Conference Agenda

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.