Friday, April 13, 2012

We need more tax inspectors

The question on how to best tax people according to some criterion is the fundamental question of much of public economics. But it is little explored how the willingness of people to pay their taxes matters in this, except for a small literature on the underground economy.

Philipp Doerrenberg, Clemens Fuest, Denvil Duncan and Andreas Peichl Study a model economy where households have heterogeneous tax morale. It should come to no surprised that under such circumstances and if the tax authority can discriminate in this regard, it will tax more heavily those that are more willing to pay. That seems to be the pay of least effort for the tax authority. But the model completely neglects that the government can do something about those with low tax morale: go after them. Of course, it costs some resources, but when the objective is to maximize revenue, it can be worth it.

In fact, I find it amazing how a government in a budget crunch often first reduces the budget of its fiscal authority, thereby amplifying the problem. That can be viewed as a smart political move, tax authorities are never popular, but I am not even convinced of that. Think precisely about those with high tax morale: seeing there getting off free may reduce their tax morale, making things even worse.

1 comment:

AP said...

I agree with your statement that we need to close loopholes and need better tax enforcement - especially in a dynamic environment.
I said something similar in an interview for a German newspaper recently: