Taxation with Mobile High-Income Agents: Experimental Evidence on Tax Compliance and Equity Perceptions

Sandro Casal,Veronika Grimm,Simeon Schächtele

doi:10.3390/g10040042

Sandro Casal, Veronika Grimm + Show 1 more

Open Access

https://doi.org/10.3390/g10040042

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Journal: Games	Publication Date: Oct 11, 2019
Citations: 4	License type: CC BY 4.0

Affiliation: University of Trento, University of Erlangen-Nuremberg

Abstract

In a laboratory experiment on tax compliance, we model a situation in which high-income taxpayers can leave a tax system that finances a public good. We compare low-income taxpayers’ compliance decisions and equity perceptions across treatments in which they are informed or not informed about the mobility option of high-income taxpayers. This allows us to test if low-income taxpayers regard the mobility option as a rationale for implementing a regressive tax schedule. To investigate if a potential `justification effect’ of the mobility option depends on the causes of income heterogeneity, we also varied whether income was allocated based on relative performance in a prior ability task or at random. Interestingly, although the performance-based allocation itself was judged to be fairer, we observed higher compliance under the random allocation mechanism. However, compliance and equity perceptions did not significantly differ by the information treatment variation, regardless of the source of income inequality. The results indicate that the threat of losing high-income taxpayers’ contributions does not lead low-income taxpayers to view the regressive tax schedule more favorably. This suggests that taking the differential mobility options as given and altering tax schedules accordingly may not be perceived as an adequate policy response.

Highlights

In a world in which high-income taxpayers are more responsive to taxation than low-income taxpayers, governments are compelled to lower taxes on high-income taxpayers compared to what would otherwise be seen as a socially desirable tax schedule
Most participants seemed to understand the basic incentive structure of the experiment; in particular the majority of informed participants understood that the outside option was not financially attractive for high-income taxpayers under the prevailing tax scheme, but would become attractive if the tax rate on high-income taxpayers were as high as the factual tax rate for low-income taxpayers
In the experimental tax compliance game, we did not find evidence that an outside option for high-income taxpayers provides a justification for low-income taxpayers to accept low tax rates for high-income taxpayers, neither on the level of stated equity perceptions and tax preferences, nor on the level of compliance behavior

Summary

Introduction

In a world in which high-income taxpayers are more responsive to taxation than low-income taxpayers, governments are compelled to lower taxes on high-income taxpayers compared to what would otherwise be seen as a socially desirable tax schedule. While mobility for labor is typically not as high as for capital, there is evidence that individual mobility increases with skill [1] and is sensitive to tax rates [2], especially for top professionals [3,4]. Countries may perceive competitive pressures to attract or retain mobile high-income individuals and effectively be compelled to lower taxes on them [5,6]. For example, offers new immigrants with high income a preferential tax rate of nearly half the rate for domestic workers, a scheme which [7] found to be very effective at attracting highly paid workers. According to an OECD report from 2011, 15 other OECD countries had introduced tax concessions for high-skilled workers. ‘obvious’ tax concessions are often confined to foreigners, similar competitive

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