AUDIT STATE DEPENDENT TAXPAYER COMPLIANCE: THEORY AND EVIDENCE FROM COLOMBIA

We develop and analyze a dynamic model of individual taxpayer compliance choice that predicts “audit state dependent taxpayer compliance,” by distinguishing between forward-looking versus myopic versus naïve behavior. We then test experimentally the audit state dependent model by reporting the results from the first tax compliance experiment run in Colombia. We find that subjects' compliance rates increase with greater enforcement. We also find more novel results: fine rates should be increased after an audit, and “nudging” myopic individuals toward reporting a constant rather than a fluctuating proportion of income would benefit both the taxpayer and the tax authority.(JEL H26, C91)     

EFFICIENT TAX REPORTING: THE EFFECTS OF TAXPAYER LIABILITY INFORMATION SERVICES

The complexity of the individual income tax system can give rise to both under‐ and overreporting of liability, thus creating a wedge between taxpayer perceptions of the price of public services and their actual cost, and potentially leading to budget misallocations and associated efficiency losses. This study uses theory and experiments to evaluate the effectiveness of taxpayer service programs that endeavor to resolve uncertainty over tax liability. To do so, we induce uncertainty over tax liability and investigate the effects of both service accuracy and reliability. We find participants are less likely to file when tax liability is uncertain but the provision of information offsets this effect; furthermore, it appears that simply providing a service, even one that imperfectly reveals liability, increases the propensity to file and the accuracy of the filing. When a service that promises to resolve uncertainty completely is requested but not delivered, the result is underreporting even more severe than in a setting where no service is available. (JEL H2, H26, C91)     

THE GREAT OVERESTIMATION: TAX DATA AND INEQUALITY MEASUREMENTS IN THE UNITED STATES, 1913–1943

Historical measures of income inequality in the United States must grapple with the challenge of data quality. We examine one such problem affecting the well-known estimates of income inequality produced by Piketty and Saez (2003) using the records of the Internal Revenue Service (IRS). Prior to 1943, incomes were self-reported. Combined with lax enforcement on the part of the IRS, self-reporting of incomes could provide a misleading portrait of the income distribution. To test the accuracy of IRS records, we compare them to independently tabulated state income tax returns between 1919 and 1945 from states with more comprehensive and rigorously enforced tax collection procedures. State income tax records show lower overall levels of income inequality than IRS records. However, we still find that top income concentrations declined across the period between 1929 and World War II. These findings attest to the sensitivity of distributional estimation to the reporting selectivity and economic quality of underlying tax data, suggesting that the existing IRS-derived series systematically overstates top-income concentration in the interwar period. (JEL H2, N32, D31, E01)     

Informal sector taxes and equity: Evidence from presumptive taxation in Zimbabwe

Using a mixed‐methods approach, this article evaluates the equity implications of Zimbabwe's presumptive tax system, introduced in 2005 to raise revenue from the country's growing informal sector. The representative taxpayer method, which compares the hypothetical tax burdens of formal and informal sector taxpayers at varying income levels, shows that the presumptive tax regime undermines both vertical and horizontal equity. In addition, interviews with key informants from the tax authorities, other relevant organizations and informal sector operators were conducted to probe issues around collection, compliance and perceptions of fairness. The qualitative data suggest that weak enforcement, with more visible informal activities bearing the brunt of the tax burden, and selective (and sometimes politically motivated) application of the legislation, compromise equity further.     

Privatization of government services: Pressure-group resistance and service transparency

Even when efficiency gains can be expected from contracting out municipal services, it surprisingly rarely occurs. Political pressure by interest groups, especially unions, is usually assumed responsible. We argue that the effectiveness of such pressure is actually a function of a service’s “transparency,” which determines voter’s knowledge of the quality and cost of the service as well as the tax burden. A model is presented of the interplay between union opposition to contracting and service transparency. Policies are offered to increase transparency and make contracting optimal for governments.     

Targeting occupations with varying reputations to increase tax revenue

If the government's goal is to raise tax revenue in a cost-effective manner, which (if any) occupation categories could be targeted with a higher probability of an audit to yield increased revenue? Looking beyond mere opportunity to evade (e.g., self-employment) and starting from the premise that taxpayers in certain occupations evade more than others, the issue is whether these taxpayers respond to a change in the audit rate. Theory suggests that compliance increases in response to higher audit rates; the occupations with the higher evaders could therefore be targeted. This theory is tested by drawing a connection between occupation, reputation, and tax compliance. We assume that taxpayers in occupations with high need for reputation respond to a lower extent to increased tax audits than taxpayers whose achievement does not depend on reputation. The results support the effectiveness of raising tax revenue by targeting specific occupations, non-managers, with a higher probability of an audit.     

The bomb-crater effect of tax audits: Beyond the misperception of chance

The experimental literature has identified the Bomb Crater Effect (BoCE), i.e., the fact that tax compliance drops immediately after a taxpayer is audited. From a theoretical perspective, BoCE has been explained either by the misperception of chance, also known as the gambler’s fallacy, or by the loss repair effect. The aim of this paper is to look more closely at the former. We run a laboratory experiment in which the information set is relatively rich but the implementation of the Bayesian updating process is fairly simple. By doing so, we are able to elicit a range of consistent but heterogeneous probability beliefs and to distinguish between Bayesian and non-Bayesian subjects. We obtain two major results concerning Bayesian subjects. First, they exhibit a strong and robust short-run BoCE. Second, they are seemingly not affected by the audits of other taxpayers in their compliance decision. These results are robust to different definitions of Bayesianity as well as to different specifications and conflict with the evidence that Bayesian agents correctly perceive the chance of being audited. In turn, these findings suggest that the existing explanations of the BoCE are not satisfactory and that alternative theories are needed.     

TAX RATES,GOVERNANCE, AND THE INFORMAL ECONOMY IN HIGH‐INCOME COUNTRIES

Approximately 16.7% of output in high‐income OECD (Organisation for Economic Cooperation and Development) countries is produced informally. I present a model economy where entrepreneurs decide how much of their production to keep informal. Informality carries a risk of getting caught, taxed, and fined. Results from a model with differences in tax rates alone only agree to approximately 23% with data on informality. Taking into account both governance quality and tax rates, agreement between the model's results and data increases to 72%. A policy experiment raising governance quality in Greece, Italy, Spain, and Portugal to Finnish standards reduces informality by 13 percentage points. (JEL E26, H26, J24)     

AMBIGUITY ABOUT AUDIT PROBABILITY, TAX COMPLIANCE, AND TAXPAYER WELFARE

We show that an increase in uncertainty about the probability of being audited (ambiguity) increases tax compliance for ambiguity-averse taxpayers but reduces compliance for ambiguity lovers. Because experimental evidence reveals considerable heterogeneity with respect to ambiguity preferences, we conclude that fostering uncertainty about the probability of being audited may not be an effective policy for increasing taxpayer compliance. Moreover, because the tax authority can neither categorize nor screen taxpayers on the basis of their preferences for ambiguity, it is not likely to be either a useful or a desirable instrument for increasing taxpayer welfare. (JEL H26 , D81 )     

Dynamics of tax evasion with back auditing,social norm updating,and public goods provision – An agent-based simulation

Income tax evasion dynamics and social interactions are analyzed with an agent-based model in heterogeneous populations. One novelty is the combined analysis of back auditing and ageing, which allows for incorporating psychological findings with respect to social norm updating over a taxpayer’s life cycle. Another novelty concerns individual’s social behavior regarding a Pareto-optimal provision of public goods. Simulation results support the counterintuitive conclusion drawn elsewhere in the literature that income tax compliance may decrease with raising marginal per capita returns (MPCRs). Yet, back auditing seems to have by far the strongest impact on the dynamics of fiscal fraud and also can help to curb the extent of tax evasion (ETE).     

CONSEQUENCES OF OFFSHORING TO DEVELOPING NATIONS: LABOR-MARKET OUTCOMES,WELFARE, AND CORRECTIVE INTERVENTIONS

Our parsimonious two-country (developed country and developing country) model of offshoring provides nuanced results. These include cases where wages monotonically improve, as well as where wages exhibit an inverted-U relationship with offshoring cost reductions. We identify conditions under which these relationships hold. Since global welfare always rises with improvements in offshoring technology, we find that there is a role for a minimum wage (alternatively, wage tax) in the developing country. We derive such a policy's optimal level. There is also the possibility of a developed country optimal offshoring tax for extracting terms-of-trade benefits. We, finally, analyze the two-country Nash equilibrium in policies. (JEL F11, F13, F16, F66, O19, O24)     

DECEPTION AND POLITICAL PARTICIPATION: THEORY AND LABORATORY EVIDENCE

We model two‐candidate elections in which (1) voters are uncertain about candidates' attributes; and (2) candidates can inform voters of their attributes by sending advertisements. We compare between political campaigns with truthful advertising and campaigns in which there is a small chance of deceptive advertising. Our model predicts that voters should vote in‐line with an advertisement's information. We test our model's predictions using laboratory elections. We find, in the presence of even a small probability that an advertisement is deceptive, voters become substantially more likely to elect a “low‐quality” candidate. We discuss implications of this for existing models of voting decisions. (JEL C92, D72, D82)     

THE CREDIT‐CHANNEL TRANSMISSION MECHANISM AND THE NONLINEAR GROWTH AND WELFARE EFFECTS OF INFLATION AND TAXES

With the credit‐channel effect driven by the central bank's open market operations, this paper's model easily gives rise to the nonlinear inflation‐growth nexus, which is evidenced by a number of cross‐country empirical studies. The threshold level of the inflation rate is found to be lower when tax rates are higher. The presence of the credit‐channel effect also provides the rationale for setting positive (and smaller than 1) tax rates on consumption, labor income, and capital income. The optimal tax rates rise as the inflation target declines. Under a fiscal policy rule where labor and capital income taxes move proportionally to each other, the optimal capital income tax rate could be higher than the optimal labor income tax rate. Under a sufficiently large central bank balance sheet, the credit‐channel effect will be so weak that inflation and all kinds of taxes are growth and welfare repressing. This provides a rationale for central banks that have implemented quantitative easing policies to shrink their balance sheets. (JEL E58, E62, O42)     

Service quality framework for the South African Revenue Service from the perspective of the tax practitioner

The objective of the present research was to propose a service quality framework regarding the service quality of the South African Revenue Service (SARS) from the perspective of the tax practitioner. In order to develop the specific “lens of the tax practitioner” regarding the service quality of SARS, an in-depth, qualitative approach was required to identify a comprehensive range of determinants that potentially drive service quality in the revenue service industry and setting. One such qualitative method is the critical incident technique, which relies on a set of procedures to collect comments on service experiences, to perform a content analysis and to classify the observations of service experiences. A process of natural language argument was used to convert the data analysis results and the relevant elements of the theory from the literature survey into the service determinants. This “lens of the tax practitioner” can be used as a basis for developing a service quality measuring instrument that could measure the service quality of SARS from the perspective of the tax practitioner.     

NONLINEARITIES AND THE SUSTAINABILITY OF THE GOVERNMENT'S INTERTEMPORAL BUDGET CONSTRAINT

We analyze the sustainability of the government's intertemporal budget constraint and the corresponding fiscal reaction function within a nonlinear error‐correction framework. Our empirical analysis, based on Italy, provides some evidence that the Italian government is meeting its intertemporal budget constraint. Nevertheless, we show that the burden of correcting budgetary disequilibria is entirely carried out by changes in the average tax rate, with a weakly exogenous government spending, possibly determined by the political process. We also document some rigidities of the tax instrument, in terms of downward inflexibility of the average tax rate with respect to its long‐run level. Finally, we provide some evidence in favor of a nonlinear adjustment toward a sustainable long‐run equilibrium, as the average tax rate adjusts faster the further away it gets from the equilibrium. By considering the behavior of taxes across the economic cycle, we also provide some evidence of inflexibility of the tax instrument during bad times. (JEL C32, C51, C52, H20, H50)     

TRADE LIBERALIZATION AND CORPORATE INCOME TAX AVOIDANCE

We identify the effect of trade liberalization on corporate income tax avoidance in a sample of Chinese manufacturing firms, taking advantage of China's entry into the World Trade Organization (WTO). We find that firms engage in more tax avoidance in industries with larger tariff reductions. Further analysis shows that firms with a lack of cash or a high demand for cash before WTO entry tend to engage in more tax avoidance after WTO entry. Our study also provides evidence that manipulating costs is one way that firms avoid corporate income tax. (JEL D22, F61, F63, H26)     

LAWYERS IN VENTURE CAPITAL CONTRACTING: THEORY AND EVIDENCE

Real‐world financial contracts are sometimes so complex that it can be difficult to understand their exact payoff consequences. We develop and test a theoretical model of a venture capitalist (VC) negotiating with an entrepreneur who may overweigh or underweigh the payoff consequences of contractual downside protection (DP). A lawyer with expertise in venture capital can inform the entrepreneur about these consequences, but less expert (but otherwise high quality) lawyers cannot. We determine how a VC's decision to include DP is affected by the expected quality of the entrepreneur's project, the entrepreneur's experience, and the VC expertise of his/her legal counsel. We show that the VC's incentive to include unnecessary DP declines in expected project quality. Indeed, for inexperienced entrepreneurs involved with high‐quality projects, VCs prefer that the entrepreneur's counsel has VC expertise. This implies that, when negotiating with inexperienced entrepreneurs, VCs who invest in high‐quality companies should be more likely to negotiate with entrepreneurs who employ lawyers with VC expertise. We document broad empirical support for the model, and provide evidence against competing explanations. (JEL L24, G24, K12, L14, L24)     

The Good Grandparent: Perspectives of Young Adults

As life expectancy increases, the role of grandparent has increased in duration and is continually adapting as families change in structure, function and form. Across the past several decades, researchers have examined grandparenting styles, finding some consistency as well as the emergence of newer styles, and evidence that grandparenting styles are related to the age and gender of both the grandparents and the grandchildren. In this study, we investigated young adults’ perceptions of grandparenting quality. University Students (N?=?470) from a Midwestern university responded to an online survey that asked them to evaluate the quality of their grandparents grandparenting now and at two retrospective points in time, childhood and adolescence. We hypothesized that the grandparents' performance of multiple styles of their role would be related to grandparenting quality. In addition, we expected that preferred grandparental roles would vary in relation to grandchildren's gender. The results of regression analysis indicated that, although grandparenting quality tended to decline across the respondents' developmental stages, higher ratings at an earlier stage were related to higher ratings at the latter two stages. Further, grandsons preferred grandparents who performed as supporters and advisors, whereas granddaughters preferred grandparents who functioned as supporter and friend. Overall, grandmothers were likely to be the more significant grandparent. Continual research on both grandchildren and grandparents will be needed to chronicle the development of the grandparental role in changing times.     

MANAGING RISK TAKING WITH INTEREST RATE POLICY AND MACROPRUDENTIAL REGULATIONS

We develop a model in which a financial intermediary's investment in risky assets—risk taking—is excessive due to limited liability and deposit insurance, and characterize the policies that implement efficient risk taking. In the calibrated model, combining interest rate policy with state‐contingent macroprudential regulations—either capital or leverage regulation, and a tax on profits—achieves efficiency. Interest rate policy mitigates excessive risk taking by altering the return and the supply of collateralizable safe assets. In contrast to commonly used capital regulation, leverage regulation has stronger effects on risk taking and calls for higher interest rates. (JEL E44, E52, G11, G18)