UC Berkeley

Taxation is the primary means by which governments engage in the redistribution of resources and in the provision of goods and services. From determining the breadth and generosity of the social safety net to influencing broader societal inequality, taxation plays a central role in shaping our lives. Moreover, for the purposes of fortifying public coffers and promoting different kinds of egalitarian values to varying extents, taxation has, at least in principle, broadly evolved to fall disproportionately on the burden of those with the greatest concentration of resources, which we refer to as progressive taxation.

However, taxation also often induces distortions in incentives and behavior; it is not profound to point out that taxpayers do not like paying taxes. Entire disciplines and industries have evolved so as to empower those with the most resources to mitigate their tax obligations. Indeed, much of the history of taxation features a perpetual arms race of tax authorities, who want to tax taxpayers, and taxpayers, who do not want to be taxed by tax authorities. A vast literature spanning many disciplines has studied the countless aspects of this relationship, with an emerging consensus that the combined sophistication of high earning taxpayers in mitigating their tax burdens and advancements in globalization and technology has grown to significantly undermine the process of taxation in facilitating redistribution as well as the provision of goods and services.

This dissertation contributes this rich tradition of study in presenting new empirical evidence on the different kinds of activities---both legal (avoidance) and illegal (evasion)---that high-earning individuals and businesses take in order to lower their tax burdens.

The first chapter focuses on the role of tax havens in facilitating tax avoidance and evasion, studying a novel policy in the Ecuadorian national setting and its impacts of tax haven usage. Tax haven usage (also referred to as ``offshoring'', among other terms) facilitates an important source of tax evasion and avoidance in the world, where taxpayers by legal or illicit means locate their income and wealth in low-to-no-tax jurisdictions that also feature a great deal of financial privacy. Recent work estimates that nearly 10% of global household financial wealth, largely attributable to the wealthiest households, is held in tax havens (Zucman, 2013). However, due to its clandestine nature, tax haven usage is difficult to empirically study. Moreover, in light of the increasing sophistication of taxpayers and their tax preparers as well as the diminishing role of international financial borders, policy aimed at discouraging tax haven usage has seen limited effectiveness.

I study a unique policy in Ecuador that adopts an unconventional approach in discouraging tax haven usage. While many policies focus on information sharing and enforcement, in 2008 Ecuador implemented a universal outflows tax that taxes (at least at the inception of the policy) all outflowing transactions. Additionally, the data that underlie the enforcement of the tax as well as subsequent legislative variation in the tax base and rate provide a highly novel environment for studying the behavioral dimensions of the relationship between incentives and tax haven usage. I ultimately produce evidence of an unprecedented success of this policy in reducing tax haven usage and increasing domestic income reporting. In short, individual tax haven users concentrated within the top 0.5% of the income distribution, in response to the imposition of the outflows that reduced the return of locating income/wealth abroad by 5%, increased their domestically reported income by around 40%; through the progressivity of the tax schedule, these individuals increased their personal income tax payments by 55%. The magnitude and persistence of this response is relatively unprecedented within the realm of anti-tax haven policy, and suggests a number of directions for the future research.

The second chapter focuses on the roles of charities and nonprofits in facilitating estate tax avoidance in the United States. The US tax code features a wide array of exemptions and considerations for nonprofits in its design so as to encourage charitable activity. To this end, a sizable literature has focused on estimating the precise quantitative relationship between the different tax incentives extended to the nonprofit sector in the US and the amount of observable charitable activity. However, recent work has pointed out the means by which this system of charitability tax preference has been abused for the purpose of facilitating tax evasion and avoidance (e.g. Fack and Landais, 2012). Other work has even called into question the normative desirability of nonprofit activity in light of critiques of the ability of the nonprofit sector to effectively serve as a substitute for state capacity and its potential to facilitate private benefit.

A long-standing literature has thoroughly documented a strongly positive, causal relationship between the estate tax rate, and charitable donations (which are fully deductible against the estate tax). The second chapter delves into this relationship, empirically studying recent federal and state estate tax reforms to demonstrate that nearly all of this long-standing relationship is driven by outsized responsiveness of private foundations (privately held nonprofits) as opposed to public charities (nonprofits that source their donations largely from the broader public) to the estate tax rate. The chapter also demonstrates the outsized scope of these private foundations to engage in potentially ``privately-benefiting'' activities, in the form of payments, loans, and other financial relationships with administration and director networks. On a high level, the chapter argues that the private foundation, as a tax exempt vehicle, disproportionately facilitates tax mitigating activity while demonstrating substantial scope for fulfilling private benefit, as opposed to the supposed public benefit that serves as the premise for the broader social desirability of nonprofit entities and their tax privilege.