Impact Factor of Sensitivity of Tax System (The Bureaucracy)

Impact factor of sensitivity of tax system (the bureaucracy) © ® 2018 Constantinos Challoumis Abstract: This paper is about the sensibility of the taxation in the bureaucracy. Therefore, we have a study for the impact factor of the tax revenues of the countries which are tax heavens subject to the trustworthy of the tax system. From the view of how much are affected the companies which participate in controlled transactions1, is able to obtain the impact of bureaucracy, when there is not that factor with the case that exists in the analysis of transfer pricing. The method of analysis of the impact of bureaucracy in combination with the impact factor of tax revenues is the Q.E. method. Is determined the behavior of the tax system subject to the bureaucracy. I. Applied methodology to the analysis of the sensitivity of tax system (the bureaucracy) The quantification analysis of the sensitivity of the tax system to the bureaucracy is done by the application of the Q.E. method.2 The background of this method stands on the behavior analysis of mathematical equations. Thus, there we determine two axes to the analysis of the Q.E. method which are those:  The analysis of the behavior of the model which stands on the scrutiny of the structural characteristics of each model accordingly allowing with that way the extraction of general conclusions about the model which is under examination.  The frequency analysis behavior scrutinizes the behavior of the dependent variables, but from the view of the number of appearances of a variable than another, estimating basically the impact that one independent variable has with one or more others independent variables. Therefrom, using the prior two axes of methodology, is plausible to extract conclusions about the behavior of mathematical equations, and how some factors react to changes. Consequently, is plausible the transformation of quality data to quantity data. This method is applied in for the 1 Controlled transections are the transections which happen between companies that control their transactions with such way to have profits and control of their losses. 2 Challoumis, Constantinos, Quantification of Everything (A Methodology for Quantification of Quality Data with Application and to Social and Theoretical Sciences) (November 12, 2017). Available at SSRN: https://ssrn.com/abstract=3136014. 1 Electronic copy available at: https://ssrn.com/abstract=3143209 purposes of this study for controlled transactions and more precisely in the variables of the impact factor of the tax revenue. [1][2][3][4]The mechanism of Q.E. is based on the dependent variables which are modified for the generator. Thereupon, the generator produces values for the dependent variables. The extracted values of the generator permit the creation of values, which are the base for comparisons, and for the scrutiny of mathematical equations. Thus, is plausible to quantify quality data. In our analysis this method is used for the purposes of clarification the behavior of the impact factor of the global tax revenue. II. Impact factor of tax revenues The impact factor of tax revenues of countries which are tax heaves, 𝑠 according to the “Methods of controlled transactions and identifications of tax avoidance”3 is determined as that4: 𝑠= 𝑘+𝑙 (1) 𝑟+𝑐+𝑡+𝑖 Therefore are countries which receive the products that are taxed in different countries. This allocation of profits between profits and losses permits to the enterprises which participate to controlled transactions of the transfer pricing activities to maximize their utility. But, contemporaneously the tax revenue from global view is declined. Then, the loss of tax income from some countries is more than the profits that make the countries which are tax heavens. Thereupon, the symbol of 𝑠 the impact factor of tax revenue from a global view, and there are some coefficients which are 𝑘, 𝑙, 𝑟, 𝑡, and 𝑐. [5][6][7][8] Thus, the symbol of 𝑘 is about the impact factor of capital, 𝑙 is the impact factor about the liability of the authorities on the tax system. The interpretation of the liability is about how much unbalanced it is the tax system. The parameter of r is about the risk, the t is about how much trustworthy is the tax system from the view of bureaucracy. This means that 𝑡 examines the case of the sensitivity of the tax system to the bureaucracy. Additionally, the symbol of c is about the cost of enterprises. The symbols with the “~” are accordingly the same thing, but from the view of the uncontrolled transactions5. 3 Challoumis, Constantinos, Methods of Controlled Transactions and Identification of Tax Avoidance (February 4, 2018). Available at SSRN: https://ssrn.com/abstract=3134109. 4 Caution: The section I and the section II are the same for five papers, because are the base for the analysis of each factor of equation (1). 5 Uncontrolled transactions are the transactions which happen between companies free of control and allocation of profits and losses. 2 Electronic copy available at: https://ssrn.com/abstract=3143209 Thus, the numerator is proportional with the income of taxes, as the investments and the stable tax environments, with lack of bureaucracy enhance the tax income. On the other hand the denominator is inverted proportional with the tax income, as the risk, the cost, and the unbalance of taxation cause less tax income. Moreover, for 𝑠̃ we have that: ̃ +𝑙̃ 𝑘 𝑠̃ = 𝑟̃ +𝑐̃+𝑡̃+𝑖̃ (2) Inasmuch as equation the equation (3) is determined the aggregate impact factor of tax revenues, which is symbolized by 𝑠̂ , and is defined by the next equation: 𝑠̂ = 𝑠 + 𝑠̃ (3) Based on the prior equations we could proceed to the identification of the behavior of the impact factors of tax revenues in the case tax heavens, and in the case of the non-tax heavens. Then, 𝑠 is a factor which allows the comparison between the controlled with the uncontrolled transactions. Thence is plausible to have a standalone behavior analysis of controlled transactions and a combined behavior analysis between the controlled transactions with the uncontrolled transactions. In the next section is analyzed the impact factor of tax revenues with the rest impact factors. III. Determination of bureaucracy The determination of bureaucracy is established by the impact factor of tax sensibility (the level of bureaucracy). To determine the way that bureaucracy affects the global tax revenues, we proceed with the following diversion:   In the first application of Q.E. methodology are applied all the factors of the global tax revenue, 𝑠. In the second application of Q.E. methodology are applied all the factors except from the factor which is under review. This methodology is illustrated below: 3 Electronic copy available at: https://ssrn.com/abstract=3143209 All factors of tax revenue Global tax revenue All factors of tax revenue except from tax sensitivity (bureaucracy) Figure 1: Steps of Q.E. application In the previous scheme is shown the methodology which followed by the Q.E. methodology to determine the behavior of the global tax revenue in the case of that exists bureaucracy and the ideal case that this factor is avoided. [2] [9][10] IV. Impact factor of tax revenues to the bureaucracy The bureaucracy is in interaction with the impact factor of tax revenues. In this behavioral analysis is determined the model which clarifies the behavior of the impact factor of tax revenues with the existence and with the avoidance of the impact factor of tax sensibility. [11][12][13][14] All the necessary equations have referred in the previous sections, except from one condition. Then, for the application of the Q.E. method we use the following condition, which is: 𝑡>𝑙>𝑖>𝑟>𝑘>𝑐 (4) Consequently, is plausible to proceed to a quantity analysis using equations (1), (2), and (4). Thence, applying the Q.E. method and choosing the appropriate magnitudes for the coefficient, we have that: Factors Values of s Values of s’ k 0,4 0,4 i 0.6 0.6 l 0.7 0.7 r 0.5 0.5 c 0.3 0.3 t 0.8 fs <0.3 <0.3 fsi <0.3 <0.3 Table: Compiling coefficients 4 Electronic copy available at: https://ssrn.com/abstract=3143209 The generator of this procedure is based on the coefficients of the previous table. Thereupon, the factors have as upper limit 1, and as a lower limit 0. Should, be notified that 𝑠 and 𝑠̃ are plausible to receive values greater than one as their mathematical structure allow this. After 461 iterations extracted the next diagrams: Figure 2: (a) Impact factors of 𝑠 (series 1) and 𝑠′ (series 2), (b) frequencies of 𝑠 and 𝑠′ In the previous scheme we used the 𝑠̃ , which here is common for the tangibles and for the intangibles. Then with 𝑠 (blue line) is symbolized the case that we have the impact factor of 𝑡 which symbolizes the sensitivity of the tax system (existence of increased bureaucracy). With 𝑠′ (red line) is symbolized the case that we have the absence of the impact factor of sensitivity of the tax system, 𝑡. Then in the case of 𝑠 we have an unstable tax system, and with 𝑠′ we have a stable tax system, with a high bureaucracy. Then, when there exists a tax system that is characterized by the increased bureaucracy (blue line) the tax revenue is decreased. In the case that there we have avoided the impact factor of tax sensitivity (bureaucracy) the tax revenue from a global view is increased rapidly. Moreover, in the diagram (b) of figure 2, we obtain that the frequency of the 𝑓𝑠 (black line), where used the impact factor of 𝑡, we have more companies which participate in controlled transactions, than in the case of 𝑓𝑠 ′ (blue line) where the tax system has lack of bureaucracy. Thereupon, we obtain as we expected that the bureaucracy causes decrease of the global tax revenue, and moreover increase the companies which participate in controlled transactions. 5 Electronic copy available at: https://ssrn.com/abstract=3143209 V. Conclusions In this paper examined the case of bureaucracy and the way that interacts with the global tax revenue. Then the companies which participate in controlled transactions prefer as expected the tax environments which have not unstable law rules and insecure economies. This has as impact the companies which participate in controlled transactions to be increased in numbers, because with that way are able to allocate better their profits and losses. Then, the decrease of bureaucracy could rapidly increase the tax income from a global view. 6 Electronic copy available at: https://ssrn.com/abstract=3143209 References 1. Challoumis, Constantinos, Quantification of Everything (a Methodology for Quantification of Quality Data with Application and to Social and Theoretical Sciences) (November 12, 2017). Available at SSRN: https://ssrn.com/abstract=3136014 2. J.D. Wilson A theory of interregional tax competition Journal of Urban Economics, 19 (3) (1986), pp. 296-315 3. Feinschreiber R.,2004, Transfer Pricing Methods An Application Guide (John Wiley & Sons, New Jersey). 4. Hines, J.R., Rice, E.M., 1994. Fiscal paradise: Foreign tax havens and American business. Quarterly Journal of Economics 109, 149–182. 5. Mansori, K.S., Weichenrieder, A.J., 1999. 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Available at SSRN: https://ssrn.com/abstract=3137747Challoumis, Constantinos 13. Methods of Controlled Transactions and Identification of Tax Avoidance (February 4, 2018). Available at SSRN: https://ssrn.com/abstract=3134109 14. Challoumis, Constantinos, Intangible Controlled Transactions (March 13, 2018). Available at SSRN: https://ssrn.com/abstract=3140026 7 Electronic copy available at: https://ssrn.com/abstract=3143209