Speaker: Ole Agersnap, Princeton University
Ole Agersnap, is a PHD student in Economics at Princeton University.
Abstract: Most tax systems around the world are highly complex. While the potential costs associated with tax complexity have been studied in depth, few have explored if complexity can also yield benefits to society. In a novel model where taxpayers can acquire costly knowledge to reduce their tax burden, we show that when taxpayers have heterogeneous elasticities of taxable income, a complex tax system can act like a sorting device akin to third-degree price discrimination, where more elastic taxpayers will invest in more tax knowledge. While complexity itself induces costly investments in knowledge, this is counterbalanced by the fact that more elastic individuals will face lower – and thus less distortionary – effective tax rates. We show that in cases where a subset of taxpayers face a tax rate above their Laffer point, introducing tax complexity can even be efficiency-improving.
Using register data on Norwegian business owners, we demonstrate that in a complex setting where different tax bases incur different rates, many taxpayers fail to optimize and therefore face higher effective tax rates. We further validate our model predictions by showing that failure to optimize is associated with a lower estimated tax elasticity.