Local autonomy, tax morale, and the shadow economy

Policymakers often propose strict enforcement strategies to fight the shadow economy and to increase tax morale. However, there is an alternative bottom-up approach that decentralises political power to those who are close to the problems. This paper analyses the relationship with local autonomy. We use data on tax morale at the individual level and macro data on the size of the shadow economy to analyse the relevance of local autonomy and compliance in Switzerland. The findings suggest that there is a positive (negative) relationship between local autonomy and tax morale (size of the shadow economy).     

Progressive tax policy and informal labor in developing economies

Governments in many industrializing democracies face difficult policy trade‐offs. Liberalization and informality have placed electoral pressure on them to expand noncontributory social spending. However, governments in developing democracies face constraints when attempting to finance this expansion. In some countries, the informal labor market is very large, thereby undermining the revenue that can be collected through income tax. We argue that this has given rise to a paradoxical situation. Left governments in developing democracies with large informal labor markets have a strong electoral incentive to expand welfare regimes to previously excluded outsiders, but to fiscally underwrite this expansion, they have increasingly been forced to fund their redistributive strategies via a regressive policy instrument, indirect consumption taxation. We examine this argument for a sample of 17 Latin American countries between the years 1990 and 2016. Our results suggest that labor informality forces left governments to turn to indirect taxation.     

Interaction between federal taxation and horizontal tax competition: theory and evidence from Canada

The aim of this paper is to determine to what extent and how federal taxes affect local tax decisions. Testing the impact of an increase in the federal tax on horizontal tax competition with Canada-US data for 1984–1994, it finds evidence that an increase in federal tax makes horizontal tax reactions weaker. This is because an increase in federal tax raises the cost, in terms of utility of income, of a unit increase in the province’s tax rate. On the methodological side, it is possible to estimate the impact of the federal tax on the fiscal policy of the province without neglecting control for year effects, which cannot be used in the empirical literature because they are perfectly collinear with the federal tax.     

A tragedy of the anticommons: local option taxation and cell phone tax bills

When multiple taxing jurisdictions overlap and fail to account for one another’s actions, they over-tax the common base. This is a prediction of the anticommons model, in which numerous parties have authority to exclude others from using a resource. This model further predicts that when governments over-tax the base, private parties will underutilize the resource, and underutilization will be greater as the number of parties with exclusion rights rises. We test these predictions by studying cell phone taxation and local option tax authority, which allows some cities, counties, and special-purpose districts to levy taxes on cell phone use. Consistent with theory, we find that the tax rate on cell phone service is higher when local governments have the option to tax. Further, the percentage of households owning cell phones is lower when there is the local option to tax, and ownership rates fall with the number of taxes levied.     

Goods and services tax,cascading, and revenue performance: Analyzing Indian commodity taxation market

Indian economy has finally introduced an improvised value‐added tax commonly known as goods and services tax (GST) with an explicit focus to target cascading. Cascading is by far the most serious issue of a tax structure as it leads to many other challenges like opaqueness, complexity, evasion besides deadweight losses. GST is a fiscal policy reform aimed at integrating and harmonizing the Indian tax structure and hence reduce the incidence of cascading. This study is an attempt to empirically analyze the possible impacts of GST on the cascading and hence revenue collection in the Indian economy. The study has employed a simple but representative simultaneous equation model representing the commodity taxation using time series data from 1990 to 2017. This study finds that reduced cascading under GST will enhance the revenue efficiency of the Indian commodity tax structure. The findings are corroborated by the post‐GST revenue performance of Indian states and the central government.     

Budget institutions and taxation

While a number of different studies have explored the effects of budgetary procedures and the centralization of the budget process on government debt, deficits and spending, few of them have explored whether such fiscal institutions matter for public revenue. This article argues that centralizing the budget process raises the levels of taxation by limiting the ability of individual government officials to veto tax increases in line with common-pool-problem arguments regarding public finances. Using detailed data on budgetary procedures from 15 EU countries, the empirical analysis shows that greater centralization of the budget process increases taxation as a share of GDP and that both the type of budget centralization and level of government fractionalization matter for the size of this effect. The results suggest that further centralizing the budget process limits government debt and deficits by increasing public revenues as well as constraining public spending.     

Tax morale in Latin America

In the tax compliance literature, there is a lack of empirical evidence on the degree of tax morale in developing countries. As a novelty, this paper focuses thus on Latin America, analysing tax morale as a dependent variable and searching for factors that systematically affect tax morale, working with the two data sets Latinobarómetro and World Values Survey. Our findings indicate that there is a significant correlation between tax morale and the size of shadow economy. Furthermore, people who said they knew/have heard about practised tax avoidance have a significantly lower tax morale than others. Looking at individuals’ perception of reasons for tax evasion we found that the tax burden, lacking honesty, and corruption are seen as the main factors. We observed a significantly lower tax morale in South America/ Mexico than in the Central American/Caribbean area. Furthermore, trust in the president and the officials, the belief that other individuals obey the law and a pro democratic attitude have a significant positive effect on tax morale.     

Patriotism, taxation and international mobility

Patriotic citizens intrinsically prefer living in their native country compared to living in the Diaspora. In this paper, we analyze the consequences of such a “patriotic lock-in” in a world with international migration and redistributive taxation. One implication is that countries with more patriotic populations are associated with higher redistributive taxes. We then combine ISSP survey data with OECD taxation data and provide empirical evidence supporting this hypothesis. Our results provide a word of caution: the Treasury’s inherent interest in patriotic taxpayers may strengthen the political push for patriotism in an age of globalization and increased mobility.     

No direct taxation without new elite representation: Industrialization and the domestic politics of taxation

The nineteenth century marked the founding period of modern public finance. We examine the domestic and non-war related determinants of direct taxation in this early democratic period and in a state building context. We argue that the reasons for the expansion of direct taxation can be found in the political competition between different elite groups in the context of industrialization. Systematically differentiating between economic and political arenas, we show that intra-elite competition in industrializing economies leads to higher levels of direct taxation only if the new economic elites are able to translate their economic power into the political arena, either through the representative system or by extra-parliamentary means. In addition, we demonstrate that these processes are directly linked to public investments in policy areas related to the interests of new economic elites such as public education. Our analysis is based on novel subnational data from the period 1850 to 1910, enabling us to concentrate on the domestic determinants of direct taxation.     

Tax rates, tax administration and income tax evasion in Switzerland

This paper contains an empirical analysis of income tax noncompliance in Switzerland, based on the standard model of tax evasion. Noncompliance is found to be positively related to the marginal tax burden and negatively to the probability of audit, though the latter impact is only weak. There is no evidence of a significant deterrent effect of the penalty tax. The extended model reveals that noncompliance is positively related to inflation. Finally, noncompliance is significantly lower when citizens/taxpayers have direct control over government budgets, whereas the opposite holds when there is no such control.     

Interest group demand for taxation

Researchers have typically ignored the determinants of the tax structure of the public sector. Political scientists have concentrated their analyses on the expenditure side of the public ledgers while economists have avoided the issue by assuming that taxes are exogenously determined. In this paper we have shown that a behavioral model of political interest groups can be employed to gain insights into the political selection of taxes. The theory provides a general complement to the well-documented analysis of special interest demand for public expenditures.Our analysis raises several important policy questions. First, is the influence of interest groups on the determination of tax systems desirable from a public policy perspective? For example, special interest groups dominated by high and middle income individuals may prefer regressive tax systems which reduce their own tax burden. Certainly the impact of interest groups on the well-known regressivity of state and local tax systems is an area worthy of additional investigation.     

The role of tax preparers in tax compliance

This paper assesses the influence of tax preparers on tax compliance. Using data from the Internal Revenue Service's (IRS) Taxpayer Compliance Measurement Program and an index of legal ambiguity based on Revenue Rulings, the impact of preparation mode (paid third party vs. self) on compliance at the level of the return line item is probed. The results suggest that preparers contribute to compliance by enforcing legally clear requirements but also contribute to noncompliance, as measured by the IRS, by helping taxpayers take advantage of legal ambiguity. Furthermore, an analysis of a campaign to enforce estimated tax requirements conducted by the Pennsylvania Department of Revenue suggests that tax preparers are also an important network for communicating tax agency enforcement priorities to taxpayers.An earlier version of this paper was prepared for the conference on Federal/State Research sponsored by the U.S. Internal Revenue Service.     

Efficient bilateral taxation of externalities

We consider the quadratic voting mechanism (Lalley and Weyl in Quadratic voting. Working paper, University of Chicago, 2015; Weyl in The robustness of quadratic voting. Working paper, University of Chicago, 2015) and focus on the incentives it provides individuals deciding what proposals or candidates to put up for a vote. The incentive compatibility of quadratic voting rests upon the assumption that individuals value the money used to buy votes, while the budget balance/efficiency of the mechanism requires that the money spent by one voter by redistributed among the other voters. From these assumptions, we show that it follows that strategic proposers will have an incentive to offer proposals with greater uncertainty about individual values. Similarly, we show that, in an electoral setting, quadratic voting provides an incentive to propose candidates with polarized, non-convergent platforms.     

Tax morale and (de-)centralization: An experimental study

We consider an economy composed of two regions. Each of them provides a public good whose benefits reach beyond local boundaries. In case of decentralization, taxes collected by members of a region are spent only on that region's public good. In case of centralization, tax receipts from the two regions are pooled and used to finance both public goods according to the population size of each region. The experiment shows that centralization induces lower tax morale and less efficient outcomes. The reasons are that centralization gives rise to an interregional incentive problem and creates inequalities in income between regions.     

Testing for causality between government spending and taxation

In the past few years the public sector deficit in Greece has reached alarmingly high levels. In view of the various hypotheses about the relation between government spending and revenues, we test for causality between these two determinants of public deficit.