Working Paper: CEPR ID: DP4210
Authors: Carlo Perroni; Kimberley Ann Scharf
Abstract: Taxation is only sustainable if the general public complies with it. This observation is uncontroversial with tax practitioners but has been ignored by the public finance tradition, which has interpreted tax constitutions as binding contracts by which the power to tax is irretrievably conferred by individuals to government, which can then levy any tax it chooses. In the absence of an outside party enforcing contracts between members of a group, however, no arrangement within groups can be considered to be a binding contract, and therefore the power to tax must be sanctioned by individuals on an ongoing basis. In this Paper we offer, for the first time, a theoretical analysis of this fundamental compliance problem associated with taxation, obtaining predictions that in some cases point to a re-interpretation of the theoretical constructions of the public finance tradition while in others call them into question.
Keywords: Government; Public Goods; Taxation
JEL Codes: H10; H20; H30; H40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax compliance (H26) | voluntary choice (D71) |
| self-enforcement (P14) | sustainable tax system (H29) |
| income and preferences (D11) | tax contributions (H29) |
| higher income (D31) | higher taxes (H29) |
| secure property rights (P14) | higher collective consumption (D16) |
| income inequality (D31) | collective consumption (D16) |
| higher inequality (D31) | direct transfers (F16) |
| direct transfers (F16) | reduce overall collective consumption (D16) |
| expropriation and enforcement of property rights (P14) | enhance tax compliance (H26) |