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The effect of tax enforcement on tax elasticities: Evidence from charitable contributions in France

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  • Gabrielle Fack

    ()

  • Camille Landais

Abstract

Optimal tax formulas expressed in "sufficient statistics" are usually calibrated under the assumption that the relevant tax elasticities are unaffected by other available policy instruments. In practice though, tax authorities have many more instruments than the mere tax rates and tax elasticities are functions of all these policy instruments. In this paper we provide evidence that tax elasticities are extremely sensitive to a particular policy instrument: the level of tax enforcement. We exploit a natural experiment that took place in France in 1983, when the tax administration tightened the requirements to claim charitable deductions. The reform led to a substantial drop in the amount of contributions reported to the administration, which can be credibly attributed to overreporting of charitable contributions before the reform, rather than to a real change in giving behaviours. We show that the reform was also associated with a substantial decline in the absolute value of the elasticity of reported contributions. This finding allows us to partially identify the elasticity of overreporting contributions, which is shown to be large and inferior to -2 in the lax enforcement regime. We further show using bunching of taxpayers at kink-points of the tax schedule that the elasticity of taxable income also experienced a significant decline after the reform. Our results suggest that optimizing the tax rate for a given tax elasticity when other policy instruments are not optimized can lead to misleading conclusions when tax authorities have another instrument that could set the tax elasticity itself at its optimal level as in Kopczuk and Slemrod [2002].

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1406.

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Date of creation: Nov 2013
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Handle: RePEc:upf:upfgen:1406

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Web page: http://www.econ.upf.edu/

Related research

Keywords: Tax Evasion; Tax Enforcement; Charitable Giving; Taxable Income Elasticity;

This paper has been announced in the following NEP Reports:

References

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  1. Bakija, Jon & Heim, Bradley T., 2011. "How Does Charitable Giving Respond To Incentives And Income? New Estimates From Panel Data," National Tax Journal, National Tax Association, vol. 64(2), pages 615-50, June.
  2. Gabrielle Fack & Camille Landais, 2010. "Are Tax Incentives for Charitable Giving Efficient? Evidence from France," NBER Chapters, in: Income Taxation, Trans-Atlantic Public Economics Seminar (TAPES), pages 117-141 National Bureau of Economic Research, Inc.
  3. Henrik J. Kleven & Mazhar Waseem, 2013. "Using Notches to Uncover Optimization Frictions and Structural Elasticities: Theory and Evidence from Pakistan," The Quarterly Journal of Economics, Oxford University Press, vol. 128(2), pages 669-723.
  4. Sara LaLumia & James Sallee, 2013. "The value of honesty: empirical estimates from the case of the missing children," International Tax and Public Finance, Springer, vol. 20(2), pages 192-224, April.
  5. Justin Marion & Erich Muehlegger, 2008. "Measuring Illegal Activity and the Effects of Regulatory Innovation: Tax Evasion and the Dyeing of Untaxed Diesel," Journal of Political Economy, University of Chicago Press, vol. 116(4), pages 633-666, 08.
  6. Kopczuk, Wojciech, 2005. "Tax bases, tax rates and the elasticity of reported income," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2093-2119, December.
  7. Yermack, David, 2009. "Deductio' ad absurdum: CEOs donating their own stock to their own family foundations," Journal of Financial Economics, Elsevier, vol. 94(1), pages 107-123, October.
  8. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
  9. Victor Chernozhukov & Ivan Fernandez-Val & Sukjin Han & Amanda Kowalski, 2012. "CQIV: Stata module to perform censored quantile instrumental variables regression," Statistical Software Components S457478, Boston College Department of Economics, revised 21 Dec 2012.
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