Research at TARC
Centre research is structured around four main themes:
Theme 1: Analysis and Simulation
This theme will apply economic modelling techniques and computational methods to formulate theories, derive implications, and numerically explore outcomes. This theme will be supported by the programming competence of Centre members to allow both agent-based simulation and computable general equilibrium (CGE) analysis to be conducted. This theme will be responsible for delivering tax policy analysis using CGE and providing training in the use of CGE methods. The analytical contribution to the refinement of the analysis of the tax gap will also be led by this theme.
Risk-based auditing and taxpayers’ responses
The research will model the equilibrium consequences of risk-based audits and investigate improved designs for risk-based auditing. The objective of the research is to improve the hit-rate on audits and to raise the tax yield. The project will model the consequences of taxpayers learning about the audit strategy, the optimal updating of a risk-based strategy, and the potential benefits of random sampling.
Estimating Risk-Based Audit Rules
The simulation analysis of risk-based auditing will be of greater value if it is informed by the audit outcome data held in Datalab. The use of such data will permit the calibration of the simulation models. Moreover, the data and simulation can be used in tandem to estimate risk-based auditing rules on the basis of actual audit outcomes and to test for the consequence by implementing within the simulation model. The IRS has an ongoing project to implement a simulation analysis that uses real data to represent individual taxpayers. The project will build on the lessons learned from the IRS work but will focus on the modelling choice behaviour and upon greater sophistication in the estimation of risk-based auditing rules.
Understanding the intertemporal aspects of tax evasion and lifecycle choices
The aim of this project is to construct and calibrate a comprehensive lifecycle model of tax compliance using data on individual tax returns linked to data on audit outcomes in the Datalab. The project will extend this framework to incorporate lifecycle choice of labour supply, savings and investment, where all potential sources of income are subject to tax. This project will also assess whether a quasi-hyperbolic model of preferences has better explanatory power than the exponential model. The predictions of the calibrated model will be used to analyse the optimal dynamic structure of audit and penalty strategy of the tax administrator.
Theme 2: Estimation and Evaluation
Led by Jonathan Shaw, this theme will subject data to econometric analysis to determine empirical values for responses, model parameters, and forecasts. This theme also encompasses policy evaluation and structural modelling. The research work of the theme will draw upon the expertise of Centre for the Microeconomic Analysis of Public Policy (CPP), the Centre for Microdata Methods and Practice (cemmap), and the centre for Programme Evaluation for Policy Analysis (PEPA) at the IFS. The IFS also possesses extensive data resources which will be available to the theme. The access to data made possible by the Datalab will allow this theme to undertake a number of innovative research projects. This theme will also manage delivery of training in project evaluation and undertake the empirical analysis of the tax gap.
Understanding the spread of information in networks
The project is designed to investigate how audits affect the behaviour of taxpayers who are linked in a network. Taxpayer networks are a potentially important means by which information is transmitted and behaviour is coordinated. In this project we aim to exploit HMRC’s random enquiry programmes to investigate how an audit that uncovers evidence of non-compliance affects the behaviour of others in the pre-enquiry network. The results will be important for understanding how networks function and may help guide future HMRC auditing strategies.
Theme 3: Economic and Social Experimentation
Led by Miguel Fonseca, this theme will apply experimental methods to understand behaviour and to explore behavioural responses. Experimentation is especially important for questions of tax compliance where data are limited. Experiments will be conducted in the laboratory and in the field. Exeter has a very successful laboratory, a strong team of experts in behavioural and experimental economics and in social psychology, and experience in field experiments. Exeter is at the forefront of experimental practice in its use of online experiments for controlled populations of non-student experimental subjects. This development makes possible many innovative future experiments.
Understanding the determinants of customer experience
HMRC offers a wide variety customer services and the level of contact to which customers are exposed to these will vary considerably. Across these services there are a variety of factors which may impact on customers’ perceptions of them. In turn, the customers’ experiences could affect their behaviour in a number of different ways, ranging from increases in avoidable error through to deliberate evasion. The two behavioural responses under scrutiny will be (i) the extent to which participants comply (note that we may not be able to distinguish errors from deliberate non-compliance), and (ii) the timeliness with which participants file their return.
Theme 4: Interdisciplinary Qualitative Analysis
Led by Lynne Oats, this theme will draw on a range of disciplines including social psychology and sociology. It encompasses qualitative surveys and interview fieldwork, which provide valuable insights into actual behaviour as well as perceptions and attitudes not readily captured by other research approaches. Complementing quantitative analyses of specific research problems with qualitative insights can help to overcome some the limitations of the former, including the difficulties in interpreting statistical correlations and causality when studying human behaviour and interactions. The benefits of bringing multiple methodological approaches to bear on a single problem include mitigating limitations of any single methodology as well as improving overall understanding of the phenomena under study. There are many areas of tax administration where qualitative research is a potentially significant component of improved understanding of the dynamics of tax practice, particularly in understanding the role of intermediaries and in enhancing customer experience.
Role of intermediaries in the relationship of large customers with HMRC
There has been considerable change in the past 10 years in terms interaction between large business and HMRC. New initiatives include DOTAS, CRMs, SAOs, xIBRL, risk rating, litigation strategy, GAAR. The aim of this research project is to explore the changing nature of the relationship between intermediaries and clients, and intermediaries and HMRC in the context of large businesses. (A possible extension of the research is to include mid sized businesses.)
Taxpayer attitudes and motivations
In order to design effective interventions for different types of taxpayers, there is a need to improve understanding of appropriate categorisations, including differentiating factors and how these create differences in taxpaying attitudes and behaviours. Qualitative research to complement and extend existing HMRC funded research will draw on social psychology and sociological methodologies to explore social norms and networks, perceptions of fairness and trust in the tax authority. Focus will be on income tax.