Lecture 5: Taxation of goods and services · Lecture 5: Taxation of goods and services ... taxation 5 Commodity taxation 6 Labour income taxation ... taxation References Outline of

Lecture 5:Taxation of goods

and services

Antoine Bozio

Introduction

I. Institutions andhistory

History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry

III. Optimaltaxation

Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues

Is indirect taxationregressive ?

Rates differentiation

Tax compliance

Direct vs indirecttaxation

References

Lecture 5: Taxation of goods and

services

Antoine Bozio

Paris School of Economics (PSE)

Ecole des hautes etudes en sciences sociales (EHESS)

Master APE and PPDParis – October 2017

1 / 137


and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Course outline : taxation

5 Commodity taxation

6 Labour income taxation

7 Labour income taxation

9 Wealth and property taxation [T. Piketty]

10 Optimal taxation of capital [T. Piketty]

12 Corporate taxation

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Commodity taxation

“C’est au milieu de la profusion des repas que se payentles taxes sur le vin, la biere, le sucre, le sel et les articlesde ce genre, et le tresor public trouve une source de gaindans les provocations a la depense qui sont excitees parl’abandon et la gaiete des fetes. ”

Germain Garnier, introduction to the French translationof The Wealth of Nations (1822 ; 1859, p. L), quoted byAtkinson and Stiglitz (1980, p. 363)

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Commodity taxation

“It is while enjoying the pleasure of food that taxes onwine, beer, sugar, salt and other such goods, are paid,and the Treasury finds revenues in the excitement toexpenses that are caused by the enjoyment of parties.”


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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Direct vs indirect taxation• Traditional definition : remittance’s technique

• Whether the tax is directly paid by the taxpayer orpaid indirectly through the purchase of goods

• Not a satisfactory definition :(i) direct taxes can be remitted by employers or banks(ii) implies full shifting of indirect taxes and no shifting

of direct taxes

• Modern distinction : taxpayers’ characteristics• “direct taxes may be adjusted to the individual

characteristics of the taxpayer, whereas indirect taxesare levied on transactions irrespective of thecircumstances of buyer and seller” (Atkinson andStiglitz, 1980, p. 427)

• With Y h the income of ind. h, X h consumptionbundle, γh ind. characteristics

T h = T (Y h,X h, γh) 6= T h = T (Y h,X h)

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Policy questions

1 Is indirect taxation regressive ?• How regressive is VAT ?• Are reduced rates efficient for redistributive

objectives ?

2 Whether or not to tax uniformly ?• History of excise taxes with multiple rates• Common view of economists in favour of neutrality• Standard theory not in favour of uniformity ?

3 Is VAT more robust to evasion ?• Third-party reporting• Carousel fraud

4 Should we prefer direct or indirect taxation ?• Are indirect taxes useless ?• Or are indirect taxes more efficient than direct taxes ?

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Outline of the lecture

I. Institutions and history

II. Incidence of taxes on goods and services

III. Optimal commodity taxation

IV. Policy issues

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

I. Institutions and history

1 History of indirect taxation

2 Types of commodity taxes

3 Commodity taxation around the world

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

History of indirect taxation

• Roman Antiquity• Direct taxes were widespread (tributum)• Indirect taxes (vectigalia) took two forms :

1 Taxes on trade (portorium)2 Taxes on consumption

• Taxes on trade• Taxes for using roads, crossing bridges, arriving in

harbour

• Taxes on consumption• Taxes on goods sold (vectigal rerum venalium)• Taxes on salt• Taxes on slaves

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


• Middle Age and Modern period• Similar to Roman Antiquity• Different tax on each commodity• Expressed as function of quantity (i.e., excises)

e.g., 1 pound for a beef

• A long list of commodity taxes• Called aides in France, or excise in England• On salt (gabelle)• On alcoholic drinks (droit de barrage, de remuage, les

vingts sous de Sedan, les cinq sous des pauvres, etc.)• On meat (droit du pied fourche)• On card games, soap, oil, leather, etc.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


• Taxes on commodity transport• Octroi on products entering cities• Cities create check-point at city gates to collect the

tax

Figure 1: Barriere d’Enfer in Paris

Source : Par Coyau / Wikimedia Commons.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


• Abolition during the French Revolution• Abolition of most indirect taxes (most hated taxes)

e.g., gabelle and other aides abolished in March 1790e.g., tobacco duties and octroi in Feb. 1791

• Reinstatement with Napoleon• Octroi back in 1798• Regie des droits in 1804 (on various food items)• Duties on salt reinstated in 1806• In 1810, indirect taxes represent 54% of tax receipt

in France against 36% in 1801 (Bottin, 1997)• Increase in indirect taxation in the 19th c. to reach

60% of tax receipt in 1911

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


• Early general consumption taxes• In France, taxe sur les paiements (1917) on all

transactions, impot sur le chiffre d’affaire (1920) onturnover, taxe unique a la production (1936) onproduction

• First attempts are general consumption taxes butbased on turnover or production

• Significant problem by inducing higher tax on longerproduction circuits, and lower taxation of import

• Production efficiency• Diamond and Mirlees (1971a, 1971b)• Optimal taxation framework : non optimal to tax

production• Taxes should not be imposed on intermediate goods

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


• The invention of VAT• Formal description by Maurice Laure (1953, 1957), a

French civil servant called “le pere de la TVA”• France introduced a fractional turnover tax in 1948• VAT introduced in 1954 (loi du 10 avril 1954), then

extended in 1968 (loi du 6 janvier 1966)

• The spread of VAT• Denmark (1967), Germany (1968), Sweden (1969),

the U.K. (1973)• EU VAT in 1977 (Sixth Directive)• In 2014, 160 countries use VAT• 41 countries do not use VAT : the U.S., Iraq, Saudi

Arabia, Syria, Malaysia, etc.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Types of commodity taxes

1 Excise taxes• Tobacco taxes• Alcool duties• Fuel taxes

2 General commodity taxes• Value added tax (VAT)• Retail sales tax (RST)

3 Production taxes• Turnover tax

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Excise or specific taxes

• Definition• Tax defined as a function of quantities of a given

commodity (in French accises) : q = p + τe.g., alcool duty as a function of amount of alcoole.g., fuel tax as a function of fuel quantitye.g., tobacco taxes

• Sin taxes• Excises were the traditional commodity tax• Now mostly designed as corrective taxes, i.e., aiming

to change behaviour

• Excise vs ad valorem• Ad valorem tax is defined as a function of the price

(in Latin, according to value) : q = p(1 + τ)e.g., VAT is an ad valorem tax

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Value Added Tax (VAT)

• Principle• A tax on the value of sales of goods and services of

registered businesses with turnover above a certainthreshold.

• It applies to all sales to private consumers and otherbusinesses (B2C and B2B)

• Businesses can offset the VAT on their purchases(input VAT) against the liability on their sales(output VAT).

• Characteristics• No taxation of intermediate goods• Remittance is ‘fractional’ (remitted at each stage)• Third party reporting• Tax collection earlier (cash flow benefit)• See Ebrill et al. The modern VAT (2001) for details

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Value Added Tax (VAT)

Table 1: VAT at 20% : firm 1 produces intermediate goodthat firm 2 uses as input

Firm 1 Firm 2VAT VAT

Sales e 1000 e 200 Sales e 3000 e 600Inputs e 0 Inputs e 1200 -e 200Wages e 800 Wages e 1800Profit e 200 Profit e 200net VAT = e 200 net VAT = e 400

Total tax remitted = e 600

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

VAT in the EU

• EU harmonization requirements• Tax base (Sixth Directive 1977)• A floor rate at 15% (since 1992)• No more than two reduced rate and no new

zero-rating goods

• Zero-rating• The seller charges a VAT rate of zero on its sales but

is still entitled to credit for the input VAT paid.

• Exemptions• Sales are not subject to VAT but the firm does not

have the right to reclaim the VAT paid on its inputs• Sectors exempted in the EU

medical care, education, social welfare and culturalactivities, financial services and letting of property.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Retail sales tax (RST)

• Principle• A tax on the value of sales to final consumers.• Sales to other businesses (B2B) are untaxed.

• Characteristics• No taxation of intermediate goods• Tax remittance at the final sale only• RST requires an “end user” distinction to be made,

between sales to businesses (untaxed) and sales tofinal consumers (taxed)

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Retail sales tax (RST)

Table 2: RST at 20% : firm 1 produces intermediate goodthat firm 2 uses as input

Firm 1 Firm 2RST RST

Sales e 1000 e 0 Sales e 3000 e 600Inputs e 0 Inputs e 1000Wages e 800 Wages e 1800Profit e 200 Profit e 200net RST paid = e 0 net RST paid = e 600

Total tax paid = e 600

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

The burden of indirect taxation

Figure 2: Indirect taxation as a share of GDP

0

2

4

6

8

10

12

14

16

18

20

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Ind

ire

ct

taxa

tio

n a

s a

sh

are

of

GD

P

Denmark Sweden France

United Kingdom Italy Germany

Japan Switzerland United States

Source : OECD, Revenues Statistics (2015) ; OECD.Stat.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Statutory VAT rates

Figure 3: Statutory VAT rates in the EU

0

5

10

15

20

25

30

Standard rate Mid rate Low rate

Source : DG Taxation and Customs Union, “Data on taxation” 2015.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Statutory VAT rates

Figure 4: Average standard VAT rate in the EU 28

18

18,5

19

19,5

20

20,5

21

21,5

22

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source : DG Taxation and Customs Union, “Data on taxation” 2015.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Statutory VAT rates

Figure 5: French VAT rates (1968-2016)

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

35,0%

11/06/1968 28/08/1976 14/11/1984 31/01/1993 19/04/2001 06/07/2009

Higher rate Standard rate

Mid rate Reduced rate

Super reduced rate

Source : IPP tax and benefit tables, April 2016.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

VAT efficiency

• VAT revenue ratio or C-efficiency

VAT revenue ratio =VAT revenue

Main rate × National consumption

• Indicator on VAT tax base

• Extent of exemption and reduced rates• Extent of fraud

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

VAT revenue ratio

Figure 6: VAT revenue ratio in OECD countries (2011)

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0,9

1

Source : OECD Consumption Tax Trends (2014), Fig. 3.1.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

II. Incidence

“One of the most valuable insights that economicanalysis has provided in public finance is that the personwho effectively pays a tax is not necessarily the personupon whom the tax is levied.To determine the true incidence of a tax or a publicproject is one of the most difficult, and most important,tasks of public economics.”

A. Atkinson and J. Stiglitz (1980)

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

II. Incidence

1 Textbook incidence of goods and services

2 Incidence with salience

3 Is VAT pass-through asymmetric ?

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Standard textbook canon

• Assumptions of the standard textbook canon• Partial equilibrium analysis• Perfect competition• Perfect information• No compliance cost

• Main implications

1 Legal incidence differs from economic incidence2 Invariance of tax incidence3 More inelastic factor bears more of the tax4 Symmetry of tax increases/decreases

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Standard textbook extensions

• Extensions to the basic partial equilibrium case

1 Market rigidities2 Imperfect competition3 Remittance and compliance cost

• General equilibrium• Tax shifting will impact other markets

e.g., tax on butter affects consumers of margarine• Factor prices will also be affected• Harberger (1962) model is the classic GE incidence

model⇒ see lecture 9 on corporate tax

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Imperfect competition

• Various incidence outcomes• Tax incidence depends on the shape of the demand

curve• Monopolist can increase prices by more than the tax

(overshifting)• Oligopolies : strategic interactions between producers

can lead to various outcome depending of thestrategic games.

• Ad valorem vs. specific taxes• For a given tax revenue, ad valorem taxes reduce

production less (and are therefore preferred)

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Standard textbook canon

• General consumption tax shifted to consumers• Very little substitution to overall consumption• Hence demand elasticities very inelastic• Consumer must pay all VAT/sames tax⇒ main assumption in CBO computations

• Exceptions• Sales close to borders• Specific good taxes with possible substitute

e.g., tax on Lexington restaurant (Gruber 2007textbook)

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Empirical evidence of incidence

1 Incidence of fuel taxes• Doyle and Samphantharak (JPUB, 2008), Marion

and Muehlegger (JPUB, 2011)

2 Incidence of tobacco taxes• Evans, Ringel, and Stech (1999), Hanson and

Sullivan (NTJ, 2009), Harding et al. (AEJ-EP, 2012)

3 Incidence of general consumption taxes• Limited empirical evidence• Poterba (NTJ, 1996), Besley and Rosen (NTJ,

1999), Carbonnier (JPubE, 2007) and Kosonen(JPubE, 2015) are exceptions

• Benedeck et al. (IMF, 2015) on EU VAT changes

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Prices in U.S. cities

• Besley and Rosen (NTJ, 1999)• Data on 155 U.S. cities for 12 commodities

(bananas, coke, big-Mac, kleenex, eggs, milk, etc.)• Quarterly price and sales tax data from 1982 to 1990

• Econometric approach• Regressing tax-exclusive prices pijt of commodity i ,

in city j , in period t :

lnpijt = β1iτijt + β2i Cijt + CITYij + TIMEit + εijt

• With Cijt cost variables (rental, wage and energycosts)

• Interpretation• β1i = 0 means full-shifting of sales taxes on prices

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


Figure 7: Estimates of shifting parameter β1i

-0,5

0

0,5

1

1,5

2

2,5

3

Note : estimates of β1i , 0 denotes the full-shifting hypothesis.Source : Besley and Rosen (1999), Table 3.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


• Results• Full-shifting for some commodities (Big Mac,

kleenex, spin balance)• Over-shifting for many others (bananas, bread, milk,

etc.)

• Interpretation from Besley and Rosen (1999)• Consistent with retail markets being imperfectly

competitive• Authors cite IO literature suggesting significant

market power in retailing

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

VAT reform in Finland

• Kosonen (JPubE, 2015)• EU directive allowing experiment in VAT cut in

labour intensive sectors (to increase employment)• VAT reform in Finland in 2007• Rate on hairdressing down from 22% to 8% (-14

ppts)• End to the experiment in 2011

• Methodology• DiD comparing beauty salons and hairdressing• Restricted price data with firm identifier• Corporate income tax data

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


Figure 8: Estimates of impact on prices

Source : Kosonen (2015), Fig. 2.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


Figure 9: Estimates of impact on quantities

Source : Kosonen (2015), Table 5.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


Figure 10: Estimates of impact on profits

Source : Kosonen (2015), Fig. 7.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


• Results• Pass-through estimated at 50%• Higher pass-through for bigger firms• No impact on quantities• No impact on employment or wages• Increased profits

• Interpretation• Low demand and supply elasticities, hence no

quantity change• Reform inefficient in raising welfare

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

EU VAT changes

• Benedeck et al. (IMF, 2015)• Use all VAT change in 17 Eurozone countries

(1999-2013)• Data on 67 COICOP categories

• Methodology• Regression design following Besley and Rosen (1999)

4ln(pict) =12∑

j=−12

γj4ln(1+τict+j )+ΓXict+αc +θi +δt+εict

• with consumption category i in country c and montht, and Xict controls (unemployment and GDPgrowth)

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

EU VAT changes

Figure 11: Average VAT pass-through (all changes)

Source : Benedeck et al. (2015), Fig. 1.B.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

EU VAT changes

Figure 12: Cumulative Pass Through by Type of VAT RateChange

Source : Benedeck et al. (2015), Fig. 2.45 / 137


and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

EU VAT changes

Figure 13: Pass Through by Type of VAT Rate Change

Source : Benedeck et al. (2015), Table 3.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

EU VAT changes

Figure 14: Number of VAT Rate Changes by Type ofReform and Total Consumption Share Affected

Source : Benedeck et al. (2015), Fig. 4.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

EU VAT changes

Figure 15: Pass Through by Share of ConsumptionAffected

Note : x-axis legend corrected.Source : Benedeck et al. (2015), Fig. 5.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

EU VAT changes

• Results• Average pass-through of 40%• Higher pass-through for standard rate (139%) :

full-shifting• Lower pass-through for reduced rate (30%)• Increasing pass-through with share of consumption

affected (but not linearly)

• Interpretation• Standard rate pass-through consistent with common

full-shifting assumption• Reduced rate significantly under-shifted• Implication for redistribution of low-rate reductions

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Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Incidence with salience

• Salience• Standard assumption that taxes are equivalent to

pricesdx

dp=

dx

dt

• Salience is the idea that visibility of taxes mightaffect behavioural responses

• Chetty, Looney, and Kroft (AER, 2009)• Part 1 : test of salience effect on consumer behaviour• Part 2 : develop theory of incidence with salience

effect

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Incidence with salience• Framework

• Pre-tax price p, tax τ not included in posted price q

q = (1 + τ)p

• Demand for good x : x(p, τ)• With full optimization

• Demand only depends on the total tax-inclusiveprice : x(p, τ) = x(p(1 + τ), 0)

• Price elasticity equals gross-of-tax elasticity :εx ,p ≡ εx ,1+τ

−∂log(x)

∂log(p)= − ∂log(x)

∂log(1 + τ)

• Degree of under-reaction to tax θ

θ =∂log(x)

∂log(1 + τ)/∂log(x)

∂log(p)

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Antoine Bozio

Introduction


History

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Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Estimating salience

• Empirical strategy 1 (Chetty et al 2009)• Manipulation of tax visibility• Compare x(p, τ) with x(p(1 + τ), 0)• Compare the effect of equivalent price increase to

estimate θ

• Experimental design• Experiment in U.S. grocery store with price-inclusive

tax tag• Scanner data on price/quantity for each product• Quasi-experimental design with control group in 2

other stores• Possible concern in experiment is “Hawthorne effect”

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Estimating salience

Figure 16: Price-tag experiment

Source : Chetty, Looney, and Kroft (2009), Exhibit 1.

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Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Estimating salience

Figure 17: Effect of posting tax-inclusive prices : meanquantity sold

Source : Chetty, Looney, and Kroft (2009), Table 3.

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Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Estimating salience

• Empirical strategy 2• Alcohol subject to two state-level taxes in the U.S. :

• Excise tax τE : included in price• Sales tax τS : added at register, not shown in

posted price

• Exploiting state-level changes in these two taxes toestimate θ

• Estimation• Aggregate state data on beer consumption• Estimate following regression :

∆logxjt = α+ β∆log(1 + τEjt ) + θ∆log(1 + τS

jt ) + εjt

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Estimating salience

Figure 18: Per capita beer consumption and state beerexcise taxes

Source : Chetty, Looney, and Kroft (2009), Fig. 2.A.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Estimating salience

Figure 19: Per capita beer consumption and state salestaxes

Source : Chetty, Looney, and Kroft (2009), Fig. 2.B.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Salience effects

Figure 20: Effect of excise and sales taxes on beerconsumption

Source : Chetty, Looney, and Kroft (2009), Table 6.

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and services

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Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Estimating salience

• Results• Posting tax-inclusive price tags reduces demand by

8 percent• Using sales tax/excise difference lead to θ = 0.06

(very far from 1 !)

• Incidence formula with salience

dp

dτ= θ

εD

εS − εD

• Incidence on producers attenuated by θ (i.e., demandcurve becomes more inelastic when consumers areinattentive)

• Statutory incidence matter (producers have toinclude in the price the tax that they bear nominally)

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Asymmetry of VAT pass-through• Asymmetry of pass-through

• Whether pass-through is higher when tax increasethan tax decrease

• Standard incidence theory rejects asymmetry : onlyεS and εD matter

• Small literature with mixed results• Carbonnier (2005, 2008) : evidence of short-term

asymmetry on French data• Politi and Matteos (2011) : evidence of asymmetry

in 10 goods in Brazil• Benedeck et al. (2015) : no asymmetry for EU VAT

changes, except anticipation effect for tax increases(hence difference of timing)

• Recent evidence• Benzarti, Carloni, Harju and Kosonen (2017) : first

convincing evidence of asymmetric pass-through

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Antoine Bozio

Introduction


History

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Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Benzarti et al. 2017

1 Finnish hairdressing VAT reform• Follow-up from Kosonen (2015)• Decrease of VAT rate in Jan. 2007 (-14 ppts)• Increase of VAT rate in Jan. 2012 (+14 ppts)

2 French restaurant VAT reform• Decrease of VAT rate in July 2009 (-14.1 ppts)• Increase of VAT rate in Jan. 2012 (+1.5 ppts)• Increase of VAT rate in Jan. 2014 (+3 ppts)

3 EU VAT rate changes• From 1996 to 2015• Eurostat price data (follow-up from Benzarti and

Carloni, 2016)

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Finnish Hairdressing VAT Reforms

Figure 21: Prices of beauty salons (controls)

ΔVAT= - 14 p.p.

ΔVAT= + 14 p.p.

8595

105

115

125

135

Pric

e in

dex

Jan. 2005 Jan. 2007 Jan. 2012 Oct. 2015Months

Beauty Salons (control)

Beauty Salon Prices

Source : Benzarti, et al. (2017), Fig. 5.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


Figure 22: Prices of hairdressers vs beauty salons

Asymmetric Pass-through

ΔVAT= - 14 p.p.

ΔVAT= + 14 p.p.

8595

105

115

125

135

Pric

e in

dex


Hairdressers (treated) Beauty Salons (control)


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and services

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Introduction


History

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Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


Figure 23: Prices of hairdressers vs beauty salons

Asymmetric Pass-through

79% pass-through

43% pass-through9010

011

012

013

0Pr

ice

inde

x


Hairdressers (treated) Beauty Salons (control)

Hairdresser and Beauty Salon Prices


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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


Figure 24: Distribution of pass-through (VAT decrease)

Full pass−through

010

2030

4050

60

−20 −15 −10 −5 0 5 10 15 20Relative price change (%) for VAT decrease


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Introduction


History

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II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


Figure 25: Distribution of pass-through (VAT increase)

Full pass−through

010

2030

4050

60

−20 −15 −10 −5 0 5 10 15 20Relative price change (%) for VAT increase

�


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Introduction


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Fiscal facts

II. Incidence

Textbook

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Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


Figure 26: Impact on profits

entry/exit

�

�� Source : Benzarti, et al. (2017), Fig. 7.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

French restaurant VAT reform

Figure 27: Decrease in VAT (from 19.6% to 5.5%)

French Sit-Down Restaurants: VAT Decrease

Pass−through = 9.7 percent

VAT decreased from19.6 to 5.5 percent

85

90

95

100

105

Pric

e In

dex

(Jun

e 20

09 =

100

)

2007 2008 2009 2010 2011 2012Time

Price

Price if Full Pass−Through


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Antoine Bozio

Introduction


History

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Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


Figure 28: Increase in VAT (from 5.5% to 7%)

French Sit-Down Restaurants: VAT Increase

Pass−through = 49.5 percent

VAT increased from5.5 to 7 percent

98

100

102

104

Pric

e In

dex

(Dec

embe

r 20

11 =

100

)

Jan−2011 Jul−2011 Jan−2012 Jul−2012Time

Price



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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


Figure 29: Increase in VAT (from 7% to 10%)

French Sit-Down Restaurants: VAT Increase

Pass−through = 38 percent

VAT increased from7 to 10 percent

98

100

102

104

Pric

e In

dex

(Dec

embe

r 20

13 =

100

)

Jan−2013 Jul−2013 Jan−2014 Jul−2014Time

Price



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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

EU VAT data (1996-2015)

Figure 30: VAT pass-through (increases vs decreases)

Asymmetric Price Response: Raw DataPass−through = 55%

Pass−through = 13%

97

98

99

100

101

102

Price Index

−3 −2 −1 0 1 2 3Months Before/After Reform

Price if VAT Increase Price if VAT Decrease

VAT Rate if VAT Increase VAT Rate if VAT Decrease

Source : Benzarti, et al. (2017), Fig. 1.Note : full sample (1996-2015). For each commodity the price index is normalized to 100 in the monthprior to the VAT reform.

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Antoine Bozio

Introduction


History

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Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Asymmetry of VAT pass-through

Figure 31: EU VAT increases and decreases

Source : Benzarti and Carloni (2015), Fig. 10-C and 10.D.

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Introduction


History

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II. Incidence

Textbook

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Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Benzarti et al. 2017 : which mechanisms ?

• Suggested explanation : fear of consumerantagonism

• Fairness considerations• Behavioural evidence of asymmetric feelings from

consumers

• Suggested model• Adjustment shock to increasing prices• No adjustment shocks to decreasing prices• Firms accumulate stock of shocks not transmitted to

posted prices

• Empirical test• Firms with eroded margins more likely to exhibit

asymmetric pricing behaviour

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Antoine Bozio

Introduction


History

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Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Asymmetry of VAT pass-through

Figure 32: Asymmetry in pass-through according tooperating margin

��

Source : Benzarti, et al. (2017), Fig. from slides.

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Antoine Bozio

Introduction


History

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Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Incidence : a tentative summary

• Known facts• Standard assumption of 100% pass-through of

largely incorrect• Pass-through varies according to commodities

affected• Pass-through is asymmetric

• Uncertain facts and mechanisms• Reduced rates vs standard rates (Benzarti et al. 2017

vs Benedeck et al. (2015))• Mechanisms : market structure, share of consumption

affected, salience, specific pricing mechanisms

• Undergraduate textbook vs research• Econ 101 presents market mechanism of incidence• Recent research tends to show how reality might be

much more complex

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II. Incidence

Textbook

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Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

III. Optimal commodity taxation

1 First best vs second best• No lump-sum tax• Distortions necessary to raise revenues

2 Only commodity taxation available• No redistribution motives (Ramsey, 1927)• With equity motives (Diamond and Mirrlees, 1971)

3 Commodity taxation and income tax• Individuals differ by ability (Atkinson and Stiglitz,

1976)• Individuals differ by taste (Saez, 2002)

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Antoine Bozio

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II. Incidence

Textbook

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Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

First best vs second best

• Basic model• Utility u(x1, x2, L), where x1 and x2 are market goods

and L is leisure.• T = h + L denotes the endowment of time, h hours

worked• Prices are q1 and q2 and the wage rate is w

• Budget constraint

q1x1 + q2x2 = wh

q1x1 + q2x2 + wL = wT

where wT is the market value of the time endowment(full income)

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II. Incidence

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Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References


• Consider a uniform tax on all consumption goodsincluding leisure at rate τ

(1 + τ)q1x1 + (1 + τ)q2x2 + (1 + τ)wL = wT

q1x1 + q2x2 + wL =wT

1 + τ

• A uniform tax on all consumption goods is equivalentto a tax on full income (which is exogenous)

• This is a lump-sum tax which is non-distortionary :first-best solution

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References


• The government does not observe leisure, but hoursworked

• Consider therefore a uniform rate τ on goods x1, x2

and leisure, measured as −h :

(1 + τ)q1x1 + (1 + τ)q2x2 = (1 + τ)wh

But then 1 + τ cancels out : this tax system does notcollect any revenue ! The tax on goods is offsetexactly by a subsidy on labor.

• If leisure cannot be taxed, then, in order to collect anyrevenue, the tax system has to distort relative prices :second-best problem.

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Antoine Bozio

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II. Incidence

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Asymmetry


Second best

Ramsey taxation

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References

Partial equilibrium• Partial equilibrium

• No cross-price effects ; relevant income derivativesare zero

• Optimal commodity tax problem• Choose n taxes (τi ) in order to minimize their

deadweight loss (DWLi )• Constraint is to raise the amount of revenues R

• Classical constrained optimization problem

mint1,...,tn

n∑i

DWLi s.t.∑

i

Ri = R

L =n∑i

DWLi − λ

[∑i

Ri − R

]∂L∂ti

=∂DWLi

∂τi− λ∂Ri

∂τi= 0

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References

Partial equilibrium• We get

∂DWLi

∂τi�∂Ri

∂τi= λ

• The ratio of the marginal deadweight loss tomarginal revenue is equal to the value of additionalgovernment revenues.

• The marginal cost of taxation is equal to its marginalbenefit.

• Using the expression of the deadweight loss

DWLi =1

2

εiSε

iD

εiS + εi

D

× τ 2i ×

Q

P

• We getεi

SεiD

εiS + εi

D

τi

P= λ

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References

The inverse elasticity rule

• Hence we get an expression for the tax rate

τi

P= λ

(1

εiS

+1

εiD

)

• This is the famous inverse elasticity rule• Each commodity should have a different tax rate• The optimal tax rate depends on the elasticity of

demand and supply• Elastically demanded goods should be taxed less

than inelastically demanded goods

• But partial equilibrium : assumes no cross-priceeffects !

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II. Incidence

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Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Ramsey taxation

Frank Ramsey (1903-1930),British mathematician,philosopher and economist

First derivation of optimalcommodity taxation (1927)

• Results forgotten for a long time

• Simultaneous rediscoveries• Marcel Boiteux (1956)• Paul Samuelson (1986), reprinted from a note to the

US Treasury (1951)

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II. Incidence

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Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

The Ramsey problem

• Problem set by Pigou to his 24 year-old student

• “A given revenue is to be raised by proportionatetaxes on some or all uses of income, the taxes ondifferent uses being possibly at different rates ; howshould these rates be adjusted in order that thedecrement of utility may be a minimum ?

• I propose to neglect altogether questions ofdistribution and considerations arising from thedifferences in the marginal utility of money to differentpeople ; and I shall deal only with a purely competitivesystem with no foreign trade.”

Ramsey (1927)

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References

The Ramsey problem

• The key assumptions• Identical households.• Only commodity taxes.• Competitive economy.• Pre-tax prices pi are fixed and tax-included prices

qi = pi + ti

• Government needs to raise revenue R• Representative household has an indirect utility

function V (q1...qn,w , I ) where w is the fixed wageand I is lump-sum income.

• The maximization problem

maxt1,...,tn

V (q1...qn,w , I ) s.t. R =n∑

i=1

ti xi (1)

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References

The Ramsey problem• Lagrangean

L = V (q1...qn,w , I ) + λ

[n∑

i=1

ti xi − R

](2)

• Derive F.O.C.

∂L∂tk

=∂V

∂tk+ λ

[xk +

n∑i=1

ti∂xi

∂tk

]= 0 (3)

• Rearrange

∂V

∂qk= −λ

[xk +

n∑i=1

ti∂xi

∂qk

](4)

• The utility cost of raising the tax rate on good kshould be in the same proportion to the marginalrevenue raised by the tax

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References

The Ramsey problem• Using Roy’s identity

∂V

∂qk= −∂V

∂Ixk = −αxk (5)

• α is the marginal utility of income

• We get

αxk = λ

[xk +

n∑i=1

ti∂xi

∂qk

](6)

• Using Slutsky equation

∂xi

∂qk= Sik − xk

∂xi

∂I(7)

• Sik is the derivative of the compensated demandcurve

• ∂xi∂I is the income effect

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References

The Ramsey problem

• We then get the Ramsey-Boiteux rule

n∑i=1

ti Sik = −

[1− α

λ−

n∑i=1

ti∂xi

∂I

]xk = −θxk (8)

• Optimal tax system should be such that :• There is the same reduction in the compensated

demand for each good• Distortions in terms of quantities (not prices) should

be limited

• Not clear which taxes should be higher/lower

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Asymmetry


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IV. Policy issues



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References

Which policy implications ?

1 Inverse elasticity rule• Assume cross-effects to be zero• Optimal taxes inversely proportional to elasticities

2 Corlett and Hague (1953)• Assume homogeneity of degree zero of compensated

demands• Then goods that are complementary with leisure

should be taxed at higher rate

3 Conditions for uniformity (Deaton 1981)• Assume that taxed goods equally complementary

with leisure• Then uniform taxation is optimal

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Ramsey taxation

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IV. Policy issues



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References

Ramsey revisited

• An uninteresting problem ?• Identical individuals• No lump-sum taxation

• Capitation or poll tax is lump-sum• Easy to implement

• Ramsey problem with lump-sum subsidy/tax G

maxt1,...,tn,G

V (q1...qn,w ,M) s.t. R =n∑

i=1

ti xi − G (9)

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References

Ramsey revisited

• Lagrangean

L = V (q1...qn,w ,M) + λ

[n∑

i=1

ti xi − G − R

](10)

• Derive F.O.C.

∂L∂tk

=∂V

∂tk+ λ

[xk +

n∑i=1

ti∂xi

∂tk

]= 0 (11)

∂L∂G

=∂V

∂G+ λ

[n∑

i=1

ti∂xi

∂M− 1

]= 0 (12)

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References

Ramsey revisited• Rearrange

n∑i=1

ti Sik

xk= −

[1− α

λ−

n∑i=1

ti∂xi

∂I

]= −θ (13)

θ =

[1− α

λ−

n∑i=1

ti∂xi

∂I

]= 0 (14)

• Optimal solution : ti = 0• No commodity taxation• Poll tax is optimal

“In countries where the ease, comfort and security of theinferior ranks of people are little attended to, capitationtaxes are very common”

Adam Smith (1771)92 / 137


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Heterogenous households

• Diamond and Mirrlees (1971b)• Only commodity taxation

• Introducing equity• Individuals differ in w• Social welfare function with higher weights on the

consumption of poor households

• Results• Larger (smaller) taxes on goods consumed by the

rich (poor)• Larger (smaller) taxes on inelastic (elastic) goods ⇒

trade-off between equity and efficiency

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References

Tony and Joe

Sir Anthony B. AtkinsonBritish economist, specialist ofincome distributionand public economics

Joseph StiglitzAmerican economist, Nobelprize winner in 2001.His contributions includeasymmetric informationefficiency wagespublic economics.

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References

Atkinson-Stiglitz (JPuB, 1976)

• The problem• Government maximizes SWF subject to a revenue

constraint• Redistribution objective : individuals differ in w• Tax instruments : commodity taxation and income

taxation

• Main assumptions• Optimal linear income tax available• No taste heterogeneity

• General result• Differentiation of commodity taxation depends on

the relationship between labour and the marginalrate of substitution between commodities

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References

The Atkinson-Stiglitz theorem

• Assuming ‘weak separability’• ‘weak separability’ between labour and all goods

taken together

Uh(x1, ..., xn, L) = uh(v(x1, ..., xn), L)

• The ‘weak separability’ theorem• Theorem : if there is a non linear (optimal) income

tax and weak separability, then optimal set ofcommodity taxes is zero ; there is no need forindirect taxation

• Recent reformulations (Laroque 2005, Kaplow 2006)

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Taste heterogeneity

• Saez (JPuB, 2002)• Relaxing the taste homogeneity assumption

• Results• If high productive types consume more of certain

goods for a given level of income, then it is optimalto tax these goods at a higher rate

e.g., modern art museum• If low productive types consume more of certain

goods for a given level of income, then it is optimalto tax these goods at a lower rate

e.g., cigarettes

• Reinterpreting Atkinson-Stiglitz (1976)• Under the A-S assumptions, commodity taxation

does not bring any information in addition to income.

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IV. Policy issues

• Politics of taxing consumption• Left opposed to indirect taxation because regressive• American Right opposed to VAT because it favours

big government• Nordic countries use high VAT to fund welfare state• IMF has been advocating adoption of VAT instead of

tariffs

• Key questions

1 Is indirect taxation regressive ?2 Are reduced rates useful ?3 Is VAT really harder to fraud ?4 Should we have more direct or indirect taxation ?

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Is indirect taxation regressive ?• Terms of the debate

• No debate about the fact that consumption is ahigher share of income for the poor in cross-section

• Debate about whether the rich save more over thelifetime (cf. Milton Friedman’s permanent incomehypothesis)

• What we know on consumption share of lifetimeincome

• No direct evidence (no consumption data panel)• Using permanent income estimation : positive

gradient (Dynan et al. 2004)• Using wealth survey and lifetime earnings : slightly

positive for the U.S. (Venti and Wise 1998 andGustman and Steinmeier) or U.K. (Bozio et al.,2017)

• No evidence on top incomes

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Is indirect taxation regressive ?

• How to measure contributive faculty ?• Current income not ideal because consumption

smoothing• Ideal would be to look at lifetime consumption (but

not available)

• Current non durable expenditure as proxy• Current expenditure good proxy in basic life-cycle

model• But current expenditure is not lifetime consumption

• Current vs lifetime• Durable goods• Issue of housing

• Estimate permanent income using cross-sectiondata

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Figure 33: Indirect taxes as a share of income orconsumption (France)

8%

10%

12%

14%

16%

18%

20%

22%

1 2 3 4 5 6 7 8 9 10

Shareofindirecttaxes

Decile of equivalised disposable income

Indirect taxes as a share of

non-housing expenditures

Indirect taxes as a share of

current income

Source : Bozio et al. (2012), Fig. 6.1.

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• Studies on indirect taxation in France• VAT slightly progressive as a share of consumption• Excises (e.g., tobacco) regressive• Total indirect taxation regressive as a share of

consumption

• Role of reduced rates of VAT• Standard rate proportional to consumption• Reduced rate at 5% progressive• Reduced rate at 10% regressive

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Figure 34: Indirect taxes as a share of consumption(France)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1 2 3 4 5 6 7 8 9 10

Pa

rt d

es

taxe

s in

dir

ect

es

da

ns

la c

on

som

ma

tio

n h

ors

loy

ers

Décile de revenu disponible net par unité de consommation

Taxes sur les tabacs

Taxes sur les alcools

Taxes sur les assurances

TICPE (ex-TIPP)

TVA

Source : Bozio et al. (2012), Fig. 6.3.

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Figure 35: Impact of reduced rate of VAT (France)

Source : Boutchenik (2015), Fig. 3, p. 18.

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• What to conclude ?• VAT broadly neutral in its distributional effects• Role of reduced rates to add some progressivity• But little progressivity compared to direct taxation

• Progressivity better assessed at the entiretax/spending process

• An efficient tax to raise revenues can be used tospend on the poorest

• Question is whether VAT is more efficient atgenerating revenue than direct taxes with similarredistribution properties

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• Motivations for rates differentiation• Redistribution : low rates for necessities• Externalities : low/high rates for positive/negative

externalities• Optimal taxation : higher/lower rates on goods

complement with leisure/work ; lower rates on goodsand services than can be substitute for homeproduction

• Historically, redistribution is main rationale• In the U.K., the purchase tax rates went from 12%

on clothing to 50% on jewellery in 1970s• In France, taxe sur les paiements went from 0,2% to

10% for luxury goods (e.g., camera)• In France, in 1970, VAT rate on luxury goods (e.g.,

cars) reached 33.33%

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Figure 36: Total gain from reduced rate of VAT (France)

Source : Boutchenik (2015), Fig. 6, p. 34.

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• Reduced rates are poorly targeted• Rich do spend on food too (and they spend more

than the poor)• Total gain (in billion euros) from reduced rate

captured by the richest households

• Direct taxation could do a much better job• With benefit/income tax changes, easier to

redistribute• Reform proposal in the U.K. by IFS :

• Removing zero-rating and reduced rates can raise£23 billion

• Compensating package for the less well off cost £12billion (+15% of all benefits and credits)

• The reform package can raise £11 billion net thatcan finance any other objectives

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Rates differentiation• Administration issues

• High administrative costs to have different tax rates• Classification problems

• France : sandwich is taxed at 10% (food ready toeat) but pain au chocolat at 5% (food to be eatenlater)

• U.K. : Chocolate covered biscuits are liable to 20%,but cakes are zero-rated

• U.K. : Tortilla chips are zero-rated, but potato crispsare liable to 20% rate

• Political economy issues• The possibility of reduced rate opens the door for

lobbyinge.g., restaurant owners’ lobby for reduced rate withJ. Chirac, and then N. Sarkozy

• The more reduced rates there are the more difficult itis to resist lobbying pressures

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References

The New Zealand VAT model

• Goods and Services Tax (GST)• Introduced in New Zealand in 1986• A comprehensive base• A single rate (currently 15%)• A low threshold registration

⇒ The VAT ratio is therefore close to 100%

• Low administration costs ?• No debate about goods classification• Compliance costs are hard to measure but likely to

be low• Tax advisory profession has few resources dedicated

to GST• Low registration threshold increase compliance cost

for SME

• General public acceptance of the ‘general rule’

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Economists vs Economists

• Optimal taxation recommendation• Browning and Meghir (ECA, 1991) firmly reject

weak separability• Complement with leisure : foodstuff, children’s

clothing, tobacco, public transport• Complement with work : alcohol, food eaten out,

motor fuel⇒ Differentiated rates for efficiency reasons

• Economists in favour of neutrality• Economists often support no rates differentiation• Distrust of optimal taxation ?• Idea that administrative/political economy issues

bear more importance

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References

Tax compliance• Slemrod (NTJ, 2008)

• Basic model assumes no compliance costs• Irrelevance of proposition depends on that

assumption• In reality compliance costs are large and matter

• A general theory of tax systems• S(p, t, x) supply function• D(p, τ, y) demand function• t and τ tax remitted by supplier/buyer• x and y , avoidance technology including audit

technology

• Remittance matter for incidence• Equilibrium depends on remittance

S(p, t, x) = D(p, τ, y)• Remittance affects equilibrium prices through

asymmetry of avoidance technology

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References

Tax compliance

• Tax compliance and information• Information from the government key to design of

tax policy (Slemrod, 2008)• Third party reporting creates paper trail• It creates incentives for information gathering

• VAT and third party reporting• Important advantage of VAT over RST in theory• Third party reporting should limit fraud• Little evidence of the impact of third party reporting• Notorious carousel fraud for EU VAT

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Tax compliance

• Pomeranz (AER, 2015)• Two randomised experiments with 445,000 firms in

Chile on VAT compliance• First evidence on self-enforcement of VAT

• Experiment 1 : deterrence letter• Threat of VAT audit letters to sub-sample of

businesses (+100,000 firms)• Assessment of VAT reporting from firms for final

sales or intermediate sales

• Experiment 2 : spillover effect• Sample of firms suspected of tax evasion randomly

told about an upcoming audit• The whole sample later audited and information

about their pretreatment trading partners wascollected

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Self-enforcement of VAT

Figure 37: Impact of deterrence letter vs control

Source : Pomeranz (2015), Fig 2.A

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Figure 38: Intent-to-treat effects on VAT payments by typeof letter

Source : Pomeranz (2015), Table 4.

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Figure 39: Impact of deterrence letter on different types oftransactions


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Figure 40: Interaction of firm size and share of sales tofinal consumers

Source : Pomeranz (2015), Table 6.A.

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Figure 41: Spillover effects on trading partners’ VATpayments


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References

Carousel fraud

• Imports, exports and VAT• VAT is destination-based (taxing consumption)• Exports are zero-rated• Imports are taxed by VAT

• Carousel fraud• Within the EU, gangs have used VAT refund without

paying VAT claims• VAT gap in the EU estimated at 160 billion euros (in

2014)e.g., 24 billion euros for Francee.g., 23 billion euros for Germany

• Cross-border fraud estimated at 50 billion euros

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Carousel fraud

Figure 42: Missing trader fraud

Source : Belastingdienst (Dutch Tax and Customs Administration). 121 / 137


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Carousel fraud : solutions1 Improved audits

• More controls and exchange of information

2 Extend reverse charging• VAT liability to the buyer instead of the seller• Transforms VAT into RST

3 Set-up VAT accounts• Sellers would transfer VAT charged to their

customer :• Higher compliance costs

4 CVAT of Varsano (2000)• Exports still zero-rated but liable to a compensating

tax creditable to the importer

5 VIVAT of Keen and Smith (1996, 2000)• all B2B, including those EU, subject to a common

VAT rate

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Carousel fraud : solutions

• EU Action plan (April 2016)• EU Commission announced legislative plan for 2017

for a cross-border EU VAT• Application of VAT principle at EU borders• VAT remitted to export country would be transferred

to import country

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Carousel fraud : solutions

Figure 43: EU plan for cross-border VAT

Source : EU Commission124 / 137


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Direct vs indirect taxation

• Traditional views in public finance

(A) Desirable balance(B) Superiority of direct taxes

• Recent dominant view with policymakers• Early 20th c. : in favour of (B)• Late 20th c. : switch in favour of (A)

• Optimal taxation vs policy advices• Atkinson and Stiglitz (1976)• Atkinson (CJE/RCE 1977) ; Auerbach (2009)

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References

(A) Two attractive sisters...

“I never can think of direct andindirect taxation except as I shouldthink of two attractive sisters...differing only as sisters may differ.I cannot conceive any reason whythere should be unfriendlyadmirers of these two damsels.I have always thought it not onlyallowable, but even an act of duty,to pay my addresses to themboth.”

William E. Gladstone, PM, House of Commons 1861

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(B) Superiority of direct taxes

• “We are ourselves of the opinion that taxes uponcommodities... are objectionable in principle, and thatthe important place which which they occupy in ourtax system can only be defended on the ground thatthey are survivals from a period when theadministration of direct taxation was much moredifficult than it is today”

Minority Report of the Colwyn Committee 1927

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Back to balanced view ?

• Large debate in the UK at the end of the 1970s• It was argued that a shift from income tax to

commodity taxation would lead to higher workincentives

• In 1979, standard VAT rate increased from 8% to15% to pay for reductions in income tax rates.

• Recent debate in France• Discussion of a shift from payroll taxation to VAT in

order to increase employment (TVA sociale or CICEtax credit)

• Idea that VAT taxes import as well as localproduction (akin to competitive devaluation)

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The indirect vs direct taxation debate

(A) Balanced view• Two instruments for two objectives (equity and

efficiency)• Direct taxation is better for redistribution• Indirect taxation more efficient to raise revenues• Compliance is higher with VAT third party

reporting• Lower disincentives effect on labour supply

(B) Superiority of direct taxation• Indirect taxation is historical remnant from a time

with insufficient administration/information• Direct taxation is better for all objectives

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Equivalence result

• Definition of the problem• Direct taxes are defined as varying by individual

characteristics• Direct vs indirect taxation debate = Uniform or

differentiated commodity taxation ?

• Atkinson-Stiglitz (1976)• If weak separability rejected, then optimal

differentiated commodity taxation• But for reasons opposed to general view A (for

efficiency reasons, not equity)

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Equivalence result• Equivalence result (with uniform commodity

taxation)• Uniform rate τ on goods x1, x2 (except leisure) :

(1 + τ)q1x1 + (1 + τ)q2x2 = wh

q1x1 + q2x2 =wh

1 + τ=(

1− τ

1 + τ

)wh

• Uniform commodity taxation is equivalent to linearlabour income tax (if no inheritance or non-labourincome)

• Formal tax rates differ• A 20% income tax ≡ 25% general consumption tax• Income tax rates are presented in tax-inclusive form,

while consumption taxes in tax-exclusive form

(1− τinc )I = C (1 + τcon)C = I

τinc = 1− 1

(1 + τcon)131 / 137


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The indirect vs direct taxation debate

• Compliance and administrative costs• Withholding makes direct taxation more efficient• Compliance issues also with VAT

• Salience impact• We know now that salience matter• Is the “superiority” of indirect taxation because less

salient taxation ?• Incidence different albeit equivalence result ?

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Salience of commodity taxation ?

“C’est au milieu de la profusion des repas que se payentles taxes sur le vin, la biere, le sucre, le sel et les articlesde ce genre, et le tresor public trouve une source de gaindans les provocations a la depense qui sont excitees parl’abandon et la gaiete des fetes. ”


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References– Anderson, S., A. De Palma, and B. Kreider (2001), “Tax Incidence in Differentiated Product

Oligopoly”. Journal of Public Economics 81, no. 2, pp. 173–192.

– Atkinson, A. B. (1977), “Optimal Taxation and the Direct versus Indirect Tax Controversy”. TheCanadian Journal of Economics / Revue Canadienne d’Economique 10 (4) : 590–606.

– Atkinson, A. B. and Stiglitz, J. (1976), “The Design of Tax Structure : Direct versus IndirectTaxation”, Journal of Public Economics, Vol. 6, pp. 55-75.

– Batista Politi, R., and E. Mattos (2011), “Ad-Valorem Tax Incidence and after-Tax PriceAdjustments : Evidence from Brazilian Basic Basket Food”. The Canadian Journal of Economics /

Revue Canadienne d’Economie 44, no. 4, pp. 1438–70.

– Belan, P., and S. Gauthier (2006), “Optimal Indirect Taxation with a Restricted Number of TaxRates”. Journal of Public Economics 90 (6-7) : 1201–13.

– Benedek, D., R. A. De Mooij, M. Keen, and P. Wingender (2015), “Estimating VAT PassThrough”. IMF Working Paper.

– Benzarti, Y., Carloni, D., Harju, J. and Kosonen, T. (2017) “What Goes Up May Not Come Down :Asymmetric Incidence of Value-Added Taxes”. Document de Travail.

– Besley, Timothy J., and Harvey S. Rosen. “Sales Taxes and Prices : An Empirical Analysis”.National Tax Journal 52, no. 2 (1999) : 157–78.

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TVA : un examen empirique a partir des reformes francaises de 1995 et 2000”. Economie etStatistique 413, no. 1, pp. 3–20.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

References– Chernick, H., and Reschovsky, A. (1997), “Who Pays the Gasoline Tax ?” National Tax Journal, pp.

233–259.

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– Ebrill, Liam, Michael Keen, Jean-Paul Bodin, and Victoria Summers (2001), The Modern VAT.International Monetary Fund.

– Goerke, L. (1999), “Value-Added Tax versus Social Security Contributions”. IZA Discussion Paper.Institute for the Study of Labor (IZA).

– Hamilton, S. (2009), “Excise Taxes with Multiproduct Transactions”, The American EconomicReview, 99, no. 1, pp. 458–71.

– Heady, C. (1987), “A Diagrammatic Approach to Optimal Commodity Taxation”. Public Finance42 : 250–63.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

References– Kaplow, L. (2006), “On the undesirability of commodity taxation even when income taxation is not

optimal”, Journal of Public Economics, Vol. 90, pp. 1235-1250.

– Keen, Michael. 2007. “VAT Attacks !” International Tax and Public Finance 14 (4) : pp. 365–81.

– Kopczuk, W., J. Marion, E. Muehlegger and J. Slemrod, (2016), “Does Tax-Collection InvarianceHold ? Evasion and the Pass-through of State Diesel Taxes”. American Economic Journal :Economic Policy 8 (2) : pp. 251–86.

– Kopczuk, W., and J. Slemrod (2006) “Putting Firms into Optimal Tax Theory”, AmericanEconomic Review 96 (2) : 130–34.

– Kosonen, Tuomas. “More and Cheaper Haircuts after VAT Cut ? On the Efficiency and Incidence ofService Sector Consumption Taxes”. Journal of Public Economics 131 (November 2015) : 87–100.

– Laroque, G. (2005), “Indirect taxation is harmful under separability and taste homogeneity : Asimple proof”, Economics Letters, Vol. 87, pp. 141-144.

– Laure, M. (1953), La Taxe a la Valeur Ajoutee, Paris, Librairie du Recueil Sirey.

– Laure, M. (1957), Au Secours de la TVA, Paris, Presses Universitaires de France.

– Marion, J., and E. Muehlegger (2011), “Fuel Tax Incidence and Supply Conditions”, Journal ofPublic Economics, 95 (9-10), pp. 1202–12.

– O’Donoghue, T., and M. Rabin (2006), “Optimal Sin Taxes”. Journal of Public Economics 90(10-11) : 1825–49.

– Pomeranz, D. (2015) “No Taxation without Information : Deterrence and Self-Enforcement in theValue Added Tax”, American Economic Review, Vol. 105, No. 8, pp. 2539–69.

– Poterba, J. (1996), “Retail Price Reactions to Changes in State and Local Sales Taxes”. NationalTax Journal 49, no. 2, pp. 165–76.

– Ramsey, F. (1927), “A Contribution to the Theory of Taxation”, Economic Journal, Vol. 37, No.145, pp. 47-51.

– Saez, E. (2002), “The Desirability of Commodity Taxation Under Non-Linear Income Taxation andHeterogeneous Tastes”, Journal of Public Economics, Vol. 83, pp. 217-230.

– Saez, E. (2004), “Direct or Indirect Tax Instruments for Redistribution : Short-Run versusLong-Run”. Journal of Public Economics 88 (3-4) : pp. 503–18.

– Samuelson, P. (1986), “Theory of Optimal Taxation”, Journal of Public Economics, Vol. 30, pp.137-143.

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and services

Antoine Bozio

Introduction


History

Typology

Fiscal facts

II. Incidence

Textbook

Salience

Asymmetry


Second best

Ramsey taxation

Atkinson-Stiglitz

IV. Policy issues



Tax compliance


References

Lecture 5: Taxation of goods and

services

Antoine Bozio

Paris School of Economics (PSE)

Ecole des hautes etudes en sciences sociales (EHESS)

Master APE and PPDParis – October 2017

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Lecture 5: Taxation of goods and services · Lecture 5: Taxation of goods and services ... taxation 5 Commodity taxation 6 Labour income taxation ... taxation References Outline of