UC Berkeley

In this thesis I explore how the elements of tax systems affect individuals’ behavior. The goal is to enhance our understanding of how tax responses are affected by search and adjustment costs, information frictions, hassle costs and behavioral biases in general.

In the first chapter, I provide theoretical and empirical evidence on the importance of statutory incidence in labor markets in presence of asymmetric frictions. Using a theoretical model I show that labor supply responses are stronger when the statutory incidence of taxes or labor rules falls on firms. The asymmetry of response stems from the assumption that firms have a greater ability to respond to incentives than workers because it is easier for firms to change working hours. The result holds even if wages adjust to equalize differences in labor costs stemming from taxes and regulations. I explore these mechanisms by studying labor responses to incentives generated by the “Mini-Job” program aimed at increasing labor supply of low-income individuals in Germany. Using administrative data, I show evidence of a strong behavioral response – in the form of sharp bunching – to the mini-job threshold that generates large discontinuous changes both in the marginal tax rates and in the total income and payroll tax liability of individuals in Germany. Sharp bunching translates into elasticity estimates that are an order of magnitude larger than has been previously estimated using the bunching approach. To explain the magnitude of the observed response, I show that in addition to tax rates, fringe benefit payments also change at the threshold. Using a large survey of businesses and a household survey, I compare wages and fringe benefits around the mini-job threshold and find that mini-job workers are paid higher gross wages but receive smaller yearly bonuses and fewer vacation days than regular workers. These results indicate that lower fringe benefits make mini-jobs attractive to employers, thus facilitating labor supply responses in accordance with the model’s predictions.

In the second chapter, I study behavioral responses to changes in marginal tax rates of social security and income taxes. I find that responses depend on individual’s employment status: whether a worker is a wage earner, self-employed, or a proprietor. In line with the existing literature I document weak (but statistically significant) bunching at kink points of the tax schedule among wage earners. Starting from 1999, wage earners accumulate pension credits when they exceed a certain threshold, however, no contributions are due until earnings reach a second, higher threshold. Even 10 years after this reform I find no bunching to the right of the eligibility threshold, suggesting that individuals do not assign a high value to pension benefits. Lack of bunching is persistent across age groups and unlikely to be explained by friction costs as individuals are able to bunch at other kink points. I find strong responses to tax incentives among the self-employed but the responses differ by the type of kink. I find sharp bunching at the first kink, medium bunching at the top kink and weak bunching at the middle kink. Comparing responses before and after a tax reform that changed the magnitude of kinks I find that self-employed individuals aggressively reduce earnings to bunch at the lower, more salient kink points.

In the third chapter, I study information reporting, which has been argued to be an effective tool against evasion. However, even the simplest reporting requirements can prove to be costly to taxpayers. The trade-off between evasion and compliance costs suggests that reporting rules should only be imposed on a subset of the population. In this paper I address the question of how to optimally determine such reporting thresholds. In the first part of the paper I use a natural experiment to document that reporting rules are indeed costly to taxpayers but are successful at reducing evasion. I study a reform that simplified reporting rules for an income tax deduction of noncash charitable contributions in the U.S. Relying on a revealed preference approach, I find that relaxing reporting requirements led to a steady increase in reported donations but that nearly 50% of these new donations were untruthful. The tax revenue loss, however, was offset by substantial savings for taxpayers because reporting requirements impose substantial hassle costs: $90 on average per person. In the second part of the paper I develop a framework which allows me to characterize optimal reporting thresholds. I show that the determination of optimal thresholds should take into account the utility loss from reporting experienced by individuals and a loss in externality benefits from charitable giving against the tax revenue loss generated by evasion. The size of a reporting threshold is primarily governed by the type and magnitude of cheating. Calibrations of the model shows that in the case of noncash charitable donation deductions, the optimal threshold is more than twice lower than the threshold chosen by the government.