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

2. Outline
Introduction
Literature review
The models
Results and conclusions

3. Introduction

4. 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

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

6. 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

7. 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

8. Literature review

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

10. 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

11. 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

12. 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

13. The models

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

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

16. 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

17. 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

18. 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

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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. THANKS FOR
YOUR ATTENTION