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Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries

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  • Henrik Jacobsen Kleven
  • Claus Thustrup Kreiner
  • Emmanuel Saez

Abstract

This paper presents a simple agency model to explain why third-party income reporting by employers dramatically improves income tax enforcement. Modern firms have a large number of employees and carry out complex production tasks, which requires the use of accurate business records. Because such records are widely used within the firm, any single employee can denounce collusive tax cheating between employees and the employer by revealing the true records to the government. We show that, if a firm is large enough, such whistleblowing threats will make tax enforcement successful even with low penalties and low audit rates. Embedding this agency model into the standard Allingham-Sandmo tax evasion model, we show that third-party reporting improves tax enforcement if the government disallows self-reported losses or audits such losses more stringently, which fits with actual tax policy practices. We also embed the agency model into a simple macroeconomic growth model where the size of firms grows with exogenous technological progress. In early stages of development, firms are small, tax rates are severely constrained by enforcement, and the size of government is too small. As firm size increases, the enforcement constraint is slackened, and government size is growing. In late stages of development, firm size is sufficiently large to make third-party tax enforcement completely effective and government size is socially optimal.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15218.

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Date of creation: Aug 2009
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Handle: RePEc:nbr:nberwo:15218

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References

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Citations

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Cited by:
  1. Tonin, Mirco, 2011. "Minimum Wage and Tax Evasion: Theory and Evidence," IZA Discussion Papers 5660, Institute for the Study of Labor (IZA).
  2. Todd Kumler & Eric Verhoogen & Judith A. Frías, 2013. "Enlisting Employees in Improving Payroll-Tax Compliance: Evidence from Mexico," NBER Working Papers 19385, National Bureau of Economic Research, Inc.
  3. Pierre Cahuc & St�phane Carcillo, 2014. "The Detaxation of Overtime Hours: Lessons from the French Experiment," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 32(2), pages 361 - 400.
  4. Pickhardt, Michael & Prinz, Aloys, 2014. "Behavioral dynamics of tax evasion – A survey," Journal of Economic Psychology, Elsevier, Elsevier, vol. 40(C), pages 1-19.
  5. Hoseini, M., 2013. "How to Enforce Value-Added Tax? The Role of Inter-Sectoral Linkages," Discussion Paper, Tilburg University, Center for Economic Research 2013-036, Tilburg University, Center for Economic Research.
  6. Blomquist, Sören & Christiansen, Vidar & Micheletto, Luca, 2011. "Public provision of private goods, self-selection and income tax avoidance," Working Paper Series, Center for Fiscal Studies 2011:6, Uppsala University, Department of Economics.
  7. Mayshar, Joram & Moav, Omer & Neeman, Zvika, 2011. "Transparency, Appropriability and the Early State," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8548, C.E.P.R. Discussion Papers.
  8. Timothy Besley, 2013. "Making and Breaking Tax Systems," The Economic and Social Review, Economic and Social Studies, Economic and Social Studies, vol. 44(3), pages 297-321.
  9. Cuff, Katherine & Marceau, Nicolas & Mongrain, Steeve & Roberts, Joanne, 2011. "Optimal Policies with an Informal Sector," Journal of Public Economics, Elsevier, Elsevier, vol. 95(11), pages 1280-1291.
  10. Lee, David & Saez, Emmanuel, 2012. "Optimal minimum wage policy in competitive labor markets," Journal of Public Economics, Elsevier, Elsevier, vol. 96(9-10), pages 739-749.
  11. Almunia, Miguel & Lopez-Rodriguez, David, 2012. "The efficiency cost of tax enforcement: evidence from a panel of spanish firms," MPRA Paper 44153, University Library of Munich, Germany.
  12. Thomas Piketty & Emmanuel Saez, 2012. "Optimal Labor Income Taxation," NBER Working Papers 18521, National Bureau of Economic Research, Inc.
  13. Anne Brockmeyer, 2013. "The investment effect of taxation: evidence from a corporate tax kink," Working Papers, Oxford University Centre for Business Taxation 1317, Oxford University Centre for Business Taxation.
  14. Eduardo Zilberman, 2011. "Audits or Distortions: The Optimal Scheme to Enforce Self-Employment Income Taxes," Textos para discussão, Department of Economics PUC-Rio (Brazil) 590, Department of Economics PUC-Rio (Brazil).
  15. Mazhar Waseem, 2013. "Taxes, Informality and Income Shifting: Evidence from a Recent Pakistani Tax Reform," 2013 Papers, Job Market Papers pwa641, Job Market Papers.

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