SHADOW EFFECT FROM LAFFER TAX ALLERGY: NEW TAX POLICY TOOL TO FIGHT TAX EVASION
Abstract
This study is inspired by the Laffer curve to develop and formalize a concept around optimal tax policy considering asymmetric information. This is the "Shadow effect". This theory states that when the tax burden is high, producers tend to inflate their fictitious expenses to reduce their declared profit (to avoid paying a high tax). The theoretical developments show that the propensity of producers to the Shadow effect is positively related to the square of the tax rate. The relationship is non-linear. They also show that there is an inverse and non-linear relationship between the tax rate and the level of production. Also, producers' sensitivity to the Shadow Effect can be influenced by fluctuating the tax burden. This study provides governments a new fiscal policy tool. For instance, a numerical application has shown that if the Cameroonian government wants to encourage production in such a way that it could reach 50% more, it should reduce the corporate tax rate down ceteris paribus, to 16.19%.
References
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[2] Assobo, A. B. 2011. La réforme de l’administration fiscale au Cameroun. Conférence sur la mobilisation des recettes fiscales dans les pays en développement. Washington.
[3] Best, M. 1976. Political power and tax revenues in Central America. Journal of Development Economics, 3(1): 49-82. DOI: https://doi.org/10.1016/0304-3878(76)90040-7
[4] Buchanan, J. M., and Dwight R. Lee. 1982. Politics, Time, and the Laffer Curve. Journal of Political Economy, 90(4): 816-819. DOI: https://doi.org/10.1086/261091
[5] Burgess, R., and Stern, N. 1993. Taxation and development. Journal of Economic Literature, 762-830 DOI:http://personal.lse.ac.uk/sternn/074NHS.pdf
[6] Cobb, C.W., and Douglas, P.H. 1928. A Theory of Production. The American Economic Review, 18(1): 139-165. DOI: https://doi.org/10.4236/ojs.2013.33019
[7] Coelli, T. 1996. A Guide to DEAP Version 2.1: A Data Envelopment Analysis (Computer) Program. CEPA Working Papers.
[8] Dhami, S., and Ali al-Nowaihi. 2006. A simple model of optimal tax systems: taxation, measurement and uncertainty. Manchester School 74(6): 645-669. DOI: https://doi.org/10.1111/j.1467-9957.2006.00521.x
[9] Fauvelle-Aymar, C. 1999. The political and tax capacity of government in developing countries. International Review for Social Sciences, 391-413. https://doi.org/10.1111/j.1467-6435.1999.tb00224.x
[10] Feige, E. L., and McGee, R.T. 1983. Sweden’s Laffer Curve: Taxation and the Unobserved Economy. Working Paper Series 95. Research Institute of Industrial Economics.
[11] Feldstein, M. 1995. The effect of marginal tax rates on taxable income: A panel study of the 1986 Tax Reform Act. Journal of Political Economy, 551–572. http://darp.lse.ac.uk/papersdb/Feldstein_(JPE95).pdf
[12] Friedman, R., and Friedman, M. 1998. Two Lucky People: Memoirs. University of Chicago Press.
[13] Fullerton, D. 2008. Laffer Curve. Palgrave Macmillan (eds) The New Palgrave Dictionary of Economics.
[14] Fullerton, D. 1982. On the possibility of an inverse relationship between tax rates and government revenues. Journal of Public Economics, 3–22. Available at: http://works.bepress.com/don_fullerton/25
[15] Gahvari, F. 1989. The nature of government expenditures and the shape of the Laffer curve. Journal of Public Economics 40(2): 251-260. DOI: https://doi.org/10.1016/0047-2727(89)90006-6
[16] Giertz, S.A. 2008. How Does the Elasticity of Taxable Income Affect Economic Efficiency and Tax Revenues and what Implications Does this have for Tax Policy Moving Forward? American Enterprise Institute for Public Policy Research, 36–42.
[17] Goolsbee, A., Hall, R. E. and Katz, L. F. 1999. Evidence on the High-Income Laffer Curve from Six Decades of Tax Reform. Brookings Papers on Economic Activity, 2: 1-64.
[18] Gruber, J., and Saez, E. 2002. The elasticity of taxable income: Evidence and implications. Journal of Public Economics, 1–32. Available at: http://piketty.pse.ens.fr/files/GruberSaez2002.pdf
[19] Guesnerie, R., and Jerison, M. 1991. Taxation as a social choice problem: The scope of the Laffer argument. Journal of Public Economics, 44(1): 37-63. DOI: https://doi.org/10.1016/0047-2727(91)90056-8
[20] Hsing, Y. 1996. Estimating the Laffer Curve and Policy Implications. Journal of Socio-Economics, 25(3).
[21] Kaldor, N. 1965. The role of taxation in economic development. Problems in Economic Development. International Economic Association Series.
[22] Kaplow, L. 2008. The Theory of Taxation. Princeton University Press.
[23] Keane, M. 2011. Labor supply and taxes: a survey. Journal of Economic Literature, 49(4): 961-1075.
[24] Laffer, A.B. 2004. Laffer Curve: Past, Present, and Future. Backgrounder.
[25] Lambert, P. 1993. Inequality reduction through the income tax. Economica, 60(239): 357-365.
[26] Leigh, A. 2008. Do redristributive state taxes reduce inequality? National Tax Journal, 61(1): 81-104.
[27] Malcomson, J. 1986. Some analytics of the laffer curve. Journal of Public Economics, 29(3). Available at: http://www.datalaundering.com/download/JofPE29-1986-263-279.pdf
[28] Mankiw, M., and Yagan Weinzierl, D. 2009. Optimal Taxation in Theory and Practice. The Journal of Economic Perspectives, 23(4): 147-174. DOI: https://doi.org/10.1257/jep.23.4.147
[29] Mirowski, P. 1982. What's Wrong with the Laffer Curve? Journal of Economic Issues, 16(3): 815-828.
[30] Mirrlees, J.A. 1971. An Exploration in the Theory of Optimal Income Taxation. Review of Economic Studies, 38(114): 175–208. DOI: https://doi.org/10.2307/2296779
[31] Palda, F. 1998. Evasive Ability and the Efficiency Cost of the Underground Economy.” Canadian Journal of Economics, 31(5): 1118–1138. DOI: https://doi,org/10.2307/136462
[32] Quinn, D., and Shapiro, R. 1991. Business political power: the case of taxation. American Political Science Review, 85(3): 851-874. DOI: https://doi.org/10.2307/1963853
[33] Ramsey, F.P. 1927. A Contribution to the Theory of Taxation. The Economic Journal, 37(145): 47-61.
[34] Sahlins, M. 1976. Âge de pierre, âge d'abondance: Économie des sociétés primitives. NRF Gallimard.
[35] Salanie, B. 2003. The Economics of Taxation. MIT Press.
[36] Simkovic, M. 2015. The Knowledge Tax. University of Chicago Law Review.
[37] Slemrod, J. 1990. Optimal Taxation and Optimal Tax Systems. Journal of Economic Perspectives, 4(1): 157-178. https://www.jstor.org/stable/1942838
[38] Stiglitz, J.E. 1987. Pareto Efficient and Optimal Taxation and the New Welfare Economics. Handbook on Public Economics (Alan Auerbach and Martin Feldstein), 991–1042.
[39] Stiglitz, J. 2010. Le Triomphe de la cupidité. Les Liens qui Libèrent.
[40] Trabandt, M., and Harald. U. 2011. The Laffer curve revisited. Journal of Monetary Economics, 58(4): 305-327. DOI: https://doi.org/10.1016/j.jmoneco.2011.07.003
[41] Wanniski, J. 1978. Taxes, Revenues, and the ‘Laffer Curve. The Public Interest.
Published
2020-06-30
How to Cite
DOMBOU, Dany R. T..
SHADOW EFFECT FROM LAFFER TAX ALLERGY: NEW TAX POLICY TOOL TO FIGHT TAX EVASION.
Theoretical and Practical Research in Economic Fields, [S.l.], v. 11, n. 1, p. 27-46, june 2020.
ISSN 2068-7710.
Available at: <https://journals.aserspublishing.eu/tpref/article/view/5245>. Date accessed: 20 apr. 2024.
doi: https://doi.org/10.14505/tpref.v11.1(21).03.
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