Matthew N. Murray

Tax Structure and Tax Compliance

A model of individual tax compliance behavior, including evasion and avoidance, is developed and estimated. The model recognizes the importance of marginal income tax rates, payroll tax contributions and benefits, and the probability of detection and the penalty on unpaid taxes. Share equations for avoidance, evasion, and reported income are estimated using individual-level data. The estimation results indicate that the tax base rises with higher benefits for payroll tax contributions and falls with higher marginal tax rates; the base also falls with more severe penalties and more certain detection of evasion as individuals substitute towards avoidance income. Copyright 1990 by MIT Press.

Audit selection and income tax underreporting in the tax compliance game

Abstract This paper uses a game-theoretic model of the tax compliance game to estimate a model of audit selection and income tax underreporting in Jamaica. The empirical analysis make use of audited tax returns for individual taxpayers, and a random sample of tax returns for the population from which the audited returns are selected. The estimation results strongly indicate a nonrandom audit strategy, and thus provide support for the game-theoretic approach. The results also indicate that the probability of underreporting and the level of underreporting are positively related to the marginal tax rate and to income, and negatively related to marginal payroll tax benefits; in general, the underreporting elasticities are small.

Local Public Policies and Interregional Business Development

A key consideration in the formulation of local government public policies is their expected influence on economic development. There is limited information on the sensitivity of economic development to specific local policies, and fearing the worst, policymakers are prone to oppose actions which appear to raise business costs, such as taxes, and fail to give full consideration to offsetting benefits which are often derived from expenditures. Through these actions local governments can be perceived as engaging in tax competition, using a mix of strategies and employing tools such as infrastructure, tax structure, and public services. Differing views on whether such competition promotes efficiency have been espoused. Public finance economists have frequently stated that tax competition is counterproductive, though McLure [8] and others have argued that its benefits are likely to be substantial. Whichever view is eventually supported, the issue remains whether the competition and resulting choice of public policies actually influence business locations and start-ups. The current paper is a comprehensive, consistent examination of the effects of a wide-ranging set of local public policies on interregional business location and start-up decisions. Aspects of the contributions offered by this paper have been included in the work of other authors, but no previous work has provided a systematic examination of the issues. First, this research, though confined to an individual state, is interregional as it measures the effect of public policies across wide geographic areas, including seven metropolitan areas and numerous rural counties. Second, the basis for analysis is firm-specific locations and start-ups which are measured using unemployment insurance records covering all industries. This allows for analysis of industry locations across all sectors. Bartik [1] and Carlton [4; 5] use firm level data for manufacturing industries and selected subsectors. The data used here permit analysis of actual firm locations across all industries and allow a distinction to be made between firms entering the economy, firms expanding or contracting, and those exiting the economy. Other researchers, such as Wasylenko and McGuire [15], study determinants of manufacturing and nonmanufacturing employment, but the data are for net employment changes, and as a result are not specific to newly locating firms.

Do Economic Effects Justify the Use of Fiscal Incentives

The siting of a large, new firm is often presumed to give rise to significant economic and tax benefits to the community of location. This presumption serves as the basis for the granting of lucrative economic development incentives to footloose businesses. This article examines whether large, mobile firms generate significant net benefits for the region of location. Panel data and nonrandom estimation techniques are applied to a primary database of large firms that made location decisions in the 1980s to explore the impact of location on regional economic performance. The empirical analysis explores different treatment regions (both effects within the county and the metropolitan statistical area [MSA] of location) and different control regions. The results show that large firms fail to produce significant net benefits for their host communities, calling into question the high-stakes bidding war over jobs and investment.

Firm size, employment risk and wages: further insights on a persistent puzzle

Recent inquiries into the observed positive relationship between wages and firm size suggest that unobservable characteristics give rise to a sorting of workers into large and small firms. Specifically, smaller firms tend to offer more unstable employment prospects and will tend to attract workers who are themselves unstable. As demonstrated by empirical analysis, the risk of permanent employment separation (i.e. the risk of firm failure) is in fact negatively correlated with firm size. Moreover, when this measure of employment risk is included as a determinant of wages, the independent influence of firm size on wages vanishes. These results suggest that firm size merely proxies for the risk of firm failure by capturing unobservable sources of heterogeneity in workers and firms.

Competition over the Tax Base in the State Sales Tax

The sales tax shows wide variation across states. Rates differ, some states allow local options, and the base can vary dramatically. Consumer items like food are often afforded preferential treatment, and business purchases like manufacturing machinery are exempt in some states. There is no research that explores these and other sales tax base choices. This article provides an empirical examination of sales tax base choice on the part of states using a political economy framework and tools of spatial econometrics. The analysis accommodates tax competition among states, using a variety of alternative definitions of “competitors.” The authors find little evidence that consumer exemptions are linked to needy segments of the population, while equipment exemptions are more common in states with large industrial sectors. The results also show that the nature of the interstate tax competition process differs for different elements of the base and that nongeographic competition can be especially important.

Would Tax Evasion and Tax Avoidance Undermine a National Retail Sales Tax

Argues that shifting to an indirect tax system (a national sales tax) will not necessarily reduce tax avoidance and tax evasion behavior by businesses and individuals, particularly if the tax rate is set high to maintain revenue neutrality. Lack of experience in administering a high-rate, indirect tax system precludes definitive statements regarding the likely extent of tax base erosion under a national sales tax.

What Factors Influence the Structure of the State Income Tax

This article contributes to a small body of literature that examines empirically the factors affecting the structure of state income taxes. We assume vote-maximizing politicians who are potentially influenced by information spillovers from other states in the spirit of yardstick competition. A number of nominal provisions of the income tax are considered in the empirical analysis, including earned income tax credits, top bracket rates, exemptions, and income thresholds. Politicians manipulate these and other structural features of the income tax to garner votes. The results yield no evidence of yardstick competition in the setting of income tax policy, regardless of how we define neighbors. Political factors like single-party control affect the choice of some tax provisions. Demographic factors play a mixed role; in particular, characteristics of the low-income population are seldom associated with provisions that benefit these particular groups.

Urban Malls, Tax Base Migration, and State Intergovernmental Aid

Decentralized systems of government finance give rise to fiscal disparities due to interjurisdictional variations in tax bases and expenditure needs. Intergovernmental aid is used to address such disparities. This article explores changes in local tax capacity and intergovernmental aid resulting from urban shopping malls that extract retail sales and sales tax revenue away from surrounding areas, especially rural counties. A model is developed and estimated to determine the impact of urban malls on local government sales tax bases, controlling for sales tax rate differentials and other factors. The results reveal a 15.9% decline in the sales tax base for counties in close proximity to two newmalls. The analysis is extended to examine impacts of changing local tax capacity on state education aid. Based on the programconsidered here, less than 20% of the loss in own-source revenue is recovered through increased aid.

Intergovernmental Aspects of Growth and Stabilization Policy

The stabilization function of subnational governments was a topic of considerable research prior to 1970.1 Very rapid growth of state and local government expenditures in the years following World War II and lingering concerns about the causal role of state and local governments in the Great Depression are probable reasons for so much attention being focused on this issue.