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

Gabrielle Fack and Camille Landais

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: 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

Keywords: tax evasion; tax enforcement; charitable giving; taxable income; elasticity (search for similar items in EconPapers)
JEL-codes: E6 (search for similar items in EconPapers)
Date: 2016-01-01
New Economics Papers: this item is included in nep-acc and nep-pbe
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Citations: View citations in EconPapers (43)

Published in Journal of Public Economics, 1, January, 2016, 133, pp. 23-40. ISSN: 0047-2727

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Related works:
Journal Article: The effect of tax enforcement on tax elasticities: Evidence from charitable contributions in France (2016)
Working Paper: The effect of tax enforcement on tax elasticities: Evidence from charitable contributions in France (2016)
Working Paper: The effect of tax enforcement on tax elasticities: Evidence from charitable contributions in France (2016)
Working Paper: The effect of tax enforcement on tax elasticities: Evidence from charitable contributions in France (2016)
Working Paper: The effect of tax enforcement on tax elasticities: Evidence from charitable contributions in France (2013)
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