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 ...
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].
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