Article

Reducing Information Gaps to Reduce the Tax Gap: When is Information Reporting Warranted?

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Abstract

A core problem for enforcement of tax laws is asymmetric information. The taxpayer knows the facts regarding the relevant transactions it engages in during the year-or at least has ready access to that information. The government is forced to play catch-up, obtaining that information either from the taxpayer or from third parties. Information reporting is routinely used to address this information gap. The government obtains information about the taxpayer's tax situation from a third party and-equally important-the taxpayer knows that the government has received that information. This fosters taxpayer honesty. Information reporting is not a panacea, however. It imposes costs on the private parties who are required to report. Moreover, it will not be equally effective in all situations. Generally speaking, the effectiveness and efficiency of information reporting varies with who the reporters are, what they are reporting about, and how much information they are required to include. Accordingly, the Essay proposes six distinct factors as a framework for evaluating information reporting requirements. The Essay also applies these factors to three current information reporting proposals and three recently enacted reporting requirements that are scheduled to become effective in 2011.The proposed framework suggests that some of the laws and proposals will likely be much more effective than others in improving tax compliance. For example, the recent amendment requiring reporting by brokers of basis in investments will likely prove very valuable, as would the proposed elimination of the reporting exemption for payments for services provided by certain small corporations. Other information reporting laws and proposals have less promise. For example, the new requirement for information reporting by online auction sites such as eBay regarding the gross receipts of their high-volume sellers will likely make only a minimal impact on the tax gap. Information reports in that context cannot include basis information that is known, if at all, only by the sellers. Least worthwhile are proposals that require decentralized information reporting, particularly in non-arm's length contexts, such as requiring reporting by recipients of gifts in excess of the annual gift-tax free limit.

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... Our findings provide important insights. Confirming some research findings and supporting the notion that information reporting improves tax compliance (IRS, 2007;OECD, 2009;Lederman, 2010;Carillo et al., 2014;Kleeven et al., 2011;Slemrod et al., 2017;Slemrod, 2019;Adhikari et al., 2020), we find that firms with information reporting (defined in the next section) were paying a larger portion of tax than those without information reporting, despite the interesting fact that the two groups report similar gross profit margin. We also find evidence that the two groups behave somewhat differently. ...
... Asymmetric information is one of the central issues in tax administration (Lederman, 2010). In response, one of evolving instruments adopted by governments to ensure compliance in relation to income-related taxes is 'information reporting obligation' (OECD, 2009). ...
... Our results provide empirical support for the implication of information reporting upon tax-paying behaviour. First, we find support for the notion that information reporting improves tax compliance (Lederman, 2010;Adhikari et al., 2020). Our results show that firms with information reporting were paying a larger portion of tax-i.e., CTTOR-than firms without information reporting, despite the interesting fact that the two groups report similar gross profit margins. ...
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... Asymmetric information is one of the central issues in tax administration (Lederman, 2010). In response, one of evolving instruments adopted by governments to ensure compliance in relation to income-related taxes is 'information reporting obligation' (OECD, 2009). ...
... Our results provide empirical support for the implication of information reporting upon tax-paying behaviour. First, we find support for the notion that information reporting improves tax compliance (Lederman, 2010;Adhikari et al., 2020). Our results show that firms with information reporting were paying a larger portion of tax-i.e., CTTOR-than firms without information reporting, despite the interesting fact that the two groups report similar gross profit margins. ...
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Businesses that have their revenue and cost reported to the tax authorities by a third party may be more likely to be caught underreporting taxes than those not subject to third-party reporting. However, very little is known about the compliance response of corporate taxpayers relating to the impact of information reporting by third-party, particularly from an emerging economy perspective. In response, we use empirical data to scrutinise tax compliance in settings where third-party information reporting is either present or absent. Investigating 538,254 anonymous corporate tax records data from the fiscal year 2014 through 2019, we find evidence that tax compliance is lower for the group without information reporting but strikingly higher for the group with information reporting. Our study shows a positive relationship between operating profit margin and corporate tax turnover ratio (CTTOR) for firms with information reporting but a negative relationship for the group otherwise, indicating the former group reported higher positive fiscal adjustment and lower operating expenses than the latter. We also find a positive association between other income ratios from side business and CTTOR for the group with information reporting but a negative relationship between the two variables for the group otherwise, indicating tax compliance is higher when the corresponding income is more detectable. Supporting other studies, this paper has critical implications in advancing the understanding of the impact of information reporting on tax-paying behaviour of firms in Indonesia. From a tax policy perspective, our results suggest that strengthening third-party reporting offers one of the effective ways to improve tax compliance.
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We examined the efficacy of a new method to reduce cybersickness. A real-time cybersickness detection system was constructed with an artificial neural network whose inputs were the electrophysiological signals of subjects in a virtual environment. The system was equipped with a means of feedback; it temporarily provided a narrow field of view and a message about navigation speed deceleration, both of which acted as feedback outputs whenever electrophysiological inputs signaled the occurrence of cybersickness. This system is named cybersickness relief virtual environment (CRVE). Forty-seven subjects experienced the VR for 9.5 min twice in CRVE and non-CRVE conditions. The results indicated that the frequency of cybersickness and simulator sickness questionnaire scores were lower in the CRVE condition than in the non-CRVE condition. Subjects also showed a higher net increase in tachyarrhythmia from the baseline period to the virtual navigation period in the CRVE condition compared to the non-CRVE condition. These results suggest that a CRVE condition may be a countermeasure against cybersickness.