"Tax Knowledge and Tax Manipulation: A Unifying Model" - Joel Slemrod, University of Michigan

Date
Nov 1, 1:20 pm2:35 pm
Location
Julis Romo Rabinowitz Building, Rm 217 and via Zoom
Event Description

Joel Slemrod is the David Bradford Distinguished University Professor and the Paul W. McCracken Professor of Business Economics and Public Policy at the University of Michigan. He is a member of the Princeton class of '73.

He will also be a visiting scholar for the week at the Griswold Center for Economic Policy Studies.

Joel Slemrod will be presenting in person. Viewers may also attend via Zoom.

Abstract

We provide a unified analysis of optimal taxation and taxpayer education when individuals have an incomplete understanding of a complex and multi-dimensional tax system. The analysis is independent of whether income is earned legitimately, or by avoiding or evading taxes. In this sense, learning about the returns to tax minimization strategies (tax manipulation) is isomorphic to learning about tax rates. Both the optimal knowledge and optimal tax problems are tractable, with welfare impacts that can be characterized by just a few aggregate sufficient statistics. A better understanding of the tax system allows a taxpayer to optimize more effectively (an internality correction), and also alters government revenue (a fiscal externality). If society places a large enough welfare weight on the taxpayer, knowledge provision raises social welfare if and only if it is beneficial to the recipient. At the opposite extreme when the recipient’s welfare weight is very low, knowledge provision is socially beneficial if and only if it increases tax remittances. Educating taxpayers is also welfare-enhancing if it improves how taxpayers allocate their effort across income-generating activities, which occurs when the true tax system treats different activities more symmetrically than the taxpayer perceives.