Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries

TY - JOUR

T1 - Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries

AU - Kleven, Henrik Jacobsen

AU - Kreiner, Claus Thustrup

AU - Saez, Emmanuel

PY - 2016/4/1

Y1 - 2016/4/1

N2 - We develop an agency model explaining why third-party information reporting by firms makes tax enforcement successful. While third-party reporting would be ineffective with frictionless collusion between firms and employees, collusive evasion is impossible to sustain in firms with many employees and accurate business records as any single employee may reveal evasion. We embed our agency model into a macro model where the number of employees grows with development, showing that the tax take evolves as an S-shape driven by changes in third-party information. We show that our model is consistent with a set of stylized facts on taxation and development.

AB - We develop an agency model explaining why third-party information reporting by firms makes tax enforcement successful. While third-party reporting would be ineffective with frictionless collusion between firms and employees, collusive evasion is impossible to sustain in firms with many employees and accurate business records as any single employee may reveal evasion. We embed our agency model into a macro model where the number of employees grows with development, showing that the tax take evolves as an S-shape driven by changes in third-party information. We show that our model is consistent with a set of stylized facts on taxation and development.

U2 - 10.1111/ecca.12182

DO - 10.1111/ecca.12182

M3 - Journal article

SN - 0013-0427

VL - 83

SP - 219

EP - 246

JO - Economica

JF - Economica

IS - 330

ER -