nep-pub New Economics Papers
on Public Finance
Issue of 2010‒05‒22
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Tax Morale and Compliance Behavior: First Evidence on a Causal Link By Halla, Martin
  2. Tax audit impact on voluntary compliance By Niu, Yongzhi
  3. Corporate Tax Stimulus and Investment in Colombia By Arturo Galindo; Marcela Melendez
  4. The Marginal Cost of Public Funds and Tax Reform in Africa By Auriol, Emmanuelle; Walters, Michael
  5. Tax rates, governance, and the informal economy in high-income countries By Zoë Kuehn
  6. Free Riding in Procurement Design By Barbosa, Klenio

  1. By: Halla, Martin (University of Linz)
    Abstract: Recent literature on tax evasion emphasizes the importance of moral considerations to explain compliance behavior. As a consequence scholars aim to identify factors that shape this so-called tax morale. However, the causal link between tax morale and actual compliance behavior is not established yet. Exploiting exogenous variation in tax morale – given by the inherited part of tax morale of American-born from their ancestors' country of origin – our instrumental variable analysis provides first evidence on a causal effect of tax morale on the size of the underground production.
    Keywords: tax morale, tax evasion, tax compliance, underground production
    JEL: A13 O17 H26 Z13 C81
    Date: 2010–04
  2. By: Niu, Yongzhi
    Abstract: This study examines the tax audit impact on voluntary compliance. It is different from those in the literature in several ways. First, models were built exclusively for investigating the voluntary compliance behavior shifts after a firm is audited. Second, apart from the theoretical approach and laboratory experiment approach used in the literature, this study applied the difference-in-differences non-experimental approach. Third, historical population data of a New York State economic sector were used in this study instead of experimental data or randomly selected sample data often used in the literature. The results of both Ordinary Least Squares (OLS) and Time Series Cross Section (TSCS) autoregressive modeling methods are presented. The results of both methods suggest that after an audit, a firm would report a higher sales growth rate. The TSCS approach shows that in the year of the audit, a typical firm would report a sales growth rate which is 2.63 percentage points higher than a firm that was not audited. The percentage would decline by a rate of 1/3 each year thereafter. The findings suggest that the audit productivity derived in many research papers, where only the direct audit collections are considered, may be underestimated. The results of this research may provide policy makers with extra incentives to strengthening the audit efforts to generate more revenues.
    Keywords: tax; audit; impact; voluntary compliance; difference-in-differences;
    JEL: H29 H26
    Date: 2010–05–11
  3. By: Arturo Galindo; Marcela Melendez
    Abstract: This paper uses a yearly dataset of plant-level investment in Colombian firms during the period 1997 to 2007 to assess the impact of a tax incentive for firms that invest in fixed assets implemented in 2004. A positive and statistically significant correlation is found between the boom observed in investment and the adoption of the tax policy. However, the correlation vanishes when year-specific effects are controlled for. This result is robust to changes in the empirical specification, changes in estimation techniques, the inclusion of additional controls, and changes in the data set, among other tests. Overall, it is concluded that the tax stimulus analyzed was ineffective in promoting investment in Colombia.
    Keywords: Taxes, Investment, Colombia
    JEL: E22 H2 O54
    Date: 2010–04
  4. By: Auriol, Emmanuelle; Walters, Michael
    Abstract: In this paper we propose estimates of the marginal cost of public funds (MCF) in 38 African countries. We develop a simple general equilibrium model that can handle taxes on five major tax classes, and can be calibrated with little more than national accounts data. Our base case estimate of the average MCF from marginal increases in all five tax instruments is 1.2. Focusing on the lowest cost tax instruments in each country, commonly the VAT but not always, the average MCF is 1.1. A key feature of our model is explicit recognition of the informal economy. The larger the informal economy, the higher MCFs tend to be. Extending the tax base to include sections of the informal economy by removing some tax exemptions offers the potential for a low MCF source of public funds, and a lowering of MCFs on other tax instruments.
    JEL: D43 H25 H26 H32 H60
    Date: 2009–11
  5. By: Zoë Kuehn (Universidad Carlos III de Madrid)
    Abstract: About 16.7% of output in high-income OECD countries was produced informally in 2001-02 (Schneider, 2002). Davis and Henrekson, (2004) show that there exists a positive relation between tax rates and the informal economy for high-income OECD countries. While existing models of the informal economy mostly focus on developing countries where informality is linked to the use of labor-intensive and low productive technologies, this paper studies the mechanisms behind the informal economy in high-income countries. I build a model economy, following Lucas, (1978), in which agents decide to become workers, managers of informal firms, or managers of formal firms. Managers of informal firms use the same technology as formal managers. However, they do not pay taxes but run the risk of getting caught, taxed, and fined. Simulations show that differences in tax rates can only account for approximately 33% of the observed variation in informal economy across high-income countries. When combining differences in tax rates with differences in governance quality, the extent to which these tax rates are enforced, the model accounts for approximately 56% of the cross-country variation in informal economy. Policy experiments show that if all countries attained Switzerland\'s governance quality, average informality would drop by around 15%. I estimate average costs of this policy to be equivalent to at most 26% of the average tax administration\'s budget and find gains in tax revenues to be around ten times larger than these costs.
    Keywords: informal economies; high-income countries; tax rates; governance
    JEL: H2 E26 H26 J24
    Date: 2010–05–12
  6. By: Barbosa, Klenio
    Abstract: Low-powered contracts do not provide proper incentives to reduce cost; still empirical studies show that they are quite pervasive in public and private procurement. This paper argues that low-powered contracts arise due to a free-riding problem when the contractor enjoys economies of scale/scope working for different buyers. A buyer, offering a procurement contract to the contractor, does not fully internalize that higher-powered incentives provide cost reduction in the contractor's activities, benefiting other buyers. As a result, buyers offer lower-powered contracts than what would be designed by cooperative buyers. Strikingly, the higher the contractor's benefits from economies of scope/scale are, the lower the power of the procurement contracts will be. In addition, laws which force buyers to award fixed-price contracts can be welfare-enhancing.
    Keywords: free-riding, procurement, multibuyers
    JEL: H57 L24
    Date: 2009–12

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