Intra-Governmental Data Sharing to Enhance Taxpayer Registration

Written By: Wei Cui

Posted On: September 28, 2020

Earlier this month, in a widely-followed online public finance seminar series, the German economist Nadine Riedel presented a paper titled “What You Do (and What You Don’t) Get When Expanding the Net – Evidence from Forced Taxpayer Registrations in South Africa”. Notwithstanding the specific setting of Professor Riedel’s study, the topic is of wide relevance to low- and middle-income countries: how can the government locate and register more operating businesses for purposes of taxation—and what can the government expect when it succeeds in doing so?

In fact, the context of the study (which I will refer to as Lediga et al 2020, following the citation convention in economics) may bear greater affinity to Asia, where a large portion of countries are middle- or high-income, than to other countries on the African continent. South Africa is an upper-middle-income economy (like China, Indonesia, Malaysia and Thailand); its tax-to-GDP ratio is already high at 29%; and the South African Revenue Service (SARS) has a reputation of competence. Even in such a setting, getting businesses to register for tax purposes, which is a big part of moving firms from the informal sector to the formal sector, seems no easy task—or at least it is so traditionally thought.

Lediga et al 2020 studies two incidents—in 2008 and 2014—in which SARS enhanced tax registration simply by taking firm data from another government authority, South Africa’s Companies and Intellectual Property Commission (CIPC). Any business must register with CIPC to formally attain corporate status. Through this simple intra-governmental data sharing, SARS expanded its roster of taxpayers by 11% in 2008 and 8% in 2014.

Two facts are already notable here. First, around 10% of firms that formally register with one government authority fail to obtain a taxpayer ID as required by law, which seems to be a rather significant level of tax non-compliance. Second, all it takes for SARS to address such non-compliance is to obtain information from CIPC, and send out letters to the firms “registered by force” to remind them to commence tax compliance. The administrative costs for such SARS action are minimal. If tax registration is an important policy objective, then an obvious question is why SARS has not done this more often—and whether there are similar low-hanging fruits in other countries for enhancing taxpayer registration.

Lediga et al 2020 focuses on not this question but the consequences of forced tax registration. They remind us that for tax collectors to raise revenue, taxpayer compliance must increase along all of several distinct margins. Registering with the government is only a first step. The taxpayers must also file tax returns in accordance with law; they must report their tax liabilities truthfully on such returns; and they must end up actually paying what they owe. Because of this, even when taxpayers are successfully brought into the government’s registration “net,” no significant increase in revenue may result.

This may seem just commonsense. The theoretically interesting question, which Professor Riedel and her co-authors try to tackle, is how taxpayers’ tendencies to comply along these different stages/margins are correlated. For example, does increased compliance along the registration margin drive down compliance with truthful reporting, or vice versa? Lediga et al 2020 offers some intuitions about this question: if the likelihoods of getting caught for non-compliance in these different margins/stages of compliance are separate, then taxpayers may seek to cheat in the stage where it is easiest to do so. However, the model they construct does not yield determinate results.

As pure factual observations, the authors report that even for corporations voluntarily registering with SARS, only about 27.3% file an income tax return.  By expanding registration through intragovernmental data sharing, SARS probably ended up registering taxpayers that are even less likely to comply in the subsequent stages. Thus, compared to the 27.3% filing rate of firms voluntarily registering, only 8-10% of firms “registered by force” file corporate income tax returns.

The very low return-filing propensities of both voluntarily and forcedly registered South African corporations seem surprising. (During Professor Riedel’s presentation, some asked whether many of these corporations are exempt from filing returns because they owed no tax—the current version of the paper does not contain these institutional details.) But if we accept this fact of very low return-filing propensity, and if, further, we think that (i) increasing the rate of timely filing of tax returns is itself an important policy goal, and (ii) increasing the rate of registration can lower the rate of timely return filing, then we may even think that the rate of taxpayer registration in South Africa was too high: we may want to lower rate of registration if a higher rate of return filing is desirable.

This raises the basic question of how we should value the outcomes of registration, return-filing, timely payment, etc.: if they are not important in themselves, what are the ultimate policy objectives for which they represent merely means? Lediga et al 2020 seems ready to accept that raising tax revenue (in the short term) is the most important objective. Yet the authors mainly examine whether the newly registered firm paid significant amounts of corporate income tax. The answer is, as one might expect, No. The reason that this is an expected outcome is that in perhaps most countries, the median corporate taxpayer in terms of profitability is making either a negative profit (i.e. loss making) or only a small profit. The firms that fail to comply with the most basic legal requirements of tax authorities are likely all to fall below that median.

In any case, whether raising tax revenue in the short term is the most important policy objective is debatable. In a book on Chinese taxation that I am currently writing, I explore the issue of how to evaluate the various compliance outcomes of tax administration, and argue that there are some important but often-neglected institutional objectives. I will sketch some of these arguments in subsequent blog entries. But just to give a hint of the relevance of the Chinese case: Chinese tax administrators have long relied on intra-governmental data sharing for taxpayer registration. Indeed, their performance is evaluated on how many taxpayers already registered with the Industry and Commerce Administration (to which the CIPC sounds like the South African counterpart) are registered for tax purposes. And back in 2000, when China’s GDP per capita was not much higher than the GDP per capita of Sub-Saharan Africa (and comparable to the GDP per capita of Tanzania and Uganda today), the national average rate of taxpayer registration—relative to registration with the Industry and Commerce Administration—was 97%!

This is shown in the first 12 columns of the following table from the Tax Inspection Yearbook 2002:

I will also further comment on this table in subsequent blog entries. But the overall takeaway from the Chinese case is that there is no mystery to getting taxpayers registered: it can be done. The main question is what the benefits and costs are for doing so, and what actually motivate states to do so.


“The Coronavirus and the Chinese Healthcare System”

Posted on: February 10, 2020

Dr. Jiwei Qian, Senior Research Fellow at the East Asian Institute, National University of Singapore, will be visiting CALS in early April to present his research on the Chinese healthcare system. Dr. Qian has written extensively on this topic, which, in the past weeks, has been the center of many heart-wrenching stories coming out of China precipitated by the coronavirus crisis.

Dr. Qian recently published a policy brief, Wuhan Virus: Facts, Government Reaction and Outlook, co-authored with Dr. Gang Chen. Among others, the authors argue:

“The information flow and coordination of government departments prove to be inadequate despite the enactment of a host of laws and regulations after the SARs crisis. The Regulation on Handling Public Health Emergencies in May 2003, the Law on the Prevention and Control of Infectious Diseases in 2004 to clarify the responsibility of local government and health authorities in infectious disease surveillance and reporting, and the regulations on contingency plans during a public crisis for central ministries and local governments in 2006 and 2011 apparently do not measure up.

The authors also allude to systematic flaws in the Chinese healthcare system:

“Wuhan has to build two emergency hospitals, one of which is expected to have 1,000 beds by 3 February. Since 20 January, the 61 hospitals in Wuhan have been providing outpatient service for fever round the clock. Hospital visits were four times higher than before the outbreak of the crisis. On the other hand, resources from primary care clinics have been underutilised due to people’s distrust of services provided. After 24 January 2020, the health authority in Wuhan implemented a referral system to take advantage of the capacity of 205 primary care providers. Rather than visit the hospitals directly, patients will be referred to hospitals from primary care clinics.”

We look forward to being enlightened by Dr. Qian’s research.

中国的影子银”行:规避风险和监管回应。 Shadow Banks in China: Risk Mitigation and Regulatory Response” Written By: Yi Zhao 赵祎

Written By: Yi Zhao 赵祎

Posted On: January 31, 2020


北京大学法学院副院长郭雳教授前日访问Peter A. Allard法学院,并于1月13日在亚洲法学研究中心进行讲座。郭雳教授的研究领域包括经济法、国际经济法、法律与金融、商法和比较法。他向前来的听众们介绍了目前中国的影子银行系统的现状和中国监管系统对此作出的回应。

首先,郭雳教授重新定义了影子银行。他认为,影子银行是在传统银行系统之外的信贷中介。传统的银行作为作为交易的中间环节,自己承担盈利和损失;但现在情况变得复杂,银行仍然进行贷款业务,但不再持有贷款直至到期,而是将贷款作为结构性投资工具,以在证券市场上发行新的切分后的小额证券(new tranches of securities)。而传统的存款方在存款利率的限制下也会转而选择购买货币市场互助基金(MMMF),这一点在中国现代银行的发展中极其显著。

其次,郭雳教授指出在“证券化”的发展中,中美银行业有所不同。在美国,美联储通过Regulation Q来控制存款利率的上限,因此美国银行利用发行货币基金来绕过Regulation Q的监管。相对地,中国的影子银行的三大典型用户则为:

一、    受制于政府借贷规定控制的企业,如近年的房地产商(政府以控制贷款作为控制房地产泡沫的手段,所以房地产不再能从银行借到足够的贷款)。

二、    民营私有企业和合资企业,这些企业同样很难从正规渠道获取贷款,驱使他们转向影子银行。

三、    地方政府融资平台。在中国政治制度下,中央政府对地方政府有更强的控制。中国中央政府长期收入大于支出,导致地方政府在经济上处于不利局面;在银行对地方政府的借贷受到政策控制的情况下,地方政府转而依赖于融资平台来完成相应的贷款。








“Categorical matching may provide insight for South Korea’s gender wage gap” Written By: Doe Lee

Written By:Doe Lee

Posted On: February 3, 2020

South Korea has an extremely high and persistent gender pay gap. This is in some ways puzzling, argued Professor Hyunji Kwon from Seoul National University in a recent seminar on this topic at the Sauder School of Business. The percentage of university enrollment in South Korea has been higher for women than men in recent years. Childcare services usage rates are also extremely high in South Korea compared to other OECD countries, rising to an impressive 62% in 2012 from 5.7% in 1997. Thus systemic disparity in education levels across genders or the lack of institutional structure to support women’s careers cannot explain the lower wages women receive.

Nor does South Korea’s Confucian culture provide an adequate explanation: Korea’s gender wage disparity is not mirrored in other arguably “Confucian” countries such as Japan or China. In fact, decomposition analyses from different sources have showed estimations that only 63%-73% of the wage gap can be explained by compositional differences in education, tenure, age, marital status, industries, and occupations. The natural question is, then, what is uniquely contributing to the wage gap in South Korea? Professor Kwon’s studies provide a new angle on this question: firm practices and existing organizational mechanisms.

Professor Kwon pointed first to the pervasive division of jobs as “standard” vs “non-standard” jobs in the Korean economy. Standard employment refers to jobs with an open-ended contract between an employee and an employer. Non-standard employment entails everything else, including part-time work, contract workers, and especially “direct hire temporary employment”, where firms directly hire employees for a fixed term. This last practice is especially favored by the large firms that dominate Korea, and therefore is used for a substantial proportion of jobs in South Korea. Non-standard job workers earn lower income compared to standard-job workers, receive less benefits, and do not receive seniority pay.

Women are disproportionately represented in non-standard work while men take up the majority of standard work employment, contributing to the gender wage gap. Professor Kwon explains in her co-authored paper that “categorical matching” may explain this systemic discrimination. The term refers to a functional category that is not associated with a social category on its face (such as organizational structures) being attached to a social category (such as gender). By matching more standard jobs (a functional category) to male workers (a social category) within an organization, the disproportionate representation of female workers among non-standard workers is perpetuated.

Three mechanisms facilitate internal categorical matching: “opportunity hoarding”, which refers to a distinct group hoarding profitable jobs; exploitation, which refers to rewarding certain employees at the expense of other employees; and claims-making, which refers to the process of using organizational structures to successfully make claims, with stronger bargaining power leading to a higher success rate. Categorical matching strengthens and creates inter-organizational inequality through these mechanisms. Hence, the paper hypothesized that it is more difficult for women to successfully make claims in wage determination in firms where their bargaining power has been diminished to the extent of their concentration in inferior positions.

Different firms participate in categorical matching to varying degrees. Using large-scale employer-employee matched data, Professor Kwon’s study finds that the degree of female to non-standard job categorical matching within a firm, measured by a disparity index, is correlated with variables related to disempowerment, including the proportions of women who have non-standard jobs, are within the top 20% wage group, or hold a union membership. Further, a higher degree of categorical matching is correlated with a higher residual wage gap. Importantly, this correlation held for both standard and non-standard jobs, supporting the hypothesis on the relationship between wage and bargaining power of women in general.

Professor Kwon also discussed the practice of seniority wage, a system of promoting employees in the order of their proximity to retirement. Many Korean firms engage in this practice, but it is not universal. It has been used to stabilize core employee relations, prominent in large Chabol companies that are family-operated. Seniority wage only applies to standard workers—illustrating the mechanisms of opportunity hoarding and exploitation–effectively making hiring standard workers more expensive in the long run. Thus, firms that practice seniority wage system hire more non-standard workers. As the wage discrepancy between standard and non-standard workers widens with seniority, the magnitude of the gender wage gap increases.

In summary, direct hire temporary work provides a mechanism for categorical matching, and seniority wage widens the gender wage gap with career progression, both perpetuating the gender wage gap in South Korea.

“From “Structural Tax Reduction” to “Inclusive” Tax Cuts” Written By: Wei Cui

Written By: Wei Cui

Posted On: January 30, 2020

In an earlier blog, I commented on a recent American Economic Journal article that studied China’s VAT reform in 2009. That study (Liu and Mao 2019) showed that China’s decision to remove a 17% tax on fixed asset purchases stimulated Chinese firms’ investment and productivity. A natural question to raise about the study is: What is the general significance of a finding about the success of China’s tax policy 10 years ago?

Consider the following critique. In the absence of extraordinary circumstances, it really does not make sense for any government to impose a very large tax on firm’s investments in equipment, etc. That China did it renders it an international outlier. Even if other countries wanted to stimulate firm investment and productivity growth, they would not have the policy option China had in 2009—because, most likely, they would never have had such an irrational tax in place to be eliminated.

To underscore this critique, one could note that a recent paper by Professor Juan Carlos Suarez Serrato from Duke University confirmed that the Chinese reform was “one of the largest tax incentives for investment in recent history”—across the world. (By the way, Professor Suarez may present his paper at the Tax Law and Policy Workshop at Allard Law in February.) According to Professor Suarez’s analysis, the 2009 tax cut in China offered a far larger investment stimulus, for any given firm to which it applied, than even the 2017 adoption of the Tax Cut and Jobs Act (TCJA) in the United States. (The TCJA had been perceived to be a veritable earthquake for corporate tax systems around the world.) To find an equivalent stimulus, Professor Suarez and co-authors considered a 17% investment tax credit: so generous a tax credit has not been made available to most U.S. businesses for decades.

I noted the apparent uniqueness of China’s 2009 VAT reform in a 2012 book chapter comparing China’s and European countries’ responses to the global financial crisis: “VAT reform constituted the most important tax policy action China took during the [GFC]. If China had had a more typical tax structure, this specific policy instrument…would not have been available. Conversely, because of the idiosyncrasies of China’s current tax structure, some of the policy measures commonly deployed in other countries also cannot be used.”

Indeed, there is another dimension to the uniqueness of the Chinese experience. Also in 2012, I was invited to talk about the need for tax reform on Radio China in Beijing, and I tried to explain how further VAT reform would enhance the efficiency of the economy. A fellow guest on the show, Professor Lin Shuanglin from PKU, asked me: “How fast do you want China to grow?” I didn’t have an answer, as the question clearly points to a puzzle: How could China have experienced such a high level of economic growth before 2009, under some very distortionary taxes? Which other country can grow for 30 years at breakneck speed, and then say, “OK, we’ve really been handicapping ourselves with high taxes, so let’s cut taxes a bit so that we can keep on growing”?

To be clear, from a pure research perspective, it is possible to give some answers to the question about the “external validity” of the Liu and Mao study. For example, in most U.S. states, and in Canadian provinces like British Columbia, sales taxes still apply to many business purchases and thus distort firms’ investment decisions. That is the most important argument for abolishing the Provincial Sales Tax and adopt the Harmonized Sales Tax, which functions like the VAT. Any such reform may have the same kind of stimulus effect as China’s VAT reform in 2009, even though the magnitude of the stimulus would be smaller. From another perspective, China continued to carry out further VAT reform between 2012 and 2016, converting the “business tax” to the VAT. That reform still reverberates through the Chinese economy. The policy outcomes of the 2009 reform certainly could help us to understand this later round of reform. If the concern about “external validity” arises only because Chinese taxation seems rather different from taxation systems in other countries, this concern should apply to much public economic research, e.g. many studies done on the U.S. tax system.

Nonetheless, for me, there is indeed something special about China’s 2009 VAT reform that does not revolve around its lacking counterparts in other countries. Instead, reading Liu and Mao 2019, I had the feeling of reading about a bygone era.

In 2009, the Chinese government’s tax policy slogan was “structural tax reduction”. This phrase connoted two ideas. First, in the government view (and the view of international public finance experts), the overall level of taxation in China at that time was not high. There was indeed room for further raising revenue, in order to fund more public goods and services. Second, at the same time, inefficient features of the existing tax system can be reformed, and often this can be implemented through cutting or eliminating outdated taxes.

This technocratic view of tax policy is generally shared by tax policymakers in Western democracies. In Canada, the United States, and many other countries, the phrase “tax reform” embodied the same orientation—improving tax systems but all the while sustaining welfare states that looked after the well-being of all citizens. In 2009, in other words, China was moving in the direction of the Western world.

In the past decade, however, the Chinese government has gradually surrendered the assumption of the legitimacy of taxation. More and more, taxes are portrayed from two perspectives. One is that taxes are a burden on workers and firms, and the burden needs to be reduced. The other is that the government should gain legitimacy by cutting taxes. In early 2019, the State Council introduced the idea of “inclusive” tax cuts, embracing the idea that the more people get tax cuts, the better.

This is an extraordinary transformation. It should also look very surprising. While China is surely a lot richer today than a decade ago, the amount of public goods and services delivered by the government is still nothing compared to most advanced economies. The general level of taxation also has not risen. How is it that the Chinese people have lost interest in public goods, and are only interested in keeping more cash in their own pockets?

This question, of course, is beyond the scope of standard tax policy research. To my knowledge, it has also been completely ignored by Western China observers. While the frenzy of tax cuts in China generates much opportunity for empirical economic research, the underlying political forces seem to me to deserve much greater attention than they have received so far.