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Information Frictions and Tax Inertia

Author

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  • Besart Avdiu

    (The World Bank Group, Firms, Entrepreneurship and Innovation Unit at the FCI Global Practice)

Abstract

Tax rates tend to be adjusted rarely. This paper proposes information frictions on the side of policymakers as a possible explanation for tax inertia. Information frictions therefore result in sub-optimal tax rates. The implications for two classes of models, namely noisy information and rational inattention, are explored. The paper examines independent as well as interrelated policymakers, who either face independent or common shocks. I find that information frictions can cause tax inertia, which is increasing in the noise of the information content. Furthermore, the degree of strategic complementarity among policymakers can also increase inertia and bunching of tax rates. I also find that investments in information processing technology as well as increased performance incentives on the side of policymakers can decrease inertia.

Suggested Citation

  • Besart Avdiu, 2019. "Information Frictions and Tax Inertia," Economics Bulletin, AccessEcon, vol. 39(3), pages 2210-2220.
    • Handle: RePEc:ebl:ecbull:eb-19-00110
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    File URL: http://www.accessecon.com/Pubs/EB/2019/Volume39/EB-19-V39-I3-P207.pdf
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    References listed on IDEAS

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    1. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1295-1328.
    2. Carlos A. Vegh & Guillermo Vuletin, 2015. "How Is Tax Policy Conducted over the Business Cycle?," American Economic Journal: Economic Policy, American Economic Association, vol. 7(3), pages 327-370, August.
    3. George R. Zodrow & Peter Mieszkowski, 2019. "Pigou, Tiebout, Property Taxation, and the Underprovision of Local Public Goods," World Scientific Book Chapters, in: George R Zodrow (ed.), TAXATION IN THEORY AND PRACTICE Selected Essays of George R. Zodrow, chapter 17, pages 525-542, World Scientific Publishing Co. Pte. Ltd..
    4. Bartosz Mackowiak & Mirko Wiederholt, 2009. "Optimal Sticky Prices under Rational Inattention," American Economic Review, American Economic Association, vol. 99(3), pages 769-803, June.
    5. Buettner, Thiess & von Schwerin, Axel, 2016. "Yardstick competition and partial coordination: Exploring the empirical distribution of local business tax rates," Journal of Economic Behavior & Organization, Elsevier, vol. 124(C), pages 178-201.
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    Cited by:

    1. Muhan Wang & Kezhong Zhang & Sihan Gao, 2024. "Does Information Exchange Affect Cross‐border Tax Avoidance? Evidence from the Common Reporting Standard," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 32(4), pages 179-228, July.

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    Keywords

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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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