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International Tax and Public Finance

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30.01.2018

A collateral tax sanction: When does it mimic a welfare-improving tag?

verfasst von: Yulia Kuchumova

Erschienen in: International Tax and Public Finance | Ausgabe 4/2018

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Abstract

The suspension of a driver’s license or the revocation of a passport or a professional license are used by the tax authorities as sanctions for failure to comply with tax obligations and are referred to as collateral tax sanctions. In this paper, I propose a new rationale for why it may be beneficial to use collateral tax sanctions for the purpose of tax enforcement. By affecting consumption and providing enforcement targeted to a group, collateral tax sanctions may allow the government to impose punishment correlated with an individual’s earning potential. Such punishment also makes the effective tax rates correlated with an individuals’ earning potential and therefore leads to a more effective redistribution of income. I show that the use of collateral tax sanctions could increase the CES social welfare function when the skill distribution of the targeted group first-order stochastically dominates the skill distribution of the other group and the social welfare function is sufficiently concave.

Nächster Artikel Optimal income taxation and migration

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See, e.g., Tax Topics, Louisiana Department of Revenue, Volume 24 Number 2 April 2004, available at http://www.revenue.louisiana.gov/forms/publications/tt(04_04).pdf. See also Suspension and Denial of Renewal of Drivers’ Licenses (LAC 61:I.1355), Louisiana Department of Revenue, available at http://revenue.louisiana.gov/forms/lawspolicies/LAC61_I_1355.pdf.

See, e.g., California to Tax Scofflaws: Pay Up or Lose your Driver’s (or CPA) License, AccountingWeb.com, September 20, 2011, available at http://www.accountingweb.com/topic/tax/california-tax-scofflaws-pay-or-lose-your-drivers-license. See also Franchise Tax Board Meeting, September 5, 2012: Delinquent Taxpayer Accountability Act Informational Item available at https://www.ftb.ca.gov/law/meetings/attachments/090512/3.pdf.

See, e.g., States target tax scofflaws with incentives and shame, usatoday.com, October 16, 2013, available at http://www.usatoday.com/story/news/nation/2013/10/16/states-target-tax-scofflaws/2993447/. See also Summary of Budget Bill Personal Income Tax Changes Enacted in 2013, New York State Department of Taxation and Finance, August 8, 2013, available at http://www.tax.ny.gov/pdf/memos/income/m13_4i.pdf.

See Jay Soled, Using Driving Privilege to Solve States’ Fiscal Crises, 60 STATE TAX NOTES 841 (June 13, 2011).

See, e.g., Wis. Stat. §73.0301(d)(11) (revocation of law licenses); Min Stat. §270C.72 (revocation of medical licenses).

See, e.g., Louisiana Dep’t of Wildlife and Fisheries, Hunting Licenses, available at http://www.wlf.louisiana.gov/licenses/hunting-licenses (last visited Oct. 22, 2012).

See Blank (2014) for more details.

The National Travel and Tourism Office is located in the International Trade Administration of the Department of Commerce.

This presumes that the cost associated with collateral sanctions are proportional to income. For instance, suspension of a passport is more costly for an individual with a high earning potential. In general, there is not much known about how the cost from the imposition of a collateral tax sanction depends on individual earning potential and hence on income.

For a detailed discussion of the properties of this monotone transformation of the CES SWF see Iritani and Miyakawa (2002).

Note that the total tax revenue increases with the effective tax rate, \(\frac{\partial TR}{\partial \theta _{0}t_{0}}=\frac{\eta }{\theta }\int _{\underline{w}}^{\overline{w}}(I(w)-\theta _{0}t_{0}\frac{\partial I(w)}{\partial \theta _{0}t_{0}})f(w)\mathrm{d}w=\widetilde{I}>0\). However, the tax revenue collected from a w-type individual may not increase with the effective tax rate, because \(\frac{\partial TR(w)}{\partial \theta _{0}t_{0}}=\frac{\eta _{0}}{\theta _{0}}\left( I(w)-\theta _{0}t_{0}\frac{\partial I(w)}{\partial \theta _{0}t_{0}}\right) =\frac{\eta _{0}}{\theta _{0}}\left( I(w)-\theta _{0}t_{0}\frac{w^{2}}{\varphi ^{''}(\frac{I}{w})}\right) =\frac{\eta _{0}}{\theta _{0}}I(w)\left( 1-\epsilon (w)\frac{\eta _{0}\int _{\underline{w}}^{\overline{w}}I(w)f(w)\mathrm{d}w-\theta _{0}\widetilde{I}}{\eta _{0}\int _{\underline{w}}^{\overline{w}}\epsilon (w)I(w)f(w)\mathrm{d}w}\right) \), which could be positive or negative depending on the size and behavior of \(\epsilon (w)\). The reason for this is that an increase in the effective tax rate has two effects on the tax revenue. The first effect is a mechanical effect: an increase in the tax rate gives a higher tax revenue from each dollar of income. This effect increases the tax revenue. The second effect is a labor supply effect: an increase in the tax rate reduces the labor supplied by an individual. This second effect decreases the tax revenue. The total effect of an increase in the tax rate on the tax revenue is determined by the size of those two effects. Note that if the inverse of the wage elasticity of labor supply is constant (i.e., \(\epsilon (w)=\epsilon =\mathrm{const}\)) then the tax revenue collected from a w-type individual increases with the effective tax rate for all w, \(\frac{\partial TR(w)}{\partial \theta _{0}t_{0}}=I(w)\frac{\widetilde{I}}{\int _{\underline{w}}^{\overline{w}}\epsilon (w)I(w)f(w)\mathrm{d}w}\).

Note that this condition is condition (26) in the case of Rawlsian s.w.f. which implies that the imposition of the collateral tax sanction is socially beneficial.

Note that this condition is easily satisfied if \(\underline{w}_{1}\) is close to zero.

The tax revenue paid by taxpayers in group 2 is \(TR_{2}=\rho _{2}t\left( \frac{1-\theta _{2}t}{1+1/\epsilon }\right) ^{\epsilon }\hat{W}_{2}\), and it could increases or decrease because \(\frac{\partial TR_{2}}{\partial \theta _{2}}=\left( \frac{1-\theta _{2}t}{1+1/\epsilon }\right) ^{\epsilon }\hat{W}_{2}\left[ \frac{\underline{W}_{2}}{\hat{W}_{1}+\hat{W}_{2}}\left. \frac{\partial \theta _{2}t}{\partial \theta _{2}}\right| _{\theta _{2}=\theta _{0}}-t_{0}\left( \frac{\rho _{0}}{\theta _{0}}-\left. \frac{\partial \rho _{2}}{\partial \theta _{2}}\right| _{\theta _{2}=\theta _{0}}\right) \right] \gtrless 0\) depending of the size of \(\left. \frac{\partial \rho _{2}}{\partial \theta _{2}}\right| _{\theta _{2}=\theta _{0}}\). It is positive if \(\left. \frac{\partial \rho _{2}}{\partial \theta _{2}}\right| _{\theta _{2}=\theta _{0}}\) is not much less than \(\frac{\rho _{0}}{\theta _{0}}\).

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Iritani, J., & Miyakawa, T. (2002). A note on the monotone transformation of CES social welfare functions. Kobe University Economic Review, 48, 19–28.

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Titel: A collateral tax sanction: When does it mimic a welfare-improving tag?
verfasst von: Yulia Kuchumova
Publikationsdatum: 30.01.2018
Verlag: Springer US
Erschienen in: International Tax and Public Finance / Ausgabe 4/2018
Print ISSN: 0927-5940
Elektronische ISSN: 1573-6970
DOI: https://doi.org/10.1007/s10797-017-9480-1

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