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LECTURE 9: TAX ME IF YOU CAN II

Tax Avoidance, Evasion, Informal Economy

复旦大学 2014年秋公共经济学研究兰小欢 1

What is Fiscal Capacity?


Earnings from informal economy, w

Because of tax avoidance and evasion, the tax authority expects to recover d, through audit and punishment.

Five Facts about Informal Economy: 1. it is huge

Source: La Porta And Shleifer (2014) 复旦大学 2014年秋公共经济学研究兰小欢 3

Fact 2: informal firms are small, unproductive, and stagnant


Fact 3: Regulation is NOT what Keeps Informal Firms Down


Fact 4: Informal Firms Rarely Becomes Formal


Even under lower cost of entry, reduced regulation

Even with access to micro-credit

Fact 5: As countries develop, informality becomes less important


Why not formal? Tax Avoidance and Other Factors


Tax Avoidance and Evasion in the Global Economy

People can move abroad for lower income tax


Or Their Money Could Move To Tax Haven!


Football Players in European Clubs and Tax Rate

SOURCE: KLEVEN, LANDAIS, AND SAEZ (2013) 复旦大学 2014年秋公共经济学研究兰小欢 12

Football Players in European Clubs and Tax Rate


Tax Rate and Performance


“Beckham Law” Tax Reform in Spain in 2004


Preferential Foreigner Tax Rates and Migration in Denmark

Source: Kleven Et. Al. (2014) 复旦大学 2014年秋公共经济学研究兰小欢 16

Tax Haven: “Sunny Places For Shady People”?


Offshore Corporation Profits and Tax Haven

Three Principles in Taxing International Corporate Profits

Source Country

Bilateral Rate

Arm’s Length Pricing

Tax avoidance: Transfer pricing and tax haven

Source: Zucman (2014) 复旦大学 2014年秋公共经济学研究兰小欢 18

Offshore Corporation Profits and Tax Haven


Offshore Corporation Profits and Tax Avoidance


Offshore Individual Wealth and Tax Haven

The amount of wealth held by foreigners in Switzerland’s banks in 2014: 2.4 trillion; in Luxembourg: 370 bn.


Foreign-owned Bank Deposits in Switzerland


How Big Is the Missing Wealth? 8%


Custom Tax and Smuggling

Source: Fisman and Wei (2008) 复旦大学 2014年秋公共经济学研究兰小欢 24

Custom Tax and Smuggling：

Source: Fisman and Wei (2008) 复旦大学 2014年秋公共经济学研究兰小欢 25

Paper Trail and Value-Added Tax (VAT)

SOURCE: Besley And Persson (2013) 复旦大学 2014年秋公共经济学研究兰小欢 26

VAT, Paper Trail, and Tax Avoidance

Source: Pomeranz (2014) 复旦大学 2014年秋公共经济学研究兰小欢 27

VAT, Paper Trail, and Tax Avoidance


Spill-over Effects in the Product Chain


G20 Tax Haven Crackdown

Source: Johannesen And Zucman (2014) 复旦大学 2014年秋公共经济学研究兰小欢 30

Allingham-Sandmo Model of Tax Avoidance/Evasion

SOURCE: SAEZ (HTTP://EML.BERKELEY.EDU/~SAEZ/COURSE/COURSE.HTML) 复旦大学 2014年秋公共经济学研究兰小欢 33

http://eml.berkeley.edu/~saez/course/course.html

The Effects of p and 𝜃

SOURCE: SAEZ (HTTP://EML.BERKELEY.EDU/~SAEZ/COURSE/COURSE.HTML) 复旦大学 2014年秋公共经济学研究兰小欢 34


Risk Aversion, the effect of w

Similar proof for 𝑑 𝑤

𝑑𝑤> 0, as long as u() is concave, risk averse

Measure risk aversion:

Absolute risk aversion: 𝑅𝑎 w ≡−𝑢′′(𝑤)

𝑢′(𝑤)

Relative risk aversion: 𝑅𝑟 w ≡−𝑢′′ 𝑤 𝑤

𝑢′(𝑤)


An Example: CRRA=1, p =0.01 and 𝜃 = 0.2

Let u(w)=log(w)

For any reasonable 𝜏 < 0.83; optimal 𝑤∗ = 0,

Why do people report income at all?

1) unable to cheat: p is much higher than 0.01 (audit rate), because of 3rd party reporting, such as your employer or banks

2) unwilling to cheat: tax morale – social norms and morality


Unable or Unwilling to Cheat: An Audit Experiment in Denmark

Source: Kelven Et Al (2011) 复旦大学 2014年秋公共经济学研究兰小欢 37

Evasion: within-person variation

Source: Kelven Et Al (2011) 复旦大学 2014年秋公共经济学研究兰小欢 38

A Modified Model of Tax Evasion

Source: SAEZ (HTTP://EML.BERKELEY.EDU/~SAEZ/COURSE/COURSE.HTML) 复旦大学 2014年秋公共经济学研究兰小欢 39


Introducing Third Party Reported Income



FOC: 𝑝 𝑤 =1

(1+𝜃)(1+𝜀)



Voluntary Compliance: Tax Morale

SOURCE: DEBACKER, HEIM, AND TRAN (2012) 复旦大学 2014年秋公共经济学研究兰小欢 42

Tax-evasion of foreign-held corporations in the U.S. & Corruption levels in the owners countries of origin

Tax Morale Mechanisms

Source: Luttmer And Singhal (2014) 复旦大学 2014年秋公共经济学研究兰小欢 43

Intrinsic Motivation

Reciprocity

Peer Effects and Social Influences

Culture Factors

The Final Remark: How Can Scandinavians Tax So Much?

SOURCE: KLEVEN (2014) 复旦大学 2014年秋公共经济学研究兰小欢 44

The Final Remark: How Can Scandinavians Tax So Much?


•Wide third-party information reporting: low level of tax evasion

•Broad tax bases: low level of tax avoidance

•Public goods complementary to working: high level of labor supply

Tax Take and Third-Party Reporting across Countries


Subsidies To Public Goods Complementary To Working


Tax Morale in Scandinavia


Northern Lights?


Extra Readings


References

Fisman, Raymond and Shang-Jin Wei, “Tax Rates and Tax Evasion: Evidence from “Missing Imports” in China”, Journal of Political Economy. (2008).

Johannesen, Niels, and Gabriel Zucman. "The End of Bank Secrecy? An Evaluation of The G20 Tax Haven Crackdown." American Economic Journal: Economic Policy 6, no. 1 (2014): 65-91.

Kleven, Henrik Jacobsen, "How Can Scandinavians Tax So Much?"Journal of Economic Perspective (2014): 77-98.

Kleven, Henrik Jacobsen, Camille Landais, and Emmanuel Saez. "Taxation and International Migration of Superstars: Evidence from the European Football Market." American Economic Review,103.5 (2013): 1892-1924.

Kleven, Henrik Jacobsen, Camille Landais, Emmanuel Saez, and Esban Schultz. " Migration and Wage Effects of Taxing Top Earners: Evidence from the Foreigners’ Tax Scheme In Denmark" Quarterly Journal of Economics 129. 1 (2014): 333-378.

Kleven, Henrik Jacobsen, Martin B. Knudsen, Claus Thustrup Kreiner, Søren Pedersen, and Emmanuel Saez. "Unwilling or Unable To Cheat? Evidence from A Tax Audit Experiment In Denmark." Econometrica 79, no. 3 (2011): 651-692.


References

La Porta, Rafael and Andrei Shleifer, “Informality and Development,” Journal of Economic Perspectives, (2014): 109-126

Luttmer, Erzo, and Monica Singhal, "Tax Morale."Journal of Economic Perspective (2014): 149-168.

Olken, Benjamin A., and Monica Singhal. "Informal Taxation." American Economic Journal: Applied Economics 3.4 (2011): 1-28.

Pomeranz, Dina. "No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax," Mimeo, Harvard University (2014).

Slemrod, Joel, and Shlomo Yitzhaki. "Tax Avoidance, Evasion, and Administration." Handbook of Public Economics 3 (2002): 1423-1470.

Zucman, Gabriel. "The Missing Wealth of Nations: Are Europe and the US net Debtors or net Creditors?" Quarterly Journal of Economics 128, no. 3 (2013): 1321-1364.

Zucman, Gabriel. "Tax Evasion on Offshore Profits and Wealth." Journal of Economic Perspectives, (2014), forthcoming


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