Tax evasion, inequality, and progressive taxes : a political economy perspective

The standard approach to tax compliance applies the economics-of-crime methodology pioneered by Becker (1968): in its first application, due to Allingham and Sandmo (1972) it models the behaviour of agents as a decision involving a choice of the extent of their income to report to tax authorities, given a certain institutional environment, represented by parameters such as the probability of detection and penalties in the event the agent is caught. While this basic framework yields important insights on tax compliance behavior, it has some critical limitations. Specifically, it indicates a level of compliance that is significantly below what is observed in the data. This thesis revisits the original framework with a view towards addressing this issue, and examining the political economy implications of tax evasion for progressivity in the tax structure. The approach followed involves building a macroeconomic, dynamic equilibrium model for the purpose of examining these issues, by using a step-wise model building procedure starting with some very simple variations of the basic Allingham and Sandmo construct, which are eventually integrated to a dynamic general equilibrium overlapping generations framework with heterogeneous agents. One of the variations involves incorporating the Allingham and Sandmo construct into a two-period model of a small open economy of the type originally attributed to Fisher (1930). A further variation of this simple construct involves allowing agents to initially decide whether to evade taxes or not. In the event they decide to evade, the agents then have to decide the extent of income or wealth they wish to under-report. We find that the ‘evade or not’ assumption has strikingly different and more realistic implications for the extent of evasion, and demonstrate that it is a more appropriate modeling strategy in the context of macroeconomic models, which are essentially dynamic in nature, and involve consumption smoothing across time and across various states of nature. Specifically, since deciding to undertake tax evasion impacts on the consumption smoothing ability of the agent by creating two states of nature in which the agent is ‘caught’ or ‘not caught’, there is a possibility that their utility under certainty, when they choose not to evade, is higher than the expected utility obtained when they choose to evade. Furthermore, the simple two-period model incorporating an ‘evade or not’ choice can be used to demonstrate some strikingly different political economy implications relative to its Allingham and Sandmo counterpart. In variations of the two models that allow for voting on the tax parameter, we find that agents typically choose to vote for a high degree of progressivity by choosing the highest available tax rate from the menu of choices available to them. There is, however, a small range of inequality levels for which agents in the ‘evade or not’ model vote for a relatively low value of the tax rate. The final steps in the model building procedure involve grafting the two-period models with a political economy choice into a dynamic overlapping generations setting with more general, non-linear tax schedules and a ‘cost-of evasion’ function that is increasing in the extent of evasion. Results based on numerical simulations of these models show further improvement in the model’s ability to match empirically plausible levels of tax evasion. In addition, the differences between the political economy implications of the ‘evade or not’ version of the model and its Allingham and Sandmo counterpart are now very striking; there is now a large range of values of the inequality parameter for which agents in the ‘evade or not’ model vote for a low degree of progressivity. This is because, in the ‘evade or not’ version of the model, low values of the tax rate encourages a large number of agents to choose the ‘not-evade’ option, so that the redistributive mechanism is more ‘efficient’ relative to the situations in which tax rates are high. Some further implications of the models of this thesis relate to whether variations in the level of inequality, and parameters such as the probability of detection and penalties for tax evasion matter for the political economy results. We find that (i) the political economy outcomes for the tax rate are quite insensitive to changes in inequality, and (ii) the voting outcomes change in non-monotonic ways in response to changes in the probability of detection and penalty rates. Specifically, the model suggests that changes in inequality should not matter, although the political outcome for the tax rate for a given level of inequality is conditional on whether there is a large or small or large extent of evasion in the economy. We conclude that further theoretical research into macroeconomic models of tax evasion is required to identify the structural relationships underpinning the link between inequality and redistribution in the presence of tax evasion. The models of this thesis provide a necessary first step in that direction.

How smokers may react to cigarette taxes and price increases in Brazil: data from a national survey

Background: Despite being the third largest tobacco producer in the world, Brazil has developed a comprehensive tobacco control policy that includes a broad restriction on both advertising and smoking in indoor public places, compulsory pictorial warning labels, and a menthol cigarette ban. However, tax and pricing policies have been developed slowly and only very recently were stronger measures implemented. This study investigated the expected responses of smokers to hypothetical price increases in Brazil.Methods: We analyzed smokers' responses to hypothetical future price increases according to sociodemographic characteristics and smoking conditions in a multistage sample of Brazilian current cigarette smokers aged >= 14 years (n = 500). Logistic regression analysis was used to examine the relationship between possible responses and different predictors.Results: in most subgroups investigated, smokers most frequently said they would react to a hypothetical price increase by taking up alternatives that might have a positive impact on health, i.e., they would try to stop smoking (52.3%) or smoke fewer cigarettes (46.8%). However, a considerable percentage responded that they would use alternatives that would reduce the effect of price increases, such as the same brand with lower cost (48.1%). After controlling for sex age group (14-19, 20-39, 40-59, and >= 60 years), schooling level (>= 9 versus <= 9 years), number of cigarettes per day (>20 versus <= 20), and stage of change for smoking cessation (precontemplation, contemplation, and preparation), lower levels of dependence were positively associated with the response I would try to stop smoking (odds ratio [OR], 2.19). Young age was associated with I would decrease the number of cigarettes (OR, 3.44). A low schooling level was strongly associated with all responses.Conclusions: Taxes and prices increases have great potential to stimulate cessation or reduction of cigarette consumption further among two important vulnerable populations of smokers in Brazil: young smokers and those of low educational level. the results from the present study also suggest that seeking illegal products may reduce the impact of increased taxes, but does not eliminate it.

Illicit cigarette consumption and government revenue loss in Indonesia.

BACKGROUND: Illicit cigarettes comprise more than 11% of tobacco consumption and 17% of consumption in low- and middle-income countries. Illicit cigarettes, defined as those that evade taxes, lower consumer prices, threaten national tobacco control efforts, and reduce excise tax collection. METHODS: This paper measures the magnitude of illicit cigarette consumption within Indonesia using two methods: the discrepancies between legal cigarette sales and domestic consumption estimated from surveys, and discrepancies between imports recorded by Indonesia and exports recorded by trade partners. Smuggling plays a minor role in the availability of illicit cigarettes because Indonesians predominantly consume kreteks, which are primarily manufactured in Indonesia. RESULTS: Looking at the period from 1995 to 2013, illicit cigarettes first emerged in 2004. When no respondent under-reporting is assumed, illicit consumption makes up 17% of the domestic market in 2004, 9% in 2007, 11% in 2011, and 8% in 2013. Discrepancies in the trade data indicate that Indonesia was a recipient of smuggled cigarettes for each year between 1995 and 2012. The value of this illicit trade ranges from less than $1 million to nearly $50 million annually. Singapore, China, and Vietnam together accounted for nearly two-thirds of trade discrepancies over the period. Tax losses due to illicit consumption amount to between Rp 4.1 and 9.3 trillion rupiah, 4% to 13% of tobacco excise revenue, in 2011 and 2013. CONCLUSIONS: Due to the predominance of kretek consumption in Indonesia and Indonesia's status as the predominant producer of kreteks, illicit domestic production is likely the most important source for illicit cigarettes, and initiatives targeted to combat this illicit production carry the promise of the greatest potential impact.

How does globalization affect the tax burden on labour income, capital income and consumption in different welfare regimes? The case of Western and Eastern EU Member States

This article analyzes the effects of globalization on implicit tax rates (ITRs) on labor income, capital income, and consumption in the EU15 and Central and Eastern European New Member States (CEE NMS). We find supportive evidence for an increase in the ITR on labor income in the EU15, but no effect on the ITR on capital income. There is evidence of convergence in terms of the ITR on consumption, as countries with higher than average ITR on consumption respond to globalization by decreasing their tax rates. There are important differences among the welfare regimes within the EU15. Social-democratic countries have decreased the tax burden on capital, but increased that on labor due to globalization. Globalization exerts a pressure to increase taxes on labor income in the conservative and liberal regimes as well. Taxes on consumption decrease in response to globalization in the conservative and social-democratic regimes. In the CEE NMS, there is no effect of globalization on the ITR on labor and capital income, but we find a negative impact on the ITR on consumption in the CEE NMS with higher than average ITR on consumption. (JEL H23, H24, H25, F19, F21)

Food consumption impacts of adherence to dietary norms in the United States: a quantitative assessment

Promotion of adherence to healthy-eating norms has become an important element of nutrition policy in the United States and other developed countries. We assess the potential consumption impacts of adherence to a set of recommended dietary norms in the United States using a mathematical programming approach. We find that adherence to recommended dietary norms would involve significant changes in diets, with large reductions in the consumption of fats and oils along with large increases in the consumption of fruits, vegetables, and cereals. Compliance with norms recommended by the World Health Organization for energy derived from sugar would involve sharp reductions in sugar intakes. We also analyze how dietary adjustments required vary across demographic groups. Most socio-demographic characteristics appear to have relatively little influence on the pattern of adjustment required to comply with norms, Income levels have little effect on required dietary adjustments. Education is the only characteristic to have a significant influence on the magnitude of adjustments required. The least educated rather than the poorest have to bear the highest burden of adjustment. Out- analysis suggests that fiscal measures like nutrient-based taxes may not be as regressive as commonly believed. Dissemination of healthy-eating norms to the less educated will be a key challenge for nutrition policy.

Food consumption impacts of adherence to dietary norms in the United States: a quantitative assessment

Promotion of adherence to healthy-eating norms has become an important element of nutrition policy in the United States and other developed countries. We assess the potential consumption impacts of adherence to a set of recommended dietary norms in the United States using a mathematical programming approach. We find that adherence to recommended dietary norms would involve significant changes in diets, with large reductions in the consumption of fats and oils along with large increases in the consumption of fruits, vegetables, and cereals. Compliance with norms recommended by the World Health Organization for energy derived from sugar would involve sharp reductions in sugar intakes. We also analyze how dietary adjustments required vary across demographic groups. Most socio-demographic characteristics appear to have relatively little influence on the pattern of adjustment required to comply with norms, Income levels have little effect on required dietary adjustments. Education is the only characteristic to have a significant influence on the magnitude of adjustments required. The least educated rather than the poorest have to bear the highest burden of adjustment. Out- analysis suggests that fiscal measures like nutrient-based taxes may not be as regressive as commonly believed. Dissemination of healthy-eating norms to the less educated will be a key challenge for nutrition policy.

Effects of beverage alcohol taxes and prices on drinking: a meta-analysis of 1003 estimates from 112 studies

Aims: We conducted a systematic review of studies examining relationships between measures of beverage alcohol tax or price levels and alcohol sales or self-reported drinking. A total of 112 studies of alcohol tax or price effects were found, containing 1003 estimates of the tax/price–consumption relationship. Design: Studies included analyses of alternative outcome measures, varying subgroups of the population, several statistical models, and using different units of analysis. Multiple estimates were coded from each study, along with numerous study characteristics. Using reported estimates, standard errors, t-ratios, sample sizes and other statistics, we calculated the partial correlation for the relationship between alcohol price or tax and sales or drinking measures for each major model or subgroup reported within each study. Random-effects models were used to combine studies for inverse variance weighted overall estimates of the magnitude and significance of the relationship between alcohol tax/price and drinking. Findings: Simple means of reported elasticities are -0.46 for beer, -0.69 for wine and -0.80 for spirits. Meta-analytical results document the highly significant relationships (P < 0.001) between alcohol tax or price measures and indices of sales or consumption of alcohol (aggregate-level r = -0.17 for beer, -0.30 for wine, -0.29 for spirits and -0.44 for total alcohol). Price/tax also affects heavy drinking significantly (mean reported elasticity = -0.28, individual-level r = -0.01, P < 0.01), but the magnitude of effect is smaller than effects on overall drinking. Conclusions: A large literature establishes that beverage alcohol prices and taxes are related inversely to drinking. Effects are large compared to other prevention policies and programs. Public policies that raise prices of alcohol are an effective means to reduce drinking.

The distributional and nutritional impacts and mitigation potential of emission-based food taxes in the UK

Agriculture and food production are responsible for a substantial proportion of greenhouse gas emissions. An emission based food tax has been proposed as one option to reduce food related emissions. This study introduces a method to measure the impacts of emission based food taxes at a household level which involves the use of data augmentation to account for the fact that the data record purchases and not consumption. The method is applied to determine the distributional and nutritional impacts of an emission based food tax across socio-economic classes in the UK. We find that a tax of £2.841/tCO2e on all foods would reduce food related emissions by 6.3% and a tax on foods with above average levels of emissions would reduce emissions by 4.3%. The tax burden falls disproportionately on households in the lowest socio-economic class because they tend to spend a larger proportion of their food expenditure on emission intensive foods and because they buy cheaper products and therefore experience relatively larger price increases.

Modelling income group differences in the health and economic impacts of targeted food taxes and subsidies

Objective : To examine the effects, by income group, of targeted food taxes and subsidies on nutrition, health and expenditure in the UK.

Methods : A model based on consumption data and demand elasticity was constructed to predict the effects of four food taxation-subsidy regimens. Resulting changes in demand, expenditure, nutrition, cardiovascular disease (CVD) and cancer mortality were estimated.

Data : Expenditure data were taken from the Expenditure and Food Survey; estimates of price elasticities of demand for food were taken from a report based on the National Food Survey 1988–2000. Estimates of effect on CVD and cancer mortality of changing fat, salt, fruit and vegetable intake were taken from previous meta-analyses.

Results : (i) Taxing principal sources of dietary saturated fat is unlikely to reduce cardiovascular disease (CVD) or cancer mortality. (ii) Taxing ‘less healthy’ foods (defined by the WXYfm nutrient profiling model) could increase CVD and cancer deaths by 35–1300 yearly. (iii) Taxing ‘less healthy’ foods and subsidising fruits and vegetables by 17.5% could avert up to 2900 CVD and cancer deaths yearly. (iv) Taxing ‘less healthy’ foods and using all tax revenue to subsidize fruits and vegetables could avert up to 6400 CVD and cancer deaths yearly. Few obesity-related CVD deaths are averted by any of the regimens. All four regimens would be economically regressive and positive health effects will not necessarily be greater in lower-income groups where the need for dietary improvement is higher.

Conclusions : A targeted food tax combined with the appropriate subsidy on fruits and vegetables could reduce deaths from CVD and cancer.

Sugar-Sweetened Beverage Taxes in Brazil

Objectives. We investigated whether taxing sugar-sweetened beverages (SSBs) would improve the diets of households in Brazil. Methods. We used household food consumption data that the Brazilian Institute of Geography and Statistics collected in 2002-2003 from a nationally representative sample of 48470 Brazilian households. The consumption of SSBs is expressed as the total SSB calories consumed and as the SSB percentage of the total calories purchased. We investigated price elasticity with regression models, controlling for demographic variables, income, and prices of all other foods and drinks. Results. Increases in the price of SSBs led to reductions in consumption. A 1.00% increase in the price of SSBs led to a 0.85% reduction of SSB calories consumed (1.03% reduction for the poor and 0.63% for the nonpoor). Increased income had a positive effect on SSB consumption, but the effect was less than half the size of the price elasticity (0.41% increase in SSB calories consumed for every 1.00% increase in income). Conclusions. High SSB price elasticity in Brazil indicates that a tax on purchased weight or volume would lead to reductions in SSB consumption. (Am J Public Health. 2012;102:178-183. doi:10.2105/AJPH.2011.300313)

Consumption-based accounting of U.S. CO2 emissions from 1990 to 2010

To tackle global climate change, it is desirable to reduce CO2 emissions associated with household consumption in particular in developed countries, which tend to have much higher per capita household carbon footprints than less developed countries. Our results show that carbon intensity of different consumption categories in the U.S. varies significantly. The carbon footprint tends to increase with increasing income but at a decreasing rate due to additional income being spent on less carbon intensive consumption items. This general tendency is frequently compensated by higher frequency of international trips and higher housing related carbon emissions (larger houses and more space for consumption items). Our results also show that more than 30% of CO2 emissions associated with household consumption in the U.S. occur outside of the U.S. Given these facts, the design of carbon mitigation policies should take changing household consumption patterns and international trade into account.

A history of taxation and taxes in England from the earliest times to the present day,

Includes bibliographical references.

The effects of excise tax changes on alcoholic beverages and tobacco consumption in Thailand

The purpose of this thesis is to examine the factors affecting the likelihood of consumption and the amount spent on alcoholic beverages and tobacco in Thailand using the 2009 Socio-Economic Survey of Thailand. Results suggest that household size, tenure and occupation have significant impacts on both the probability of alcohol and tobacco consumption and spending levels. Income also plays a key role in explaining the amount spent on alcoholic beverages and tobacco. Demand elasticities are calculated under the Extended Linear Expenditure System (ELES). Demand for alcoholic beverages and tobacco is found to be inelastic. The effects of increasing taxation on alcohol and tobacco consumption in Thailand are estimated. The findings are that excise taxes in Thailand are efficient taxes with only a modest rise in deadweight loss. Taxes result in a small decrease in consumption but generate higher expenditure and government tax revenue. Excise tax on alcoholic beverages results in a net benefit to the Thai economy. Tobacco taxes increase total expenditure and government revenue as well as increasing net benefit to the Thai economy. However, the low elasticities of demand also mean that excise taxes have only a small impact on reducing the costs associated with drinking and smoking.

Mobile phone consumption and implications for SMS marketing

This paper reports on a Q-methodology study on the consumption of mobile phones and opinions on SMS-marketing, extracted from interpretive interviews and focus groups. The Metaphors Q-sort, developed within a framework of Holt's (1995) four metaphors of consumption, identifies three experiential value clusters in the consumption of mobile phones: the Mobile Pragmatists, the Mobile Connectors and the Mobile Revelers. The SMS-marketing Q-sort identifies two key clusters of subjective opinions on various aspects of SMS-based mobile-marketing. By integrating the findings from these two Q-sorts, we demonstrate that while all three value clusters express positive opinions towards ‘location specific’ and ‘customer initiated contact’ SMS-marketing, there are noticeable differences in how marketers should develop their strategies to maximize the consumers’ perceived experiential value derived from the consumption of their mobile phones. Keywords: mobile phones; experiential consumption: SMS-marketing; Q-methodology