Paper #1406

Title:

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

Authors:

Gabrielle Fack and Camille Landais

Date:

November 2013

Abstract:

Optimal tax formulas expressed in "sufficient statistics" are usually calibrated under the assumption that the relevant tax elasticities are unaffected by other available policy instruments. In practice though, tax authorities have many more instruments than the mere tax rates and tax elasticities are functions of all these policy instruments. In this paper we provide evidence that 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 behaviours. 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 optimizing the tax rate for a given tax elasticity when other policy instruments are not optimized can lead to misleading conclusions when tax authorities have another instrument that could set the tax elasticity itself at its optimal level as in Kopczuk and Slemrod [2002].

Keywords:

Tax Evasion, Tax Enforcement, Charitable Giving, Taxable Income Elasticity

Area of Research:

Labour, Public, Development and Health Economics

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