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Authors
Annette Alstadsæter (Skatteforsk), Johannes Scheuerer (Skatteforsk), and Jakob Brounstein (Institute for Fiscal Studies and Skatteforsk)
Abstract
We study tax noncompliance penalties as an enforcement instrument, focusing on their effects on compliance behavior and tax administration. Using novel administrative data from Norway that link penalty assignments to appeals and tax records, we analyze a reform that reduced the statutory penalty rate from 30% to 20%. Comparing cohorts of noncompliant taxpayers, we estimate an elasticity of reported income with respect to the penalty rate of 0.3 to 0.45. We also document substantial administrative effects. Higher penalties increase appeal activity: doubling the penalty raises the likelihood of appeal by 60%, leading to longer processing times and lower expected collections. This shows that penalties are not costless, but involve important administrative trade-offs. Further, we develop a framework for optimal penalty design and show that, to a firstorder approximation, the actuarial penalty rate should equal the optimal linear income
tax rate. Calibrating the model to Norway implies an optimal penalty rate of about 200%.
JEL Codes
H26, H83, H21, H22, H23, H24
Key words
Tax penalties, tax administration, tax evasion and avoidance