APPLICATIONS OF BEHAVIOURAL ECONOMICS TO TAX EVASION

The paper reviews recent models that have applied the techniques of behavioural economics to the analysis of the tax compliance choice of an individual taxpayer. The construction of these models is motivated by the failure of the Yitzhaki version of the Allingham–Sandmo model to predict correctly the proportion of taxpayers who will evade and the effect of an increase in the tax rate upon the chosen level of evasion. Recent approaches have applied non‐expected utility theory to the compliance decision and have addressed social interaction. The models we describe are able to match the observed extent of evasion and correctly predict the tax effect but do not have the parsimony or precision of the Yitzhaki model.     

MONETARY POLICY AND BEHAVIOURAL FINANCE

Abstract.  There have been major advances in both theory and econometric techniques in mainstream macro-models and parallel advances in knowledge of the monetary transmission mechanism acting via asset prices. At the same time, behavioural finance has provided evidence that not all actors in the economy are 'fully rational' and this has influenced models of asset pricing on which part of the monetary policy transmission mechanism depends. Such uncertainty about the behaviour of asset prices has in part stimulated a move towards 'robustness', as an important criterion for guiding monetary policy. We argue that although we have discovered much, including 'what not to do', nevertheless our knowledge of the transmission mechanism is very incomplete. This is because, in spite of all the theoretical advances that have been made, there is still considerable uncertainty over the behaviour of agents, which has been reinforced by insights from behavioural finance.     

TAXATION OF ECONOMIC RENTS

Economic rents have long been identified as an efficient tax base. In addition, the recent literature documents that rent income is highly concentrated and that rents are quickly increasing. Rent taxation thus seems attractive for reasons of both efficiency and equity. Nevertheless, rent taxation remains a marginal topic in research and policy making. In a systematic review of the neoclassical literature on different rent types, we find that some types of rents reflect inefficiencies and should thus be minimized, while others reward investments and should be supported in line with social welfare. What remains for taxation are land rents, one of the few true scarcity rents. Land rents have significant potential to improve the efficiency of the tax system. We then begin to develop a comprehensive theory of land rent taxation by identifying relevant efficiency and equity effects. The interaction of many of these effects remains unexplored, which might explain policymakers' hesitation in using land taxes to date.     

TAXATION AND THE USER COST OF CAPITAL

This paper provides a review of the concept of user cost and its determinants. Particular attention is given to the influence of taxation. The concept of user cost relates to the rental, the rate of return to capital, that arises in a profit maximizing situation in which further investment in capital produces no additional profit. This paper sets out in some detail the range of assumptions involved in obtaining alternative expressions for the user cost. The user cost refers to a before-tax capital rental, the rate of return that ensures that the (after-tax) cost of capital is equal to the post-tax returns over its life. Hence, associated with the user cost measure is an effective marginal tax rate. This can differ substantially from the statutory marginal rate applicable to the investor. A related effective average tax rate is also defined.     

ADVERTISING'S ELUSIVE ECONOMIC RATIONALE: PUBLIC POLICY AND TAXATION

Advertising and its effects have been debated for well over a century. In the last few decades a generally sceptical view of the benefits of advertising has been overturned by a series of academic advances in economics that detail a variety of ways in which advertising may affect the economy and society. This academic work has however been paralleled by a growing popular and political opposition to advertising and its social effects. In this paper, the positive economic case for advertising is challenged by an assessment of the main channels of its influence and by a review of the associated empirical findings on its economic and wider impact. A policy response of limiting the tax deductibility of business advertising is explored.     

SHIFTING BOUNDARIES IN ECONOMICS: THE INSTITUTIONAL COGNITIVE STRAND AND THE FUTURE OF INSTITUTIONAL ECONOMICS

This paper aims at contributing to the debate on the future of institutional economics and of the field as a whole by starting from the literature that discusses the relationship between Old‐Original Institutional Economics and New Institutional Economics. It suggests that the process of reunifying OIE and NIE (and evolutionary economics) prompted by part of the literature could be improved by the contribution of the Cognitive Institutional Economics. The paper follows a two‐stage pathway: first, it frames the debate on the relationships between NIE and the OIE and it concentrates on a subset of the literature that shows that NIE's recent developments complicate the distinction between NIE and OIE, and it explores the possibility that NIE and OIE may merge so that an amalgam of NIE, OIE and Evolutionary Economics becomes the next economic paradigm. Secondly, the paper argues that a step forward in the direction outlined by the literature has been made by CIE, which is a research stream that developed from cross‐fertilization among NIE, OIE and the Hayekian contributions to the analysis of institutions. In the concluding remarks, the possible emergence of a single institutional paradigm is discussed in the light of the literature about change in economics.     

FDI AND TAXATION: A META‐STUDY

Abstract In this paper we extend former meta‐analyses on FDI and taxation in three ways. First, we add 16 recent publications. Second, we code additional meta‐regressor variables addressing important issues in research on FDI and taxation. Third, we refer to the sophisticated meta‐analytical methodology and present a coherent strategy to choose the meta‐regression estimator most suitable for the meta‐data at hand. As compared to prior surveys, the meta‐analysis is thus based on a much broader methodological basis and a considerably richer meta‐data set. The median tax semi‐elasticity of FDI based on 704 primary estimates is 2.49 in absolute terms. The precision weighted average of the full sample of semi‐elasticities is 2.55, again in absolute terms. Moreover, our meta‐analysis shows that there is a publication bias in the primary literature. Meta‐regressions show that studies based on aggregate data report systematically larger semi‐elasticities than firm‐level analyses, that integrating bilateral tax regulations into effective tax rates leads to more effective measurement of adverse tax incentives on foreign investment, and that tax effects are not compensated by public spending.     

REPETITION AND FINANCIAL INCENTIVES IN ECONOMICS EXPERIMENTS

Abstract While experimental methods have been an effective tool for economic research, there have been controversies on the methodological aspects. The reason why we need to care about it is clear: if the method in an experiment is not valid, the results from that experiment cannot be valid too. Among other things, the methodological issues of financial incentives and repetition, which are norms in experimental economics, have been at the centre of many debates. While there are previous reviews that investigate financial incentives and repetition separately, our view is that the effects of these two factors are interdependent rather than independent. Thus, our review here is more specific and more conditional, that is, we are interested in the answer to the question, ‘Do we need to use financial incentives conditional on the use of repetition?’ After we discuss the relationship between financial incentives and repetition, we argue, from a review of 44 experimental studies, that using financial incentives would be more necessary to improve the validity of experimental results if an experimenter needs to use repetition.     

IDENTITY ECONOMICS: SOCIAL INFLUENCE AND SKILL DEVELOPMENT

Within the economic literature, studies in identity economics, peer effects, and skill development have all suggested that social influences have an important role in determining choices. In this review, I draw on lessons learned from the identity economics literature to examine implications from the peer effects and skill development literature. I focus on the role of social identity in generating social group effects from peers and what role identity may have in shaping the development of skills from broader environments, parents and peers during childhood and adolescence.     

IMITATING ACCRUAL TAXATION ON A REALIZATION BASIS

Abstract.  While taxation of capital gains upon accrual poses problems of liquidity and valuation, taxation upon realization evokes the so-called lock-in effect that possibly induces distortions of the investors' liquidation and investment decision. The tax schemes, proposed in the literature in order to remedy simultaneously the shortcomings of both taxation methods, are mostly based on the idea of imitating accrual taxation on a realization basis. The paper surveys these proposals of so-called formulaic taxation and develops a uniform formal way of describing the suggested schemes that allows them to be easily compared and evaluated from a theoretic point of view.     

COPYRIGHT AND ARTISTS: A VIEW FROM CULTURAL ECONOMICS

Abstract.  Most of the standard economic literature on copyright ignores a number of aspects that have considerable significance for cultural production and for artists, the primary creators of copyright works, the supply of which copyright is supposed to stimulate. Specifically, there is little mention in that literature of moral rights, no distinction is made between copyright for authors and neighbouring rights for performers, the distributional effects of copyright are barely referred to, and the question of how much artists earn from copyright is ignored. In this article, I survey work that relates copyright and cultural economics showing that cultural economics offers another view to the 'standard' economics of copyright. Moreover, the case for government intervention in the arts and heritage made by cultural economists has resonance for the economic rationale of copyright.     

PUBLIC CHOICE AND URBAN ECONOMICS: THE UNNOTICED LINK BETWEEN LIQUOR LICENSING AND URBAN SPRAWL

The paper's hypothesis is that strict liquor licensing laws, as in Britain and the US, which ban street cafés (ostensibly to protect children) effectively transfer property rights in the streets to the commuting car users. Road pricing, either explicit or implicit via congested streets, loses its constituency. The result is road widening, neglect of city amenities and consequent urban sprawl. In line with the hypothesis, we find that continental European countries permitting street cafés and restaurants have less urban sprawl. They also attract more tourists, and their citizens are less obese. Therefore, the forthcoming Licensing Act, by (hopefully) assisting street cafés, marks an important step forward for British cities.     

SOCIAL SECURITY AND RETIREMENT DECISION: A POSITIVE AND NORMATIVE APPROACH*

Abstract Social insurance for the elderly is judged responsible for the widely observed trend towards early retirement. In a world of laissez‐faire or in a first‐best setting, there would be no such trend. However, when first‐best instruments are not available, because health and productivity are not observable, the optimal social insurance policy may imply a distortion on the retirement decision. The main point we make is that while there is no doubt that retirement systems induce an excessive bias towards early retirement in many countries, a complete elimination of this bias (i.e. a switch to an actuarially fair system) is not the right answer for two reasons. First, some distortions are second‐best optimal. This is the normative argument. Second, and on the positive side, the elimination of the bias might be problematic from a political perspective. Depending on the political process, either it may not be feasible or alternatively it may tend to undermine the political support for the pension system itself.     

BEHAVIORAL ECONOMICS AND BEHAVIORAL FINANCE: A BIBLIOMETRIC ANALYSIS OF THE SCIENTIFIC FIELDS

The aim of the study is to conduct a bibliometric analysis of the scientific field of Behavioral Economics and Behavioral Finance. The research was conducted using the Web of Science database, which returned 2617 articles, revealing that the amount of research within these fields has grown over time. Furthermore, the results also prove the relevance of the works of Daniel Kahneman and Amos Tversky for the field of Behavioral Economics and Finance, and Steven Hursh to Behavioral Economics. It is still possible to note that the field of Behavioral Economics encompasses subjects that connect human behavior with demand, consumption and price, with investments and with managerial decisions, as well as with the role played by heuristics and cognitive biases in decision‐making processes. In turn, the field of Behavioral Finance is more focused on the study of errors of judgment and of decision‐making characteristics in financial investments. Additionally, it is inferred that the field of Behavioral Economics is more wide‐ranging than the field of Behavioral Finance, as the latter is a byproduct of Behavioral Economics. Finally, a conclusion is then reached, demonstrating that the fields of Behavioral Economics and Finance have turned into an important field of study.     

LIBERAL ECONOMICS AND THE RISE OF LAISSEZ‐FAIRE ECOLOGY

The shift in thinking about how to manage national economies and economic systems in the 1980s was part of a broader revolution in intellectual thought. This is seen in ecology, where a shift in thinking about how to manage environments took place at the same time. Traditionally, the environment was viewed in determinist (structuralist) terms, as a system which was susceptible to management and manipulation. Ecosystems were thought to evolve through predictable stages, reaching a climax state. From the late 1980s, ecologists became increasingly convinced that ecosystems, like economic systems, are complex. They argued that while human intervention is often necessary, wherever possible it should be replaced with more natural controls, which can often fulfil policy aims as well if not better than deliberate intervention. Like economies, the best ecosystems are those which largely manage themselves.     

THE ARTICLES OF CONFEDERATION SHOW THE NEED FOR DIRECT TAXATION? IT JUST AIN'T SO!

Historians and economists often refer to the United States experience under the Articles of Confederation as evidence against decentralised government finance. While it is true that the US government had difficulty raising money from the states during this period, we argue that these facts are a benefit of the system, not a flaw. A 'bottom-up' system of finance, such as the one that existed under the Articles of Confederation, is an important check on Leviathan and has implications for United Nations fund-raising efforts and development economics.     

CLASSIFYING MONETARY ECONOMICS: FIELDS AND METHODS FROM PAST TO FUTURE

Abstract We propose a simple, yet sufficiently encompassing, classification scheme of monetary economics. It comprises three fundamental fields and six recent areas that expand within and across these fields. The elements of our scheme are not found together and in their mutual relationships in earlier studies of the relevant literature; neither does this attempt aim to produce a relatively complete systematization. Our intention in taking stock is not finality or exhaustiveness. We rather suggest a viewpoint and a possible ordering of the accumulating knowledge. Our purpose is to promote discussion on the evolving nature and internal consistency of monetary economics at large.     

PRESUMPTIVE TAXATION METHODS: A REVIEW OF THE EMPIRICAL LITERATURE

This paper reviews the empirical literature studying the effect of the introduction of presumptive taxation methods on taxpayers’ behavior. Although the concept of presumptive taxation entails numerous alternative methods to determine tax liabilities, I survey two main areas of the literature: indirect tax assessment methods and presumptive minimum taxes. The review investigates efficiency and equity implications of presumptive taxation methods. Conflicting conclusions emerge about the effectiveness of presumptive policy tools in achieving different goals, such as the increase of voluntary tax compliance, the growth of tax revenues, and the reduction of shadow economy and fiscal evasion.     

THE ECONOMICS OF THE GREENHOUSE EFFECT

Abstract. The recognition that economic activity is contributing to climatic change, with attendant costs that may be of large magnitudes, has set in motion a substantial research effort. This paper seeks to review the contribution of economics to analysis of the greenhouse effect and to the policies and instruments suggested as means of mitgiating its damage.
A brief overview of the causes and consequences of global warming is given, and a number of energy-economy forecasting models are examined. As the costs of global warming depend upon the extent to which preventative and adaptive measures are undertaken, the techniques available to evaluate these costs are surveyed.
We examine extant targets for greenhouse gas emissions reduction, and explore the frameworks within which optimal policy targets can be designed. The paper also considers the narrower question of (minimized) abatement costs, and surveys the types of models used to estimate them.
The merits of alternative policy instruments are examined, paying particular attention to the role that risk and uncertainty, and the costs of monitoring and implementation of policy under conditions of imperfect information, may play in the choice of instruments. Problems of international co-operation in the development of abatement policy are examined, and we consider the compensations (across both nations and generations) that are likely to be necessary conditions for effective action.