Taxation and the relationship between payments and time spent

TL;DR

This study demonstrates a positive relationship between the hours taxpayers spend on tax compliance and the amount of tax paid, suggesting that simplifying tax processes could reduce administrative costs and societal burden.

Contribution

The paper provides empirical evidence linking tax compliance time and tax payments, using data from PwC and the World Bank, and validates the methodology across multiple tests.

Findings

Positive correlation between tax compliance hours and tax payments.

Stronger relationship observed with total number of tax payments.

Methodology validated through multiple confirmatory tests.

Abstract

Tax work is costly for society: Administrative tax labour is typically to a high degree shuffled off the government and onto every taxpayer by law. The higher the burden of any tax system, the costlier for society, as taxpayers are unable to engage in proper wealth creation when being kept busy with administrative tax work. This research finds evidence for a relationship between hours spent to comply with taxes and amount of tax payment. These findings help better understand tax administrative costs and ultimately may help reduce them. PwC and World Bank's final "Paying taxes"-publication (2019) contains tax data for most of the world's jurisdictions, in particular annual hours spent to comply with tax obligations (X) and annual amount of tax payments (Y), both for the year 2019. X and Y were plotted in 6 tests. A positive slope, satisfying p and r values, high mutual information and finally a conclusive scatter plot picture were the 5 requirements that all needed to be met to confirm a positive relationship between X and Y. The first 2 tests did not make any adjustments to the data, the next 2 tests removed cities --thereby avoiding the double counting of jurisdictions-- and the final 2 tests removed cities and outliers. Each test pair uses for Y first total number of payments; and for each second test the number of other payments, which excludes income tax payments for profit and labour. All 5 requirements were met in every of the 6 tests, indicating a positive dependence. In addition, 4 confirmatory tests validate the methodology. The found relationship is noticeably stronger for the total number of tax payments. Findings indicate that taxpayers' time spent on tax, and thereby society's overall tax administrative costs, could be reduced by simplifying taxation processes, including tax collection and payments.