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Behavioral responses to taxes

Alternative title: Skattetilpasning

Awarded: NOK 3.0 mill.

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Project Period:

2018 - 2022

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This project provides new insights for the international and national debates on how taxes and public support schemes (negative taxes) affect agents' tax avoidance and tax evasion behavior, also in relation to inequality. Norway is one of the very few countries that imposes an annual wealth tax, and the wealth tax is now increasingly on the international agenda and presented as one potential way to raise more tax revenue in light of the Covid-19 induced economic crises and to counter inequality. However, very little empirical research is done on the wealth tax. In this project, we analyze how the wealth tax affects employment and investments in closely held businesses, as well as how it affects individuals? savings level and composition. We find that the wealth tax does not appear to negatively affect employment in small and medium sized family-owned businesses. The results received great media attention in the public debate during autumn 2020, and renewed attention in the public debate leading up to the parliamental election autumn 2021. In addition, have our work on the measurement of inequality received renewed impact, on how the official statistics do not chapter large parts of the income of the richest. Since official statistics on inequality are based on information collected for tax purposes, this means that it only captures realized, and not actual income. The increased use of holding companies mean that it locks in income that previously would have been distributed to owners as dividends and no longer is visible on the individual owner's tax return. These are results from a related previous project that we keep working on under the umbrella of the current project. As a response to the immediate economic crisis induced by the onset of the Covid-19 pandemic, we have shown how available historical register data can be utilized to simulate the effects of various government measures and support packages. We find that both Norwegian and US crisis packages have cut the potential negative impact of the crisis on firms in half, measured by the firms' profitability, liquidity, and solidity. Assistance programs to cover wage costs were the most efficient crisis measure aimed at businesses, independent of whether it was given in the form of extended temporary unemployment benefits, as in Norway, or as wage bill support, as in the US. We utilize different data, mostly Norwegian register data, in combination with innovative methods. Much of the time and resources in the project has benn utilized for applying for and cleaning big data deliveries from the Statistics Norway, in addition to ensureing compliance with GDPR, which all is hugely time consuming.

The project generated several academic papers that have been published or are in the final stages of international journal publication (AER Papers and Proceding, Journal of Public Economics, National Tax Journal, ITAX), 16 op-eds , 153 media coverages, and 68 presentations/disseminations worldwide to academics, policy makers, and the public, many of these digital during the last two years due to the pandemic. In addition, research insights have been communicated to students in classes. The output from the project has renewed the understanding of the magnitude of tax evasion and tax avoidance and provided useful policy insights for the Ministry of Finance and the Norwegian Tax Administration. The project has also substantially contributed to the public debate. For instance, For instance, a paper from the project was even featured in the popular Friday night entertainment show "Nytt på Nytt" on NRK, autumn 2020, as well as being discussed in the Norwegian Parliament.

Our work provides new insights for the international and national debates on the design of the VAT and on the role that wealth taxation might play in targeting inequality, all using rich Norwegian administrative micro data and innovative methods. One of the main goals of this project is to build an infrastructure to access rich micro data on individual and firm level, and the interaction between the two, and to make these data available for project members through remote access, in order to facilitate more tax research and enable an efficient division of work among the project members. We will use these data to analyze behavioral responses to taxes in various settings. First, the VAT is one of the main sources of revenue for many countries, but it also is provides opportunities for fraud. EU estimates that export related VAT fraud led to 50 Billion Euro in lost tax revenue for EU in 2014. In spite of this, little research has been done on VAT and tax evasion in developed countries. We will study issues of tax fraud driven by rate differentials and export exemptions that have not been studied in the academic literature before. Second, Norway is one of the very few countries that imposes an annual wealth tax, and it was one of the main topics in the public debate leading up to the 2017 election. However, very little empirical research is done on the wealth tax, and the debate is mostly based on anecdotes and beliefs, rather than facts. We aim at shedding light at the impacts of the wealth tax design on wealth distribution and investment behavior. In the same context we will investigate another tax on capital, namely the individual level capital taxation and its impact on firm level investments.

Publications from Cristin

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