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Tax Systems

Tax Systems

Joel Slemrod
Christian Gillitzer
Copyright Date: 2014
Published by: MIT Press
Pages: 240
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  • Book Info
    Tax Systems
    Book Description:

    Despite its theoretical elegance, the standard optimal tax model has significant limitations. In this book, Joel Slemrod and Christian Gillitzer argue that tax analysis must move beyond the emphasis on optimal tax rates and bases to consider such aspects of taxation as administration, compliance, and remittance. Slemrod and Gillitzer explore what they term a tax-systems approach, which takes tax evasion seriously; revisits the issue of remittance, or who writes the check to cover tax liability (employer or employee, retailer or consumer); incorporates administrative and compliance costs; recognizes a range of behavioral responses to tax rates; considers nonstandard instruments, including tax base breadth and enforcement effort; and acknowledges that tighter enforcement is sometimes a more socially desirable way to raise revenue than an increase in statutory tax rates. Policy makers, Slemrod and Gillitzer argue, would be well advised to recognize the interrelationship of tax rates, bases, enforcement, and administration, and acknowledge that tax policy is really tax-systems policy.

    eISBN: 978-0-262-31900-3
    Subjects: Business

Table of Contents

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  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Series Foreword
    (pp. vii-viii)
    Karl Gunnar Persson

    The Zeuthen Lectures offer a forum for leading scholars to develop and synthesize novel results in theoretical and applied economics. They aim to present advances in knowledge in a form accessible to a wide audience of economists and advanced students of economics. The choice of topics will range from abstract theorizing to economic history. Regardless of the topic, the emphasis in the lecture series will be on originality and relevance. The Zeuthen Lectures are organized by the Institute of Economics, University of Copenhagen.

    The lecture series is named after Frederik Zeuthen, a former professor at the Institute of Economics....

  4. Acknowledgments
    (pp. ix-x)
  5. I Introduction and Motivation

    • 1 The Need for Tax-System Analysis
      (pp. 3-12)

      A new type of motorcycle with three wheels and long benches at the back seating up to eight passengers, and a redesigned panel truck with glass windows instead of wood panels and upholstered seats in the back — both designed to avoid high taxes on cars.

      Income taxes based not on income but, for restaurants, the seating square footage and number of tables.

      Simplified tax rules — or no tax at all — levied on businesses below a size threshold.

      The IRS commissioner testifying before a congressional appropriations committee that an additional dollar added to its budget will generate $7.30...

    • 2 Standard Optimal Tax Models
      (pp. 13-20)

      Although in this book we expand the scope of tax analysis in many dimensions, we adopt analytical techniques that are standard to public economics. Thus, in our positive modeling, we assume that individuals maximize utility, or expected utility, subject to constraints. In doing so, for the most part we leave aside the fascinating questions raised by behavioral economics, although we refer to these issues in chapter 10. In our normative modeling, we characterize tax systems that maximize the well-being of citizens, either via a stylized representative individual or as a function of all citizens ’ well-being that obeys the Pareto...

  6. II Building Blocks of Tax Systems

    • 3 Multiple Behavioral Margins
      (pp. 23-68)

      In the standard optimal tax problems of chapter 2, taxation generates efficiency cost, an excess burden, because it distorts what consumption bundle (and perhaps how the consumption goods are produced) is chosen, including how much leisure. Individuals make choices according to relative prices that, because of tax distortions, do not reflect the true social trade-offs. A utility-maximizing consumer naturally substitutes toward relatively low-taxed goods, where leisure is completely untaxed. Although this is privately optimal, it is an unintended consequence of the unavailability of nondistorting, or lump-sum ways, to raise revenue. When taxpayers are heterogeneous and society has distributional concerns, some...

    • 4 Multiple Sources of Costs
      (pp. 69-78)

      Standard tax analysis focuses on the efficiency costs due to the distorted real behavior caused by tax-induced relative price changes. Chapter 3 focused on classes of behavioral response—evasion and avoidance—that are often ignored in positive and normative models of taxation. But social costs due to distorted private decisions are not the only resource cost of tax systems. Administrative costs are costs incurred directly by the tax authority in establishing and operating tax systems. Compliance costs are, in the first instance, borne by taxpayers in following the rules and procedures set out by a tax authority, and in planning...

    • 5 Tax Base Elasticity
      (pp. 79-92)

      Because it holds the promise of summarizing the welfare cost of all behavioral responses undertaken to reduce tax liability, the elasticity of taxable income (ETI) has assumed a central role in measuring the marginal excess burden of income taxation (Feldstein 1999; Usher 1986).¹ The larger is the elasticity of response, the higher is the marginal excess burden per dollar raised. In most standard models, hours of work is the only dimension of behavioral response to changes in marginal tax rates, but the ETI concept generalizes the set of behavioral responses to all the margins of adjustment affecting taxable income discussed...

    • 6 Multiple Tax-System Instruments
      (pp. 93-112)

      In the standard model taxes magically collect themselves, but in the real world no government can expect taxpayers to comply with a tax code without devoting resources to administration and enforcement. Procedures for ensuring compliance, audit rates, penalties, and reporting requirements all represent important tax-system instruments absent from our standard models.

      Withholding refers to a situation where some or all of a tax liability must be remitted by someone other than the statutory bearer of the liability. It facilitates administration by allowing the tax authority to take advantage of economies of scale that exist in dealing with a smaller number...

  7. III Optimal Tax Systems

    • 7 General Model
      (pp. 115-120)

      Analysis of tax systems must—and can—address a wide variety of tax instruments that extend well beyond the usual optimal tax concerns—tax-rate schedules and the choice of base. In this chapter we show how optimal tax analysis can naturally be extended to cover other instruments.

      We begin this task by developing a normative model of income tax policy that allows for both multiple tax instruments and multiple kinds of cost. As in section 3.3, here we refer to sheltering income as shorthand for avoidance and evasion. The model is inspired by Mayshar (1991), but differs in a number...

    • 8 Standard Instruments with New Costs
      (pp. 121-136)

      In this chapter we consider some examples of how introducing administrative and compliance costs modifies and enriches the normative analysis of the standard set of tax instruments.

      The key insight of the classic optimal commodity tax problem, laid out in chapter 2, is that at an optimum, the marginal excess burden per dollar raised is equated across all taxed commodities. This is a special case of the proposition in chapter 7: for all tax-system instruments at an interior solution the marginal efficiency cost of funds should be equalized. Assuming perfectly elastic supply of commodities, we need know “only” the matrix...

    • 9 Endogenous Elasticity
      (pp. 137-144)

      As we argued in chapter 5, the elasticity of behavioral response with respect to a tax rate is a central concept in modern tax analysis. The higher the (compensated) elasticity of a tax base, the higher is the marginal excess burden per dollar raised from that base. Other things equal, the higher is marginal excess burden the lower is the optimal tax rate on a given base.

      In most contexts the fact that a behavioral elasticity need not be constant over the range of parameters considered is noted and then put aside, as the insights do not depend on this...

    • 10 Optimal Observability and Complexity
      (pp. 145-156)

      Our analysis of tax systems has focused on the manipulability of a tax base, often summarized by a tax base elasticity that depends on the behavioral response of both real quantities and the reporting of such quantities. The optimal tax-systems approach suggests that another important aspect of tax bases is the observability of the true value by the tax authority. Many tax systems rely on a report by a private party to the government, which may be inaccurate, willfully or inadvertently. But the tax authority can directly ascertain information about the true tax base other than via taxpayer reports. Even...

    • 11 Notches and Optimal Line Drawing
      (pp. 157-168)

      As any tax lawyer will say, real-world, in-the-trenches, scuffling about taxation is largely about drawing and interpreting lines that separate the cases where discretely different tax treatments apply.¹ Is a given donation a deductible charitable donation or not? Are food expenditures a deductible business expense for someone who sells their blood, or not? Is a worker an employee, for which an employer must withhold and remit income and payroll taxes, or an independent contractor, for which no withholding is required? Despite its ubiquity and policy relevance, line drawing is almost completely absent from economic analysis. Why?

      Let’s begin with commodity...

  8. IV Future Directions and Closing Thoughts

    • 12 Future Directions
      (pp. 171-184)

      We have stressed throughout this book that taxation is at its core a problem of information: who has it, the cost of government obtaining more of it, and what restrictions are placed on its use. From that perspective, the ongoing revolution in information technology would be expected to have profound implications for tax systems. And so it does. For tax authorities, computerization facilitates the collection, tracking, and analysis of data to operate existing tax systems. Technology also makes it easier to base tax liability on a wider range of information than otherwise. One of the most famous examples are the...

  9. 13 Conclusion
    (pp. 185-188)

    Tax systems, their costs, and the behavioral response to them have multiple dimensions. Until recently, standard tax analysis has narrowly focused on tax rates, excess burden, and labor supply response. A narrow focus is not in itself sufficient to generate a call for a redirection of research, because all of modern economic analysis relies on stylized models of the world we live in. In this book we argue that there are good reasons to broaden the standard perspective, at the cost of complicating the analysis.

    We hope that our book has shed light on the tax phenomena that began the...

  10. Notes
    (pp. 189-196)
  11. References
    (pp. 197-214)
  12. Index
    (pp. 215-224)