Decoding Tax Policy and Administration

Issues of tax policy and administration can often be clouded. They can be overly complicated and overtly politicized, making it difficult for the taxpayers to fully understand their tax code and what their taxes are being used for. Serving as the foundation for financing government services and programs, it is important for citizens to grasp at least some understanding of how tax policy works and what that policy means for government projects, business activity, and overall economic growth and development.

On Wednesday, April 27, academics, students, business leaders, city officials, and tax policy enthusiasts gathered at Drexel University to discuss timely issues on Urban Tax Policy, a joint conference with Econsult Solutions, Inc. and Drexel’s School of Economics. With speakers whose credentials and experience spanned the worlds of academia, local government, and private-sector industry, the conversation was diverse, engaging, and insightful. The participants included: James Hines, PhD, Mark Stehr, PhD, Marisa Waxman, Michael Knoll, JD, PhD, David Marriman, PhD, Stephen Mullin, Daphne Kenyon, PhD, Paul Levy, PhD, and Matthew Knittel, PhD. A clear focus throughout the presentations, and one not often seen with such accomplished academics and experts, was to bring clarity without oversimplification to complicated tax policy issues.

This conference provided a unique opportunity to listen and discuss with such experts to decode sometimes controversial topics of tax policy and administration and see the fallacies surrounding tax issues people face at the local, national, and international levels. After engaging presentations and dialogue with our distinguished presenters, here’s a breakdown of some of the key lessons learned and the debunking of myths from the conference.

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Tax Policy and Competition

The keynote speaker, James Hines, PhD, as well as one panelist, Daphne Kenyon, PhD both discussed issues of how tax incentives and tax rate policy affect business decisions and development. Since tax policy will always be controversial, as Dr. Hines confessed at the beginning of his keynote, this means that these already complex issues can be deceivingly complicated and buried in misinformation. Both presenters helped to demystify tax policy issues pertaining to business and competition.

Do not fall prey to thinking of tax in a single-minded way

The biggest fallacy one can fall for is to oversimplify tax issues that are innately complex. As our world becomes even more interconnected and interdependent, tax policy will continue to increase in its complexity. We are forced to think not only about tax policy domestically, but as well as how changes in tax policy across the globe affect our constituents.

IMGP0893Dr. Hines gave a clear example of how we must change our mindset: a rise in taxes in business taxes in Canada would discourage business in Canada, but would benefit the U.S., since the U.S. would become more attractive to businesses. The story does not end there, for the U.S. auto industry often buys manufactured goods from Canada, which would make cars more expensive and force U.S. businesses to face higher costs. A simplistic view of economics does not suffice anymore, for business in the U.S. is interwoven into the economies and policies of other nations.

Tax incentives can be effective, but only if done right

It is common practice for governments to provide tax breaks and incentives to attract businesses. The evidence of effectiveness, though, shows different results. There has been much success by many small countries and islands in enticing business by creating tax havens, as explained by Dr. Hines. Ireland is a perfect specimen, for it was once a country plagued with poverty and low economic growth, but now is a prosperous country. The country’s success, though, was not due solely to low tax rates. Incentives are going to work on average, but they work in conjunction with other factors, especially good government. Providing a tax incentive is not enough to attract business, it needs to be coupled with effective governance and political stability.

IMGP1012Dr. Daphne Kenyon explained some of the misconceptions of tax incentives on a purely domestic front. While she admits that there are ways to implement successful property tax incentives to attract business, often the incentives provided do not reap the economic returns they expected. She highlights three common pitfalls of property tax incentives:

    1. Granting incentives that don’t affect local decisions
    2. Granting incentives costs exceed benefits
    3. Allowing proliferation of incentives and engaging in destructive bidding wars

 

If governments are going to provide tax benefits to businesses, they must be certain that the tax breaks still result in positive economic returns. When a firm has already decided on a location, is does not make sense to provide a tax incentive, for it would result only in a decrease in revenue. Similarly, there must be some level of certainty that a company will follow through in providing the jobs, tax payments, property development that will benefit the community. Otherwise, taxpayers are giving up money without any real returns. Too intense of competition between municipalities can make it so businesses gain major tax reliefs, while the government sees little in tax revenue from the firm.

Governments must be careful in how they provide incentive to businesses. The story of tax policy is never simple, so it is vital that all variables are considered, as well as possible outcomes.

Tax Administration in Philadelphia

Marisa Waxman, Deputy Commissioner, Policy and Analysis for the City of Philadelphia, is all too aware of the issues that come with tax policy complexity and the level of misinformation among people in the city. Confusion and misinformation not only goes beyond understanding tax policy, but as well as with tax administration.

The City has focused a lot of energy on finding the best ways to communicate  with its constituents in order to receive the tax revenue they need to operate programs and initiatives. Marisa talked about these efforts by the Revenue Department: what has worked, what hasn’t worked, and what comes next.

Helping Philadelphians make better decisions

Tax administration can be just as complicated as tax policy. Although economic models  assume that people behave rationally, in reality, people often don’t act as we would expect. In fact, studies from the field of behavioral economics demonstrate that our economic decisions are influenced by psychological, social, cognitive, and emotional factors.  In behavioral economics, we marry the fields of economics with psychology, in order to overcome some of the challenges that arise in the practice of tax administration. Applying the findings from behavioral economics, Marisa and her team have researched and identified four ways the city can change tax administration to help consumers become better informed and responsive:

  1. Things need to be easy
  2. Things need to be attractive
  3. Things need to be social
  4. Things need to be timely

The Revenue Department was able to test how they could make access to information and payment of taxes easy, attractive, social, and timely. They ran experiments to see how different messages, packing, and forms of communication would affect response rates. Thorough research and carefully constructed experiments gave the City better insight to how to communicate with its taxpayers and find some clarity in the complex world of tax administration.

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The Takeaways

Tax Policy and Administration may be complex, but does not mean it has to be indecipherable. Individuals and businesses should be able to follow issues on tax in order to make better decisions and one way to do so is to gain insight from individuals like James Hines, Daphne Kenyon, and Marisa Waxman who provide insight on such intricacies. However, it takes more than engaged academics to decode salient topics of tax policy and administration. The public, as well, must be active in these tax conversations and be willing to learn. As Dr. Hines so boldly put – we must elevate the public discussion around tax policy. The Urban Tax Policy conference was a great step in this direction. Let’s continue our conversation about tax policy, that way, the public can be better informed about how policy changes affect them locally, nationally, and globally.

 

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Lauren Bauman is a Marketing Assistant at Econsult Solutions, Inc. (ESI) and a student at Drexel University studying Global Studies with a focus in International Business and Economics.

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