The United Nations' "2030 Agenda for Sustainable Development" highlights the importance of formalizing the informal economy, which could potentially increase tax revenues in developing countries. This paper investigates the impact of formalization on optimal tax schedules, emphasizing the need for redistributive incentives alongside formalization. Extending the Mirrlees model to incorporate government intervention against the informal economy, we propose an optimal tax formula. Quantitative analysis shows that aligning the tax schedule with formalization increases tax revenue and income transfers while maintaining social welfare. The result can be interpreted as an implicit cost of welfare-neutral formalization in terms of tax revenues and income transfers. Conversely, leaving the tax schedule unchanged undermines these benefits. This research provides insights into the design of optimal tax policies that incorporate formalization.

We study the administration of income tax noncompliance penalties in Norway. Penalties potentially offer a low nominal-cost tool for tax administrations to use in reducing tax noncompliance. We design a model that conceptually illustrates the tradeoffs of penalties. We then produce descriptive statistics on the administration of penalties: who receives penalties and how costly are penalties? We find that penalty administration in Norway is small in scope, amounting to only to less than 1% tax collections and assigned to around .5% of taxpayers in a given year, and mildly progressive (albeit moreso at the top of the income/wealth distribution). Lastly, we leverages variation in timing of penalty recipiency in an event study setting that also compares the differential change in outcomes of high-rate to low-rate penalty recipients. We find that high-rate penalty recipients exhibit a sharper increase in reported income following penalty recipiency.

Corporate tax filings typically include a declaration of taxable earnings and auxiliary data. Tax compliance theory acknowledges using both inputs to improve tax enforcement policies. However, firms can misreport auxiliary data to benefit from weaker enforcement policies and increase evasion. To comprehend how this bias should be taken into account, we extend tax compliance theory to strategic data reporting. Our main finding is that, although the primary goal of an audit is to ensure truthful profit reporting, this objective cannot be achieved without also monitoring the submitted data. Otherwise, audit probabilities based on firm-reported data are misspecified, which allows firms to evade taxes by manipulating their data input. We describe examples where this can lead to a higher tax gap than disregarding data. The characterized optimal tax enforcement policy for strategic data involves a distortion at the top and non-constant penalties.

This paper investigates how price misperceptions, which are pervasive and mainly ascribed to a complex system of mixed tax schedule, affect the design of optimal tax rules. Our theoretical results show that in the presence of price misperceptions indirect taxation exerts both a corrective role and a redistributive role even with the preference structure of Atkinson and Stiglitz (1976). This makes the linear commodity taxation no longer superfluous. In particular, the optimal income tax schedule can be more progressive if perceived marginal income tax rates are influenced by commodity prices. Moreover, taking income tax credit for electric vehicles as an example we simulate the optimal subsidy rate and income tax schedule when price misperceptions are considered in the design of optimal mixed taxation. Compared with conventional optimal taxation, optimal taxation in our model results in a rise in welfare by 8.79% to 36.34\% under plausible values of labor supply elasticity.

While quantifying the impact of corporate taxes on firms’ investment, location decisions and tax avoidance has attracted considerable interest over recent years, other corporate adjustment margins are less well studied. In this paper, we use rich customs and tax return information for South Africa to establish that corporate taxes impact firms’ competitiveness in international product markets. Drawing on a difference-in-differences strategy that allows us to non-parametrically absorb confounders at the level trading partner countries and 6-digit product categories, we show that exports by South African firms decline significantly when host country-corporate taxes of foreign competitors decrease. The effect emerges across a broad set of industries and is concentrated among large, regular exporters. Affected firms’ real activity and profits in South Africa drop significantly when foreign competitors’ corporate tax costs decline.

Credible corporate tax announcement allows the government to exploit its reputation and impose a high tax rate by attracting investment, but amplifies tax distortion on investment as firms become more responsive to the announced tax rate. While the latter effect is outweighed by the first effect in a general model of corporate taxation with government reputation, introducing firms' profit-shifting makes the latter effect dominant. Reputation is modeled as the probability of government committing to the announced tax rate, and the optimal tax rate decreases in reputation when firms can shift profits across countries. This induces higher investment and less profit-shifting under higher levels of reputation. The model predictions are consistent with empirical facts on how government reputation is related to statutory corporate tax rate, foreign direct investment inflows, and multinational firms' profit-shifting.

Rising globalization has exerted a downward pressure on global tariffs, thereby eroding tariff revenues in developing nations. We analyze how gains from lowering import tariffs are distributed within the firm and the corresponding tax (base) implications. First, we study the effect of tariff changes on imports. Second, we estimate the firm-level semi-elasticities of profits, sales, capital, and wages with respect to import tariffs. Using linked employer-employee data and firm-product-level import data for South Africa we find that lowering tariffs, leads to higher imports and lower import prices, raises within firm wage inequality and favors capital owners, while overall government revenues decline. The latter is attributable to the insufficient expansion of alternative tax bases (profits, sales, and wages) after a tariff cut. This limits the government's capacity to mitigate the adverse distributive effects arising from tariff reductions.

Developing country growth is expected to reduce aid dependence and mobilize domestic revenues (DRM) to finance public expenditure. Income status upgrades by the World Bank represent milestones in this transition and may anticipate a decline in aid precipitating an increase in tax collection to complement the shortfall in government revenue. Applying the synthetic control method (SCM) and synthetic difference-in-differences (SDID) to countries with sufficient data in the UNU-WIDER GRD tax database and the WDI, I investigate whether the income status upgrades raise government revenue in sub-Saharan African (SSA) countries. Robustness checks confirm findings of little impact, except for SSA countries ineligible to International Development Association (IDA) lending relative to other SSA countries, suggesting economic growth may not translate into DRM before the IDA eligibility threshold has been crossed.

This paper considers Tiebout (1956) competition for mobile firms without restrictions on the set of tax policy instruments. Communities set taxes and provide public input goods in order to attract heterogeneous firms. In equilibrium, there is sorting of firms into communities that specialize on a certain firm type. The efficiency properties of the equilibrium allocation crucially depend on the observability of the variable that drives the congestion externality. With observable congestion drivers, the resulting equilibrium is efficient and the first-best allocation is attained through decentralized decision-making. With unobservable congestion drivers, communities use distortive input taxes in equilibrium. Nevertheless, the fiscal externality is zero. In contrast to the standard tax competition model, capital taxes are too high, but tax coordination on input taxes alone fails to achieve a welfare improvement. The model rationalizes the use of distortive source-based taxes in tax competition and questions the welfare enhancing potential of tax coordination.

Self-determination is a main rationale for fiscal decentralization, but seldomly analyzed in model of local public finance. This paper studies the equilibrium effects of local fiscal autonomy, accounting for preferences of self-determination. We propose a quantifiable structural equilibrium model where heterogeneous households sort across municipalities in response to progressive income taxation and public good provision. We calibrate the model to municipalities in the Canton of Bern in Switzerland using rich household-level and municipal data. In particular, we exploit quasi-experimental policy variation in voting rights to quantify benefits from self-determination and employ machine learning methods to represent the local political process. We find that restricting local fiscal autonomy decreases welfare by 1% for (almost) all households.

To study the distribution of economic activity across space and the effects of place-based policies, I develop a model of the location choice of new establishments incorporating taxes, monopsonistic labor markets, and spillovers. Estimates using administrative data from Germany indicate that establishments generally have a preference for lower taxes, as well a preference for lower worker outside options which enable establishments to pay lower wages. The degree to which various types of productivity spillovers matter in the location decision of establishments varies greatly between industrial sectors. I also quantify the effects of a counterfactual place-based policy and find that commuting zones display highly heterogeneous wage and economic activity responses to the same policy due to differing degrees of labor market power across space.

This study reveals how an interaction between tax competition and the political overrepresentation of the rich can collectively impede redistribution in response to rising inequality. We develop a model of capital tax competition between countries, each comprising two classes: the rich and the poor. Income bias in political attention creates the overrepresentation of the rich in each country. First, we show that tax competition diminishes the political attention level of the poor, amplifying the rich's political influence. Hence, tax competition reduces capital taxation not only through conventional economic channels but also by altering the political power in favor of the rich. Remarkably, from a global perspective, the attention level of the poor is under-provided for their own benefit. Second, rising inequality should increase the poor’s political attention level, inducing higher taxation. However, increasing inequality is more likely to reduce taxation under tax competition compared to a closed economy.

We construct a new linked survey-administrative dataset for Italy to show the relevance of heterogeneity among the self-employed for income evasion. We find that liberal professionals, sport and art performers underreport to tax authorities about 50% of their true income, which is almost three times the size of income underreporting detected on average for entrepreneurs. We also find that low-educated entrepreneurs evade more income than high-educated ones and provide explanation for this result. Then, we study the implications of evasion on income dis-tribution and earning differentials. We find that households at the 10th income decile generate about 80% of tax revenue losses due to self-employment income underreporting. We also show that the self-employment earning puzzle is reversed after accounting for evasion, with income gains of about 40% relative to salaried workers with differences across working status and edu-cational level.

We present empirical evidence on the cost of tax sheltering among high-income taxpayers within progressive income tax systems. Exploring a unique personal income tax policy change in Australia, we use the “bunching” around the top tax kink to estimate the costs of tax sheltering and the Elasticity of Taxable Income (ETI). Our findings reveal substantial behavioural responses to tax changes among high-income taxpayers, particularly those with greater flexibility in income adjustment, suggesting that tax-sheltering behaviours play a pivotal role in their responses. When accounting for these costs, the estimated ETI significantly increases, emphasising the necessity of considering tax sheltering in tax policy analysis. We contribute to the ongoing discourse on optimal tax policy design and its impact on economic behaviour. Our findings have important implications for policy debates on whether high-income individuals should be taxed at higher rates.

We examine the use of paid tax preparers by individual taxpayers in the US between 2011 and 2019. We provide novel descriptive evidence characterizing the paid tax preparers and the users of their services. We show that over 55% of individuals use paid tax prepares and taxpayers who use paid tax preparers earn more than non-users, but claim significantly more credits at the same time. The average size of the tax preparer clientele varies with average income of clients and declines for clients with highest incomes, suggesting small specialized tax preparer networks for the richest clients. Second, we quantify the tax savings that paid preparers are able to offer their clients using a two-way fixed effect switchers model (AKM). Preliminary evidence suggests that while individual fixed effects determine the overwhelming majority of variation in effective income tax rates (ETRs), variation in paid preparer skill explains 10% of ETR inequality.

This paper documents the impact of third-party enforcers on behavioral tax responses. Using administrative data from the wealthiest state in Brazil, we analyze the effect of a tax reform that designated notary officers as enforcers of gift tax liability. Our findings indicate a 3.8(1.3)-fold increase in the number (total sum) of reported gifts per semester, positively impacting tax liabilities. The reform led to smaller individual gifts, with the elasticity of taxable gifts close to 0.01, which is significant after the reform. These results suggest that the delegation policies, such as pre-auditing schemes, promote tax compliance in developing countries.

Child care in the United States is usually described as a fragmented system, where public programs interact with private organizations to supply childcare services. In this paper, I analyze the effects of an expansion of subsidized childcare for low-income 4-year-old children, the North Carolina Pre-Kindergarten Program (NCPK), on the enrollment of 0-4-year-old children. I combine rich data from administrative records with a design that exploits geographical and temporal variation in the NCPK rollout. I found that, when joining the program, NCPK centers enrolled more children and reorganized their structure to serve more eligible children. Nearby childcare facilities also enrolled more four- and three-year-olds, particularly in lower-income areas. This is most likely explained by the displacement of ineligible children from NCPK to non-NCPK centers. The results suggest that the policy increased childcare access for low-income families and led to a reallocation of children to centers, increasing economic segregation across centers.

Parental leave is one of the most important policies that shape the post-birth careers of women. We exploit a sequence of parental leave reforms in Germany that extended both the job protection period and the duration of parental leave benefits to different extents to study the effects of the two policy instruments parental leave consists of. Using administrative social security data, we first replicate the stylized facts that mothers respond to extensions in parental leave and that the average effect of longer leave-taking on their careers is negative. Second, holding constant the length of mothers' post-birth labor market break, we show that extending job protection significantly reduces losses in long-run earnings while extensions of the benefit duration have no measurable impact. The positive effect of employment protection works both by enhancing employer continuity as well as by improving outside opportunities for mothers who change their employer.

We assess the impact of daycare enrollment on how housework and childcare are shared between mothers and fathers. Utilizing survey data from a Japanese municipality and observing all key variables influencing daycare enrollment, we employ a quasi-experimental approach to infer causal relationships. Our findings reveal that daycare enrollment leads to greater involvement by fathers in housework and childcare, concurrently with a reduction in mothers' participation in these areas. Notably, the shift in household labor dynamics appears to stem primarily from a direct influence of daycare enrollment on fathers' behavior, rather than from an increase in maternal employment.

We examine the role of spatial policies on employment, location choices, and labour force participation in markets marked by labour market frictions and spatial externalities. We compare the outcomes of competitive markets with those of a welfare-maximising social planner. Our findings indicate that including local labour force participation as a key component in our model significantly alters optimal spatial policies. This adjustment affects the spatial distribution of workers, labour supply, and overall welfare. Using data from Germany, we show that these optimal policies could increase the labour force, especially among women, by about 2% and improve aggregate welfare by 5%. Ignoring the extensive labour supply margin leads to a substantial underestimation of the effects of fiscal redistribution and the benefits derived from spatial policies.

Research in health economics indicates that spending time in traffic has long run adverse consequences for health. Literature suggests that, when making decisions about commuting, workers underestimate the consequences for their long run health. For this reason, we argue that commuting has demerit properties. From a welfare perspective, on top of the demerit aspect, commuting is also associated with an externality. We derive marginal cost of funds (MCF) expressions incorporating externalities and demerit aspects. We calculate the MCF for the 51 US states, for a tax on commuting, income taxation, and a poll transfer. We show that both the externality and the demerit considerations cause rank switches in over half of the States and that an increase in the taxes on commuting accompanied by a decrease in other taxes benefits social welfare.

This paper uses a novel GPS-coded dataset for more than three million car trips in the four largest German cities to measure the efficiency losses from using uniform fuel taxes as a second-best optimal tax to reduce traffic congestion. We estimate the short-run price elasticity of vehicle-kilometres travelled (VKT) across different hours of the day from a panel gravity equation. Identification of the price elasticity relies on comparing VKT changes between granular trip origin and destination pairs within each city. We find that the VKT price elasticity differs strongly across trips taken at different hours of the day, and that this elasticity correlates with contributions to the congestion externality. Using a policy simulation, we show that 52% of the deadweight loss of the congestion externality remains after levying a uniform fuel tax.

The paper discusses the tax treatment of commuting where wages and housing cost vary across locations. An income tax distorts the locational choices of agents, who dislike commuting and have preferences for place of residence. Further distortion issues arise where housing is tax favoured, as is often the case. Wages, housing cost and commuting cost determine how subsidising or taxing commuting affects behaviour and social efficiency. A subsidy encourages commuting and induces agents to choose a more favourable living place. The analysis clarifies the circumstances in which the subsidy alleviates or exacerbates the tax distortions. The distributional impact depends on the effects of wages on commuting. An empirical illustration based on Norwegian data supplements the theoretical analysis and shows how one can infer efficiency effects of responses to subsidies on commuting.

We analyze whether mayors’ prior occupation in the local public administration matters for their performance. In theory, mayors’ professional background may shape their competence in bureaucratic tasks. We use the example of grant receipts for visible investment projects for which mayors must submit an extensive application to the state government. Our dataset includes 1,933 mayor elections (1993-2020) in the German state of Hesse to which we apply a sharp RD design for close mixed-background races. Mayors’ background on average has no effect on grant receipts. Yet, public administrator mayors do attract more grants than outsider mayors when they are ideologically aligned with the council, raising the motivation to apply for grants in the first place. We conclude that the competence of public administrator mayors only matters when they are motivated to use it, i.e. this is an example where incentives are necessary for the effects of political selection to materialize.

We analyze the impact of Italy's OpenCivitas data disclosure program on mayoral behavior. Utilizing the program's website, we construct a network of mayors accessing expenditure data. Results show that younger, educated mayors from larger cities in northern regions, affiliated with traditional parties, are more likely to engage. Using directed dyadic models, we find mayors tend to link with similar-aged peers managing similar-sized cities in their region. Unlike neighboring municipalities, mayors within this network compete internally rather than engage in yardstick competition. We observe this network predates the website's launch, but after data disclosure, yardstick competition intensifies for re-election-seeking mayors within the network, contrasting with unaffected neighboring municipalities.

We study the reaction of low vs. high-skilled politicians - proxied by their educational attainments - to a reform that introduces financial and career penalties in case the local administration is deemed co-responsible for the bankruptcy of the municipality. We leverage plausibly exogenous variation induced by close elections between a mayoral candidate who holds a college degree and a mayoral candidate who did not attend college. To start, we document that graduate mayors on average implement a more responsible fiscal policy and are more capable of attracting external resources to the municipality's budget. Upon the introduction of penalties, however, skilled politicians tend to declare bankruptcy with a higher probability than low-skilled politicians. The effect is concentrated in the first year of the term.

We study the provision of information by local governments that supports individual compliance with nationwide regulation, and how this provision relates to the electoral process. We study this question using information about individual mobility (compliance with the lockdown) and Facebook posts by Italian local governments during the Covid 19 pandemic. We show that in municipalities where mayors were up for re-election, local governments provided significantly more covid-related information. This information caused a significant decrease in mobility and excess mortality. However, these effects seem to arise only in the northern regions of the country, where the impact of the pandemic was more severe.