In “Measuring the Tax Gap: International Experience and Opportunities for Canada,” Pierre-Pascal Gendron and Richard M. Bird examine the “compliance gap,” which includes not only tax evasion and avoidance, but also intentional or unintentional taxpayer errors, as well as, in some cases, unpaid and even uncollectible tax liabilities. The authors find that with extra resources and enforcement effort the Canada Revenue Agency could net about $3 billion.
With the federal government projecting swelling budget deficits in the Fall Economic Statement and then the 2021 Budget due to pandemic relief measures, the debate is shifting to the revenue raising measures needed to pay for them. However, “closing the tax gap should not be considered a silver bullet to deal with burgeoning federal debt,” notes Richard Bird, an eminent tax scholar.
After reviewing measurement methods and issues, and surveying international experience, the authors provide a reasonable estimate of the total tax gap, based on the latest Canada Revenue Agency reports, to be between 6.4 percent and 8.3 percent of total tax revenues. Of that gap, the CRA could reasonably recover about $3 billion through additional administrative resources and effort, perhaps even as much as $5 billion.
“A billion here, a billion there is not chicken feed,” says Gendron. “Every little bit helps – but $3 billion, or even a highly improbable $5 billion, will not do much to establish a more sustainable long-term fiscal balance in the (perhaps long) post-COVID recovery period.”
Devoting more resources to improving administration provides an important demonstration that governments can be trusted to at least enforce tax laws fairly and equally, note the authors. It will also increase revenue yields. But no matter how much the administration of the existing law can and should be improved, it alone is most unlikely to resolve the eventual revenue crunch if expenditures are to be maintained, let alone further expanded. Unless a substantial increase in growth occurs to shore up revenues, some changes in tax policy are also likely to be needed.”
The authors make several recommendations for the agency, including updating its gap estimates to more recent tax years as is the practice in the UK and EU; redeveloping the presentation of its estimates to feature pre- and post-audit figures consistently; and developing a communications campaign to explain its work on the tax gap to the public and the media.
For more information contact: Pierre-Pascal Gendron, Professor & Program Coordinator – International Business, Faculty of Business and International Development Institute, Humber Institute of Technology & Advanced Learning; Richard M. Bird, Professor of Economics Emeritus, Rotman School of Management, and Senior Fellow of the Institute on Municipal Finance & Governance, Munk School of Global Affairs & Public Policy; or David Blackwood, Communications Officer, the C.D. Howe Institute, 416-873-6168, dblackwood@cdhowe.org.
https://www.cdhowe.org/media-release/closing-ottawa’s-tax-gap-not-silver-bullet-post-covid