Eric M. Zolt

Technology and Taxation in Developing Countries: From Hand to Mouse

Tax systems in developing countries, like those in more developed countries, face both new challenges and new possibilities as a result of technological change. In developing countries, taxpayers and tax administrations must cope with more difficult environments with fewer resources. Some issues (such as privacy, the benefits and costs of public/private partnerships, and corruption) are common to both developing and developed countries, but differ in relative importance in particular countries. Other issues (such as how new technology may or should influence the way a country’s tax system or particular taxes are designed and administered) may be more important in developing countries. This paper examines the general issues facing developing countries from technological changes and provides some promising examples of technological innovation and application in tax administration and tax policy.

Efficient deterrence and the tax treatment of monetary sanctions

Many business activities generate external harm. Oil refineries generate air pollution, overloaded trucks damage highways, and messenger services obstruct traffic as they double park. To control these harms, the government subjects offenders to monetary as well as nonmonetary sanctions. In this article, we examine how the government should adjust the amount or the tax treatment of monetary sanctions to achieve efficient deterrence of external harm by firms that are subject to income taxation. We believe that the Becker (1968) formula-that the amount of sanctions be based on the external harm caused and the probability of enforcement-must be adjusted in a world in which firms pay income taxes. Most firms that engage in activities generating external harm are subject to federal and state income taxation. We contend that failure to consider tax consequences in the design of monetary sanctions distorts firms’ choice of inputs, firms’ scale of production, and total industry output. The government can achieve efficient deterrence only by either changing the tax rule to allow deductibility of monetary sanctions or adjusting the amount of such sanctions to reflect the offender’s marginal tax rate. The tax law does not treat monetary sanctions in a coherent fashion. The U.S. tax system, like most income tax systems, taxes a firm on its net income and, therefore, generally allows deductions for all ordinary and necessary expenses paid or incurred in carrying on a trade or business. ’ The Internal Revenue Service and taxpayers have disagreed about whether amounts paid as monetary sanctions, usually fines or penalties imposed by federal and state agencies, qualify as ordinary and necessary business expenses. Courts faced two competing considerations: the pressure to measure net income accurately, regardless of moral and legal considerations, and a notion that to allow such deductions would frustrate public policy. In the major decision examining the deductibility of fines and penalties, the U.S. Supreme Court denied the deduction of amounts paid as fines by a trucking concern for violation of a state’s maximum highway weight laws.’ It held that allowing such deduction would reduce the odds of compliance and would frustrate sharply defined state policy. The Tax Reform Act of 1969 codified this decision

Taxation and inequality in the Americas: Changing the fiscal contract?

Times change. In the words of an old English ballad, some things seem to have “turned upside down” in recent years. Since 2000, Latin America has become less unequal, with lower levels of poverty and likely greater economic mobility (Lustig, Lopez-Calvo and Ortiz-Juarez 2012), assisted in part by more progressive fiscal policy (Mahon 2012). In contrast, the United States has become more unequal (Piketty and Saez 2003, 2013), while poverty has remained relatively constant (U.S. Census Bureau 2012), economic mobility has likely declined (Hungerford 2008), and tax and spending policies have become less effective in reducing inequality (Harris and Sammartino 2011). This chapter examines whether the tide has really changed in Latin America or in the United States, and, if it has, what may lie ahead for these two regions of the Americas? Do recent events portend fortune or misery? Although the primary cause of the more equal income distribution in Latin America is probably the sharp increase in growth and employment following the challenging political and economic decade of the 1990s (Gasparini and Lustig 2011), fiscal policy played at least some role. Indeed, recent Latin American experience suggests that the pessimism prevalent since the 1970s about the extent to which taxation can affect income distribution has perhaps been misguided. Economic, social and political changes can and do give rise to new norms and power configurations, which sometimes result in important changes in the social and fiscal contract underlying governance structures.