Abstract
Abstract We estimate effective and optimal net income tax schedules and compare them to the estimated statutory rates for the case of Lithuania for the period 2014–2015. Values of effective net tax rates are estimated from the survey of EU Statistics on Income and Living Conditions; the statutory net tax rates are estimated with the European tax-benefit simulator EUROMOD, whereas optimal net taxes are calculated via Saez (2002) methodology. We find that the three net tax schedules are similar for employees in the middle of the income distribution. At the bottom of the income distribution, optimal net tax schedules suggest higher in-work benefits. The net tax schedules diverge substantially for the self-employed. At the top of the income distribution, where the majority of self-employed are concentrated, the self-employed are required to pay 15 cents less net taxes per Euro than employees—and they effectively pay 29 cents less.
Highlights
It is widely accepted that taxes are necessary to finance government expenditures and social transfer programs, there is a great deal of disagreement concerning who should be paying these taxes
These three concepts are interrelated in a complex way: optimal taxes inform us about the desirable rate structure, whereas effective rates show how the tax system effectively taxes people based on rules set out by statutory rates as prescribed by law
IZA Journal of Labor Policy (2021) 11:5 though the evidence suggests that employees do evade income, up to 20% of the top incomes in Estonia do so (Paulus 2015), the self-employed tend to engage in tax evasion and avoidance substantially more with some estimates showing that more than half of the income may be concealed from the authorities (Artavanis et al 2016)
Summary
It is widely accepted that taxes are necessary to finance government expenditures and social transfer programs, there is a great deal of disagreement concerning who should be paying these taxes. The self-employed usually face lower statutory income tax rates and are more likely to evade taxes as compared to employees, which leads to smaller government coffers and questions of social injustice (Milanez and Bratta 2019). The literature of optimal taxation started with partial equilibrium models based on individuals, most notably Mirrlees (1971) He demonstrated that higher marginal tax rates generate labor responses that cause employees to spend less time in employment. The Mirrlees model was modified by Saez (2001) by replacing theoretical labor responses with observable income-dependent labor supply elasticities This methodology was first used to argue that optimal gross income (which excludes social contributions) tax rates of top incomes in the United States could exceed 50%.
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