Corporate and personal income tax declarations

Decisions by firms and individuals on the extent of their tax payments have generally been treated as separate choices. Empirically, a positive relationship between corporate and personal income tax evasion can be observed. The theoretical analysis in this paper shows that a manager's decision on the firm's behaviour will be independent of his personal preferences if the gain from reducing corporate tax payments is certain, as in the case of tax avoidance. If, however, the firm evades taxes so that the manager's income depends on whether the firm's activities are detected or not, corporate and personal income tax evasion choices cannot be separated. Jel Code H 24 · H 25 · H 26     

Evidence of the invisible: toward a credibility revolution in the empirical analysis of tax evasion and the informal economy

Empirical research about tax evasion and the informal economy has exploded in the past few decades, seeking to shed light on the magnitude and (especially policy) determinants of these phenomena. Quantitative information informs the analysis of policy choices, enables the testing of hypotheses about determinants of this phenomenon, and can help with the accurate construction of national income accounts. Even as empirical analysis has burgeoned, some have expressed doubts about the quality and usefulness of some prominent measures. The fact that high-quality data is elusive is neither surprising nor a coincidence. The defining characteristic of tax evasion and informal economic activity—that they are generally illegal—often renders unreliable standard data collection methods such as surveys. Unlike invisible phenomena in the natural sciences, these invisible social science phenomena are hard to measure because of choices made by individuals. Analysis of tax evasion and the informal economy must proceed even in the absence of the direct observability of key variables, and theory should guide the construction and interpretation of evidence of the “invisible.” In this paper, we address what can be learned using micro or macro data regarding tax evasion and the informal economy under given conditions and assumptions, and critically review some of the most common empirical methods in light of our conclusions. We conclude with an entreaty for researchers in this field to enlist in the “credibility revolution” (Angrist and Pischke in J. Econ. Perspect. 4(2):3–30, 2010) in applied econometrics.     

Optimal commodity taxation with duty-free shopping

International travellers are frequently offered the opportunity to purchase a certain quantity of goods duty-free. Individuals differ in their opportunities to benefit from duty-free shopping, and we focus on the implications of these differences for optimal commodity taxation within a version of the optimal tax model of Mirrlees (Review of Economic Studies, 38, 175–208, 1971). We show how duty-free alters the constraints on the use of commodity taxes to reduce the distortionary costs of income taxation or to reflect externalities. Beyond characterising optimal taxes in the duty-free regime, we discuss conditions under which allowing duty-free would increase or reduce social welfare.      

Is Prescott right? Welfare state policies and the incentives to work, learn, and retire

This paper bolsters Prescott’s (Fed. Reserve Bank Minneap. Q. Rev. 28(1):2–13, 2004) claim that high taxes are responsible for lackluster labor market performance in Continental European countries. We develop a life-cycle model with endogenous skill formation, endogenous labor supply, and endogenous retirement. Labor taxation distorts not only labor supply, but also education and retirement decisions. Actuarially unfair pensions further exacerbate labor tax distortions on retirement. Education subsidies can nevertheless cushion the adverse impact of taxation on skill formation. Feedbacks between education, labor supply, and retirement are important. The model is simulated with realistic behavioral elasticities that are consistent with microeconometric evidence. If, besides labor supply, also learning and retirement are endogenous, the uncompensated (compensated) elasticity of the tax base equals 0.46 (0.85), which is more than twice as large as the standard uncompensated (compensated) labor supply elasticity of 0.18 (0.40). Furthermore, life-cycle interactions between education, working, and retirement are quantitatively important and the interactions raise all behavioral elasticities substantially. For example, the uncompensated labor supply elasticity increases with one-half due to life-cycle interactions (to 0.26). We demonstrate that low European labor supply can be fully explained by taxation without relying on unrealistically high labor supply elasticities. Reducing labor market distortions, cutting benefit levels, lowering tax rates, and making (early) retirement actuarially more fair, therefore, boosts labor supply, delays retirement, and stimulates skill formation. In addition, high education subsidies are needed in large welfare states to offset explicit and implicit tax burdens on human capital investment.      

The marginal cost of public funds and the flypaper effect

A lump-sum intergovernmental transfer has a “price effect”, as well as an “income effect”, because it allows the recipient government to reduce its tax rate, which lowers its marginal cost of public funds, while still providing the same level of public service. This reduction in the effective price of providing the public service helps to explain the “flypaper effect”—the empirical observation that a lump-sum grant has a much larger effect on spending than an increase in personal income. Contrary to the assertions of Mieszkowski (Modern Public Finance, 1994) and Hines and Thaler (J. Econ. Perspect. 9:217–226, 1995), a model of a benevolent local government financing its expenditures with a distortionary tax predicts flypaper effects from lump-sum grants that are similar to those observed in many econometric studies.     

Effective labor taxation and the international location of headquarters

Profit taxes are widely acknowledged to influence the location of firms’ headquarters. This paper sheds light on the role of aspects of labor taxation for the international location of headquarters. While profit taxes can be avoided in various ways, it is much harder for firms to manipulate the firm-specific labor tax base so that labor taxes may be relatively important for firm location. We construct a unique data set of effective labor taxes in 120 countries and use data on the location of 35,206 firms to analyze the impact of labor income tax rates, the progressivity of the income tax schedule, and social security contributions on firms’ decisions where to locate their headquarters. The findings suggest that both a higher progressivity of the tax system and higher (employee- and employer-borne) social security contributions negatively influence a country’s attractiveness for headquarters location. Hence, a one percentage point increase in these payroll taxes, reduces the probability of a country to attract headquarters by 6.1 %. The results prove robust in various empirical model specifications and subsets of the data.     

On taxing capital income with income shifting

We examine a linear capital income tax and a nonlinear labor income tax in a two-type model where individuals live for two periods. We assume that taxes are paid only in the second period in which the agents receive both labor and capital income and may shift income from labor to capital. The two types of individuals may differ with respect to wage rate and initial resource endowments. In the absence of income shifting, endowment variation motivates a capital income tax which would not exist where there is pure wage rate variation. In the latter circumstance, income shifting would indeed establish a case for a capital income tax while adding variation in resource endowments would ambiguously affect the case. The asymmetric information case for a capital income tax must be traded off against distortionary effects not only on savings, but also on labor as an agent may earn labor income which is reported and taxed as capital income.      

Destination taxation and evasion: Evidence from U.S. inter-state commodity flows

Tax evasion has been an important issue in the accounting literature for several decades, but the focus has been on corporate income taxes. We develop a new way to examine tax evasion that focuses on corporate transactions, rather than corporate profits. Specifically, we examine how commodity flows respond to destination sales taxes, allowing for tax evasion as a function of distance between trade partners. After accounting for transportation costs, we find that the effect of taxes decreases as distance increases. This is consistent with the notion that longer distances between trade partners hinder government oversight and increase the likelihood of successful tax evasion. Our results are robust with respect to outliers, strategic neighbor effects, information sharing agreements and other re-specifications. These results are important to policymakers because they evidence the difficulty of enforcing destination taxation in open economies such as U.S. states and the European Union.     

Taxes and stabilization in contemporary macroeconomic models

The role of proportional and procyclic labor income taxes for automatic stabilization with stochastic productivity is analyzed in a contemporary macroeconomic model based on imperfect competition. The importance of short-run nominal wage rigidity for the effectiveness of progressive taxes on labor income for stabilizing output and raising household welfare is examined in a model that yields complete analytical solutions with stochastic output shocks. Increasing the procyclicity of labor income tax rates raises welfare with and without rigid nominal wages in the model economy. With fully flexible prices and wages, a positive covariance between the distortionary tax rate and productivity reduces the volatility of production and employment. This effect disappears under nominal wage rigidity, although progressive taxation can still raise welfare by reducing the distortion caused by a proportional labor tax. With rigid nominal wages and flexible consumer goods prices, payroll taxes levied at rates that rise with output can serve as automatic stabilizers. JEL Code E62 · H20     

Has Tax Competition Emerged in OECD Countries? Evidence from Panel Data

The theory of international tax competition suggests a shift of tax burden from mobile to immobile tax bases, especially for small open economies. This paper assesses these hypotheses empirically using a sample of 23 OECD countries and the time period 1965–2000. In accordance with tax competition theory, we find that capital mobility exerts a negative impact on capital tax burden, and a positive one on labor tax burden. Further, we observe a positive effect of country size, suggesting that small open economies are levying lower capital and labor taxes than larger ones. Finally, we analyze the time pattern of tax competition and demonstrate that tax competition has intensified since the mid 1980’s.JEL Code: H7, H87, C23     

Human capital and optimal positive taxation of capital income

This paper analyzes optimal linear and non-linear taxes on capital and labor incomes in a life-cycle model of human capital investment, financial savings, and labor supply with heterogenous individuals. A dual income tax with a positive marginal tax rate on not only labor income but also capital income is optimal. The positive tax on capital income serves to alleviate the distortions of the labor tax on human capital accumulation. The optimal marginal tax rate on capital income is lower than that on labor income if savings are elastic compared to investment in human capital, substitution between verifiable and non-verifiable inputs in human capital formation is difficult, and most investments in human capital are verifiable so that education subsidies can directly reduce the tax wedge on learning. Numerical calculations suggest that the optimal marginal tax rate on capital income is substantial.     

Base independence in the analysis of tax policy effects: with an application to Norway 1992–2004

The analysis contrasts results of two recently expounded microlevel data approaches to derive robust intertemporal characterizations of redistributional effects of income tax schedules; the fixed-income procedure of Kasten et al. (Tax progressivity and Income Inequality, Cambridge University Press, 1994) and the transplant-and-compare method of Dardanoni and Lambert (J. Public Econ. 86:99–122, 2002). Our study is normative in that the Blackorby and Donaldson (Can. J. Econ. 17:683–694, 1984) index of tax progressivity is employed. This enables contributions from vertical redistribution and horizontal inequity also to be assessed, using for the latter one classical measure and one no reranking measure. When the competing methodologies are applied to Norwegian data for 1992–2004, their respective strengths and weaknesses are revealed. The transplant-and-compare procedure is found to have a number of advantages.      

CASH FLOW OR INCOME?: The Choice of Base for Company Taxation

Cash flow and equity income (or income) are two alternativebases advocated for taxes on businesses throughout the world.Although in practice most tax systems are hybrids with elementsof both types of taxes, recent literature has stressed the meritsof the cash flow tax because it is simple in concept and itdoes not distort decisions about capital expenditures and financing.But international issues and administrative complexities—particularlytax evasion—present problems that must be sorted out beforea cash flow tax can be implemented.      

Comparing the top and the bottom income earners: Distribution of income and taxes in the United States

Tax reform is again at the center stage as Congress grapples with ideas to reduce the US budget deficit and the country readies itself for another election year. Given this unusually charged tax reform season, populist and party rhetoric appears to the general population to have largely replaced reasoned debate as politicians, economists and pundits “cherry pick” facts to justify their claims. Our contribution to the current debate on tax equity is that this is one of the very few studies that jointly consider the impact of payroll and income taxes. Most tax equity studies focus only on the federal income tax and as such issue misleading implications. It is important to jointly consider payroll and income taxes because (a) for taxpayers in lower income ranges, the payroll tax burden outweighs the income tax burden, while (b) for higher income taxpayers income from wages above $106,800 ($110,000 in 2012) are payroll-tax free, and (c) other sources of income, namely dividends and capital gains, are not subject to payroll taxes at all. Thus, we provide a more comprehensive picture of the overall progressivity (or lack thereof) exhibited by the current tax laws. In addition, we also consider how some often-raised tax proposals would prospectively affect income inequality and tax progressivity.     

Education policies and optimal taxation

This paper studies the design of education policies in a setting in which optimal redistributive labor taxation is available. It is usually argued that the crucial parameter to guide education policy is the complementarity of education and ability. This is true only when labor supply is fixed or when income taxes are not allowed. I show that, if labor supply is endogenous and if the government can tax income in a nonlinear way, the crucial parameter is how the education elasticity of wage changes with ability. Taking the elasticity criterion into account, education subsidies are optimal in cases in which, under the complementarity criterion, education taxes would be optimal. To do this, I use an asymmetric information setting that motivates nonlinear taxation of income and education. JEL Classification H21 · H23 · H52 · I28     

结合逃税的最优税收理论研究评述

最优税收理论主要研究税制的最优设计问题,而逃税理论主要致力于政府的最优执行问题,最近出现了将这两种理论结合起来的研究趋势。结合逃税的最优税收理论,包括最优所得税和最优商品税等内容,研究结果表明:结合逃税的最优税收理论并不能得出比标准最优税收理论更为明确的政策结论,其还有待于进一步的研究和发展。     

A positive analysis of labor-market institutions and tax reforms

In this paper, we investigate the structure of the “Laffer curve” for taxes on labor and other factors of production, under different institutional frameworks of the labor market. Using a Cobb–Douglas production technology allows us to characterize important properties of the “Laffer curve” in terms of the wage share for a competitive labor market, the monopoly union model, the right-to-manage approach, the insider-dominated union, and efficient Nash bargains simultaneously. In this way, we are able to highlight the menu of factor tax systems, and thus of potential tax reforms available to a government, without perfect knowledge of the mechanism of the labor market. In particular, we show that the employment-maximizing tax system features a constant energy tax, while the energy mini-/maximizing tax system features a constant labor tax. We also illuminate to what extent these results must be modified if we either employ a CES production function, or if we allow for an endogenous reservation wage.     

Tax compliance under horizontal and vertical equity conditions: An experimental approach

Tax compliance is a complex phenomenon, which requires to be addressed from different perspectives. We report the results of a real-effort experiment aiming at testing the effect of different equity conditions on individual tax compliance levels. We show that equity considerations seem to change individual behaviour only when a vertically unfair tax system is implemented. Also, random effects Tobit estimations show that being audited in the previous period has a negative effect on tax evasion, whereas the level of the fine paid in the previous period positively affects income underreporting. Also, we find that when subjects are in the vertical inequity condition they are significantly more likely to fully evade taxes than in the equity condition, whereas such result cannot be found in the horizontal inequity condition. Finally, we find a standard gender effect showing that female participants are less likely to evade taxes than man and that risk aversion negatively affect tax evasion behaviour.     

Political Sustainability and the Design of Environmental Taxes

This paper studies the issue of political support for environmental taxes. The environmental tax is determined by majority voting, given a refund rule that specifies the allocation of tax proceeds. The refund rule is chosen by a welfare-maximizing constitutional planner. We show that: (i) The equilibrium tax rate is increasing in the proportion of tax reductions based on wage incomes. (ii) If labor and capital income taxes are reduced in the same proportion, to keep the government's budget balanced, majority voting yields a rate of environmental taxation that is lower than the optimal (Pigouvian) level. (iii) To mitigate this negative bias, the government reduces wage taxes by a higher proportion than capital income taxes. (iv) The final outcome will either be the Pigouvian tax or else all reductions will be given in wage taxes. This depends on individuals' preferences for the polluting good as well as wage and capital income distributions.     

Tax-tariff reform with costs of tax administration

As is broadly recognised, the straightforward application of the Diamond–Mirrlees (1971) production efficiency theorem implies that when lump-sum taxation is not available, then it is optimal for the government in a small open economy to rely on taxes on the net demand of households rather than on border taxes to finance its resource requirements. However, the theorem does not hold when taxation is associated with administrative costs. The present paper explores the implications for optimal taxation and for desirable directions of tax-tariff reform of taking into account the costs of tax administration in countries at different levels of economic development. The paper clarifies the reasons for, and lends support to, the criticism by Stiglitz (Presentation to Congress of International Institute of Public Finance, Prague, 2003) of the IMF and the World Bank’s recommendation to developing countries to adopt VAT to replace border taxes.