs relative to tax rev-enue and GDP for the U.S. are based onrecent estimates provided by Slemrod(1995, p. 1332). Using his estimate, thecompliance costs of the federal and stateincome tax plus the IRS budget wereabout $75 billion (in U.S. money) in 1995.15

Subtracting the IRS budget of about $7.4billion in 1995 (see IRS, 1997, Table 28)from $75 billion, the compliance costs ofthe U.S. tax system were estimated to be$67.6 billion. This represented about 9.0percent of the U.S. federal and state taxrevenue or 0.93 percent of the U.S. GDPin 1995.

It is easy to see that the Australia andU.S. compliance costs of individual tax-payers are broadly comparable, whileboth are considerably higher than thoseencountered in the UK. This is attribut-able to the unusual UK income tax struc-ture at the time of the UK study:

• some 95 percent of taxpayers paidtax at the same marginal rate

• there was a subtle cumulative PAYEsystem by which the right amountof tax was deducted from wages andsalaries

• tax was deducted at source at thestandard rate (which 95 percent ofindividual taxpayers paid at themargin) from virtually all invest-ment income.

As a result, the majority of UK indi-vidual taxpayers did not file income taxreturns, and many did not incur any com-pliance costs.

Business Taxpayers

Table 5 summarizes the estimated busi-ness taxpayer compliance costs by busi-ness size.

Note that, as in Table 3, the total columnis weighted by population distribution ofbusiness taxpayers (1 909 564, 528 299, and10 602 for small, medium and large busi-ness taxpayers, respectively). The aboveresults show a clear inverse relationshipbetween business compliance costs (as apercentage of annual turnover) and busi-ness size (measured in terms of annualturnover). The most striking feature ofTable 5 is that large business taxpayersenjoy negative TCC of about $30,000 pertaxpayer after all offsets are taken into ac-count. In contrast, small business taxpay-ers incur compliance costs in excess of$1,000, and medium sized businesses havecompliance costs of about $5,000. This in-verse relationship can be even more starklyshown when comparisons are made of theaverage amount of compliance costs car-ried by small, medium, and large businesstaxpayers per $1,000 of turnover. Wherethe small business faces, on average, tax-payer compliance costs of nearly $25 per

TABLE 4COMPLIANCE COSTS OF INDIVIDUAL TAXPAYERS

Year of studyTaxesObserved samplesResponse rateSCC per taxpayer ($)SCC as % of tax revenueSCC as % of GDP

1983–4National

1,77643.31343.6

0.38

UK

Source: Evans et al. (1997, pp. 62 & 65) and Internal Revenue Service (1995, Table 28).aBased on Slemrod and Sorum (1984).bBased on Slemrod (1995) and Hite and sawyer (1997).

U.S.Country

1982/1995Federal & State

826a

43.2a

542a

9.0b

0.93b

1994–5Federal1,66536.23497.90.63

Australia

15 In a paper comparing the compliance cost estimates for the tax systems in the U.S. and NZ, Hite and Sawyer(1997, p. 93) appear to have mistakenly taken the $75 billion figure reported by Slemrod (1995, p. 1332) aspurely the compliance cost estimate of the U.S. federal and state income tax system.


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$1,000 of turnover, the figure is just under$1 per $1,000 of turnover for the mediumsized business, and translates to a nega-tive compliance cost (of 60 cents per $1,000turnover) for the average large business(Evans et al., 1997, pp. 80–1).

At this point it is worth mentioning thatthe incidence of business compliancecosts, like business taxes themselves, mustultimately fall on individuals. Table 5 sug-gests that, at the social level, business com-pliance costs are almost six times as largeas personal compliance costs in Austra-lia. Thus, the results obtained in Table 5may significantly change the regressivityimplication of personal compliance costs.Exactly which individuals end up bear-ing the burden of business compliancecosts is unknown from this study. The ef-fective incidence of tax compliance coststhus represents an important area that de-serves further investigation.

There is another related point that needsto be addressed more fully in future re-search. With personal taxpayers, there isno question that in so far as compliancecosts are tax deductible, they represent acost to the government and an offset orbenefit to the personal taxpayer. But theposition with business taxpayers is moreclouded. The case for offsetting the taxdeductibility of business compliancecosts, as has been done in Table 5, is opento question. The compliance costs that abusiness faces become business costs likeany other business costs. We don’t thinkof the wages of employees as tax deduct-ible when we are assessing the costs to thebusiness. Why, then, should we make this

special distinction for business compli-ance costs? Clearly this is all wrapped upwith the issue of the effective incidenceof compliance costs, which needs to bemore fully addressed in the literature.

The ATAX study also shows that thechoice of legal entity with which to con-duct the business may have important con-sequences for the level of compliance costsencountered. The average social compli-ance costs per taxpayer for sole traders in1994–5 was about $1,500, compared tonearly $5,000 where the business was con-ducted through a trust and just over $7,000where companies were involved (Evanset al., 1997: p. 52). Note that these averagefigures do not take into account the fact thatlarger businesses (with higher absolutecompliance costs) tend to be conductedthrough companies and trusts. Nonethe-less, when adjusted for size of business, thesole tradership still encounters the lowestcompliance costs (and trusts the most ex-pensive) (Evans et al., 1997, p. 80). Theremay be a number of reasons for this. Forexample, tax audit and adviser costs maybe lower for sole traders; they may be lessinclined to participate in tax planning ac-tivities; they may encounter fewer businesstaxes and are less likely to act as an agencyfor collecting taxes on behalf of others (e.g.,PAYE and WST).

Table 6 provides estimates of business taxcompliance costs by tax type. It is apparentthat business income tax is by far the mostdominant tax in terms of compliance costs,both at the social and taxpayer level.

Table 7 shows how the business tax-payer compliance costs of particular tax

TABLE 5ESTIMATED AVERAGE BUSINESS TAXPAYER COMPLIANCE COSTS BY BUSINESS SIZE,

AUSTRALIA, 1994–5

Number of taxpayers in sampleSCC per taxpayer ($)Value of tax deduction ($)Cash flow benefits ($)TCC per taxpayer ($)TCC per taxpayer ($) per $1,000 of turnover

Overall

1,5241,707(358)(113)1,23524.71

Small

8728,784

(2,834)(1,016)4,9350.98

Medium

Source: Evans et al. (1996, p. 88; 1997, p. 52).

LargeBusiness Size

2991,864

(24,995)(96,963)(30,052)(0.60)

2,4253,624(999)(727)1,898


250

types compared with the revenue col-lected. The table suggests that the PPS sys-tem imposes relatively high complianceburdens in terms of the revenue it collects(22 percent), while the PAYE (1.3 percent)and WST (4.7 percent) systems impose rela-tively low compliance costs as a propor-tion of the revenue generated. FBT (10.5percent) and income tax (6.8 percent) com-pliance costs (relative to revenue) are in themiddle of the range on this analysis.

This outcome is largely to be expected.It confirms generally accepted viewsabout the relative efficiency of the PAYEcollection mechanism compared to othermethods of tax collection, and also pointsto the relatively high level of fixed costsassociated with compliance costs. As rev-enue increases, it is to be expected that theratio of compliance costs to yield will fall.It should also be remembered that despitethe relatively high compliance costs asso-ciated with PPS (and RPS, which is notshown in Table 7, would show an evenhigher cost:yield ratio), such mechanisms

play a very important role in ensuringcompliance by taxpayers. Inevitably therewould be a significant risk to the revenueif such mechanisms were not in place.

CONCLUSION

The ATAX research represents a con-tinuation of international interest in taxcompliance costs by governments andacademic communities. It has producedreliable and up-to-date estimates of themagnitude and the distribution of com-pliance costs for Australian federal tax-payers. The research team had availableto it the experience of many previous stud-ies, and has refined and implementedmany of the world’s best ideas and prac-tices in the area of tax compliance cost re-search. In terms of methodology, the studyprovides a clear distinction between so-cial and taxpayer compliance costs, a pointwhich has not been sufficiently consideredin the literature. It has also provided aclear and well-documented estimating

TABLE 7ESTIMATED BUSINESS TAXPAYER COMPLIANCE COSTS RELATIVE TO TAX REVENUE BY TAX TYPE,

AUSTRALIA, 1994–5

PAYEWSTIncome tax including CGTFBTPPS

Source: Evans et al., 1997, p. 57.

Tax Type

51,23811,10031,0002,7362,169

Tax Revenue ($m) TCC as a % of Tax Revenue

1.34.76.8

10.522.0

688519

2,106286477

TCC ($m)

TABLE 6BUSINESS TAXPAYER COMPLIANCE COSTS BY TAX TYPE,

AUSTRALIA, 1994–5

Income TaxCGTFBTSGCWSTPAYEPPSRPSOtherTotal

% of Total TCC

4,550349468609737

1,27070181

1098,874

SCC ($m)

51.33.95.36.98.3

14.37.90.91.2

100.0

% of Total SCC

Source: Evans et al., 1997, p. 56.(Totals may not add up due to rounding. See Endnotes 9 and 10 for a definition and description of the acronyms.)

TCC ($m)Tax Type

1,9511552864305196884776279

4,647

42.03.36.29.3

11.214.810.31.31.7

100.00


251

framework that can be replicated in fu-ture similar studies.

The support of the Australian federaltax authority (in the provision of fundingand access to its current and confidentialdatabase) has enabled the ATAX research-ers to avoid many of the pitfalls that ear-lier studies have encountered. As a result,a body of rich, reliable, and representa-tive data on Australian compliance costshas been obtained. This database is poten-tially available for further investigation ondifferent aspects of tax compliance costsin Australia.

The ATAX study has established thatcompliance costs in Australia are currentlysignificant and highly regressive. In thissense, the empirical evidence generatedhas confirmed previous Australian andoverseas studies. In particular, it has beenfound that tax compliance costs of indi-vidual taxpayers in the U.S. and Austra-lia seem to be broadly comparable, despitemajor differences between the two taxsystems, tax cultures, and country sizes.

The research did not attempt to makesuggestions as to how compliance costsshould or might be reduced or redistrib-uted. That was not the aim of the study.The task of reducing or redistributing thecosts of compliance is, perhaps, one of thegreatest challenges facing tax policy mak-ers and administrators in Australia andoverseas in the years ahead. In Australiathat task can now proceed on the basis ofa reliable benchmark against which futureprogress can be measured.

Acknowledgments

This paper is derived from a researchproject funded by the Revenue AnalysisBranch of the Australian Taxation Office.The authors wish to thank various inter-national experts and, in particular, Profes-sor Cedric Sandford, for their valuable in-put. Constructive comments from Mr.Ameen Talib and three anonymous refer-ees are also gratefully acknowledged.

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