This study examines how different dynamic audit strategies affect tax evasion within an agent-based model embedded in a small-world network, where the only enforcement mechanism is a dynamic audit cutoff rule. Taxpayers attempt to identify the cutoff by observing their social networks, in which information about audits spreads, and adapting their own behavior accordingly. Results show that increased uncertainty can reduce the intensity of evasion-i.e., the average amount evaded per person-but not necessarily its incidence, meaning the share of taxpayers who evade at all. Different uncertainty mechanisms may interfere with each other, highlighting that the structure of uncertainty matters more than its mere presence.
This paper studies whether the landmark ruling "Radmacher v Granatino 2010" changed tax non-compliance by married self-employed individuals in the UK through an increase in the enforceability of marriage contracts. I argue that the probability of divorce and the probability of marriage contracts being enforceable influence married self-employed individuals' tax non-compliance behaviour as they try to hide income from their spouses. Using a theoretical model, I show that a higher probability of marriage contract enforceability leads to less income being hidden, while a higher probability of divorce results in more concealment. Additionally, the model predicts that higher tax rates increase the incentive to underreport income. A difference-in-differences analysis comparing married self-employed and married employed households in the UK suggests that the Radmacher v Granatino ruling however did not seem to significantly reduce income misreporting among married self-employed households.
This paper considers the private provision of a public good within a community, whose members are inclusive Kantian or Nashian optimizers. It is analyzed how a change in group size affects the mixed Kant-Nash equilibrium. Kantians face a trade-off when admitting a Nashian into the community. Even though the new member is a contributor, there is a negative externality, as the Kantians' hypothetical cost of public good provision falls in group size. This can lead to a lower utility of Kantian individuals.
The present paper makes a comparison of different non-revenue-neutral tax policy packages. We recommend that tax packages should be designed to neutralize either consumption or labor supply effects. The intent would be to offset the consumption or labor supply disruptions caused by domestic or external shocks. This paper aims to clarify which neutrality conditions, and which tax reductions can effectively counteract adverse events. The right policy responses will differ depending on the type of adverse events, the relationship between consumption and leisure, and the assumptions made about factor intensities. Among the array of policies under consideration, one stands out as particularly intriguing: reductions in both consumption and income taxes.
We examine the effect of capital income tax cut on individuals' stock market participation and economic growth. Specifically, we construct an endogenous growth model in which individuals choose one of two types of savings (i.e., physical capital, which yields higher returns for individuals with higher financial literacy; and bank deposits, which require no financial literacy but the return rate is lower), and banks allocate deposits to physical capital investments and non-productive lending to individuals. We show that the capital income tax cut can raise both individuals' stock market participation and economic growth.
An often neglected implication of couple taxation is its impact on marital sorting. A tractable model of such an impact is offered in this paper. It reveals that, as compared to joint taxation with income splitting, individual taxation makes higher-ability individuals more picky in the marriage market, which translates into a higher degree of economic homogamy in society. Furthermore, a shift from joint to individual taxation is predicted to reduce the average quality of marriages in the population.
In 1995, Germany introduced a Long-Term Care Insurance (LTCI) scheme. The financing has been set up as pay-as-you-go, and therefore created windfall profits. We calculate an index (IWP) that measures the change in the expected initial windfall resulting from updating financial flows between LTCI and its insureds. Our results show that the level of windfall profits fluctuated for generations living in 1996 and decreased during the period 1996 to 2022. While older generations are less severely impacted, the decrease in IWP mainly concerns younger generations. Demography is not the main driver of these developments, but rather policies regarding benefit levels.
Why do public policies change little over time in individual places, sometimes for centuries? We investigate different mechanisms for policy persistence. Several city mayors serving in democratic Weimar Germany were expelled by the Nazis in 1933 but re-installed by the Allies after World War II. We find that pre-Nazi patterns in public debt re-appear in cities with a re-installed mayor, albeit all city debt defaulted after the war. We do not find such correlations in a matched sample of cities where the Weimar mayor did not return to office. Historical public debt does also not predict debt today in East Germany and in former German cities in present day Poland - places where political elites or most of the population changed. We conclude that elite persistence can dominate place-based features such as geography or population preferences in explaining persistent policies.
This paper examines how fiscal inequality affects regional economic growth in China through two fiscal systems using an event-study approach. The "event" is the 1994 tax- sharing reform that transitioned from the Fiscal Responsibility System (1987-1993) to the Tax Sharing System (1994-present). It presents three primary findings: Firstly, fiscal inequality positively impacts economic growth before 1994, but the effects become negative, albeit close to zero, thereafter. Secondly, there is no significant economic growth gap between "rich" and "poor" provinces before 1994; however, this gap widens post-1994. Finally, the use of extra-budgetary funds does not mitigate the economic growth gap.
This paper empirically assesses the role of political variables in the implementation of tax reforms in a sample of 45 emerging market and low-income economies over the 2000-2015 period. The existing literature identifies several hypotheses that could drive reforms, but empirical studies that support these hypotheses are lacking. Using a narrative database of tax reforms and by means of binary-type models, our results suggest that a left-wing government is less inclined to implement tax reforms while both proximity to elections and political strength or cohesion are positively associated with tax reforms. The influence of the left government is stronger in low-income than in emerging market economies and revenue administration reforms are resisted the most by such governments. Proximity to elections seems to trigger reforms of personal income tax (PIT) but opposite holds for trade tax reforms. Political cohesion is a necessary ingredient to reform most tax categories and revenue administration.
The recent literature on green finance has extensively discussed the extent to which responsible investors can contribute to a greener economy, particularly regarding climate change. Somewhat surprisingly, governments as key players in climate policies are practically absent in this analysis. Using a simple model of private and public provision of a public good, we show that, even under favorable conditions, interaction with government policies renders private green investment ineffective and maybe even detrimental to making the economy truly greener. This result does not only hold for a benevolent, welfare-maximizing government but also in a political-economy setting with a median- voter government.
Germany's debt brake faced significant challenges during the Covid-19 pandemic and now faces public criticism. The Federal Constitutional Court invalidated the 2021 federal budget due to unlawful attempts to bypass the debt brake. In early 2024, the Board of Economic Advisers reignited debate with reform proposals, including modifying the prompt repayment requirement for emergency loans, which are currently not promptly repaid. Implementing the Board's proposal would establish economically rational practices on a solid legal foundation.
One of the most discussed subjects within the European Fiscal Rules' debate is whether the framework is too complex. In this paper, using a database of more than 200 papers, we argue that "complexity" can be defined along three axes: "framework set-up", "compliance", and "enforcement". Using this framework, we evaluate the new EU's economic governance framework. Our assessment indicates that the proposal simplifies elements along the first axis but provides less clear gains in terms of complexity along the two other ones. Finally, we provide some tentative explanations to understand why the complexity of the framework has grown over time, based on literature dealing with "complexity" in other areas.
Tax legislators have used a tax exemption of retained profits (TERP) to stimulate an increase in firms' equity by imposing a lock-in effect. We examine the Croatian TERP over the period 2013-2016 to investigate whether taxpayers use a TERP and whether it contributes to an increase in firms' equity. Our findings show that Croatian firms used the TERP, but its application varies substantially depending on the ownership structure of the firm. Compared to a control group, total equity of Croatian firms did not increase after the introduction of the TERP, indicating that firms used the TERP as a tax saving tool without changing their payout policy.
We show that the optimality of uniform commodity taxation applies in a family setting when individuals live in two -adult families and take some decisions collectively. Allowing for household decisions to include intra-family redistribution, family production and public goods, uniform commodity taxation Pareto dominates differential commodity taxation when preferences are weakly separable and quasi-homothetic in goods and individual income taxation is linear progressive (Deaton, 1979; Hellwig, 2009), unless family welfare exhibits transferable utility (Chiappori and Gugl, 2020). We extend these results to general weakly separable preferences (Laroque, 2005; Kaplow, 2006), family income taxation and different timing of household decisions.
Climate policy increasingly requires carbon dioxide removal (CDR). We describe its role, characterize optimal flows for non -permanent removals and describe optimal pricing regimes under different information and liability conditions. Non -permanent removal - though to a certain extent optimal - creates liabilities that warrant careful risk management. Thus, seemingly cheap land -based technologies can become expensive. We discuss possibilities for integrating CDR in the EU policy architecture and define four tasks: managing the emission cap; R&D support; quality certification of removals; management of liabilities from non -permanent CDR. We propose three institutions for these tasks: a European Carbon Central Bank, a Carbon Removal Certification Authority and a Green Leap Innovation Authority.
In this paper, we explore the characteristics of newly established firms with different legal forms of organization. Using the Kauffman Firm Survey (KFS), a panel study of businesses established in 2004, we examine the relationship between firm performance and its organizational form and how this relationship changes as firms transition between legal status. We show that firms that are organized into forms that provide liability protection have more debt, higher credit scores, and are more innovative than firms without liability protection. We also observe a larger share of B2B firms with liability protection. Our analysis also indicates that expanding firms, intending to fund their growth via investors' equity, exhibit a preference for C -corporations over S -corporations or LLCs.
In this paper, we consider how the hours of work and retirement age ought to respond to a change in the uncertainty of the length of life. In a first best framework, where a benevolent government exercises perfect control over the individuals’ labor supply and retirement-decisions, the results show that a decrease in the standard deviation of life-length leads to an increase in the optimal retirement age and a decrease in the hours of work per period spent working. This result is robust, and is also derived in models of decentralized decision-making where individuals decide on their own consumption, labor supply, and retirement age, and where the government attempts to affect their behavior and welfare through redistribution and pension policy.
We use a micro simulation model for Germany to show that it is optimal to use part of carbon tax revenue for handing out climate dividends, part to lower income taxes, and part to make up for public revenue shortfalls. The optimal recycling mix is tilted towards climate dividends away from tax reductions as relative inequality aversion increases. For baseline inequality aversion, up to half of carbon tax revenue is used to fund climate dividends and the rest to fund income tax cuts. We consider the implications of a Linear Expenditure System for carbon price policies.
