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Why can modern governments tax so much? An agency model of firms as fiscal intermediaries

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  • Kleven, Henrik Jacobsen
  • Kreiner, Claus Thustrup
  • Saez, Emmanuel

Abstract

We develop an agency model explaining why third-party information reporting by firms makes tax enforcement successful. While third-party reporting would be ineffective with frictionless collusion between firms and employees, collusive evasion is impossible to sustain in firms with many employees and accurate business records as any single employee may reveal evasion. We embed our agency model into a macro model where the number of employees grows with development, showing that the tax take evolves as an S-shape driven by changes in third-party information. We show that our model is consistent with a set of stylized facts on taxation and development.

Suggested Citation

  • Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup & Saez, Emmanuel, 2016. "Why can modern governments tax so much? An agency model of firms as fiscal intermediaries," LSE Research Online Documents on Economics 66114, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:66114
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    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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