The main goal of this project is bringing businesses and individuals together and investigating how the ties between individuals and firms could potentially affect behavioral responses to taxes.
Much of the economic literature draws a distinction between firm and individual. In that view, a corporation acts either to maximize profits or objectives of managers. Once one turns to tax incentives, the behavior of a corporation responds to corporate tax incentives and may only respond to individual tax incentives in general or, more subtly when clientele effects are taken into account, those of an average owner. Most firms though do not fit this framework: for corporations with few owners, there is usually no separation of management and control and a specific individual owner's circumstances may shape the behavior of the corporation The majority of corporations are small and medium sized, and they are often owner-managed. For such corporations, the owner decides on firm behavior in order to maximize his private level utility, which implies that these firms may respond differently to tax incentives than large, listed corporations. The majority of mpirical research on firms' tax behavior is conducted on large, listed corporations with separation between ownership and management.
Most tax research on firms is conducted on large corporations with separation between ownership and management. However, the majority of firms are small and medium sized and often owner-managed. For such firms, the owner decides on firm behavior to maximize his private level utility. The main goal of this project is to investigate how ties between individuals and firms can affect behavioral responses to taxes. We find that changes in the dividend tax can affect tax avoidance, tax evasion, investments, and also, the measured level of inequality.
The integration between corporation and owner affects which share of the owner’s true income is observable on individual level, and thus also measured income inequality. Pass-through income is taxed when earned; capital-gains income is taxed when realized; and dividends when distributed. Business owners often have control over the timing and character of their income. And laws change, changing the incentive and ability to shift income between the individual and corporate sectors.
The introduction of a dividend tax in Norway in 2006 lead to lock-in of retained profits in the corporate sector and reduced income inequality post-reform, based on observable realized income statistics from administrative tax data. We propose a new integrated approach for measuring income from the firm and distribute change in retained profits as income to owners. Then the income share of the top 1% increases post-reform, from 7% (when measured as realized income from tax data) to 12% (when distributing earned, but retained, profits to owners).
What is seen as an increase in income inequality in the US following the 1986 tax reform may in fact mainly be a reporting issue, as there is a shift from incorporated to pass-through firms, rendering firm level income visible at the personal income tax return and thus being included in individual level at the time of accrual instead of realization.
Related, we discuss available evidence about the evolution of top wealth shares in the United States over the last one hundred years. Various methods of measuring the top wealth shares generate consistent findings until mid-1980s but diverge since then, due to the changing nature of top incomes and the increased importance of self-made wealth.
There is heterogeneity in the participation in tax planning activities. We show that few Swedish individuals utilize legal and observable tax avoidance opportunities by establishing a shell corporation. We show that in addition to monetary benefits from tax avoidance (incentives), the opportunity to participate in tax avoidance (access), as well as information and knowledge about these opportunities (awareness), are important factors for the individual’s tax avoidance decision. We further show that tax avoidance appear to spread within municipalities.
We also find that changes in the dividend tax rate can have real effects through corporate investments. A Swedish dividend tax cut in 2006 lead to reduced cost of capital for previously cash-constrained firms. These firms increased their investments post-reform, compared to cash-rich firms.
Tax compliance is by nature challenging to observe and analyze. In rich Swedish micro data, we observe over-reporting of a self-reported dividend allowance that can reduce the total tax liability of Swedish business owners. We find that tax noncompliance increases as individuals face higher tax rates and that incentives appear to play an economically important role in tax noncompliance.
Another way to study tax evasion is through audits, where we primarily look closer into the employer-employee relationship. Third-party reporting and employers’ tax withholding only work as self-enforcing compliance mechanisms as long as the employer and employee do not cooperate to evade taxes. We have cooperated with the Norwegian tax administration on randomized firm level audits to uncover the extent of unreported workers. By merging the audit data to administrative data, we provide evidence of collaborative tax evasion by employers and employees. We also show that audits work; employers increase reported wage payment after an audit by the tax administration.
Annette Alstadsæter, Wojciech Kopczuk og Kjetil Telle (2018): "Social Networks and Tax Avoidance: Evidence from Well-Defined Norwegian Tax Shelter". NBER Working Paper No. 25191. SSB Discussion Paper No. 886.
Marie Bjørneby, Annette Alstadsæter og Telle Kjetil (2018): "Collusive Tax Evasion by Employers and Employees: Evidence from a Randomized Field Experiment in Norway". CESifo Working Paper Series No. 7381.
Annette Alstadsæter, Martin Jacob, Wojciech Kopczuk og Kjetil Telle (2016): "Accounting for Business Income in Measuring Top Income Shares: Integrated Accrual Approach Using Individual and Firm Data from Norway". NBER Working Paper No. 22888.
Published peer-reviewed papers:
Annette Alstadsæter og Martin Jacob: "Tax incentives and non-compliance - Evidence from Swedish micro data". Public Finance Review, forthcoming.
Conor Clarke and Wojciech Kopczuk (2016): "Business Income and Business Taxation in the United States Since the 1950s'', in Robert Moffitt (ed.), Tax Policy and the Economy, 2017, 121-159.
Wojciech Kopczuk (2017): "U.S. Capital Gains and Estate Taxation: A Status Report and Directions for a Reform, in Alan Auerbach and Kent Smetters (eds.)", The Economics of Tax Policy, Oxford University Press, 2017, 265-91.
Annette Alstadsæter, Martin Jacob, og Roni Michaely (2017): "Do dividend taxes affect corporate investment?" Journal of Public Economics 151, 74-83.
Wojciech Kopczuk, Comment on "Measuring Income and Wealth at the Top Using Administrative and Survey Data", by Jesse Bricker, Alice Henriques, Jacob Krimmel and John Sabelhaus, Brookings Papers on Economic Activiy, Spring 2016, 321-27.
Wojciech Kopczuk: "What Do We Know About the Evolution of Top Wealth Shares in the United States?", Journal of Economic Perspectives, 2015, 29(1), 47-66.
Annette Alstadsæter og Martin Jacob (2017): "Who Participates in Tax Avoidance?-Evidence from Swedish micro data". Applied Economics 49(28), 2779-2796.
Annette Alstadsæter (2018): "Tre triks mot skattetriksing", Dagens Næringsliv, Page 3, February 20, 2018.
Annette Alstadsæter (2017): Faktabaserte fake news?, Open ed, Dagens Næringsliv, September 5, 2017, p4.
Annette Alstadsæter (2017): Trump på skattejakt, Open ed, Dagens Næringsliv, May 16, 2017, p 4.
Annette Alstadsæter (2017): Formuesskattens fortreffelighet. Dagens Næringsliv, 23.mars 2017.
Annette Alstadsæter og Kjetil Telle (2016): Utbytteskatt skjuler ulikhet. Kronikk, Dagens Næringsliv, 12. februar 2016, s 4.
Annette Alstadsæter og Martin Jacob (2015): "Utbytteskatt bremsa investeringane". Kronikk, Dagens Næringsliv, 5. September 2015, s 31.
"Who'd Gain From an Estate Tax Rollback: The 0.2 Percenters", The New York Times, 16. november 2017.
Dagsnytt Atten, NRK, Radio, 20. desember 2017.
"The 0.2% of Americans exempted by the GOP estate-tax plan (including the Trump cabinet) have never paid tax on their millions and never will.", BoingBoing, 17. november 2017.
"How the U.S. Could Kill the Corporate Tax.", Bloomberg, 29. november 2016.
"Inequality in the US has been getting worse since Reagan - but not by as much as many believe.", Quartz, 4. november 2016.
"Bankenes skatteløfter møter bred kritikk", Aftenposten, 4. september 2017.
"Helsemilliarden", Aftenposten, 29 november 2017.
"Få søker utsatt skatt", Klassenkampen, 15. August 2017.
"Forskere: Ja, ulikheten øker", Dagavisen, 14. August 2017.
"Det er en skattekonkurranse", Dagens Næringsliv, 4. july 2016.
"Så ulike kan vi bli i Norge", Dagens Næringsliv, 9. August 2016.
Dialogseminar med Nærings- og fiskeridepartementet, Mai, 2, 2018. With Annette Alstadsæter and Knut Einiar Rosendhal.
International workshop on "Tax evasion, tax avoidance, and inequality", Copenhagen, October 27-28, 2017. Organized by Annette Alstadsæter, Niels Johannesen and Gabriel Zucman.
Martin Jacob, WHU – Otto Beisheim School of Management.
Wojciech Kopczuk, Columbia University.
Kjetil Telle, Statistics Norway.
Research Council of Norway, grant 239225/H20.
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