EFFICIENT REDISTRIBUTION THROUGH THE REDUCTION OF COMPLIANCE COSTS Mauro Bux Faculty of Economics Department of Economics, Mathematics and Statistics University of Salento

Outline Introduction Literature review The models Results and conclusions

Introduction

Compliance costs Compliance costs are defined as the costs the taxpayers bear in order to be compliant with their fiscal duties excluding the costs of the taxes themselves; they may have different nature and magnitude. Measuring compliance costs is not an easy task! Introduction

Compliance costs of households, 1984-2014 Source: Eichfleder & Vaillancourt (2014) Introduction

Compliance costs In the last two decades, many countries have implemented measures aimed at reducing taxpayers compliance costs by providing pre-filled tax returns. The ultimate objective of such measures is generally to reduce tax evasion. Are there other motivations? Could these measures be a way to achieve efficient redistribution? Introduction

Selected OECD countries Year e-filing introduced % of all returns e-filed during this fiscal year % partially pre-filled in 2013 % fully prefilled in 2013 2004 2009 2011 2013 Australia 1990 80 92 93 84 Belgium 2002 3 40 54 70 100 29 Canada 1993 49 58 64 76 n.appl. Chile 1999 81 98 99 n.a. 68 Denmark 1994 96 74 Finland 2006 23 33 45 73 France 2001 4 27 34 17 Germany 7 30 32 51 Iceland 86 28 Italy 1998 Japan 31 44 50 Norway 37 82 91 63 Spain 36 19 53 Sweden 15 55 77 75 Turkey 2005 United Kingdom 2000 85 United States 1986 47 65 83 OECD ave. (unw.)   59 72 - Introduction

Literature review

Fundamental theoretical framework Taxation direct effects indirect effects Administration Passive compliance Substitution Active non- compliance Literature review

Literature review: compliance costs Question: “Should we raise more revenue by raising tax rates or increasing administration?” Mayshar (1991): first model including both administrative activity by the government and tax-resisting behavior by the taxpayers. Marginal cost of funds (MCF), defined as the taxpayer’s marginal welfare loss per dollar of marginal net revenue. Literature review

Literature review: compliance costs Yitzhaki (1979) first proposes a model on commodity taxation with costly administration. Azienman (1987) investigates the use of tariffs and inflation tax as less costly ways of raising revenue. Kaplow (1990) shows that when distortion rises disproportionally with the EMTR, greater enforcement is more efficient than increasing the nominal tax rates. Slemrod and Yitzhaki (1996) argue on the equality between the private cost and the social cost when a taxpayer tries to reduce her tax liability. Keen and Slemrod (2016) introduce the concept of “enforcement elasticity of tax revenue”, a sufficient statistic for taxpayers beahvioral response to administration. Kotakorpi and Laamanen (2014) provide empirical evidence on the impact of prefilled returns in the late 90’s Finnish case. Literature review

Main results of this paper Reducing compliance costs by increasing administrative costs is inefficient when the government is restricted to linear taxation The same policy can be efficient in a non-linear taxation context, if the unskilled’s wage rate is sufficently higher than the price paid by the government to provide fiscal services. Conclusions

The models

linear income tax & fixed compliance costs Assumptions: 2 agents with B.C.: with The models

Linear income tax & fixed compliance costs Optimality condition: leads to optimal choices of Indirect utility: where The models

Linear income tax & fixed compliance costs The social planner maximizes by choosing the optimal t and b From the optimum status, let us increase the θ parameter: The models

Linear income tax & fixed compliance costs By substituting and rearranging, we get where α is the net social marginal valuation of income. The above result cannot be positive. Conclusion: Reducing the compliance costs is inefficient in this case! The models

Non-linear income tax & fixed compliance costs Assumptions: 2 agents with Gov. cannot observe neither skill nor labor supply. The only observable variable is gross earned income. The models

Non-linear income tax & fixed compliance costs The social planner maximizes by choosing the optimal pairs of The models

Non-linear income tax & fixed compliance costs From the optimum status, let us increase the θ parameter: which after substituing and rearranging becomes: Conclusion: Also in this case, the compliance cost reducing policy inefficient! The models

Non-linear income tax & heterogeneous compliance costs New (key) assumptions: or simply ai = i-quality fiscal services on the market (units of time) the Gov provides only free B-quality fiscal services (at price pB per unit of time) The models

Non-linear income tax & heterogeneous compliance costs Agents’ budget constraints: when G does not mimic B: when G mimics B: any B-type agent: The models

Non-linear income tax & heterogeneous compliance costs Agents’ new utility functions: when G does not mimic B: when G mimics B: any B-type agent: The models

Non-linear income tax & heterogeneous compliance costs The social planner maximizes by choosing the optimal pairs of From the optimum status, let us increase the θ parameter: The models

Non-linear income tax & heterogeneous compliance costs After substituing and rearranging we get: which is positive iff: Conclusion: In this non-linear case with heterogeneous compliance costs the public measure is found to be efficient, if the condition above holds. The models

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