A paper by Henrik Kleven entitled 'Unwilling or Unable to Cheat? Evidence from a Tax Audit Experiment in Denmark' is forthcoming in Econometrica
This paper analyzes a tax enforcement ﬁeld experiment in Denmark. In the base year, a stratiﬁed and representative sample of over 40,000 individual income tax ﬁlers was selected for the experiment. Half of the tax ﬁlers were randomly selected to be thoroughly audited, while the rest were deliberately not audited. The following year, threat-of-audit letters were randomly assigned and sent to tax ﬁlers in both groups. We present three main empirical ﬁndings. First, using baseline audit data, we ﬁnd that the tax evasion rate is close to zero for income sub ject to third-party reporting, but substantial for self-reported income. Since most income is sub ject to third-party reporting, the overall evasion rate is modest. Second, using quasi-experimental variation created by large kinks in the income tax schedule, we ﬁnd that marginal tax rates have a positive impact on tax evasion for self-reported income, but that this effect is small in comparison to legal avoidance and behavioral responses. Third, using the randomization of enforcement, we ﬁnd that prior audits and threat-of-audit letters have signiﬁcant effects on self-reported income, but no effect on third-party reported income. All these empirical results can be explained by extending the standard model of (rational) tax evasion to allow for the key distinction between self-reported and third-party reported income.
The paper can be found here
A paper by Henrik Kleven entitled 'Transfer Program Complexity and
the Take Up of Social Beneﬁts' is forthcoming in the American Economic Journal: Economic Policy
This paper models complexity in social programs as a byproduct of efforts to screen between deserving and undeserving applicants. While a more rigorous screening technology may have desirable effects on targeting efficiency, the associated complexity introduces transaction costs into the application process and may induce incomplete take up. The paper integrates the study of take up with the study of classiﬁcation errors of type I and type II, and argues that incomplete take up can be seen as a form of type I error. We consider a government interested in ensuring a minimum income level for as many deserving individuals as possible, and characterize optimal programs when policy makers can choose the rigor of screening (and associated complexity) along with a beneﬁt level and an eligibility criterion. It is shown that optimal program parameters reﬂect a trade-off at the margin between type I errors (including non-takeup) and type II errors. Optimal programs that are not universal always feature a high degree of complexity. Although it is generally possible to eliminate take up by the undeserving (type II errors), policies usually involve eligibility criteria that make them eligible and rely on complexity to restrict their participation. Even though the government is interested only in ensuring a minimum beneﬁt level, the optimal policy may feature beneﬁts that are higher than this target minimum. This is because beneﬁts generically screen better than either eligibility criteria or complexity.
The paper can be found here