Tax Complexity as Price Discrimination

Ole Agersnap () and Julie Brun Bjørkheim ()
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Ole Agersnap: Yeh College, Princeton University, Postal: Princeton University , Yeh College, B105 Fu Hall, Princeton, NJ 08544, USA
Julie Brun Bjørkheim: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway, https://www.nhh.no/en/employees/faculty/julie-brun-bjorkheim/

No 2024/4, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: Most tax systems around the world are highly complex. While several economists have studied the potential costs associated with tax complexity, few have explored if complexity can also have beneficial effects. In a novel model where taxpayers can acquire costly knowledge to reduce their tax burden, we show that when elasticities of taxable income are heterogeneous, a complex tax system can act as a sorting device similar to second-degree price discrimination, where more elastic taxpayers will invest in more tax knowledge. We prove that if elasticities are increasing with income, introducing tax complexity can allow the government to raise higher tax revenues at no efficiency cost. However, we show that complexity primarily benefits the highest earners and thus exacerbates inequality. In the empirical section of our work, we study a complex tax system in Norway. Using rich register data on business owners, we demonstrate that many taxpayers make accounting decisions that cause them to pay higher taxes than would have been possible, and we quantify the exact size of this tax overpayment at the individual level. We show that overpayment tends to be larger for women, the less wealthy, and immigrants. We validate our model predictions by showing that failure to optimize is associated with a lower estimated tax elasticity.

Keywords: Taxation; Personal Income Taxes; Fiscal Policies and Behavior of Economic Agents: Household; Tax Evasion and Avoidance (search for similar items in EconPapers)
JEL-codes: H20 H24 H26 H31 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2024-01-30
New Economics Papers: this item is included in nep-acc, nep-iue, nep-pbe and nep-pub
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