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The effect of tax enforcement on tax elasticities: evidence from charitable contributions in France

Fack, Gabrielle and Landais, Camille ORCID: 0000-0002-9534-680X (2016) The effect of tax enforcement on tax elasticities: evidence from charitable contributions in France. Journal of Public Economics, 133. pp. 23-40. ISSN 0047-2727

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Identification Number: 10.1016/j.jpubeco.2015.10.004


In the “sufficient statistics” approach, the optimal tax rate is usually expressed as a function of tax elasticities that are often endogenous to other policy instruments available to the tax authority, such as the level of information, enforcement, etc. In this paper we provide evidence that both the magnitude and the anatomy of tax elasticities are extremely sensitive to a particular policy instrument: the level of tax enforcement. We exploit a natural experiment that took place in France in 1983, when the tax administration tightened the requirements to claim charitable deductions. The reform led to a substantial drop in the amount of contributions reported to the administration, which can be credibly attributed to overreporting of charitable contributions before the reform, rather than to a real change in giving behaviors. We show that the reform was also associated with a substantial decline in the absolute value of the elasticity of reported contributions. This finding allows us to partially identify the elasticity of overreporting contributions, which is shown to be large and inferior to − 2 in the lax enforcement regime. We further show using bunching of taxpayers at kink-points of the tax schedule that the elasticity of taxable income also experienced a significant decline after the reform. Our results suggest that failure to account for the effect of tax enforcement on both the magnitude and the anatomy of the elasticity of the tax base with respect to the net of tax rate can lead to misleading policy conclusions, both for the global optimal tax rate (when all policy instruments are optimized) and the local optimal tax rate (conditional on all other

Item Type: Article
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Additional Information: © 2015 Elsevier B.V.
Divisions: Economics
Subjects: H Social Sciences > HJ Public Finance
Date Deposited: 03 Dec 2015 09:12
Last Modified: 05 Jun 2024 06:54

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