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

Author

Listed:
  • Gabrielle Fack

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Camille Landais

    (SIEPR - Stanford Institute for Economic Policy Research - Stanford University)

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 policy instruments staying at their status quo levels, potentially away from the optimum).

Suggested Citation

  • Gabrielle Fack & Camille Landais, 2016. "The effect of tax enforcement on tax elasticities: Evidence from charitable contributions in France," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01300122, HAL.
    • Handle: RePEc:hal:cesptp:hal-01300122
    DOI: 10.1016/j.jpubeco.2015.10.004
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    as
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    More about this item

    Keywords

    Tax evasion; Tax enforcement; Charitable giving; Taxable income; Elasticity;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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