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We compare two approaches to increasing tax revenue: tax administration and tax rates. We show that when Indonesia moved top regional firms into “medium taxpayer offices,” with high staff-to-taxpayer ratios, tax revenue more than doubled. Examining nonlinear changes to corporate income tax rates, we estimate an elasticity of taxable income of 0.579. Combining these estimates, improved tax administration is equivalent to raising top rates on all firms by 8 percentage points. On net, improved tax administration can have significant returns for developing countries. (JEL H25, H26, K34, O17)
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On Bunching and Identification of the Taxable Income Elasticity
The elasticity of taxable income with respect to the net of tax rate is a key parameter for predicting the effect of tax reform or designing an income tax. Bunching at kinks and notches in a single budget set has been used to estimate the taxable income elasticity. We show that when the distribution of preferences is unrestricted the amount of bunching at a kink or a notch is not informative about the size of the taxable income elasticity, and neither is the entire distribution of taxable income for a convex budget set. Kinks do provide information about the size of the elasticity when a priori restrictions are placed on the preference distribution. They can identify the elasticity when the preference distribution is completely and correctly specified across the kink and provide bounds under restrictions on the preference distribution. We find wide estimated bounds in an empirical example using data like Saez (2010) based on upper and lower bounds for the preference density.
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- Award ID(s):
- 1757140
- PAR ID:
- 10472332
- Publisher / Repository:
- The University of Chicago Press
- Date Published:
- Journal Name:
- Journal of Political Economy
- Volume:
- 129
- Issue:
- 8
- ISSN:
- 0022-3808
- Page Range / eLocation ID:
- 2320 to 2343
- Format(s):
- Medium: X
- Sponsoring Org:
- National Science Foundation
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- Free Publicly Accessible Full Text
-
Accepted Manuscript1.0
- Journal Article:
- https://doi.org/10.1086/714446
