Tax Simplicity and Heterogeneous Learning

75 Pages Posted: 12 Dec 2017

See all articles by Philippe Aghion

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Ufuk Akcigit

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER); Center for Economic and Policy Research (CEPR)

Matthieu Lequien

National Institute of Statistics and Economic Studies (INSEE)

Stefanie Stantcheva

Harvard University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: November 2017

Abstract

We study how strongly individuals respond to tax simplicity and how they learn about the complexities of the tax system. We focus on the self-employed, who can more easily adjust to tax incentives and whose responses directly stem from their own understanding of the tax system. We use new French tax returns data from 1994 to 2012. France serves as a good quasi-laboratory: it has three fiscal regimes -- or modes of taxation -- for the self-employed, which differ in their monetary tax incentives and in their tax simplicity. Two key features are that, first, these regimes are subject to eligibility thresholds; we find large excess masses (bunching) right below the latter. Second, the regimes impact different agents heterogeneously and have changed extensively over time. Taken together, these two key elements give us measures of tax responses (the bunching) as well as the variation needed to jointly estimate a value of tax simplicity and taxable income elasticities. They also give us an opportunity to study how individuals learn about and respond over time to changing policy parameters.

We estimate a large value for tax simplicity of up to 650 euros per year per individual depending on the regime and activity. We also find sizable costs of tax complexity; agents are not immediately able to understand what the right regime choice is, leave significant money on the table, and learn over time. The cost of complexity is "regressive" in that it affects mostly the uneducated, low income, and low skill agents.

Agents who can be viewed as more informed and knowledgable (e.g., the more educated or high-skilled) are more likely to make the correct regime choice and to learn faster.

Keywords: Complexity, entrepreneurship, learning, Self-employment, taxation

JEL Classification: H21

Suggested Citation

Aghion, Philippe and Akcigit, Ufuk and Lequien, Matthieu and Stantcheva, Stefanie, Tax Simplicity and Heterogeneous Learning (November 2017). CEPR Discussion Paper No. DP12471. Available at SSRN: https://ssrn.com/abstract=3082337

Philippe Aghion (Contact Author)

College de France and London School of Economics and Political Science, Fellow ( email )

London
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ufuk Akcigit

University of Chicago - Department of Economics ( email )

1126 E. 59th St
Chicago, IL 60637
United States

HOME PAGE: http://www.ufukakcigit.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Center for Economic and Policy Research (CEPR) ( email )

London
United Kingdom

Matthieu Lequien

National Institute of Statistics and Economic Studies (INSEE) ( email )

18, Boulevard Adolphe-Pinard
92244 Malakoff Cedex
France

Stefanie Stantcheva

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

HOME PAGE: http://scholar.harvard.edu/stantcheva/home

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