Marginal Welfare Costs of Taxation with Human and Physical Capital

We develop a perfect foresight, overlapping generations model with intragenerational inequality and endogenous human and physical capital investment, and we calculate welfare costs for marginal reforms of taxation and public spending. Welfare costs are uniformly lower than in the equivalent static model where human and physical capital are fixed. Most of the upward bias in static estimates arises from fixed human capital because welfare cost is predominantly tax leakage from lower effective labor supply, but reallocating time between education and labor can leave effective labor supply unchanged. Hence, adjustments in human capital have an important mitigating influence on marginal welfare costs. (JEL D91, H20, H31, H41, J22, J24 )     

TAX EFFECTS, PRICE EXPECTATIONS AND THE NOMINAL RATE OF INTEREST

This paper investigates the relationship between price expectations, income taxes and the nominal rate of interest in Canada. Our primary approach was to utilize the rational expectations hypothesis to create a synthetic price expectations series and to apply this series to four models of the determination of the nominal rate of interest; the Yohe-Karnovsky model, the Carr-Smith model, the Feldstein-Eckstein model and the Jenkins-Lim model. The analysis is inconclusive with respect to the Darby hypothesis that income tax considerations will cause the nominal rate of interest to increase by more than the increase in the expected rate of inflation.     

Social norms and tax compliance: Framing the decision to pay tax

Observed levels of tax compliance are higher than predicted levels (when predictions are based on Allingham and Sandmo's neoclassical model of tax evasion). They are higher if social norms recognise the importance of compliance. But how do social norms frame decisions to pay tax? Can prospect theory be applied to shed insight into the way that social norms exert their influence? An analysis of questionnaire responses (from Italy and from the UK) suggests that they exert their influence by changing the reference points that individuals use when they code changes as ‘gains’, or ‘losses’. The evidence suggests that social norms frame the decision to pay tax by changing individuals’ perceptions of their entitlement to income. This consideration is important when designing policy to deter evasion.     

Citizenship and power in an agent-based model of tax compliance with public expenditure

In this paper we present a model of tax compliance with heterogeneous agents who maximize their individual utility based on income and the conjectured level of per capita public expenditure. We formally include psychological drivers in this model. These drivers affect individual behavior, such as risk aversion, together with appreciation of public expenditure, expectations about peers’ compliance and a natural inclination to comply, all of which we summarize in a quality termed “citizenship”. The enforcement system, based on random inspections, is standard and only partially known to agents.The agent-based model is simulated under a variety of settings, representing different “societies”. We use the artificial data produced by the model to estimate the effects of taxpayers’ traits on personal tax behavior and to build a compliance societal slippery slope. At the individual level, we find a positive dependence of compliance on all variables, with the significant exception of the tax rate, which has a negative impact. As far as societies are concerned, we show how aggregate tax compliance depends on composite indices of citizenship and power, and we find that the former is more important than the latter.     

An agent-based model of network effects on tax compliance and evasion

Agent-based models are flexible analytical tools suitable for exploring and understanding complex systems such as tax compliance and evasion. The agent-based model created in this research builds upon two other agent-based models of tax evasion, the Korobow et al., 2007, Hokamp and Pickhardt, 2010 models. The model utilizes their rules for taxpayer behavior and apprehension of tax evaders in order to test the effects of network topologies in the propagation of evasive behavior. Findings include that network structures have a significant impact on the dynamics of tax compliance, demonstrating that taxpayers are more likely to declare all their income in networks with higher levels of centrality across the agents, especially when faced with large penalties proportional to their incomes. These results suggest that network structures should be chosen selectively when modeling tax compliance, as different topologies yield different results. Additionally, this research analyzed the special case of a power law distribution and found that targeting highly interconnected individuals resulted in a lower mean gross tax rate than targeting disconnected individuals, due to the penalties inflating the mean gross tax rate in the latter case.     

Decision heuristics and tax perception – An analysis of a tax-cut-cum-base-broadening policy

In this paper, both a conjoint analysis and a lab experiment are conducted to analyze the influence of changes in the tax rate and the tax base on the perceived tax burden. Our results show that the majority of individuals do not make rational tax decisions based on the actual tax burden but rather use simple decision heuristics. This leads to an irrationally high impact of changes in nominal tax rates on the perceived tax burden. Taxpayers favor tax options that apply a lower tax rate on their gross income over a higher tax rate applied on their net income despite the lower actual tax burden of the latter option. This result suggests that politicians could combine increasing fiscal revenues and decreasing subjects’ tax perception. Furthermore, overestimation of tax rate changes increases considerably when information on tax rate is considered first (framing effect).     

On the formation of inflationary expectations: Some empirical evidence from Finland, 1979–1980

The results of a survey of inflationary expectations executed in 1979–1980 are reported. The respondents form one “informed” and one “uninformed” group. The purpose of the study are: (1) to test standard hypotheses on the formation of inflationary expectations, (2) to study the term structure of those expectations, (3) to study their dispersion among individuals, (4) to investigate the uncertainty in the formation of expectations.The results suggest that the adaptive expectations formation model works best for the uninformed group, while the extrapolative model is more satisfactory for the informed group. The lagged rate of unemployment was found to be a significant explanatory variable as well. Long-run inflationary expectations turned out to be very similar to short-run predictions, although the dispersion among individuals was greater in the former case. The uninformed respondents also expressed expectations with a greater dispersion than the informed respondents. The standard deviation of the expectations was quite stable over the observation period. The proxy used for subjective uncertainty also indicates a high degree of stability.     

The effects of official and unofficial information on tax compliance

The administration of tax policy has shifted its focus from enforcement to complementary instruments aimed at creating a social norm of tax compliance. In this paper we provide an analysis of the effects of information regarding the past degree of tax evasion at the social level on the current individual tax compliance behavior. We build an experiment where subjects declare their income after receiving either a communication of the average tax evasion rate (“official information”) or a private message from a group of randomly matched peers about their tax behavior (“unofficial information”). We use the experimental data to estimate a dynamic econometric model of tax evasion and find three main results. First, tax compliance is very persistent, but less so in the presence of information. Second, the higher the officially communicated past tax evasion rate, the higher the degree of persistence: former evaders are more likely to evade again (and evade more), and former compliant individuals are more likely to comply again (and, when evading, evade less). Third, when an unofficial communication of past evasion (compliance) from all their peers is received, both former evaders and compliant individuals are more likely to evade (comply) again.     

SOCIAL PREFERENCES AND TAX POLICY DESIGN: SOME EXPERIMENTAL EVIDENCE

This article reports the results of a set of experiments designed to examine whether a taste for fairness affects people's preferred tax structure. Using the Fehr and Schmidt model, we devise a simple test for the presence of social preferences in voting for alternative tax structures. The experimental results show that individuals demonstrate concern for their own payoff and inequality aversion in choosing between alternative tax structures. However, concern for redistribution decreases as the deadweight loss from progressive taxation increases. Our findings have important implications for tax policy design. ( JEL C92, D63, H21, H23)     

OPTIMAL WAGE TAXATION WHEN HUMAN CAPITAL AND EMPLOYMENT ARE ENDOGENOUS

This paper studies how optimal wage tax conclusions from the classic two‐period life cycle model of human capital accumulation are affected by endogenizing the number of taxpaying workers. In the absence of a corrective policy, young individuals underinvest in human capital from a social perspective because tax premiums for transfers to nonworkers are not actuarially adjusted downward for human capital attainment. A combination of wage taxes and wage subsidies can restore proper price signals. Numerical simulations suggest that even modest employment elasticities can be sufficient to substantially impact the magnitudes and even the signs of optimal wage tax rates. (JEL H21, H3, J24)     

Cohabiting,Dating, and Perceived Costs of Marriage: A Model of Marriage Entry

This paper investigates the decision to marry among individuals in cohabiting and steady noncohabiting relationships, with emphasis on the effects of cohabitation in the decision‐making process. A model is proposed wherein cohabitation influences the perceived costs and benefits of marriage, which influence intentions and expectations to marry, which influence actual marriage entry. The model is tested using data from the first and second waves of the National Survey of Families and Households. Cohabitation status is found to predict perceived costs and benefits of marriage, and also to predict marriage intentions and expectations. Cost perceptions further predict intentions and expectations among both cohabitors and daters, and perceived costs, intentions, and expectations to marry the partner predict actual marriage behavior. Cohabitation appears to significantly change the context in which decisions about marriage are made in romantic relationships and merits a greater place in the literature on dating and courtship.     

ADAPTING TO DEPRIVATION: AN EXAMINATION OF INFLATED EDUCATIONAL EXPECTATIONS

Many researchers argue that lower-class individuals adapt to their deprivation by lowering their aspirations for success. Data provide only limited support for this position, however, and suggest that many lower-class individuals continue to hold high aspirations. This article points to a second method of adapting to deprivation: raising expectations for success to inflated levels—levels that have a low probability of realization. The extent and determinants of inflated educational expectations are explored using data from a national, longitudinal survey of high school seniors. Results indicate that almost half of all deprived individuals with high aspirations have inflated expectations. The primary determinants of inflated expectations appear to be pressure to attend college and the overestimation of one's abilities. These data are relevant to anomie or strain theories of deviance and social structure and personality.     

A RESPECIFIED TAX-ADJUSTED FISHER RELATION

How much will a 1% increase in expected inflation increase nominal interest rates? Irving Fisher's famous equation implies that nominal interest rates will rise in proportion to an increase in expected inflation. Darby and Feldstein, correcting the Fisher equation for taxation, predict a nominal interest rate increase of [1/(1 - T)]% where T is the marginal tax rate: i.e., if T =3, then a 1 % increase in expected inflation should cause a 1.4 % rise in interest rates. Empirical evidence, however, suggests that the rise in interest rates is much smaller than the Darby/Feldstein prediction. Estimates are around 9, varying mostly between 5 and 1.15, which is much closer to Fisher's original prediction. It is important to know the size of the interest rate response to inflation expectations in a world in which inflation and interest rates are volatile and in which tax laws are designed to influence savings and investment through interest rates. In this paper we attempt to close the gap between theorized and estimated effects of inflation by incorporating into the Fisher equation two important aspects of the U.S. tax code: historic cost depreciation and the lower tax rate on capital gains. Our model shows that the effect of expected inflation on interest rates is dampened by the lower benefits from depreciation deductions arid the capital gains tax. Our corrected Fisher equation predicts a 1.12 % nominal interest rate increase, rather than the 1.4 % increase implied by the Darby/Feldstein model. The, our model closes about 56 % of the gap between theory and empirical evidence. The remainder could be closed by additional refinements in the model or better empirical modeling.     

Social Class and Expectations of Rural Adolescents: The Role of Parental Expectations

This study investigated mechanisms involved in the intergenerational transmission of social class, specifically addressing the prediction of career expectations. The results indicated that among rural high school students (N= 200) in Grades 10–12, there was no direct effect of socioeconomic status (SES; as measured by parent education and occupation) on career expectations. However, there was a direct effect of educational expectations on occupational expectations. Building on the importance of educational expectations in the prediction of occupational expectations, the results suggested that perceived parental expectations explain variance in educational expectations. Overall, it seems that the effect of SES on occupational expectations was mediated by educational expectations; therefore, individuals of lower SES who have increased educational expectations are more likely to have occupational expectations similar to those of their higher SES peers. Moreover, increased parental expectations were positively associated with educational expectations among individuals of various SES levels.     

Optimum taxation of life annuities

The market for private life annuities is characterised by adverse selection; that is, contracts offer lower than fair payoffs to individuals with low life expectancy. Moreover, longevity and income have been found to be positively correlated. We formulate an optimum income taxation model that incorporates these facts and discuss the conditions under which a linear tax on annuity payoffs, which raises more revenues from long-living individuals than from short-living, can serve as an instrument for redistribution. Further, we consider a nonlinear tax on annuity payoffs, and find that it can be employed to correct the distortion of the rate of return caused by asymmetric information.     

The triumph of hope over disappointment: A note on the utility value of good health expectations

In this paper, we present and test the empirical implications of competing theories about how expectations of outcomes affect utility. In the first utility formulation, which is consistent with particular interpretations of disappointment, prospect theory and regret theory, individuals receive negative utility from outcomes that were worse than expected. This directly implies that expectations themselves enter utility negatively. The second utility formulation incorporates anticipatory savoring, where positive expectations about the future directly lead to more utility today. We test which of these formulations best explains actual connections between health and welfare over time, using data from the Household Income and Labour Dynamics in Australia survey. Estimated coefficients from fixed-effects ordered logit models support a strong positive utility impact of positive expectations: expecting good health in the future increases happiness now. Our results are one argument for benevolent health care providers to allow individuals to maintain unrealistically positive expectations about the future.     

Honesty or dishonesty of taxpayer communications in an enforcement regime

In many settings the true likelihood of capture when engaging in an illegal activity, such as tax evasion, is not well known to an individual. “Official” statements from the tax administration regarding enforcement effort provide some information. In addition, “informal”, or “unofficial”, communication among taxpayers can supplement these official announcements, but individuals do not know with certainty whether such unofficial information is honest (or accurate) versus dishonest (or inaccurate). We examine the truthfulness of an individual’s revelation of unofficial information to other individuals, along with the factors that affect any revelation, focusing on the intrinsic motivations for revelations. Our experimental design allows us to examine the type and the honesty of messages that an individual chooses to send to other individuals regarding their own audit outcome and their own compliance behavior. Our results indicate that most individuals send accurate messages about their own audit outcomes and their own compliance behaviors. Nevertheless, many individuals are also systematically dishonest about being audited; that is, we observe a significant tendency for individuals to claim that they were audited when they were not. We also observe a strong interaction between individuals’ audit outcomes and their compliance behaviors, so that individuals who engaged in tax evasion and who were audited were more truthful in their communications than those whose tax evasion went undetected.     

Learning in experiments: Dynamic interaction of policy variables designed to deter tax evasion

While neoclassical economic theory sheds insight into the way that audit rates and penalty rates interact when individuals decide to declare income for taxation, it predicts far lower levels of compliance than observed levels of compliance. This paper analyses experimental responses to explore a dynamic interaction between audit and penalty rates as individuals learn how to comply with taxation. It compares the responses of subjects in experiments with responses that are predicted when individuals rely on an adaptive learning process (that offers information feedback about decision payoffs). This comparison suggests that learning is an important consideration when explaining differences between predicted and observed levels of tax compliance.     

税务稽查的功能、问题及完善路径研究

税务稽查是税收的重要环节,税收越发展,稽查越重要。目前,我国税务稽查工作存在着很多问题和不足,这将直接影响中国整体税务工作的协调发展和国家税收的保全。因此,研究税务稽查的完善路径对于我们构建和谐税收具有重要的理论和实践意义。     

THE FINANCIAL AND TAX EFFECTS OF MONETARY POLICY ON INTEREST RATES

Standard analysis of monetary policy effects on interest rates in terms of liquidity, income, and expectations effects is incomplete. After a change in monetary policy, substitution among securities will increase as time elapses and so reduce or eliminate financial effects caused by short-run financial market segmentation. Also, the standard expectations effect omits the transfer of income tax liability on that part of the interest payment representing a return of real capital. So a 1 percentage point increase in the expected inflation rate should increase the nominal interest rate by 1/(1 —τ) percentage points, τ being the marginal tax rate.