Progressive Taxation and Tax Morale

As the link between tax compliance and tax morale is found to be robust, finding the determinants of tax morale can help to understand and fight tax evasion. In this paper we analyze the effect of progressive taxation on tax morale in a cross-country approach – which has not been investigated before. Our theoretical analysis leads to two testable predictions. First, an individual’s tax morale is higher, the more progressive the tax schedule is. Second, the impact of tax progressivity on tax morale is declining in income. In our empirical analysis, we make use of a unique dataset of tax progressivity measures and follow most of the tax morale literature by employing the World Values Survey to measure tax morale. Controlling for a wide range of variables, we confirm both hypotheses in our empirical analysis.tax morale, tax compliance, progressivity, taxation, redistribution

Progressive Taxation and Tax Morale

As the link between tax compliance and tax morale is found to be robust, finding the determinants of tax morale can help to understand and fight tax evasion. In this paper we analyze the effect of progressive taxation on tax morale in a cross-country approach - which has not been investigated before. Our theoretical analysis leads to two testable predictions. First, an individual's tax morale is higher, the more progressive the tax schedule is. Second, the impact of tax progressivity on tax morale is declining in income. In our empirical analysis, we make use of a unique dataset of tax progressivity measures and follow most of the tax morale literature by employing the World Values Survey to measure tax morale. Controlling for a wide range of variables, we confirm both hypotheses in our empirical analysis.Tax Morale, Tax Compliance, Progressivity, Taxation, Redistribution

Tax Incidence in the Presence of Tax Evasion

This paper studies the effect of tax evasion on the economic incidence of sales taxes. We design a laboratory experiment in which buyers and sellers trade a fictitious good in double auction markets. A per-unit tax is imposed on sellers, and sellers in the treatment group are provided the opportunity to evade the tax whereas sellers in the control group are not. We find that the market equilibrium price in the treatment group is economically and statistically lower than in the control group. This result is consistent with a theoretical model in which access to evasion opportunities reduces the effective tax rate and therefore dampens real behavioral responses. Our findings suggest that the benefits of tax evasion are not limited to the side of the market with access to evasion but are partly shifted to the non-evading side of the market. We discuss the implications of our findings for the distributional and welfare effects of taxes

Nice Guys Finish Last: Are People with Higher Tax Morale Taxed More Heavily?

This paper is the first to provide evidence of efficient taxation of groups with heterogeneous levels of 'tax morale'. We set up an optimal income tax model where high tax morale implies a high subjective cost of evading taxes. The model predicts that 'nice guys finish last': groups with higher tax morale will be taxed more heavily, simply because taxing them is less costly. Based on unique cross-country micro data and an IV approach to rule out reverse causality, we find empirical support for this hypothesis. Income groups with high tax morale systematically face higher average and marginal tax rates.tax morale, tax compliance, optimal taxation, political economy

The impact of redistributive policies on inequality in OECD countries

Recent discussions about rising inequality in industrialized countries have triggered calls for more government intervention and redistribution. Due to obvious behavioral effects caused by redistribution, it is however not clear whether redistributional policies are indeed able to combat inequality. This paper contributes to this relevant research question by using different contextual country-level data sources to study inequality trends in OECD countries since the 1980s. We first investigate the development of inequality over time before analyzing the question of whether governments can effectively reduce inequality. Different identification strategies, using fixed effects and instrumental variables models, provide some evidence that governments are capable of reducing income inequality despite countervailing behavioral adjustments. The effect is stronger for social expenditure policies than for progressive taxation, which seems to trigger more inequality increasing indirect behavioral effects. Our results also suggest that the use of secondary inequality data should be handled with caution

The impact of redistributive policies on inequality in OECD countries

Due to behavioral effects triggered by redistributional interventions, it is still an open question whether government policies are able to effectively reduce income inequality. We contribute to this research question by using different country-level data sources to study inequality trends in OECD countries since 1980. We first investigate the development of inequality over time before analyzing the question of whether governments can effectively reduce inequality. Different identifcation strategies, using fixed effects and instrumental variables models, provide some evidence that governments are capable of reducing income inequality despite countervailing behavioral responses. The effect is stronger for social expenditure policies than for progressive taxation

Tax compliance and information provision - A field experiment with small firms

We study tax compliance in Slovenia using data generated in a field experiment. Small accounting companies were randomly assigned to an untreated control group and two treatment groups. Companies in the first treatment group received a letter that highlighted the importance of paying taxes and informed about the likelihood of becoming subject to an audit. In the second treatment group, tax officers from the tax authorities handed out in person the same letter that companies in the first treatment group received by post. The results indicate that such letters can increase compliance, and trigger even more compliance if handed over in person. These findings are in line with the theoretical predictions that we derive to rationalize the experiment

Asymmetric labor-supply responses to wage-rate changes : evidence from a field experiment

The standard labor-supply literature typically assumes that the labor supply response to wage increases is the same as that for equivalent wage decreases. However, evidence from the behavioral-economics literature suggests that people are loss averse and thus perceive losses differently than gains. This behavioral insight may imply that workers respond differently to wage increases than to wage decreases. We estimate the effect of wage increases and decreases on labor supply using a randomized field experiment with workers on Amazon's Mechanical Turk. The results provide evidence that wage increases have smaller effects than wage decreases, suggesting that the labor-supply response to wage changes is asymmetric. This finding is especially strong on the extensive margin where the elasticity for a wage decrease is twice that for a wage increase. These findings suggest that a reference-dependent utility function that incorporates loss aversion is the most appropriate way to model labor supply

Circumstantial risk : impact of future tax evasion and labor supply opportunities on risk exposure

This paper examines whether risk-taking in a lottery depends on the opportunity to respond to the lottery outcome through additional labor effort and/or tax evasion. Previous empirical attempts to answer this question face identification issues due to self selection into jobs that facilitate tax evasion and labor effort exibility. We address these identification issues using a laboratory experiment (N = 180). Subjects have the opportunity to invest earned income in a lottery and, depending on randomly assigned treatment states, have the opportunity to respond to the lottery outcome through evasion and/or extra labor effort. We find strong evidence that ex-post access to labor opportunities reduces ex-ante risk willingness while access to tax evasion has no effect on risk behavior. We discuss possible explanations for this result based on the existing literature

Do people really want a simple tax system? Evidence on preferences towards income tax simplification

Using new survey and experimental data for a representative sample of the German population, we study preferences for tax simplification. The general wisdom seems to suggest that most tax systems are overly complex and that tax simplification is generally desirable. Consistent with this general wisdom, we find that more than 90% of our sample believe that the tax system needs to be simplified. However, there also are efficiency and equity arguments in support of a certain degree of tax complexity and it is puzzling why tax systems remain highly complex despite the conventional view in favor of more simplification. The main purpose of our study then is to investigate if the high support for tax simplification is driven by a lack of awareness about the trade-offs behind simple and complex tax systems. Our data show that the support for simplification decreases as we randomly provide economic arguments against simplification and as we ask respondents if the tax system should account for specific differences in living situations (such as costly care of elderly family members). Overall, our findings suggest that the high support for simpler taxes is to some extent driven by a lack of awareness about the implications of tax simplification