Conference Agenda

We study how tax authority can manipulate the elasticity of taxable income (ETI) through tax monitoring. We build on a model of a trade-off between consumption and earned income subject to a kinked tax schedule, in which tax administration scales down the ETI through stricter tax enforcement. Using tax-return data on Czech self-employed individuals, we show that the ETI falls 30% in business sectors subject to real-time monitoring of business-to-customer sales via electronic sales registers. A down-scaled ETI permits increasing the revenue-maximizing top tax rate. The results support the optimal tax literature in which the ETI depends on tax environment.

This paper revisits the elasticity of taxable income (ETI) framework in the presence of income volatility. First, I document significant year-to-year income volatility at the top of the income distribution: both upwards and downwards relative income shocks increase in magnitude when moving up the income distribution. I show that this volatility threatens identification and the interpretability of existing ETI estimates due to (i) the sensitivity of logarithms to changes in higher order moments (Jensen bias) and (ii) SUTVA violation when behavioural adjustments cannot be considered as marginal. I propose alternative estimators to recover the parameter of interest.

Taxpayers can reduce their tax liability by itemizing deductions and claiming more than the standard deduction they are automatically entitled to. I show that taxpayers also itemize when costs exceed benefits, a behavior that is strictly dominated by not itemizing. Using German administrative income tax data, I document that 57 percent of tax filers make this mistake at least once. They itemize even when the sum does not exceed the standard deduction, or when they already face a zero tax liability before itemizing, or both. The observed itemizing behavior is consistent with a model with optimization frictions in which some taxpayers always itemize regardless of the costs and benefits.

This paper studies whether tax–transfer systems are inefficient in the sense that they allow for self-financing tax cuts. In the first part, we combine household microdata with tax–transfer calculators for 33 countries around the world. We show that, under standard labor supply elasticities, self-financing tax cuts exist in all 29 countries in which effective marginal tax rates (EMTRs) exhibit sudden drops. In the second part, we show analytically that sudden drops in EMTRs give rise to inefficiencies whenever (a) taxpayers are rational with additively separable preferences, or (b) taxpayers use an ironing heuristic and EMTRs exceed a certain threshold. In the third part, we characterize discrete reforms that move tax–transfer systems to the Pareto frontier for both rational and non-rational taxpayers. Focusing on a model with isoelastic, quasi-linear preferences, we provide an empirically applicable recipe for designing tax reforms that raise revenue without making any individual in society worse off.