Denvil Duncan

Global Reform of Personal Income Taxation, 1981-2005: Evidence from 189 Countries

In this paper we use a panel of 189 countries to describe the salient trends that have emerged in national personal income tax systems spanning the twenty five year period from 1981 to 2005. Using complete national income tax schedules, we calculate actual average and marginal tax rates at different income levels as well as time-varying measures of structural progressivity and complexity of national tax systems. We show that frequent alterations of tax structures have reduced tax rates at higher levels of income and diminished the overall progressivity and complexity of national tax systems; however, the degree of this change varies considerably across countries. We also find that the relationship between the tax rates and revenue is positive for high income countries; however, the strength of the relationship declines with weaker institutions and lower levels of economic development.

Tax Progressivity and Income Inequality

This paper examines whether income inequality is affected by the structural progressivity of national income tax systems. Using detailed personal income tax schedules for a large panel of countries, we develop and estimate comprehensive, time-varying measures of structural progressivity of national income tax systems over the 1981-2005 period. We find that while progressivity reduces observed inequality in reported gross and net income, it has a significantly smaller impact on true inequality, approximated by consumption-based measures of Gini. We show theoretically and empirically that, under specific conditions, tax progressivity may increase actual inequality, especially in countries with weak law and order and a large informal nontaxable sector. The paper discusses implications of these results for increasingly popular flat tax policies. The Kuznets hypothesis is also supported by the estimates.

Estimating Tax Agency Efficiency

Empirical work on a tax agencys production process has been plagued by the absence of comparable tax administrative data across countries and years. Such data are now available from the Organisation of Economic Co-operation and Development. This paper uses these data for the years 2007 to 2011, together with an estimation strategy that utilizes data envelopment analysis and stochastic frontier analysis, to determine the relative efficiency of tax agencies in their use of inputs. Overall, the average efficiency scores indicate that countries should be able to collect their current level of revenues with approximately 10 to 16 percent less inputs.

Does Labor Supply Respond to a Flat Tax? Evidence from the Russian Tax Reform

We exploit the exogenous change in marginal tax rates created by the Russian flat tax reform of 2001 to identify the effect of taxes on labor supply of males and females. We apply the weighted difference-in-difference regression approach and instrumental variables to the labor supply function estimated on individual panel data. The mean regression results indicate that the tax reform led to a statistically significant increase in male hours of work but had no effect on that of females. However, we find a positive response to tax changes at both tails of the female hour distribution. We also find that the reform increased the probability of finding a job among both males and females. Despite significant variation in individual responses, the aggregate labor supply elasticities are trivial and suggest that reform-induced changes in labor supply were an unlikely explanation for the amplified personal income tax revenues that followed the reform.

Distributional Implications of Tax Evasion

We study the differential effects of tax reforms on actual and observed net income inequality in a laboratory experiment where participants first supply effort and then make a tax reporting decision. We show that for a group with relatively homogeneous levels of true gross income, higher taxes increase both actual and observed inequality but have a larger effect on actual inequality. We decompose the effect of tax rates into a mechanical tax effect and two behavioral (effort and evasion) effects. Our results indicate that the mechanical and effort effects on actual inequality are larger than on observed inequality while the evasion effect is generally larger on observed inequality. We also find that the size of the effects, relative to each other, depends on the measure of income.

Distributional Implications of Tax Evasion: Evidence from the Lab

We study differences between actual and reported net income inequality in a laboratory experiment where participants first supply effort and then make a tax reporting decision. We show that for a group with relatively homogeneous levels of true gross income, 1) inequality in reported net incomes is higher than inequality in actual incomes and 2) higher taxes increase both types of inequality but have a larger effect on actual inequality. We decompose the effect of tax rates into a mechanical tax effect and two behavioral (effort and evasion) effects. Our results indicate that the mechanical and effort effects on actual inequality are larger than on observed inequality while the evasion effect is generally larger on observed inequality. We also find that the size of the effects, relative to each other, depends on the measure of income.

Bumpy Designs: Impact of Privacy and Technology Costs on Support for Road Mileage User Fees

The mileage user-fee is a promising alternative to the fuel tax but public opposition is a barrier to implementation. We use a large nationally representative survey with an embedded experimental design to determine the extent to which key design features (technology costs and perceived invasion of privacy) influence public opinion regarding the adoption of mileage user-fees. Our findings confirm widespread opposition of mileage user-fees; the ratio of opponents to supporters is about four to one. The embedded experiment provides evidence that public opposition can be attenuated somewhat through two design features: insulating motorists from a new one-time cost for GPS technology to measure mileage, and safeguards that eliminate or minimize perceived invasions of privacy. Future research should explore additional design innovations that can minimize public opposition to this promising source of public revenue.

Demand for Benefit Taxation: Evidence from Public Opinion on Road Financing

Rising fuel economy standards for motor vehicles and higher road construction costs, coupled with infrequent adjustments to fuel taxes, have eroded the revenue base for road construction and repairs. We use survey data to determine whether the revenue‐enhancement measures being used by policy makers to address the revenue shortfall reflect the publics preferences regarding the distribution of road financing costs. In particular, we explore whether there is public support for the idea that road financing costs should be distributed in proportion to benefits received from roads; that is, the benefit principle. We find that public support for the benefit‐principle ranges from a low of 5 percent to a high of 34 percent, depending on the definition used. We also find evidence that people who support benefit‐principle financing are more likely to agree that the road mileage user‐fee is fair and also more likely to support revenue sources that satisfy the benefit principle. These findings suggest that a mix of revenue sources that vary in the extent to which they satisfy the benefit principle is a responsive political strategy. They also suggest that the low level of support for benefit‐principle financing is partly responsible for the unpopularity of mileage user‐fees. Policy makers who wish to pursue mileage user‐fees as a replacement for fuel taxes should make an effort to educate voters on the advantages of benefit‐based revenue sources.

Searching for a Tolerable Tax: Public Attitudes toward Roadway Financing Alternatives

A growing number of states are pursuing strategies to combat declining fuel tax revenue and fund road construction and maintenance, including the use of sales taxes, income taxes, and tolls; raising fuel tax rates; and adopting road mileage user fees. We use data from a nationally representative survey to compare public acceptability of a mileage user fee with each of these alternative revenue mechanisms. We find that support for the revenue options varies from 13.4 percent for income taxes to 33.8 percent for tolls, with higher gasoline tax rates, mileage user fees, and sales taxes in the middle. The evidence also points to stronger intensity of opposition than intensity of support across all alternatives. Finally, we find that, conditional on opposition to the mileage user fee, public acceptability is highest for tolls, followed by higher fuel taxes, sales taxes, and income taxes. Policy implications are discussed.

Circumstantial risk: Impact of future tax evasion and labor supply opportunities on risk exposure

This paper examines whether investment in a risky asset depends on future circumstances. We conduct a laboratory experiment where subjects have the opportunity to invest earned income in a risky asset and, depending on randomly assigned treatment states, have the opportunity to respond to the outcome of the investment through extra labor effort and/or tax evasion. We find evidence that ex-post access to labor opportunities decreases ex-ante risk-taking, while access to tax evasion has no effect. Having both opportunities leads to lower risk-taking, but this effect is not statistically significant. We explore the channels behind these results with two additional treatments and find that our results are driven by background risk rather than flexibility.