Compliance Costs for Personal Income Tax in a Transition Country: The Case of Slovenia

Author(s): MAJA KLUN

Source: Fiscal Studies, Vol. 25, No. 1 (MARCH 2004), pp. 93-104
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Fiscal Studies (2004) vol. 25, no. 1, pp. 93-104

Compliance Costs for Personal

Income Tax in a Transition

Country: The Case of Slovenia

MAJA KLUN

Abstract
The evaluation of taxpayers' compliance costs has grown in significance within tax system research
over the last 15 years. In 2001, two surveys of VAT and personal income taxpayers were conducted
in Slovenia to evaluate compliance costs for the 2000 fiscal year. This paper presents the results of

research into compliance costs for personal income tax in Slovenia. The results show that
compliance costs for personal income tax are relatively low, primarily because most taxpayers
consider filing their tax declaration to be a simple procedure, which means that consultancy costs
are low.

JEL classification: H21, H24.

I. INTRODUCTION

Research into compliance costs in the countries in transition (CI

phenomenon. The main reasons for the lack of interest in compliance

CITs are a shortage of experts who may also be overloaded w

pressing issues no taxpayers' associations and no civil initiativ
Bajo, 2000). There are also several obstacles within the CITs to in
research (lack of interest, cooperation with tax authorities pra

existent, surveys in CITs not common, constant changes in tax syst

spite of the obstacles, in 2001, compliance cost research was conduct

major taxes in Slovenia: VAT (Klun, 2003) and personal income

"Faculty of Administration, University of Ljubljana.

Institute for Fiscal Studies, 2004

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Fiscal Studies

year later, a broad-based research project into compliance costs of the tax system

in Croatia was also launched.

Compliance costs have become an important research subject in most

developed countries (Australia, Canada, the Netherlands, the UK, the USA, etc.)

and this research is a significant element of tax policy. The first attempt to
measure compliance costs was made by Haig in 1935. The earliest research was
actually carried out by individuals wanting to persuade policy-makers that
compliance costs were a significant part of tax-related costs. Until then,
compliance costs had been neglected when the tax burden or tax administration
effectiveness were assessed. In some countries, the research was not supported
by the tax administration, while in others, the measurement of compliance costs

was initiated by the tax administrations themselves. Compliance cost

measurement was the main theme of the 1989 International Fiscal Association

(IFA) congress.
Researchers evaluating compliance costs in different countries' have arrived
at similar conclusions from their results: compliance costs are relatively high,
especially for major taxes; they are also higher than administrative costs; they

amount to as much as 10 per cent of tax revenues; compliance costs are

regressive and therefore create some undesirable distributive effects; high

compliance costs diminish voluntary compliance; and compliance costs can

cause excess tax burden.

The major objective of the research here was to evaluate compliance costs for
personal income tax in Slovenia and discover whether the conclusions from prior

research could be replicated for Slovenia. The above-mentioned studies were

also extended by assessing the influence on compliance costs of income, number

of income sources and taxpayer attitude to tax. The purpose of this paper is to
present an evaluation of compliance costs for personal income tax in Slovenia.

Section II describes the personal income tax system in Slovenia. Section III
introduces the methodology used to evaluate compliance costs. Section IV

presents the results of the research and Section V concludes.

II. SOME FACTS ABOUT PERSONAL INCOME TAX IN SLOVENIA

The overhaul of the tax system initiated after Slovenian independence

largely drew to a close with the introduction of value added tax and exc
in 1999. The emerging new system (with the exception of property tax,
currently under assessment) is similar in structure to the standard tax
OECD member countries. The tax system is currently undergoing refo

'Sandford, Godwin and Hardwick (1989) in the UK; Slemrod (1998), Blumenthal and Slemr
Slemrod and Sorum (1984) in the USA; Vaillancourt (1989) in Canada; Allers (1994) in the Neth

Nam et al. (2000) and Pope (1995) in Australia; Maimer (1995) in Sweden; Hasseldine (1995) in N
etc.*

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Compliance Costs for Personal Income Tax

primarily at closing existing tax loopholes and finalising its harmonisation with

the tax systems of EU countries. All taxes are collected by the Tax
Administration of the Republic of Slovenia, except for customs duties, excise
duties and value added tax on imports, which are collected by the Customs
Administration of the Republic of Slovenia.

Personal income tax applies to an individual's income. There are six

categories of income:
income from employment (salary, incentives, income earned under contracts
for temporary work);

pensions and other receipts, income from private business or professional

activity of writers, painters, sportsmen, journalists, etc.;
income from agriculture (cadastral income of farmland and woodland);
income from property (income from profit, interest, rents);

income from property rights (copyrights, inventions, trademarks);

capital gains.

Each individual is treated as a separate taxpayer. There is no taxation of

spouses or families as a whole. The tax year is the calendar year. Advance tax
payments are made during the tax year. Those paying taxable income are
required to calculate and pay an advance tax payment for the taxpayer. The rate
of advance tax payment on income earned under contracts for temporary work or
for the performance of services and other receipts including remunerations and
similar receipts, income from property and income from property rights is 25 per
cent. The rate of advance tax payment on capital gains is 30 per cent. Advance

tax payments on private business or professional activity income have to be

made by the taxpayer monthly, quarterly or twice per taxable year (i.e. every
sixth month in the taxable year) on the basis of the latest assessed year. Income
from private business or professional activity refers to the profit derived by a
sole trader who independently performs a profit-making activity as his or her
sole activity and the profit derived from professional activity of writers, painters,
sportsmen, journalists, etc. Advance tax payments on salaries, wages, pensions
and cadastral income are determined according to a special tax scale. Taxpayers
can inform their employer about child, disabled and seniority allowances to have
them included in the calculation of advance taxes taken from salary. Slovenian
personal income tax therefore does not use a withholding tax system like PAYE,

since every source of income is individually assessed during the year and

advance taxes are paid separately.

The annual income tax liability of an individual is assessed by separately

calculating the taxable bases of different sources of income earned in a calendar

year and then aggregating them. The annual taxable base is calculated after
certain personal allowances, compulsory social security contributions and other

permitted expenses are deducted. The annual tax rate scale is adjusted on an

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Fiscal Studies

annual basis in line with the average wage of employees in Slovenia. There are
six tax brackets, with rates from 17 per cent to 50 per cent.

The annual tax declaration must be completed, signed by the taxpayer and
sent to the local tax administration office by 31 March of the following year. The
taxpayer must complete the tax declaration with information on all sources of
income, the amount of advance taxes and contributions already paid, exemptions,
deductions, allowances and credits. The tax liability of the taxpayer is calculated
by the Tax Administration. The Tax Administration is obliged to assess the tax
due and issue a written decision before 31 October of the same year. The tax due
(the difference between the total tax payable and the total amount of tax paid in
advance) must be paid within 30 days of the day the written decision is issued.

When the total sum of advance payments exceeds the annual tax payable, a
refund can be requested from the tax authorities. The result of a personal income
tax system of this type is that almost all the working population have to file an

income tax declaration. The only exception occurs when an employee's only
income is from employment and that income, including all allowances, does not
reach 11 per cent of the average wage in Slovenia (and therefore no advance tax
is paid).

Allowances and deductions that reduce the aggregated taxable base for an
individual on an annual level include: general allowance 11 per cent of the
average annual wage in Slovenia for all taxpayers; disabled person's allowance
100 per cent of the average annual wage if the taxpayer is a disabled person;
student allowance 40 per cent of the average annual wage if the taxpayer is a
student (only when he derives income from his work as a student); seniority
allowance 8 per cent of the average annual wage if the taxpayer is above 65
years of age; and family allowances granted to taxpayers who support their
children.2 Certain expenses may be deducted from the aggregate taxable base up
to a limit of 3 per cent of the taxable base (for all such expenses together).
III. METHODOLOGY

Compliance costs in Slovenia were evaluated for the 2000 fisc

survey. The reasons for evaluating compliance costs for perso

alone were:

personal income tax represents a major source of tax revenue, alongside

social security contributions and VAT (in 2000, personal income tax raised
24.9 per cent of tax revenues);

most of the active population are potential personal income taxpayers (tax
register is secret);
2The disabled person's allowance, the student allowance, the seniority allowance and family allowances are
given in addition to the general allowance.

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Compliance Costs for Personal Income Tax

the costs of evaluating compliance costs for the entire tax system would be
too high and surveys of all taxpayers would be more complex;

major international research on compliance costs has also covered personal

income tax.3

ihe survey contained questions about the time spent preparing information

and filling in tax forms, consultancy costs and other expenses. The survey
created was similar to prior research instruments, despite the fact that
international comparisons of compliance costs could not be made because of
several obstacles (Sandford, Godwin and Hardwick, 1989) such as different
methodologies, different response rates, evaluation of time, assessment of tax

and tax rates.

Before the survey commenced, the questions were piloted on 10 taxpayers

with a view to improving the questionnaire. The main purpose of piloting was to

make the survey more understandable and easier to answer. Determining the
sample of personal income taxpayers caused some problems, since the tax
register is secret and the Tax Administration refused to cooperate. In fact, tax
administrations withheld their support in almost all the countries in which the
earliest research projects into compliance costs were carried out (except in New

Zealand and Sweden). Questionnaires were sent to persons randomly selected

from the telephone directory (50 per cent of the sample); other taxpayers were

interviewed. As it was anticipated that the response rate from low income

earners (first two income brackets) would be lower, visits were largely targeted
(69.7 per cent of interviews) at that group of taxpayers in their workplace. The

selection was made in response to statistical information about the income

earned from different jobs. Cooperation also came from trade unions. The
questionnaires were sent to taxpayers at the end of March 2001, when most

taxpayers file their tax declarations.

The final sample was 350 taxpayers. In response, 226 questionnaires were
returned (response rate 64 per cent). Four questionnaires were excluded as they
were filled in by self-employed persons, who submit a different tax form from
other personal income taxpayers. Thus the evaluation of compliance costs was

made on the basis of 222 responses. The population coverage was 0.022 and is
similar to those in other research (see Table 1). The representativeness of the
sample was examined according to income and income source structure across
the entire personal income taxpayer population. The sample is representative in
respect of income sources, though less representative with regard to income
earned. The percentage of the lowest income earners was lower in the sample
than for the overall personal income taxpayer population. Weighting was
therefore used (percentages for each income bracket) to evaluate compliance

3Vaillancourt, 1989; Slemrod, 1998; Sandford, 1994; Hasseldine, 1995; Pope, 1995.

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Fiscal Studies

TABLE 1

Population Coverage of the Sample

Country

Study

Year research

carried out

Population
coverage

(%)
UK

Sandford, Godwin and Hardwick, 1989

1983-84

0.008

Australia

Pope, 1995

1990-91"

0.013

Tran-Nam et al., 2000

1994-95

0.03
0.03

USA

Slemrod and Sorum, 1984

1982

(Minnesota)

Blumenthal and Slemrod, 1992

1989

0.05

Netherlands

Allers, 1994

1990

0.09

Canada

Vaillancourt, 1989

1986

0.011

Diaz and Delgado, 1995

1991

0.026

Spain
Sweden

Maimer, 1995

1993

Germany

Tiebel, 1986

1984

0.008

Slovenia

Klun, 2004

2000

0.022

aThe surveys for personal income tax were carried out in 1986-87; compliance costs were evaluated for the
"The
fiscal year 1990-91.

costs, despite the fact that the correlation between compliance costs and income

was low.

IV. EVALUATION OF COMPLIANCE COSTS

Compliance costs were evaluated for personal income taxpayers only

of self-employed taxpayers, of employers (who are responsible

payments of tax) and for planning tax liabilities were excluded
psychological costs. These limitations should be considered when
analysed. Negative financial benefits were included because repa
quite high (net repayments of personal income tax in 2000 reached
SIT 20.8 billion)4
The evaluated compliance costs include the cost of time spent filing a tax
declaration properly, consultancy costs and other expenses (forms, postage,
copying, etc.), each of which is given in Table 2. Evaluating time spent on filing
tax declarations depends on how 'time spent' is determined. The time could be
calculated in relation to spare time, work time or overtime at work. Net wage,
gross wage and other values can therefore be used in calculations of the cost of
that time. Almost all researchers have used the values stated by taxpayers in

questionnaires but with different modifications: Sandford, Godwin and

Hardwick (1989) used stated values and checked their reliability with the

4The exchange rate on 29 December 2000 was Euro 1= SIT 212.7.

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Compliance Costs for Personal Income Tax

TABLE 2

Structure of Compliance Costs for Personal Income Tax, 2000

Average
Average
valuevalue
(SIT)
(SIT)
Time

Consultancy

Expenses
Total

Percentage
Percentage
of total
ofcost
total cost
(%)

4,523

89.6

32

0.6

498

9.8

5,053

100

average income earned by respondents; Diaz and Delgado (1995) used stated
values corrected by income source; Pope (1995) used stated values but the
extreme high or low values were removed; Allers (1994) made two evaluations,
one with stated values and the other using GDP to value an hour; net wage was

used by Slemrod and Sorum (1984), Blumenthal and Slemrod (1992), Maimer
(1995) and Tran-Nam et al. (2000); and gross wage was used by Vaillancourt

(1989).
Times spent by taxpayers, taxpayers' friends and family are evaluated here
with the values that the taxpayers stated in questionnaires. The average value per
hour spent on tax compliance was SIT 1,916. This value would be lower if time
spent were evaluated using the average gross wage (SIT 1,106) or the GDP value

(SIT 1,706).
On average, taxpayers spent 1.73 hours, family members 0.45 hours and

friends 0.18 hours filing tax returns. Thus, in total, 2.36 hours were spent, on
average. The time did not differ greatly according to the sex of the taxpayer (F

test = 0.297, significance = 0.586);5 more time was spent by taxpayers with a
higher level of education (Pearson correlation = 0.17, p < 0.05).6

The correlations between compliance costs and income, number of income

sources and attitude variables were also assessed and are given in Table 3. The

correlation coefficients were low. The number of income sources was found to

have a weak influence on compliance costs, but compliance costs were not
correlated with income. Taxpayers who stated that they find tax compliance
complicated had higher compliance costs, as did taxpayers who monitor their
inflow of income and distribute income to reduce their tax liability. Some

correlations between attitude variables are also shown in the correlation matrix
in Table 3.

Compliance cost weighting was used to evaluate total compliance costs for
personal income tax. Costs were weighted according to the number of taxpayers

5For the F test, the null hypothesis was that the variance was the same for men and women.

6A regression was estimated: Time spent by taxpayer, in hours = 1.02 + 0.18xLevel of education; t test = 2.53,
significance = 0.012.

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Fiscal Studies

TABLE 3

Correlation Matrix

Complianc

Number of

e costs

income

Income

Tax

Taxpayer
monitors

compliance is
complicated

sources

income and
distributes it

to reduce tax

liability

Compliance costs

(-)
Number of
income sources
Income

0.205

(0.003)

0.119

(0.094)

0.194

(0.002)

(0.004)

0.557

0.130

0.559

(-)

(0.000)

(0.054)

(0.000)

(-)

Tax compliance
is complicated

0.209

-0.184

0.963

(0.000)

(0.006)

-0.151

()

(0.025)
1

Taxpayer
()

monitors income
and distributes it
to reduce tax

liability
Note: The numbers presented are the Pearson correlation and a two-tailed significance test (in parentheses).

in each tax bracket because the proportions in each tax bracket for the sample
deviated from those for the overall population. The average weighted compliance
costs per taxpayer were SIT 4,462. Negative financial effects were evaluated as
net personal income tax repayments multiplied by an average interest rate on

bank deposits in 2000 and their total value for all taxpayers was evaluated at
SIT 2.06 billion. Taking into account compliance costs for all personal income
taxpayers and negative financial effects together, total compliance costs reached

SIT 7.15 billion. This is around 0.18 per cent of GDP and 2.8 per cent of

personal income tax revenue collected in 2000. Excluding unpaid help by family
members and friends, compliance costs for personal income tax represent 2.5 per
cent of personal income tax revenue. Looking at the international comparison in
Table 4, compliance costs for personal income tax are relatively low in Slovenia.
The main reason for this is the low consultancy costs. The majority of taxpayers
in the survey (81.2 per cent) stated that they found tax compliance simple. If they
sought help, they turned to friends and family and did not pay for it. The largest
component of compliance costs (89.6 per cent) is the time spent filling in tax

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Compliance Costs for Personal Income Tax

TABLE 4

International Comparison3
Country

Study

Year

Average

research

time spent

carried outby taxpayer

(hours)

Compliance
costs as a

percentage

of revenue
from

personal
income tax

(%)
UK

Sandford, Godwin & Hardwick, 1989

1983-84

3.6

Australia

Pope, 1995

1990-91b

7.8

Tran-Nam et al., 2000

1994-95

8.5

3.6
10.4
4

1982

21.7

Blumenthal and Slemrod, 1992

1989

27.4

Netherlands

Allers, 1994

1990

4.5

Canada

Vaillancourt, 1989

1986

5.5

2.5

Diaz and Delgado, 1995

1991

6.8

3.3

1.4

1.7

1.7

2.5

Slemrod and Sorum, 1984

USA

Spain
Sweden

Maimer, 1995

1993

Germany

Tiebel, 1986

1984

Slovenia

Klun, 2004

2000

5-7

5.6
3

11

"The
The methodologies
methodologies used
used in
in different
different countries
countries differ;
differ; therefore
therefore direct
direct comparison
comparison is difficult.

'The surveys for personal income tax were carried out in 1986-87; compliance costs were evaluated for the
fiscal year
year 1990-91.
1990-91.

forms, which is on average 15 percentage points more than the average in other

countries. If self-employed taxpayers were taken into consideration, that

percentage would be lower.7

The Slovenian Tax Administration is planning to introduce the electronic

submission of tax declarations in 2004. This change will probably cause a further

decrease in compliance costs for personal income taxpayers. In our surveys,

taxpayers were asked if they would be willing to file their tax declarations via
the Internet, and 48.6 per cent stated that they would be happy to do so.

In addition, the regressiveness of compliance costs for personal income

taxpayers was tested, with the results given in Table 5. The proportion of costs to
income is highest in the first tax bracket (0.7 per cent), then decreases in the next

four brackets and increases in the last tax bracket. Allers (1994) in the

Netherlands and Maimer (1995) in Sweden came to similar conclusions.

'Self-employed taxpayers represent 6 per cent of personal income taxpayers. More than 40 per cent of them use

paid consultancy services, and average consultancy costs reached SIT 0.1 million in 2000 (derived from
questionnaire for VAT taxpayers see Klun (2003)).

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Fiscal Studies

TABLE 5

Compliance Costs as a Share of Income

Tax bracket

Compliance costs
as a share of income
(%)
0.69

0.26

0.17

0.15

0.06

0.19

V. CONCLUSION

Sandford (2000, p. 140) states that OECD research work into how the ev

of compliance costs influenced tax policy concludes that in only fo

countries is the influence strong; the evaluation was used periodicall
countries, and the influence was minimal in seven countries. Despite
democratic tradition in those countries, compliance costs are often neg

determining tax policy. Research in this field is therefore important. Re

this type in CITs has the same role as the earliest research in d

countries. The CITs transferred to the democratic system more than 12

ago. It is true that CITs could learn a great deal from other countries bu

other hand, the situation differs from country to country and peo
differently within the same situation or tax system. The role of

administration in tax reforms is often ignored. On the other hand, the

taxpayers in creating fiscal policy is almost negligible. Compliance

rarely considered when tax laws are changed. Slovenia has no civil char
taxpayers, but an association of tax advisers has existed for three years.
Given the circumstances, research in the field does not receive much
The evaluation presented above is the first attempt to measure complia
in a transition country. In the Czech Republic, some preliminary resear
been done (Vitek, Pavel and Pubal, 2003), while broad research into com
costs across the entire tax system in Croatia was concluded in 2003 (Bla

Brajdic, 2003).

Taxpayers in CITs are not accustomed to questionnaires and w

comfortable responding to questions about income, attitudes to tax

avoidance since these are considered to be very private matters. Explain

purpose of the research is very important. Explaining the research objec
introducing results from research in other countries proved very useful

support from tax administrations, it is very difficult to initiate the research

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Compliance Costs for Personal Income Tax

my experience, taxpayers and trade unions were in favour of the research. Any
research that assesses the taxpayer's point of view is important evidence to place
before policy-makers. Since compliance costs and/or the role of taxpayers are
important in EU countries, this argument becomes even stronger. I hope that this
research will stimulate research in other CITs and that some comparisons will be
possible in the future.
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