Agent-Based Modeling, Books, Tax Dynamics

Policy Reform Effects in the Tax Ecosystem

An Agent-Based Simulation Approach

On February 4, 2021 a new book is published: “Combating Fiscal Fraud and Empowering Regulators” which focuses on diverse aspects of tax evasion and tax avoidance. This book is one of the results of the COFFERS project for which I have worked 4 years and which has funded my Ph.D. position. One of the chapters, chapter 14 is part of my dissertation and I am happy to have it published in this amazing Oxford University Press book.

The COFFERS project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No. 727145. More details.

Excerpt (Chapter 14)

This chapter analyses the effects of two recent tax policy reforms: Country- by-Country Reporting (CbCR) and Automatic Exchange of Information (AEoI) in the tax ecosystem. These two reforms have different goals: while the former aims at reducing tax avoidance of corporations, the latter one focuses on reducing tax evasion by individuals. How successful have these policies been and how successful will they be when implemented fully in all EU countries?

So far, policy analyses have concentrated either on studying effects of reforms on tax avoidance (the legal part of not paying taxes by using loopholes in the international tax system) or on tax evasion (the illegal part of not declaring taxes). Following this logic, so far, the effects of reforms of CbCR and AEoI have also been analyzed separately in the literature.

We will present a model that allows the study of both reforms and their interaction simultaneously. Policy reforms, when happening at the same time, can reinforce or counteract each other. Our model allows us to simulate the isolated effects of both reforms and to study them jointly. We evaluate the effects of these reforms by comparing them to what would have happened to tax compliance in the absence of these reforms (if they would never have happened), to a baseline model (what had happened until 2019 without implementing them further) and to full implementation of each reform by all 33 European countries studied. We do so over ten years, from 2019 to 2029 to allow the tax ecosystem to adjust and in order to see the long-term reactions to the reforms.

Our model views tax avoidance and tax evasion as sharing one crucial feature: the non-compliance of some of the actors of the tax ecosystem, which leads to unpaid taxes depriving the public sector of resources needed for public spending. Hence, the policy effects that we study are effects on tax compliance, which we can separate into effects on tax avoidance and tax evasion.

The model offers a tool for regulators to find out what makes companies and individuals within the EU 27 Member States and five additional European countries become more compliant, and what deters them from doing so. With this, policy recommendations for improvement of reforms, which aim at collecting more tax revenues in order to fill the public COFFERS, can be derived.

In the following, we will first describe the two policy reforms CbCR and AEoI and existing analyses of their effects (Section 14.1). We will then describe why we think that our model—an agent-based simulation model—might be more appropriate (Section 14.2). We then describe the theoretical model of tax compliance from which we start, the slippery slope of Kirchler et al. (2008) (Section 14.3) and how we modify it for analyzing an international tax system (Section 14.4). We then give an overview of the data collected (Section 14.5) and present our results (Section 14.6). We conclude (Section 14.7) and point at future research needed.

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