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Article Contents

1. introduction, 2. the economic effects of cutting taxes on the rich, 3. data and empirical strategy, 5. robustness tests, 6. discussion and conclusion, acknowledgements, supplementary material.

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The economic consequences of major tax cuts for the rich

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David Hope, Julian Limberg, The economic consequences of major tax cuts for the rich, Socio-Economic Review , Volume 20, Issue 2, April 2022, Pages 539–559, https://doi.org/10.1093/ser/mwab061

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The last 50 years has seen a dramatic decline in taxes on the rich across the advanced democracies. There is still fervent debate in both political and academic circles, however, about the economic consequences of this sweeping change in tax policy. This article contributes to this debate by utilizing a newly constructed indicator of taxes on the rich to identify all instances of major tax reductions on the rich in 18 Organisation for Economic Co-operation and Development (OECD) countries between 1965 and 2015. We then estimate the average effects of these major tax reforms on key macroeconomic aggregates. We find tax cuts for the rich lead to higher income inequality in both the short- and medium-term. In contrast, such reforms do not have any significant effect on economic growth or unemployment. Our results therefore provide strong evidence against the influential political–economic idea that tax cuts for the rich ‘trickle down’ to boost the wider economy.

The past half century has been a period of substantial change in tax policy in the advanced democracies ( Steinmo, 2003 ; Kiser and Karceski, 2017 ). A particularly prominent part of this transformation has been the dramatic fall in taxes on the rich across the Organisation for Economic Co-operation and Development (OECD) countries ( Ganghof, 2006 ; Hope and Limberg, 2021 ). While this sweeping policy change has been well documented, its consequences for the economy are less well understood.

Proponents of the tax cuts for the rich often argue for their beneficial effects on economic performance. This line of reasoning, focusing on efficiency gains and the removal of behavioral distortions, has been central to the arguments made for several major tax reforms in the USA ( Auerbach and Slemrod, 1997 ; Bartels, 2005 ; Gale and Samwick, 2017 ). There are few macro-level empirical studies exploring the relationship between taxes on the rich and economic performance, however, and the evidence we do have is mixed. While some studies find higher top marginal income tax rates and tax progressivity adversely affect economic growth ( Padovano and Galli, 2002 ; Gemmell et al., 2014 ), a number of other studies find no significant association ( Lee and Gordon, 2005 ; Angelopoulos et al., 2007 ; Piketty et al., 2014 ).

On the other side of the debate, many opponents of tax cuts for the rich argue that they simply further concentrate income in the hands of the affluent. The pioneering work of Piketty and co-authors charting the evolution of top incomes over the course of the 20th century has shown that reductions in tax progressivity in recent decades have gone hand-in-hand with soaring income inequality, especially in the Anglo-Saxon countries ( Atkinson and Piketty, 2007 ; Alvaredo et al., 2013 ; Piketty, 2014 ). This is supported by evidence from cross-country panel studies that have found that lower taxes on the rich, especially top marginal income tax rates, are strongly associated with rising top income shares ( Roine et al., 2009 ; Volscho and Kelly, 2012 ; Piketty et al., 2014 ; Huber et al., 2019 ).

Given the lack of consensus in existing empirical analyzes and the difficulties of making causal inferences from macro-level panel data analyzes, it remains an open empirical question how cutting taxes on the rich affects economic outcomes. We believe the question is best answered by looking at the effects of major tax cuts packages, as the story of taxing the rich in the advanced democracies over the past 50 years is one of discrete and stark changes in policy. For example, Ronald Reagan implemented two major packages of tax cuts for the rich in his time in the White House, one in 1981 and another in 1986. A similar pattern of large, infrequent tax cuts characterized Thatcher’s tax reforms in the UK, as well as reform trajectories in many other advanced democracies (see Section 3).

Focusing on the effects of individual reforms also allows us to apply a new statistical approach for causal inference in observational studies that applies a novel matching method to pooled time series data. This is particularly pertinent in this case, as there is a large literature on the power of rich voters and organized business interests to shape public policies (including tax policies) in their favor ( Gilens, 2005 ; Bartels, 2009 ; Hacker and Pierson, 2010 ; Svallfors, 2016 ; Emmenegger and Marx, 2019 ), which suggests reverse causality could be a major issue in empirical studies lacking a clear identification strategy.

There are only a handful of existing macro-level studies exploring the economic consequences of specific tax cuts for the rich and their external validity is constrained by focusing on a small number of tax cuts ( Saez, 2017 ; Rubolino and Waldenström, 2020 ) or on tax reforms in a single country ( Zidar, 2019 ). This article takes a wider lens, looking at all major reductions in taxes on the rich across 18 OECD countries from 1965 to 2015. We also draw on a more comprehensive indicator of taxes on the rich, which takes into account changes across an array of taxes on top incomes, assets, and capital. This approach allows us to draw more generalizable conclusions. It also provides researchers with a new dataset of major tax cuts for the rich that can be utilized for future empirical analyzes.

Our results show that major tax cuts for the rich increase income inequality in the years following the reform ( t + 1 to t + 5 ) ⁠ . The magnitude of the effect is sizeable; on average, each major reform leads to a rise in top 1% share of pre-tax national income of over 0.7 percentage points. The results also show that economic performance, as measured by real Gross Domestic Product (GDP) per capita and the unemployment rate is not significantly affected by major tax cuts for the rich. The estimated effects for these variables are statistically indistinguishable from zero, and this finding holds in both the short and medium run.

Our findings on the effects of growth and unemployment provide evidence against supply side theories that suggest lower taxes on the rich will induce labor supply responses from high-income individuals (more hours of work, more effort, etc.) that boost economic activity (see standard models of optimal labor income taxation in Saez, 2001 and Piketty and Saez, 2013 ). Relatedly, they also show little support for the influential political–economic idea that tax cuts for the rich ‘trickle down’ to boost wider economic performance ( Sowell, 2012 ). They are, in fact, more in line with recent empirical research showing that income tax holidays, windfall gains and tax cuts targeted at the top decile of the income distribution do not lead individuals to significantly alter the amount they work ( Akee et al., 2010 ; Jones and Marinescu, 2018 ; Martínez et al., 2021 ; Zidar, 2019 ).

Overall, our analysis finds strong evidence that cutting taxes on the rich increases income inequality but has no effect on growth or unemployment. We employ a measure of top 1% share of pre-tax national income that includes both labor and capital income, which makes it less likely that tax shifting and avoidance are driving the results. In fact, our results are more in line with Piketty et al. (2014) , who suggest that lower taxes on the rich encourage high earners to bargain more forcefully to increase their own compensation, at the direct expense of those lower down the income distribution.

The remainder of the article is structured as follows. Section 2 explores the existing literature on the economic effects of cutting taxes on the rich. Section 3 sets out our data and empirical strategy. We present our headline results in Section 4, before carrying out a variety of robustness tests in Section 5. Lastly, Section 6 concludes.

The 20th century was one of immense change in the tax systems of advanced democracies. Highly progressive income taxes arose in the wake of the two World Wars, with average top marginal income tax rates still standing at around 60% in the early 1980s. That decade proved to be a major turning point, however, and average rates have since fallen to under 40% ( Scheve and Stasavage, 2016 ; Kiser and Karceski, 2017 ). This trend was mirrored in other taxes on the wealthy and corporations, which also dropped sharply over the past half century ( Hope and Limberg, 2021 ).

A large body of work that spans economics, sociology and political science has sought to explore the causes and consequences of this widespread and significant reduction in tax progressivity. Scheve and Stasavage’s ( 2010 , 2012 , 2016 ) pioneering historical research argues that progressive systems emerged due to mass conscription for war, but that the strength of these compensatory demands for fiscal fairness have weakened over time, leading to falling progressivity. Other scholars point to the role of major structural changes in the advanced democracies, such as capital mobility and trade ( Swank and Steinmo, 2002 ), international tax competition ( Genschel and Schwarz, 2011 ), and the rise of the knowledge economy ( Hope and Limberg, 2021 ), in undermining the highly progressive tax systems of the post-war era. Lastly, Blyth (2002) and Swank ( 2006 , 2016 ) find evidence that the diffusion of neoliberal economic ideas from the USA was crucial to driving the major tax reductions seen elsewhere.

There is already a substantial theoretical literature on the economic effects of cutting taxes on the rich. There are a number of lines of reasoning in that literature that predict positive effects of cutting taxes on the rich on economic performance. Standard models of optimal labor income taxation (see, e.g. the textbook models in Saez, 2001 and Piketty and Saez, 2013 ) predict a positive labor supply response from high-income individuals to lower top tax rates (e.g. working more hours) that boosts overall economic activity. On a more macro-level, theoretical models of economic growth typically predict that more progressive tax systems dampen economic performance by stifling investment in physical and human capital ( Gemmell et al ., 2014 ). Recent work has also drawn a link between taxes on the rich and productivity. In so far as taxes on the rich approximate for taxes on entrepreneurs, lower taxes on the rich may stimulate growth and employment by encouraging risk-taking, innovation and entrepreneurship ( Lee and Gordon, 2005 ; Arnold et al ., 2011 ).

On the other side of the coin, there are theories that predict adverse economic effects from reducing taxes on the rich. The most prominent theory relates to the bargaining power of CEOs and other top executives. When taxes on top incomes are lower, high earners have more to gain from aggressively bargaining to increase their own compensation. This rise in unproductive, rent-seeking behavior pushes up incomes at the top but at the expense of employment and growth in the wider economy ( Alvaredo et al ., 2013 ; Piketty et al ., 2014 ). Another important strand of the literature focuses on the relationship between corporate income taxes and corporate savings. General equilibrium models with capital and product market imperfections predict that corporate income tax cuts will increase corporate savings ( Chen et al ., 2017 ). Related empirical work shows that corporate income tax cuts have indeed contributed to the stark accumulation of savings among non-financial firms in advanced economies in recent decades, which have been largely stashed in financial markets instead of being reinvested in ways that stimulate growth and employment ( Redeker, 2021 ).

While there is clear ambiguity in the theoretical literature on the predicted effects of cutting taxes on the rich on growth and employment, there is more consensus when looking at the predicted effects on income inequality. There are three main arguments in the literature for why we would expect lower taxes on the rich to be associated with higher income inequality, as measured by the pre-tax income share of the top 1% ( Huber et al ., 2019 ). The first is that lower taxes on the rich improve the work incentives of high earners, leading them to accrue more earned income, as well as raising their incentives to invest, boosting capital incomes (see the discussion of the relevant literature in Volscho and Kelly, 2012 ). The second argument relates to tax evasion and avoidance. When taxes on the rich are lower, this may reduce the incentives for shifting taxable incomes into other time periods or bases to minimize tax liabilities ( Piketty et al ., 2014 ; Rubolino and Waldenström, 2020 ). Third, as already outlined previously, lower taxes on the rich may increase the incentives of top executives to bargain forcefully for higher compensation ( Alvaredo et al ., 2013 ; Piketty et al ., 2014 ).

Turning to the growing empirical literature on the economic effects of cutting taxes on the rich, we also see more ambiguity when looking at the effects on economic activity. Several prominent cross-country panel data analyzes have found that tax progressivity is not significantly associated with economic growth ( Lee and Gordon, 2005 ; Angelopoulos et al ., 2007 ; Piketty et al ., 2014 ), although there are some exceptions, which find adverse effects of more progressive tax systems on economic performance ( Padovano and Galli, 2002 ; Gemmell et al ., 2014 ). Studies using similar methodologies that explore the relationship between taxing the rich and income inequality tend to find a strong negative association between top marginal income tax rates and top income shares. In other words, they find that falling taxes on the rich since the 1980s have coincided with rapidly rising income inequality, especially at the top of the distribution ( Roine et al ., 2009 ; Volscho and Kelly, 2012 ; Piketty et al ., 2014 ; Huber et al ., 2019 ).

A pitfall of a large portion of the empirical literature on the consequences of falling tax progressivity is that it does not take into account the typical pattern of tax reform within countries. Tax cuts for the rich in the advanced democracies have mostly been stark and irregular, as shown in Section 3. It is therefore important to look at the consequences of individual reform packages if we hope to understand the economic effects of cutting taxes on the rich.

There are few existing studies that estimate the economic effects of instances of major tax reform on the rich. Saez (2017) analyzes the 2013 tax increase on the rich in the USA and finds it has only short-term effects on income inequality. In another analysis focused on the USA, Zidar (2019) exploits regional variation to look at the growth and employment effects of cutting taxes on different part of the income distribution. He finds that the effect of cutting taxes on the top 10 percent on employment growth is small. The closest study to ours, however, is Rubolino and Waldenström (2020) . They utilize the synthetic control method and find that three major reductions in top marginal income tax rates in Australia, New Zealand and Norway had lasting and large positive effects on top income shares, but no significant effects on economic growth. We build upon this study by identifying major reductions in tax progressivity using a more comprehensive measure of taxes on the rich that goes beyond income tax progressivity. We also look at all major reductions in taxes on the rich across 18 OECD countries from 1965 to 2015, which strengthens the generalizability of our results.

Our research is also closely related to a nascent strand of experimental research in political economy that looks at how citizens’ preferences for taxing the rich are shaped by their views about how the economy works ( Barnes, 2021 ) and by their beliefs in the extent to which the benefits of tax cuts for the rich ‘trickle down’ to those lower down the income distribution ( Stantcheva, 2021 ).

Estimating the effect of tax cuts for the rich faces two major empirical problems: measuring taxes on the rich and isolating the effect of tax reforms. First, governments do not levy solely one single tax on the richest members of society. Instead, they have a broad toolkit of different tax policy instruments. They can lay taxes on high personal incomes, capital and assets such as inheritances, immovable property, and net wealth. All of these different taxes are commonly seen as highly progressive as they target the richest members of society ( Messere et al ., 2003 ). Most studies solely focus on one single type of tax. While some authors look at taxes on personal income ( Ganghof, 2006 ; Cansunar, 2020 ), others focus on corporate taxation ( Genschel et al ., 2011 ) or taxes on assets like inheritance taxes ( Graetz and Shapiro, 2005 ; Scheve and Stasavage, 2012 ; Lierse, 2021 ; Limberg and Seelkopf, 2021 ) and net wealth taxes ( Lierse, 2021 ; Limberg and Seelkopf, 2021 ). Although such a zoomed-in focus allows researchers to trace policy-making in one particular field of progressive taxation, it overlooks the fact that all of these taxes can serve as substitutes for one another. For instance, a government might choose to raise taxes on the rich by increasing taxes on inheritances while keeping income taxes the same (or vice versa). Thus, solely focusing on one of these taxes fails to adequately capture overall taxes on the richest members of society as it overlooks the variety of tax policy instruments at hand ( Capano and Lippi, 2017 ; Durazzi, 2020 ). Furthermore, empirical studies often have to make decisions about how to operationalize tax policy-making ( Genschel, 2002 ; Swank and Steinmo, 2002 ). For instance, some scholars argue that statutory tax rates are more capable of capturing actual policy changes ( Lierse and Seelkopf, 2016 ; Limberg, 2019 ), while others prefer measures such as effective tax rates or revenue that take the definition of the tax base into account ( Osterloh and Debus, 2012 ). In sum, there is no clear and comprehensive approach to measuring taxes on the rich, as scholars have looked at different taxes as well as different indicators.

Second, estimating the effect of macro-level tax policy change from a comparative perspective faces endogeneity problems. Most studies have analyzed long-term developments of tax indicators and economic outcomes. For instance, Huber et al . (2019) find that the top personal income tax rate is negatively correlated with top 1% income shares. Furthermore, some studies find negative correlations between progressive taxation and economic growth ( Gemmell et al ., 2014 ), while others find no significant association ( Lee and Gordon, 2005 ; Piketty et al ., 2014 ). These existing studies are important as they detect broad correlations between macro-level dynamics over the long run of history. However, they are only able to make limited claims about the causal effects of specific tax cuts. For instance, if countries that experience lower economic growth rates are more likely to cut taxes on the rich, results will be biased. Hence, we have to compare countries with similar socio-economic trajectories. In more technical terms, this means that we need an approach that allows us to check whether trends of our outcome variables are parallel prior to treatment. Furthermore, we have to ensure that countries with and without a tax cut do not differ with regards to other important variables.

In order to tackle these two problems, we proceed in two steps. First, we use a new, comprehensive measure to identify major tax cuts for the rich. Second, we employ a new approach for panel data analysis that combines matching methods with a difference-in-differences estimation ( Imai et al ., 2021 ). We explain each step in turn.

3.1 Identifying major tax cuts for the rich

In order to build a more complete picture of how taxes on the rich have evolved over time in the advanced economies, we use a newly constructed, comprehensive measure of taxes on the rich ( Hope and Limberg, 2021 ). The measure utilizes Bayesian latent variable analysis ( Lee, 2007 ) and covers three types of taxes that fall predominantly on the rich: taxes on top incomes, capital and assets. Table  1 shows the seven indicators that feed into the comprehensive measure, as well as their coverage and sources. For each of the three tax types, there is a measure of both top statutory tax rates and effective tax rates or tax revenues (as a percentage of GDP).

Indicators and data sources for Bayesian latent variable analysis

Modeling taxes on the rich as a latent variable that relies solely on the shared variance of commonly used indicators allows for the creation of a measure that is comparable across countries and over time. This approach has three advantages. First, it looks beyond a single tax policy measure. Instead, identifying common variation across a range of different taxes and indicators that are typically used to measure taxes on the rich. Solely relying on statutory tax rates would crucially, overlook reforms that alter the definition of the tax base. Hence, our comprehensive indicator incorporates changes in the definition of the tax base, as well as changes statutory tax rates. Second, the approach avoids the need for fine-grained micro-data and is less sensitive to aggregation rules ( Saez and Zucman, 2019 ). Finally, compared to classic factor analysis based on frequentist models, Bayesian latent variable analysis is particularly robust to missing values, which allows the measure to cover a longer time span. In total, the measure covers 18 OECD economies over five decades (1965–2015). The latent variable is estimated using a Bayesian Markov-Chain Monte Carlo (MCMC) approach with a single dimension, diffuse normal priors, three MCMC chains and 1000 burnin iterations ( Lee, 2007 ; Merkle and Rosseel, 2018 ; Hanson and Sigman, 2021 ; Hope and Limberg, 2021 ).

Figure  1 shows the development of the taxing the rich indicator in the sample. 1 In line with other empirical studies that have found substantially declining taxes on the rich in the last decades ( Genschel and Schwarz, 2011 ; Genschel et al ., 2011 ; Scheve and Stasavage, 2016 ), the indicator decreases substantially from the mid-1980s onwards. From the late 1960s to the end of the 1990s, the average value of the latent variable for taxes on the rich across the sample dropped by more than 30%. Furthermore, the cross-sectional standard deviation (SD) of the indicator steadily declined from the late 1960s. This indicates that tax policies on the rich have converged among OECD countries over time ( Kemmerling, 2010 ).

Latent variable for taxes on the rich, 18 OECD countries, 1965–2015. Note: Gray dots show country–year observations. Black dots with lines show year-specific means with 95% confidence intervals.

In a second step, we use the latent variable to detect major tax cuts for the rich. We calculate country-specific first-differences of the indicator and then define major tax cuts as years in which the indicator drops by at least 2 SD. 2 Since we are interested in the effects of major tax cuts for the rich, this high threshold is in line with our theoretical focus. Furthermore, 2 SD shocks are often employed in the empirical literature in macroeconomics ( Fernández-Villaverde et al ., 2015 ) and this size threshold is in line with the size of tax and spending changes identified in the literature exploring the effects of large fiscal policy adjustments on economic outcomes ( Blanchard and Perotti, 2002 ; Alesina and Ardagna, 2010 ).

Figure  2 visualizes the resulting binary variable, which shows years in which taxes on the rich were reduced substantially. 3 In total, we identify 30 country–year observations where taxes on the rich were significantly reduced. Governments enacted major tax reforms across the whole observation period and only two countries in the sample (France and Switzerland) did not see any major tax cuts. Many countries implemented major tax cuts for the rich in the late 1980s and early 1990s. Furthermore, the identification of tax cuts is also in line with previous studies that have focused on income tax progressivity ( Rubolino and Waldenström, 2020 ) or on overall tax progressivity within specific countries ( Saez and Zucman, 2019 ). For instance, echoing these authors’ findings, we find two major reforms that reduced taxes on the rich significantly in the USA: 1982 (First Reagan Tax Cut) and 1986/1987 (Second Reagan Tax Cut). This approach also identifies other well-known examples of tax reforms that reduced progressivity. Among others, these include the Austrian tax reform in 1989 that cut taxes on top incomes, corporate profits, and capital income; the German tax reform of the red-green coalition, which was legislated in 2000 and became effective from 2001 onwards; Norway’s 1992 tax reform that cut top income and corporate tax rates; and the major package of tax cuts in Sweden in 1991. However, we also identify tax cuts for the rich that have received a bit less attention, such as the Canadian reform that repealed the inheritance tax in 1971 and the corporate tax reform in Germany in 2008.

Distribution of major tax cuts for the rich, 1 965–2015. Note: Each square shows a country–year observation. Red squares show observations with a major tax cut for the rich, and blue squares show those without.

3.2 Estimating the effect of major tax cuts for the rich

Using such an approach to estimate the effect on economic outcomes of major tax cuts for the rich creates three methodological challenges. First, the effect of tax cuts may vary over time. However, Equation (1) requires the researcher to specify a lag of the treatment registration. For instance, Equation (1) would estimate the contemporaneous effect of tax cuts ( ⁠ t + 0 ⁠ ). Second, related to this, the standard approach does not account for past tax cuts. Put differently, if β 0 ≠ 0 for X i , t - n ⁠ , where n ∈ N ⁠ , estimating the effect of tax cuts might run danger of being biased due to previously implemented tax cuts. Thus, we need to compare cases with similar pre-treatment trajectories of tax cuts. Third, tax cuts do not come at random. Instead, political and economic factors might make major tax cuts on the rich more likely, and these factors can also affect subsequent macroeconomic dynamics. Furthermore, the practice of adding potential confounders as covariates, as in Equation (1) , does not allow for the assessment of covariate balance.

However, tax cuts are not random. In particular, observed confounders, ∑ k = 1 K ( X kit ) ⁠ , as well as unobserved confounders can lead to biased results. Therefore, we use a difference-in-differences estimator as well as non-parametric matching techniques for additional time-varying covariates ( Imai et al ., 2021 ). Matching is an intuitive and powerful tool to deal with selection into treatment ( Ho et al ., 2007 ; Diamond and Sekhon, 2013 ). In contrast to adding confounders as covariates like in Equation (1) , it is less prone to modeling decisions and allows for the assessment of covariate balance. Furthermore, the difference-in-differences estimator relaxes the unconfoundedness assumption, but crucially assumes a parallel trend in the outcome variable after adjusting via matching on the previous treatment history, ∑ ℓ = 2 L X i , t - ℓ ⁠ , as well as on the covariate trajectory, ∑ ℓ = 0 L ∑ k = 1 K ( X k i , t - ℓ ) ⁠ . Thus, we need to explicitly check whether the parallel trend assumption holds.

We use the block-bootstrap procedure proposed by Imai et al . (2021 ) to calculate standard errors. Following Otsu and Rai (2017) and Imbens and Rubin (2015) , this approach circumvents the inference problems caused by standard bootstrapping procedures for matching by calculating the weight that each observation gets in the matching procedure. This weight-variable is used as a conditioning factor and is not recomputed in the bootstrapping procedure ( Imai et al ., 2021 , p. 12).

Our main treatment variable is the presence of a major tax cut for the rich (calculated as outlined in Section 3.1). The first dependent variable we look at is income inequality. The top 1% income share is the most commonly used measure in existing empirical studies looking at the relationship between taxes on the rich and income inequality ( Roine et al ., 2009 ; Volscho and Kelly, 2012 ; Piketty et al ., 2014 ; Scheve and Stasavage, 2016 ; Huber et al ., 2019 ; Rubolino and Waldenström, 2020 ). To fit with the previous literature and because our theoretical focus is on the rich (see Section 2), we use the top 1% share of pre-tax national income from the World Inequality Database ( Alvaredo et al ., 2018 ) as our measure of income inequality. 4 The measure includes both labor and capital income, and is calculated from administrative tax sources using a common methodology, so allows for comparison over time and across countries ( Atkinson et al ., 2011 ). It is particularly important to note that this is a measure of market income inequality—i.e. it is before taking into account the operation of the tax/transfer system. There is therefore no mechanical feed through of changes in taxes on the rich on this measure of income inequality ( Rubolino and Waldenström, 2020 ). Rather, any effects on income inequality from tax cuts for the rich will be due to behavioral responses (as per the mechanisms outlined in Section 2).

Second, we analyze whether tax cuts for the rich boost growth by looking at the effect on real GDP per capita. In line with other studies, we look at logged real GDP per capita ( Piketty et al ., 2014 ; Rubolino and Waldenström, 2020 ). The data is from the Penn World table 9.1 ( Feenstra et al., 2015 ) and is in 2011 US dollars. Finally, we analyze the effects on the labor market using harmonized unemployment rates from the OECD (2020) .

In our models that include covariate matching, we include a battery of additional time-varying covariates, covering economic and political determinants of economic outcomes. We include capital account openness (Chinn–Ito Index; Chinn and Ito, 2006 ), trade openness (as a percentage of GDP; IMF, 2020 ), government expenditure (as a percentage of GDP; OECD, 2019 ), government debt (as a percentage of GDP; IMF 2020 ), left vote share in the last election ( Brady et al ., 2020 ). 5

Figure  3 presents the results. Countries are matched upon their treatment and covariate histories up to 5 years prior to a tax cut (i.e. L = 5 ⁠ ). 6 To differentiate between short- and medium-term effects of tax cuts for the rich, we look at the effects for up to 5 years after the reform (i.e. F = 5 ⁠ ). For each year, the graph displays the cumulative treatment effect and 95% confidence intervals.

Effects of major tax cuts for the rich on inequality, growth, and unemployment, 1965–2015.

Note: Solid black line shows point estimates. Gray shaded areas show 95% confidence intervals based on 5,000 bootstrap iterations.

The upper panel shows that major tax cuts lead to a significant increase in inequality and that this effect becomes stronger with time. Three years after the major tax cut, the top 1% income share increases by 0.6 percentage points. Over 5 years, the top 1% share of pre-tax national income increases by more than 0.7 percentage points. This effect is highly statistically significant, with P  < 0.0001. Furthermore, the top panel of Figure  3 also shows a placebo test by estimating the effect of tax cuts in the years before the reform. These placebo models test whether trajectories of inequality are significantly different in countries with and without a major tax cut for the rich prior to the reform actually taking place. The point estimates of the placebo tests are statistically indistinguishable from zero. Thus, we find no evidence that countries that cut taxes for the rich experience a stronger (or weaker) growth in inequality prior to tax reforms. 7 In other words, the findings show strong support for the parallel trends assumption that underlies the difference-in-differences estimator.

The middle panel of Figure  3 repeats the analysis but looks at the effect of major tax cuts for the rich on real GDP per capita. The results suggest that tax reforms do not lead to higher economic growth. The effect size of major tax cuts for the rich on real GDP per capita is close to zero and statistically insignificant. Major tax cuts for the rich do not lead to higher growth in either the short or medium run. Furthermore, we do not find any effect of tax cuts in the placebo tests. Countries with and without major tax cuts for the rich experience similar economic growth trajectories prior to reforms. Thus, the parallel trend assumption holds. We also calculated the same model by replacing (log) real GDP per capita with the real GDP per capita growth rate. Again, we find no significant effect of tax reforms on changes in real GDP per capita growth (see Supplementary Appendix Figure A4 ). 8

Robustness checks for the effects of major tax cuts for the rich on inequality, growth and unemployment, 1965–2015.

Finally, we look at the effect of major tax cuts for the rich on unemployment. The lower panel of Figure  3 shows the results. In general, we see more fluctuation in the estimates. In the years immediately following the tax reform, the point estimates are negative. In the medium term, the estimates return to close to zero. However, none of these estimates are statistically significant at any conventional level. Furthermore, we see small fluctuations in unemployment rate trajectories prior to the tax reform. While the placebo estimate for period t - 5 is negative, unemployment grew slightly faster in the year directly before the reform. However, the point estimates in the placebo tests are all statistically insignificant and there is no clear trend in unemployment rates prior to tax cuts. In sum, although the results show slight indications of a flash in the pan effect of tax cuts for the rich on unemployment, these findings are neither statistically significant nor robust.

We run several alternative specifications to check the robustness of our findings. Figure  4 visualizes the results for the different models. First, we repeat our main analyzes but solely match upon previous treatment trajectories. Not matching on covariates increases transparency, as it ensures that our results are not driven by covariate choices ( Gelbach, 2016 ). Our results for the effect of major tax cuts for the rich on inequality, growth and unemployment hold.

Second, we match upon the propensity score instead of the Mahalanobis distance ( Rosenbaum and Rubin, 1985 ). Although some studies have argued that propensity score matching is based on modeling assumptions and might therefore increase bias compared to non-parametric matching procedures ( King and Nielsen, 2019 ), it is an intuitive and widely applied matching approach ( Caliendo and Kopeinig, 2008 ). We apply two types of propensity score matching: one that solely matches upon the propensity score, and one that uses covariate balancing propensity scores (CBPS), which were designed to overcome common problems of propensity scores ( Imai and Ratkovic, 2014 ). Our findings are robust to these alternative specifications.

Third, we use a weighting instead of a matching approach ( Hirano et al ., 2003 ). Weights are calculated by using propensity scores as well as CBPS. Again, our main findings hold: major tax cuts for the rich lead to a higher top 1% income share. In fact, the effect size is even slightly larger than in the original model. In contrast, the coefficients for growth and unemployment remain statistically indistinguishable from zero.

Fourth, we apply a lower threshold of 1 SD to detect major tax cuts for the rich. Using a 1 SD threshold means that we include tax cuts of smaller magnitude. Hence, it is a more conservative approach of estimating the effects of tax cuts for the rich on economic outcomes. At the same time, this approach covers more tax cuts, which increases statistical power and ensures that our results are not driven by specific outliers. The findings hold when using this alternative threshold. Cutting taxes for the rich increases the top 1% share of pre-tax national income significantly and this effect persists over time. The new models using the lower threshold estimate that tax cuts for the rich lead to an increase in top 1% income shares of 0.6 percentage points. The smaller effect size is unsurprising, given the lower threshold for identifying major reforms. Furthermore, we find no effect of tax reforms on real GDP per capita. When looking at the effect on unemployment rates, the estimates show a slightly different pattern. Here, tax cuts for the rich lead to slightly higher unemployment rates immediately after the reform. However, this effect does not hold over time either. Hence, it supports our previous finding that tax cuts for the rich do not have a robust effect on unemployment.

In addition to the models shown in Figure  4 , we have calculated a range of further robustness checks, which are presented in the Supplementary Appendix . We use a range of other thresholds for major tax cuts ( Supplementary Figure A5 ), look at alternative measures of income inequality (top 10% income shares and market income Gini coefficients; Supplementary Appendix Figure A6 ), and analyze the effect of tax cuts on domestic and foreign direct investment ( Supplementary Appendix Figure A7 ). Our central results hold across this wide range of additional robustness tests.

Another important point is that our newly constructed indicator of taxes on the rich takes both statutory tax rates and effective tax rates into account. Crucially, the measurement of effective tax rates partly relies on the underlying macroeconomic tax bases (e.g. corporate income). These tax bases, in turn, might be affected themselves by our outcome variables of interest. This should not pose a significant problem for our estimation for two reasons. First, both the numerator and the denominator of effective tax rates would be affected by economic dynamics. For example, GDP growth is unlikely to drive effective tax rates, as it is connected to both a larger tax base and, consequently, a higher tax burden. Second, we identify tax cuts prior to changes in our outcome variables. This temporal dimension rules out the possibility that our measurement of tax cuts is endogenous to changes in our outcome variables. However, our results also stay similar when running additional analyzes that identify tax cuts by relying on more conventional tax policy indicators (i.e. top personal income tax rates and the corporate income tax rate) instead of using our newly constructed indicator of taxes on the rich ( Supplementary Appendix Figure A8 ).

Taxes on the rich have fallen substantially across the OECD in recent decades, but the economic consequences of this dramatic shift in tax policy are still not fully understood. This article aims to close this gap in our knowledge by utilizing a two-stage process to estimate the effects of major tax cuts for the rich on economic outcomes. First, we identify instances of major reductions in tax progressivity by looking at substantial falls in a new, comprehensive indicator of taxes on the rich that covers 18 OECD countries from 1965 to 2015. Second, we utilize a new statistical approach that applies matching methods to pooled time series data to estimate the effect of major tax cuts for the rich on income inequality, economic growth, and unemployment.

We find that major tax cuts for the rich push up income inequality, as measured by the top 1% share of pre-tax national income. The size of the effect is substantial: on average, each major tax cut results in a rise of over 0.7 percentage points in top 1% share of pre-tax national income. The effect holds in both the short and medium term. Turning our attention to economic performance, we find no significant effects of major tax cuts for the rich. More specifically, the trajectories of real GDP per capita and the unemployment rate are unaffected by significant reductions in taxes on the rich in both the short- and medium-term.

Our analysis provides some indicative evidence about the mechanisms underpinning the results. On the income inequality side, the results do not closely align with the theory that the rich have greater incentives to work and invest when their taxes are cut, given that we do not find any statistically significant effects on growth, unemployment or investment from cutting taxes on the rich. Given our measure of income inequality includes both realized capital gains and labor income, it is also unlikely the results are being driven by tax avoidance, because a significant part of avoidance takes the form of shifting income into capital ( Piketty et al ., 2014 ). Rather, our results are most consistent with Piketty et al .’s (2014) argument that lower taxes on top incomes induce the rich to bargain more aggressively to increase their own rewards, to the direct detriment of those lower down the income distribution. Turning to our (null) results on economic growth and unemployment, it is more difficult to disentangle the mechanisms at work. It could be that cutting taxes on the rich does not affect economic activity, but it could equally be that there are positive and negative effects that are counteracting one another. The latter explanation would fit with the existing (ambiguous) theoretical literature on the relationship between taxes on the rich and economic performance (as outlined in Section 2).

Our results have important implications for current debates around the economic consequences of taxing the rich, as they provide strong evidence that cutting taxes on the rich increases top income shares, but has little effect on economic performance. These findings are in line with a growing pool of macro-level panel studies on the economic consequences of cutting top marginal rates of income taxation ( Angelopoulos et al ., 2007 ; Piketty et al ., 2014 ), as well as Rubolino and Waldenström’s (2020) synthetic control analysis of major tax cuts for the rich in Australia, New Zealand and Norway.

One open question is why our findings differ from the small number of studies that have found that higher top marginal income tax rates and tax progressivity adversely affect economic growth ( Padovano and Galli, 2002 ; Gemmell et al., 2014 )? One reason could be our more comprehensive approach that takes different taxes into account when measuring tax cuts for the rich. We have argued that this approach has several advantages over relying on single tax rates and indicators. Our results also hold, however, when using statutory tax rates as the main independent variable (as in Gemmell et al ., 2014 ). Hence, the most likely reason for the difference in our findings is that we utilize new methods for causal inference with pooled time series data ( Imai et al ., 2021 ). In contrast to the methods used in previous work, this approach combines matching methods with a difference-in-differences design. This enables us to (a) identify the effect of tax cuts in the potential outcomes framework, (b) estimate varying treatment effects over time, and (c) check the covariate balance, previous treatment trajectories and the parallel trends assumption. This approach therefore allows us, unlike previous research, to estimate generalizable and dynamic causal effects of tax cuts.

In sum, this study finds that major tax cuts for the rich push up income inequality, but do not boost economic performance. It therefore provides strong evidence against the influential political–economic idea that tax cuts for the rich ‘trickle down’ to benefit the wider economy. The study also points to a number potentially fruitful avenues for future research. It remains puzzling why ‘trickle down’ ideas have been so powerful and persistent in tax policy-making in the advanced democracies despite the lack of macroeconomic benefits from cutting taxes on the rich. Further research is also needed to more rigorously test the specific mechanisms driving our results. Lastly, future studies could investigate the extent to which the results generalize to developing and emerging economies, as well as non-democratic regimes.

See Supplementary Appendix Figure A1 for country-specific time series.

Standard deviations are calculated based on the variance of the indicator in the whole sample.

Supplementary Appendix Figure A2 shows how changes in the latent variable translate into the binary variable of major tax cuts for the rich based on the 2 standard deviations threshold.

We also re-run our analysis with two other measures of market income inequality—the market income Gini coefficient and the top 10% share of pre-tax national income (see Supplementary Appendix Figure A6 ). We choose to present these results as a robustness test of our main results (in Section 5), as these alternative measures of income inequality do not fit as closely with the theoretical focus of our analysis as the top 1% share of pre-tax national income (see Section 2).

See Supplementary Appendix Table A1 for the sources and summary statistics of the dataset. There are a small number of missing data points for top income shares (<10% of cases) and some of the additional covariates. In these cases, we have used an exponentially weighted 5-year moving averages interpolation procedure.

Since we match upon covariate histories prior to tax cuts, controls should not be subject to post-treatment bias.

Since the model calculates the first differences in relation to the year before the tax reform (i.e. t − 1), the effect is always zero (by design) for this year.

Before matching, several variables showed significant imbalance with a standardized mean differences beyond the commonly accepted threshold of 0.25 ( Rosenbaum and Rubin, 1985 ). After matching, the standardized mean differences no longer exceed this threshold. Supplementary Appendix Figure A3 shows changes in the standardized mean difference for different specifications.

We are grateful to Marco Giani, Cevat Giray Askoy, Leo Ahrens and the participants of Inequalities Seminar Series at the LSE International Inequalities Institute for their helpful comments and suggestions.

No funding to disclose.

Supplementary material is available at SOCECO Journal online.

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Effects of Income Tax Changes on Economic Growth

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William g. gale and william g. gale the arjay and frances fearing miller chair in federal economic policy, senior fellow - economic studies , co-director - urban-brookings tax policy center @williamgale2 andrew a. samwick aas andrew a. samwick dartmouth college.

February 1, 2016

This paper examines how changes to the individual income tax affect long-term economic growth. The structure and financing of a tax change are critical to achieving economic growth. Tax rate cuts may encourage individuals to work, save, and invest, but if the tax cuts are not financed by immediate spending cuts, they will likely also result in an increased federal budget deficit, which in the long-term will reduce national saving and raise interest rates.  The net impact on growth is uncertain, but many estimates suggest it is either small or negative.  Base-broadening measures can eliminate the effect of tax rate cuts on budget deficits, but at the same time, they reduce the impact on labor supply, saving, and investment and thus reduce the direct impact on growth.  They may also reallocate resources across sectors toward their highest-value economic use, resulting in increased efficiency and potentially raising the overall size of the economy.  Results in the literature suggest that not all tax changes will have the same impact on growth.  Reforms that improve incentives, reduce existing distortionary subsidies, avoid windfall gains, and avoid deficit financing will have more auspicious effects on the long-term size of the economy, but may also create trade-offs between equity and efficiency.

Introduction

Policy makers and researchers have long been interested in how potential changes to the personal income tax system affect the size of the overall economy. In 2014, for example, Representative Dave Camp (R-MI) proposed a sweeping reform to the income tax system that would reduce rates, greatly pare back subsidies in the tax code, and maintain revenue levels and the distribution of tax burdens across income classes (Committee on Ways and Means 2014).

In this paper, we focus on how tax changes affect economic growth. We focus on two types of tax changes – reductions in individual income tax rates and “income tax reform.” We define the latter as changes that broaden the income tax base and reduce statutory income tax rates, but nonetheless maintain the overall revenue levels and the distribution of tax burdens implied by the current income system. Our focus is on individual income tax reform, leaving consideration of reforms to the corporate income tax (for which, see Toder and Viard 2014) and reforms that focus on consumption taxes for other analyses.

By “economic growth,” we mean expansion of the supply side of the economy and of potential Gross Domestic Product (GDP). This expansion could be an increase in the annual growth rate, a one-time increase in the size of the economy that does not affect the future growth rate but puts the economy on a higher growth path, or both. Our focus on the supply side of the economy in the long run is in contrast to the short-term phenomenon, also called “economic growth,” by which a boost in aggregate demand, in a slack economy, can raise GDP and help align actual GDP with potential GDP.

The importance of the topics addressed here derive from the income tax’s central role in revenue generation, its impact on the distribution of after-tax income, and its effects on a wide variety of economic activities. The importance is only heightened by concerns about the long-term economic growth rate (Gordon 2016; Summers 2014) and concerns about the long-term fiscal status of the federal government (Auerbach and Gale 2016).

We find that, while there is no doubt that tax policy can influence economic choices, it is by no means obvious, on an ex ante basis, that tax rate cuts will ultimately lead to a larger economy in the long run. While rate cuts would raise the after-tax return to working, saving, and investing, they would also raise the after-tax income people receive from their current level of activities, which lessens their need to work, save, and invest. The first effect normally raises economic activity (through so-called substitution effects), while the second effect normally reduces it (through so-called income effects).

The financing of tax cuts significantly affects its impact on long-term growth. Tax cuts financed by immediate cuts in unproductive government spending could raise output, but tax cuts financed by reductions in government investment could reduce output. If they are not financed by spending cuts, tax cuts will lead to an increase in federal borrowing, which in turn, will reduce long-term growth. The historical evidence and simulation analyses suggest that tax cuts that are financed by debt for an extended period of time will have little positive impact on long-term growth and could reduce growth.

Tax reform is more complex, as it involves tax rate cuts as well as base-broadening changes. There is a theoretical presumption that such changes should raise the overall size of the economy in the long-term, though the effect and magnitude of the impact are subject to considerable uncertainty. One fact that often escapes unnoticed is that broadening the tax base by reducing or eliminating tax expenditures raises the effective tax rate that people and firms face and hence will operate, in that regard, in a direction opposite to rate cuts and mitigate their effects on economic growth. But base-broadening has the additional benefit of reallocating resources from sectors that are currently tax-preferred to sectors that have the highest economic (pre-tax) return, which should increase the overall size of the economy.

A fair assessment would conclude that well-designed tax policies have the potential to raise economic growth, but there are many stumbling blocks along the way and certainly no guarantee that all tax changes will improve economic performance. Given the various channels through which tax policy affects growth, a tax change will be more growth-inducing to the extent that it involves (i) large positive incentive (substitution) effects that encourage work, saving, and investment; (ii) small or negative income effects, including a careful targeting of tax cuts toward new economic activity, rather than providing windfall gains for previous activities; (iii) reductions in distortions across economic sectors and across different types of income and consumption; and (iv) minimal increases in, or reductions in, the budget deficit.

The remainder of the paper is organized as follows. Section II provides a conceptual framework by discussing the channels through which tax changes can affect economic performance, including the many ways in which a positive substitution effect in response to a tax rate cut might be dissipated or even reversed by other factors.

Section III provides an empirical starting point. We show that growth rates over long periods of time in the United States have not changed in tandem with the massive changes in the structure and revenue yield of the tax system that have occurred. We also report findings from Piketty, Saez and Stantcheva (2014) that, across advanced countries, even large changes in the top marginal income tax rate over time do not appear to be strongly correlated with rates of growth.

Section IV explores empirical evidence on taxes and growth from studies of major income tax changes in the United States. Consistent with the discussion in Section III, the studies find little evidence that tax cuts or tax reform since 1980 have impacted the long-term growth rate significantly.

Section V examines the new “narrative” approach to identifying tax changes that are exogenous to current economic conditions, stemming from the seminal work of Romer and Romer (2010). The literature, which generally uses vector autoregression (VAR) models, finds that tax cuts that meet the exogeneity criteria raise short-term output and other economic activity. The narrative literature does not speak to the long-term effects, though.

Section VI discusses the results from the literature on simulation models, which has generated two main results. First, debt-financed tax cuts will tend to boost short-term growth (as in standard Keynesian models and in the literature using the narrative approach), but also tend to reduce long-term growth, if they are financed eventually by higher taxes. Second, revenue-neutral income tax reform can provide a modest boost to economic growth.

Section VII concludes. 1

[1] There are a number of related issues that are both interesting and important, but beyond the scope of the paper – including, for example, the elasticity of taxable income, the relationship between inequality (especially as it is affected by the tax system) and growth, the effects of corporate income tax reform on growth and the detailed literatures on the effects of taxes on labor supply, saving, and investment.

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A Systems View Across Time and Space

• Open access
• Published: 16 February 2021

Factors influencing taxpayers to engage in tax evasion: evidence from Woldia City administration micro, small, and large enterprise taxpayers

• Erstu Tarko Kassa   ORCID: orcid.org/0000-0002-8199-4910 1  

Journal of Innovation and Entrepreneurship volume  10 , Article number:  8 ( 2021 ) Cite this article

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The main purpose of this paper is to investigate factors that influence taxpayers to engage in tax evasion. The researcher used descriptive and explanatory research design and followed a quantitative research approach. To undertake this study, primary and secondary data has been utilized. From the target population of 4979, by using a stratified and simple random sampling technique, 370 respondents were selected. To verify the data quality, the exploratory factor analysis (EFA) was conducted for each variable measurements. After factor analysis has been done, the data were analyzed by using Pearson correlation and multiple regression analysis. The finding of the study revealed that the relationship between the study independent variables with the dependent variable was positive and statistically significant. The regression analysis also indicates that tax fairness, tax knowledge, and moral obligation significantly influence taxpayers to engage in tax evasion, and the remaining moral obligation and subjective norms were not statistically significant to influence taxpayers to engage in tax evasion.

Introduction

In developed and developing countries, business owners, government workers, service providers, and other organizations are forced by the government to pay a tax for a long period in human being history, and no one can escape from the tax of the country. To support this, there is an interesting statement mentioned by Benjamin Franklin “nothing is certain except death and taxes”. This statement confirmed that every citizen should be subjected to the law of tax, and they are obliged to pay the tax from their income. To build large dams, to construct transportation infrastructures, and to provide quality social services for the community, collecting a tax from citizens plays a significant role for the governments (Saxunova and Szarkova, 2018 ).

Tax is the benchmark and turning point of the country’s overall development and changing the livelihoods and enhancing per capital income of the individuals. The gross domestic product of the developed countries and average revenue ratio were 35% in the year 2005, whereas in developing countries the share was 15% and in third world countries also not more than 12% (Mughal, 2012 ).

In the developing world, countries have no system to collect a sufficient amount of tax from their taxpayers. The expected amount of revenue cannot be enhanced due to different reasons. Among the reasons tax operation of the system may not be smooth, tax evasion and lack of awareness creation for the taxpayers are common in the developing world, and citizens are not committed to paying the expected amount of tax for their countries (Fagbemi et al., 2010 ). In today’s world, this remains very much the same as persons now pay taxes to their governments. As the world has evolved, tax compliance has taken a back seat with tax avoidance and tax evasion being at the forefront of the taxpayer’s main objective. Tax avoidance is the use of legal means to reduce one’s tax liability while tax evasion is the use of illegal means to reduce that tax liability (Alleyne & Harris, 2017 ). Tax evasion is a danger to the community; the countries and international organizations have been making an effort to fight undesirable phenomena related to taxation, the tax evasion, or tax fraud (Saxunova and Szarkova, 2018 ).

Tax evasion may brings a devastating loss for the country's GDP at the micro level, and it became a debatable and a special concern for tax collector authorities (Aumeerun et al., 2016 ). The participants in tax evasion activity critized by different individuals and groups by considering the loss that brings to the country economy (Alleyne & Harris, 2017 ).

According to Dalu et al., ( 2012 ) state that in the Zimbabwe tax system there are identical devils tax evasion and tax avoidance that create a problem for the government to collect a tax from taxpayers. Like Zimbabwe, many nations have faced challenges to cover the annual budget and to construct different infrastructures due to the budget deficit created by tax evasion (Alleyne & Harris, 2017 ; Turner, 2010 ).

Scholars especially economists agreed that tax evasion may be considered a technical problem that exists in the tax collection system, whereas psychologists believed that tax evasion is a social problem for the countries (Terzić, 2017 ).

Tax evasion practices are more worsen in developing countries than when we compare against the developed countries. Tax evasion is like a pandemic for the countries because they are unable to control it. Therefore, governments were negatively affected by tax evasion to improve the life standard of its citizens and to allocate a budget for public expenditure, and it became a disease for the country’s economy and estimated to cost 20% of income tax revenue (Ameyaw et al., 2015 ; degl’Innocenti & Rablen, 2019 ; Palil et al., 2016 ).

Several factors may lead taxpayers to engage in tax evasion. Among the factors, tax knowledge, tax morale, tax system, tax fairness, compliance cost, attitudes toward the behavior, subjective norms, perceived behavioral control, and moral obligation are major factors (Alleyne & Harris, 2017 ; Rantelangi & Majid, 2018 ). Other factors have also a significant effect on taxpayers to engage in tax evasion practice such as capital intensity, leverage, fiscal loss, compensation, profitability, contextual tax awareness, interest rate, inflation, average tax rate, gender, and ethical tax awareness on tax evasion (Annan et al., 2014 ; AlAdham et al., 2016 ; Putra et al., 2018 ).

According to Woldia City Administration Revenue Office annual report ( 2019/2020 ) from July 1, 2019, to June 30, 2020, 232,757,512 birr was planned to be collected from taxpayers; however, the office was able to collect only 198,537,785.25 birr; however, the remaining 34,219,726.75 birr have not been collected by the office from the taxpayers. The reason behind this was there might be some factors that lead to taxpayers not to pay the annual tax from their annual income. Based on the review of the previous studies and by diagnosing the tax collection system in the city administration, the researcher identified the gaps. The first gap that motivated the researcher to undertake this study is that the prior studies did not address the factors that influence the tax collection system of Ethiopia, specifically, there is no research result that was able to show which factors influence taxpayers to engage in tax evasion in the Woldia city administration. The other gap is the previous study focused on the demographic, economic, social, and other factors. However, this study mainly focused on the behavioral and other factors that lead taxpayers to engage in tax evasion.

To indicate the benefit of this study, the study specifies on which critical factors the authority will focus on to enhance annual revenue and to aware tax payers of the devastating impact of tax evasion. Moreover, the paper may bring new insights on tax evasion influential non-economic factors that the researchers may give more emphasis on the upcoming researches. This paper will also contribute innovative ways to know the reasons why tax payers engage in tax evasion and inform the authority at which factors they will struggle to reduce their influence and to enhance revenue. The study can be an evidence that the tax authority should launch innovative techniques to control tax evasion practices. Moreover, applying fair tax system in the collectors’ side, the enterprises become innovative and will expand their business.

To sum up, in this study, the researcher examined which factor (tax knowledge, tax fairness, subjective norms, moral obligation, and attitude towards the behavior) influences taxpayers to engage in tax evasion activities. Based on the above discussion, the objective of the study is to examine factors that influence taxpayers to engage in tax evasion in Woldia city administration.

Literature review

Tax and tax evasion.

Tax is charged by the government to the business, governmental organization, and individual without any return forwarded from the authority. Tax can be categorized as direct tax which is collected from the profit of the companies and the incomes of individuals, and the other category of tax is an indirect tax collected from consumers’ payment (James and Nobes, 1999 ).

Tax evasion is a word explaining individuals, groups, and companies rejecting the expected amount of payment for the authority. It is a criminal offense on the view of law (Nangih & Dick, 2018 ). The overall procedure of tax collection faced different challenges especially tax evasion the most important one. Tax evasion is done intentionally by taxpayers by avoiding and hiding different documents that become evidence for the tax collection authorities. It is simply an illegal act to pay the true amount of the tax (Aumeerun et al., 2016 ; Storm, 2013 ). Tax evasion is a crime that is able to distort the overall economic, political, and social system of the country. The economic aspect of tax evasion affects fair distribution of wealth for the citizens. The social aspect also creates different social groups motivated by tax evasion discouraged by these individuals due to unfair competition (AlAdham et al., 2016 ). Tax evasion is a mal-activity that reduces the amount of tax paid by the payers. Perhaps the taxpayers who engaged in evasion activity may be supported by the legislative of the country (Kim, 2008 ; Putra et al., 2018 ; Allingham & Sandmo, 1972 ). According to Al Baaj et al. ( 2018 ) argument, there are two types of tax evasions. The first one is the legal evasion or tax avoidance which is supported by the legislation of the countries and the right is given for the taxpayer, but it is not constitutional (Gallemore & Labro, 2015 ; Zucman, 2014 ).

Theoretical reviews on factors affecting tax evasion

The illegal activity done by taxpayers has many determinants that lead them to engage in tax evasion. Among the factors that trigger taxpayers who participate in this activity are the economic factors. Under the economic factors, business sanctions, business stagnation, and the amount of tax burden are considered as influential factors. On the other hand, legal factors, social factors, demographic factors, mental factors, and moral factors are the most important factors (Saxunova and Szarkova, 2018 ). Many factors determine the taxpayers’ interest to engage in tax evasion. Among the factors, the following are considered under this review.

The factors that able to influence taxpayers to engage in tax evasion are moral obligation . It is a principle and a duty of taxpayers by paying a reasonable amount of tax for the tax authorities without the enforcement of others. It is an intrinsic motivation of payers paying the tax (Sadjiarto et al., 2020 ). When taxpayers have low tax morals, they will become negligent to pay their allotted tax, and they will engage in tax evasion (Alm & Torgler, 2006 ; Frey & Oberholzer-Gee, 1997 ; Torgler et al., 2008 ). According to Feld and Frey ( 2007 ), when tax officials are responsible and provide respect in their duties toward taxpayers, tax morale or the honesty of taxpayers will increase. Tax morals may be affected by a demographic and another factor like income level, marital status, and religion (Rantelangi & Majid, 2018 ). It is the determinant behavior of tax payers whether they participate or not. Tax morals can affect positively taxpayers to engage in tax evasion (Nangih & Dick, 2018 ; Terzić, 2017 ). It is known that taxes levied by the concerned authority are ethical. As cited by Ozili ( 2020 ), McGee ( 2006 ) argues that there are three basic views on the ethics and moral of tax evasion. The first view is tax evasion is unethical and should not be practice by any payer, the second argument deals that the state is illegal and has no moral authority to take anything from anyone, and the last argument is tax evasion can be ethical under some conditions and unethical under other situations; therefore, the decision to evade tax is an ethical dilemma which considers several factors (Robert, 2012 ). Therefore, the discussion leads to the following hypothesis:

H 1 . Moral obligation has a negative influence on taxpayers to engage in tax evasion.

The other factor that influences taxpayers to engage in tax evasion is tax fairness . Tax fairness is a non-economic factor that determines the tax collection of the country (Alkhatib et al., 2019 ). It is known that the tax collection procedures, principles, and implementation must be fair. Unethical behavior may happen due to the unfairness of the tax collection process. The fairness of tax may influence payers positively to pay the tax. When the tax rate is not reasonable and fair, the payers will regret to engage in the tax evasion practices and they will inform authorities their annual income without denying the exact amount. Considering the ability of paying or acceptable tax rates helps to maintain the fairness of the taxation system (Rantelangi & Majid, 2018 ). The governments choose to levy in what amounts and on whom will pay a high tax rate (Thu, 2017 ). The tax rate is a factor that induces taxpayers to pay less amount from their income. The rate of tax should be fair and reasonable for the payers (Ozili, 2020 ). As cited by Gandhi et al. ( 1995 ) the Allingham and Sandmo’s model, Allingham and Sandmo ( 1972 ) shows that the tax rate on payment can be positive, zero, or negative, which implies that an increase in the tax rate may cause the tax payment to increase, remain the same, or decrease. The theoretical literature could not evidence the claim that an increase in the tax rate will lead to an increase in tax evasion (Gandhi et al., 1995 ). The fairness of tax is controversial and argumentative because there may not happen a similar amount of tax for all payers (Abera, 2019 ). Thus, based on this ground the study hypothesis would be:

H 2 . Tax fairness has a positive influence on taxpayers to engage in tax evasion.

Tax knowledge is vital for taxpayers to know the cause and effect brought to them to engage in tax evasion. If tax payers are well informed about tax evasion, their participation in tax evasion would be infrequent; the reverse is true for a taxpayer who is not well informed. Tax-related information should give more emphasis to enhance the knowledge of taxpayers and experts of the authority (Poudel, 2017 ). Tax knowledge is a means to enhance the revenue of the country from the side of tax payers (Sadjiarto et al., 2020 ). If the authorities cascade different training for taxpayers about tax evasion and other tax-related issues, taxpayers become reluctant to engage in tax evasion (Rantelangi & Majid, 2018 ). Tax knowledge is a determinant factor for the taxpayer to engage and retain from the tax evasion activities (Abera, 2019 ). When taxpayers are undertaking their routine tasks without tax knowledge, they may involve in certain risks that expose them to engage in tax evasion (Thu, 2017 ). Thus, the discussion leads to the following hypothesis:

H 3 . Tax knowledge has a negative influence on taxpayers engaged in tax evasion.

The stakeholders, government experts, families, individuals, groups, and peers influence taxpayers whether they engaged in tax evasion or not (Alleyne & Harris, 2017 ). As cited by Alkhatib et al. ( 2019 ), the influence of peer groups on tax taxpayers is high, thus affecting the taxpayers’ preferences, personal values, and behaviors to engage in tax evasion (Puspitasari & Meiranto, 2014 ). The stakeholders around the taxpayers might be motivators to push taxpayers in the criminal act of tax evasion. This act called subjective norms meant that the payers are influenced by peers and other stakeholders. When the tax payer is reluctant to pay a tax for the authority, his/her friends are more likely to hide tax. As cited by Abera ( 2019 ), there is a strong relationship between social norms and subjective norms with tax evasion and affects the small business taxpayers (Nabaweesi, 2009 ). The above discussion can support the following hypothesis of the study:

H 4 . Subjective norms have a positive influence on taxpayers to engage in tax evasion.

The other factor that influences taxpayers to engage in tax evasion is an attitude towards the behavior of taxpayers. Attitude is a means of evaluating the activities whether they are positive or negative of any object. Many studies have been done by different scholars by defining and identifying the relationship between the attitudes of taxpayers with tax evasion (Alleyne & Harris, 2017 ). If the attitude of taxpayers towards taxation is negative, they will be reluctant to pay their obligation to the authority; the reverse is true when taxpayers have positive attitudes towards taxation (Abera, 2019 ). Based on the above discussion, the hypothesis of the study would be as follows:

H 5 . Tax payers’ attitude towards the behavior has a positive influence on taxpayers to engage in tax evasion.

Conceptual framework of the study

The researcher identified the variables and presented the relationship between independent and dependent variables as follows (Fig. 1 ):

Conceptual framework of the study. Adapted from Alleyne and Harris ( 2017 ) and Rantelangi and Majid ( 2018 )

Materials and methods

The researcher applied descriptive and explanatory research design to carry out this study. The explanatory research design enables the researcher to show the cause and effect relationship between independent and dependent variables, and the descriptive research also helps to describe the event as it is. The quantitative approach has been followed by the researcher to analyze and interpret the numerical data collected from the respondents. The researcher used primary and secondary data. The primary data was collected from the respondents by using questionnaires, and the secondary data was also collected from the reports, websites, and other sources.

The target population of the study was 4979 taxpayers (micro, small, and large enterprises). From the total taxpayers, 377 are categorized under level “A,” 207 are under level “B,” and the remaining 4395 taxpayers are categorized under level “C”. From the target population by using a stratified sampling technique, the respondents have been selected. The target population has been divided by the level of taxpayers; after dividing the population by level, the researcher applied a simple random sampling technique to select respondents. To identify the target participants or sample size in this study, the researcher used Yamane’s ( 1967 ) formula. Hence, the formula is described as follows:

where N = target population, n = sample size, e = error term

Based on the sample size, the respondents have participated proportionally as follows from each level. The total population was divided by strata based on the level categorized by the authorities. By using a simple random sampling technique, 28 respondents were from level “A,” 15 respondents from level “B,” and 327 respondents from level “C” have participated.

Regarding data collection instruments , the data was collected by self-administered standardized questionnaires. The variable of the study a moral obligation was measured by 4 items; after conducting factor analysis, the fourth variable or questionnaire has been removed and after that correlation and regression analysis has been done for 3 items; the value of Cronbach’s alpha was .711; the other factor attitude towards the behavior was measured by 4 items with a value of .804 Cronbach’s alpha; the third variable subjective norms was also measured by 4 items; the value of Cronbach’s Alpha was .887, and tax evasion was measured by 5 items; the Cronbach’s alpha value was .868. For the above-listed variables, the questionnaires were adapted from Alleyne and Harris ( 2017 ), and the remaining variable tax fairness was measured by 7 items, the Cronbach’s alpha value was .905, the items were adapted from Benk et al. ( 2012 ), and the last variable tax knowledge was measured by 5 items. However, after conducting factor analysis, the fifth item has been removed due to low value of the variable. After the removal of the fifth item, the Cronbach’s alpha value for the remaining items was .800, the items were adapted from Poudel ( 2017 ). For all variables, the researcher has used a five-point Likert scale from strongly agree to strongly disagree.

To analyze the collected data, the researcher used descriptive statistics analysis, factor analysis, correlation analysis, and multiple regression analysis to know the result of variables by using SPSS Version 22. Moreover, the model of the study is described as follows:

where Y = tax evasion, X 1 = moral obligation, X 2 = tax fairness, X 3 = tax knowledge, X 4 = subjective norms, and X 5 = attitude towards the behavior, β = beta coefficient, B 0 = constant, e = other factors not included in the study (0.05 random error).

Results and discussion

Level of respondents.

As indicated in Table 1 from the total respondents, 88.4% are categorized under level “C,” 4.1% are leveled under “B,” and the remaining 7.6% of respondents have been categorized under level “A”.

Factor analysis of the study variables

To undertake exploratory factor analysis, the data should fulfill the following assumptions. The first assumption is the variables should be ratio, interval, and ordinal; the second one is within the variables there should be linear associations; the third assumption is a simple size should range from 100 to 500; and the last assumption is the data without outliers. Thus, this study data have been checked by the researcher whether the data meets the assumption or not. After checking the assumptions, factor analysis was conducted as follows.

KMO and Bartlett’s test

Conducting KMO and Bartlett’s test is a precondition to conduct the factor analysis of the study measuring variables. KMO measures the adequacy of the sample of the study. In the result reported in Table 2 , the value was 0.883 and enough for the factor analysis. Related with Bartlett test as shown in Table 2 , the value is 5727.623 ( p < 0.001), which reveals the adequacy of data using factor analysis.

As shown in Table 3 , factors were extracted from study data; there was a linear relationship between variables. From the table, we can understand that 6 variables have more than one eigenvalue. The first factor scored the value 31.782 of the variance, the second value is 11.739 of the variance, the third factor scored 8.246 of the variance, the fourth factor accounts for 6.725 of the variance, the fifth factor also accounts for 5.233, and the last factor scored 4.123 of the variance. All six factors were explained cumulatively by 67.85% of the variance.

As shown in the Fig. 2 , the scree plot starts to turn down slowly at the low eigenvalue which is less than 1. The six factors eigenvalue is greater than one.

Scree plot. Source: own survey (2020)

The pattern matrix is shown in Table 4 which is able to show the loading of each variable and the relationship of variables in the study. The highest value among the factors measured the variable considerably. The cutoff point of loading was set at .35 and above. Based on the loading cutoff point except two factors, all are significant and analyzed under this study. From the six variables (five independent and one dependent) incorporated under this study, the identified factors show that how significantly enough to measure the situation. These factors have scored greater than 1 eigenvalue and able to explain 67.85% of the variance. In general, the detail variables and their factor are described as follows:

The first component tax fairness has 7 factors; the eigenvalue is 8.58 and able to explain 31.78 of the total variance. In this component, the highest contributed factor was item TF3 (weight = .925), TF5 (weight = .865), TF1 (weight = .859), TF2 (weight = .778), TF4 (.668), TF6 (weight = .614), and TF7 (weight = .568). The second component was tax evasion and has 5 items; the eigenvalue is 3.17 and explaining 11.73 of the variance. The factor weight of the items, TE4 (factor weight = .860), TE5 (factor weight = .810), TE3 (factor weight = .730), TE2 (factor weight = .650), and the last one is TE1 (factor weight = .606). The third component was subjective norms; it has 4 factors the weight of each factor described as follows. The first item SNS1 weight = .898, SNS2 factor weight = .887, SNS4 factor weight = .846, and SNS3 factor weight = .820. Moreover, the eigenvalue of this component is 2.226 and explained 8.246 of the variance of the study. The fourth component is an attitude towards the behavior. This variable has four factors that have 1.816 eigenvalue and explained 6.725 of the total variance. Among the items, ATB2 factor weight = .863, ATB1 factor weight = .792, ATB3 factor weight = .791 and the last factor is ATB4 factor weight = .500. The fifth component of the study is tax knowledge; at the very beginning of this variable, the researcher adapted five items. However, one item (TK5) was not significant and removed from this analysis. In this component, the highest value was scored by TK3 (factor weight = .866), the second highest TK2 (factor weight = .801), the third highest factor weight (weight = .700), and the last factor is TK4 (weight = .690). The eigenvalue of this component was 1.413 and explained 5.233% of the variance. The last component is a moral obligation; like tax knowledge, the researcher adapted for this variable 4 items, though, one item (MO4) was not significant and removed from the items list. The eigenvalue of this component was 1.113 and explained 4.123 of the variance. From the items, MO1 scored the highest factor weight of .891, the second highest weight in this component was MO3 with a factor weight of .854, and the third highest factor weight was scored by MO3 with a value of .508.

Association analysis of the study variables

To analyze the correlation between variables as shown in the Table 5 , the relation between subjective norms with taxpayers engaged in tax evasion is r = 0.240 ( p < 0.05); this indicates that there is a statistically significant relationship between the two variables. The relationship between ATB with TE, MO with TE, TK with TE, and TF with TE, the Pearson correlation result is r = 0.318 ( p < 0.05), r = 0.371 ( p < 0.05), .446, and r = 0.691 ( p < 0.05) respectively and statistically significant. It implies that the independent variables have a positive relationship with the dependent variable of the study with a statistically significant level of p < 0.05 and n = 370.

Effect analysis of the study variables

As shown in Table 6 , the study independent variables (SNS, ATB, MO, TK, and TF) explained the study dependent variable (TE) by 54.9%. This result indicates that there are other variables that explain the dependent variable by 45.1% which has not been investigated under this study.

Hypothesis test

The proposed hypothesis of the study has been tested based on the coefficient of regression and the “ p ” value of the study variables. The detail result is described as follows:

As shown in Table 7 , moral obligation influences positively the taxpayers to engage in tax evasion activities with a beta value of .177 and p < .05. This result entails that the taxpayers are influenced by other stakeholders to engage in tax evasion, and they have low moral value to pay the tax levied by the government. This result is supported by the finding of Alleyne and Harris ( 2017 ), Rantelangi and Majid ( 2018 ), and Sadjiarto et al. ( 2020 ). Thus, the hypothesis related to this variable has been rejected because moral obligation influences positively taxpayers to engage in tax evasion.

H 2 . Tax fairness has a positive influence on taxpayers to engage in tax evasion

To minimize the participation of taxpayers engaged in tax evasion, tax fairness plays a significant role. The regression result indicates in Table 7 that tax fairness positively influences the taxpayers to engage in tax evasion. This result is similar to the finding of Majid et al., ( 2017 ) and contradicts with the finding of Rantelangi and Majid ( 2018 ) and Alkhatib et al. ( 2019 ). Accordingly, the proposed hypothesis has been accepted because the beta value is .563 and the p value is less than .05.

H 3 . Tax knowledge has a negative influence on taxpayers to engage in tax evasion

Table 7 shows that tax knowledge influences the taxpayers positively to engaged in tax evasion. The beta value is .183 and the value is p = 0.00. It is known that when the taxpayers were not well informed about the importance of tax for the country development and the devastating issues of tax evasion, they will be forced to engage in tax evasion. This finding contradicts the finding of Rantelangi and Majid ( 2018 ) and is supported by the finding of AlAdham et al. ( 2016 ). To conclude, the proposed hypothesis rejected because tax knowledge positively influenced the taxpayers to engage in tax evasion.

H 4 . Subjective norms have a positive influence on taxpayers engaged in tax evasion

Table 7 indicates that subjective norms have not been significantly influenced positively by the taxpayers engaged in tax evasion, which means taxpayers were not influenced by others to participate in tax evasion activities. This result is consistent with the finding of Alleyne and Harris ( 2017 ). Thus, the proposed hypothesis is rejected because the variable of subjective norms was not statistically significant with a p value of .099.

H 5 . Tax payers’ attitude towards the behavior has a positive influence on taxpayers to engage in tax evasion

As indicated in Table 7 , attitudes toward the behavior were not significantly influencing the taxpayers to participate in tax evasion with the p value of .985. However, according to the study conducted by Alleyne and Harris ( 2017 ), attitude toward the behavior significantly predicts the intentions of taxpayers to engage in tax evasion. This finding contradicts with this study result. To conclude, the proposed hypothesis has been rejected because the variable is not statistically significantly influencing the taxpayers to engage in tax evasion activities.

According to Table 7 through the examination of coefficients, moral obligation had a positive effect on tax evasion having a coefficient of .197. This means that a 1% change in moral obligation keeping the other things remain constant can result to motivate taxpayers to engage in tax evasion by 19.7% in the same direction. This finding is similar to the result of Alleyne and Harris ( 2017 ), Nangih and Dick ( 2018 ), Rantelangi and Majid ( 2018 ), and Sadjiarto et al. ( 2020 ). Tax knowledge had a positive effect on tax evasion having a coefficient of .174. This indicates that a 1% change in tax knowledge keeping the other things constant can result in a change in taxpayers to engage in tax evasion by 17.4% in the same direction. This finding contradicts the finding of Rantelangi and Majid ( 2018 ) and is similar to the finding of AlAdham et al. ( 2016 ) and Thu ( 2017 ). Tax fairness also had a positive effect on tax evasion having a coefficient of .468. This implies that a 1% change in tax fairness keeping the other things remain constant can result in a change in taxpayers engage in tax evasion by .468% in the same direction. This result is similar to the finding of Majid et al. ( 2017 ) and contradicts the finding of Alkhatib et al. ( 2019 ) and Rantelangi and Majid ( 2018 ). Thus, the final model of the study would be:

Tax evasion = .623 + .197MO + .174TK + .468TF

To generalize, the standardized beta coefficient indicates that tax fairness highly affects taxpayers to engage in tax evasion by 56.3%, tax knowledge affects secondly taxpayers to engage in tax evasion by 18.3%, and moral obligation affects taxpayers to engage in tax evasion by 17.7%. The remaining variables subjective norms and attitude towards the behavior were not statistically significant.

Conclusion and recommendations

Every citizen of the country was subjected to pay the tax of the country levied by the authority that administered the revenue. However, the taxpayer may be reluctant to pay a tax based on their revenue. There are push factors that instigate payers to engage in tax evasion. Sometimes the payers may be convinced themselves that being engaged in tax evasion is ethical, others may consider it unethical. They may argue “I Do Not Receive Benefits, Therefore I Do Not Have to Pay” (Robert, 2012 ). This study tried to examine the factors that influence taxpayers to engage in tax evasion by identifying five factors namely moral obligation , tax fairness , tax knowledge , subjective norms , and taxpayers’ attitude towards the behavior . The study findings based on the result analysis described as follows.

The correlation analysis of the study shows that there was a positive and statistically significant relationship between independent variables with the dependent variable (tax evasion). The regression result, on the other hand, revealed that tax knowledge affects taxpayers to participate in tax evasion activities with a statistically significant level. This finding can be evidence that the knowledge of the taxpayers regarding the importance of tax is limited. Because according to the regression result, they engaged in the tax evasion activities in the study area. The other factor that affects taxpayers to engage in tax evasion is tax fairness. The regression result of tax fairness supported that taxpayers have been affected by the fairness of the tax system in the study area to participate in tax evasion. The finding confirms that the tax charged by the government is not fair for payers. Thus, we can conclude that due to the absence of tax fairness taxpayers are engaged in tax evasion in the city administration. The other variable moral obligation regression result confirms that moral obligation affects positively taxpayers to engage in tax evasion. This is signal that taxpayers did not know the moral value of retaining from tax evasion that is why the moral obligation results in positive and statistical significance. Generally, tax fairness highly affects taxpayers to evade taxes, tax knowledge affects secondly, and moral obligation affected tax payers thirdly to evade tax in the city administration.

Based on the findings, the following recommendations have been forwarded by the researcher. The first one is creating a fair tax payment system, or charging fair tax for the payers helps to reduce the participation of payers in tax evasion. The second recommendation is cascading different training related to tax will help taxpayers to pay a tax based on their annual income. The last recommendation is related to tax moral or moral obligation. The moral is an abounding rule for human beings to know the right and wrong activities. The authority is better to strive to recognize the payers about the moral obligations of the payers and better to inform to the payers to think about the shattering effect of tax evasion for the country development and city as well.

Further future lines of research will attempt to:

Investigate the employees’ side of tax authority and the perception of the community towards tax evasion.

Explore other influencing factors that affect tax payers to engage in tax evasion which are not incorporated under this study.

Conducting a comparative study on one city, region, and country with others.

Suggestion for future study

This study addresses only one city administration in Amhara region; other researchers are better to undertake the study on one more cities.

Availability of data and materials

All data are included in the manuscript and available on hand too.

Abbreviations

Attitude towards the behavior

• Moral obligation

Micro and small enterprises

Subjective norms

• Tax evasion
• Tax fairness
• Tax knowledge

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I am grateful to all anonymous reviewers, my respondents, and Woldia City administration revenue office experts sharing the required information.

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Kassa, E.T. Factors influencing taxpayers to engage in tax evasion: evidence from Woldia City administration micro, small, and large enterprise taxpayers. J Innov Entrep 10 , 8 (2021). https://doi.org/10.1186/s13731-020-00142-4

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The public is divided in its views of the IRS. In a separate spring 2023 Center survey , 51% of Americans said they have an unfavorable opinion of the government tax agency, while 42% had a favorable view of the IRS. Still, of the 16 federal agencies and departments we asked about, the IRS was among the least popular on the list.

Views of the IRS differ greatly by party:

• Among Republicans, 29% have a favorable view and 64% have an unfavorable view.
• Among Democrats, it’s 53% favorable and 40% unfavorable.

On balance, Democrats offer much more positive opinions than Republicans when it comes to most of the federal agencies we asked about. Even so, the IRS ranks near the bottom of their list.

Individual income taxes are by far the government’s largest single source of revenue, according to estimates from the Office of Management and Budget (OMB).

The federal government expects to collect about $2.5 trillion in individual income taxes in fiscal year 2024. That accounts for nearly half (49%) of its total estimated receipts for the year. The next largest chunk comes from Social Security taxes (including those for disability and retirement programs), which are projected to pull in $1.2 trillion this fiscal year (24%).

By comparison, corporate income taxes are estimated to bring in $612.8 billion, or 12% of this fiscal year’s federal receipts. And excise taxes – which include things like transportation trust fund revenue and taxes on alcohol, tobacco and crude oil – are expected to come to $99.7 billion, or 2% of receipts.

American tax dollars mostly go to social services. Human services – including education, health, Social Security, Medicare, income security and veterans benefits – together will account for 66% ($4.6 trillion) of federal government spending in fiscal 2024, according to OMB estimates.

An estimated 13% ($907.7 billion) will go toward defense spending. Another 13% ($888.6 billion) will repay net interest on government debt, and 10% ($726.9 billion) will fund all other functions, including energy, transportation, agriculture and more.

Related: 6 facts about Americans’ views of government spending and the deficit

The vast majority of Americans e-file their taxes, according to IRS data . In fiscal 2022, 150.6 million individual federal income tax returns were filed electronically, accounting for 94% of all individual filings that year.

Unsurprisingly, e-filing has become more popular since the turn of the century. Fiscal 2000, the earliest year for which comparable data is available, saw 35.4 million individual income tax returns filed electronically (including those filed over the phone). These accounted for just 28% of individual filings that year.

By fiscal 2005, more than half of individual income tax returns (52%) were filed electronically.

Note: This is an update combining information from two posts originally published in 2014 and 2015.

• Economic Policy
• Economy & Work
• Income & Wages

Americans’ Top Policy Priority for 2024: Strengthening the Economy

Congress has long struggled to pass spending bills on time, what the data says about food stamps in the u.s., inflation, health costs, partisan cooperation among the nation’s top problems, economic ratings are poor – and getting worse – in most countries surveyed, most popular.

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• Published: 09 May 2020

Tax structure and economic growth: a study of selected Indian states

• Yadawananda Neog   ORCID: orcid.org/0000-0002-3578-0460 1 &
• Achal Kumar Gaur 1  

Journal of Economic Structures volume  9 , Article number:  38 ( 2020 ) Cite this article

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The present study examines the long-run and short-run relationship between tax structure and state-level growth performance in India for the period 1991–2016. The analysis in this paper is based on the model of Acosta-Ormaechea and Yoo ( 2012 ), and for the verification of the relationship between taxation and economic growth the panel regression method is used. With the use of 14 Indian states data, Panel Pool mean group estimation indicates that income tax and commodity–service tax have negative effects whilst property and capital transaction tax have a significant positive effect on state economic growth. This study finds ‘U’ shape relationship between tax structure and growth performance. Based on the analysis, we conclude that for faster growth of Indian states, policymakers should give more focus on property taxes along with the reduction in income taxes.

1 Introduction

The study on the potential association between tax structure and growth performance has gathered a great deal of attention from policymakers, academicians and regulatory circles for several reasons. First, the developing and emerging economies require a large volume of tax revenues for the smooth and efficient functioning of the state at both the national and sub-national levels. Globalization has laid down the foundation for Goods and Service Tax (GST) in many developing countries (Mcnabb 2018 ). Due to competition, developing countries are also facing the difficulties to maintain existing tax revenues (Bird and Zolt 2011 ). Second, tax collection and structure of it create distortionary impacts in the economy through tax burden. Thus, the positive and negative impact of tax made the ‘tax–growth’ relationship more complex and the structure of taxation has a definite role in the development process of an economy.

In a budget constraint economy like India, investigation of tax–growth relationship enables us to formulate the suitable policy measure for the more inclusive and equitable growth process. The budget crisis is usually resolved through the cut-down of public spending or/and an increase in tax revenues (Macek 2014 ). Rapid reduction in spending or increase in taxes is harmful to long-run growth performance. Thus, the concern of the government lies with the problem of fiscal consolidation with sustainable growth performance where tax policies are vital.

Empirical evidence on the impact of tax structure on growth performance is not conclusive. India has adopted the Goods and Service Tax (GST) policy in 2017 intending to raise indirect tax collections and transform the indirect tax structure into a single market to avoid tax evasions and double taxation. GST is regarded as one of the major tax policy changes in independent India and economists are an optimist about its impact on revenue generations and growth performance. But this policy is not the only policy that shaped in independent India; other major policy changes also take place after independence. Footnote 1 Tax Reform Committee (TRC) report of 1991 regarded one of the productive and structured policy recommendations in the recent decade. At the state level, sales tax reform in the form of Value Added Tax (VAT) in 2005 becomes a fruitful policy initiative. However, the tax collections in both national and sub-national level are still low as compared to the international standards. Changes in tax policy also change in the tax structure in the economy and India witnessed these changes at both levels of governments. Recent studies proved that the changes in tax structure have decisive implication in the growth performance through work–leisure behaviour, investment decisions and overall productivity (Arnold et al. 2011 ; Gemmell et al. 2011 ; Macek 2014 ; Mdanat et al. 2018 ; Durusu-Ciftci 2018 ). In India, very few empirical studies are available which analyse the impact of these changes in tax structure on growth performance and this study will be first to investigate tax–growth nexus in India with the use of state-level data.

This analysis primarily concerned with tax structure rather than to tax levels (usually measured as a tax–GDP ratio). The main advantage of tax structure analysis is that it provides revenue-neutral tax policy changes which remove the difficulties related with the question of how aggregate tax revenue changes relates with expenditure changes (Arnold et al. 2011 ). The empirical results from linear panel regression suggest us that property and capital transection tax are positively affecting the state’s growth performance, where commodity and service tax effect negatively. However, the non-linear panel regression indicates that the positive effect is only visible for property taxes at a higher level where the negative effect of commodity and service taxes becomes positive after a threshold point. The effect of income tax is not significant in long run irrespective of panel regression models.

The structure of the paper is as follows: Sect.  2 deals with the theoretical framework and empirical literature, followed by a brief description of data and methodology in Sect.  3 . Empirical results and discussion are presented in Sect.  4 and our last Sect.  5 is for conclusions and recommendations.

2 Theoretical framework and empirical literature

Growth literature very recently acknowledges the role of taxation in the growth process of an economy. Until recently, growth models are more concerned with the steady-state process and exogenous changes. On the theoretical ground, taxation does not have any impact on growth (Myles 2000 ). Development of endogenous growth models creates the space for fiscal policy especially tax policy in determining the growth performance. Barro ( 1990 ), King and Rebello ( 1990 ) and Jones et al. ( 1993 ) were the pioneer in this regard. Tax level and tax structure have an impact on the saving behaviour of the household and investment in human capital. On the other hand, the firm also changes its investment decisions and innovations following tax policies (Johansson et al. 2008 ). These decisions and incentives in the accumulation of physical and human capital create the ‘Growth’ disparities amongst the countries and state economies.

A large body of literature available on “Tax-Growth” relationship is mostly dedicated to cross-country settings (Martin and Fardmanesh 1990 ; Karras 1999 ; Myles 2000 ; Tosun and Abizadeh 2005 ; Johansson et al. 2008 ; Vartia et al. 2008 ; Arnold 2011 ; Szarowska 2013; Macek 2014 ; Stoilova 2017 ; Safi et al. 2017 ; Durusu-Ciftci 2018 ) that investigates the effect of tax policy on economic performance. Income and corporation taxes are the major tax instruments for the governments irrespective of the level of developments of a country. The formation of tax structure with these two taxes has many implications in the growth performance. The study made by Arnold et al. ( 2011 ), Macek ( 2014 ) and Dackehag and Hansson ( 2012 ) has explored the negative relation of income and corporation tax with growth performance. Vartia et al. ( 2008 ) find the negative impact of corporation tax for OECD countries. If we consider the average and marginal tax rate, marginal tax is very influential than to average tax rate in investment decisions and labour supply. Empirical studies prove that marginal tax has a negative relation with growth, which indicate raising of marginal tax rate is associated with compromises with growth performance (Padovano and Galli 2001 ; Lee and Gordon 2005 ; Poulson and Kaplani 2008 ). Studies also established that other type of taxes also has a significant impact on growth performance, like consumption tax (Johansson et al. 2008 ; Durusu-Ciftci 2018 ), GST and Payroll (Tosun and Abizadeh 2005 ), property tax (Xing 2011 ), labour tax (Szarowska 2014 ), sales tax (Ojede and Yamarik 2012 ), excise (Reynolds 2006 ), etc.

However, looking at the single country’s perspective, we find very little evidence on the same. Stockey and Rebelo ( 1995 ) with the use of the endogenous growth model study the role of tax reforms on U.S. growth performance. They have found that tax reforms have very minor implication with economic outcomes. There are several studies exist for US economy where they empirically try to establish the link between tax and growth. Atems ( 2015 ) finds the spatial spillover effect of income taxes on the growth of 48 contiguous states. On the other hand, Ojede and Yamarik ( 2012 ) have not found any kind of impact of income taxes on growth in these states. Their panel pool mean group estimation indicates that property and sales tax has detrimental consequences in development. With the use of data for the U.S. covering the period of 1912–2006, Barro and Redlick ( 2009 ) find that average marginal income taxes were halting the economic growth. However, they have provided an interesting argument that in wartime, the tax does not have any kind of relation with growth. In search of an answer to the question that whether corporate tax rise destroys jobs in the U.S., Ljungqvist and Smolyansky ( 2016 ) use firm-level data for the period 1970–2010. The main conclusion of the paper is that a rise in corporate tax is not good for employment and income and has very little impact on economic activity. Using the error correction model, Mdanat et al. ( 2018 ) find for Jordan that income tax, corporation tax and personal tax negatively impact the growth. They suggest that irrespective of tax collection, the prime focus of the government should be social justice of the people. Dladla and Khobai ( 2018 ) also find similar results for South Africa where income taxes are coming out to be negative. For the case of Italy, Federici and Parisi ( 2015 ) used the 880 firms’ data and results show that corporation tax is bad for investments with the consideration of both effective average and marginal taxes rates.

Looking at the literature, the empirical relationship of tax structure with growth performance is still unclear for India. This study attempts to fill the gap by examining the effect of tax policy on economic performance in an emerging economy such as India at the state level. Second, with the use of panel Pool Mean Group (PMG) estimator which assumes slope homogeneity in the long run and heterogeneity in the short run, we can incorporate the dynamic behaviour of the variables which will be new to tax structure–growth study in India. Third, the tax–growth nexus may show a non-linear relationship due to the threshold effect. We consider this non-linearity in our panel regression model which will be a contribution to the existing literature.

3 Data and methodology

To study the effect of tax policy on economic performance in India, we employed three models and included each tax instruments in the models separately to avoid the problem of Multicollinearity. Following the works of Arnold et al. ( 2011 ) and Acosta-Ormaechea and Yoo ( 2012 ), the tax structure is measured by the share of individual tax to the total state tax revenues. We investigate the tax–growth relationship with the following equation.

Here, Y it is the growth rate of Per capita net state domestic product (NSDP), SGI is the state gross investment as a percentage of state domestic product, TAX is one of the tax shares (Property, Commodity & Services and Income), Tax Burden Footnote 2 is the ratio of total tax revenues to state domestic product and ϵ is the error term. Per the work of Acosta-Ormaechea and Yoo ( 2012 ), this study is more concerned with the impact of tax structure on growth rate rather than level effect. In model 1, we include property tax share, and in model 2 and model 3, we incorporate commodity & service tax and income tax, respectively. By following the approach of Arnold et al. ( 2011 ), we include total tax burden as a control variable which will reduce the biases that may occur from correlation in between tax mix and tax burden. We also included Secondary Enrollment Rate as a proxy variable for human capital in our model, but the inconsistent and insignificant results make us drop the variable from the final estimation model.

In search of a possible non-linear relationship, we introduce a separate panel regression by introducing the square of each tax share into the models.

If the coefficient of α 3 significant and carries an opposite sign to α 2 , then we can conclude that there is a non-linear relationship exist.

In this study, we included 14 Indian states for the period 1991 to 2016 and excluded North-Eastern states due to their relatively small tax revenue collections. Data have been taken from the Centre for Monitoring Indian Economy (CMIE) and Handbook of Statistics on the Indian States, published by Reserve Bank of India. The states that are included in this study are Andhra Pradesh (undivided), Footnote 3 Assam, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka, Kerala, Maharashtra, Punjab, Tamil Nadu, Orissa, Rajasthan and West Bengal. All the states are included in model 1 and model 2. For model 3, due to the data availability, we include only seven states Footnote 4 namely Andhra Pradesh, Assam, Gujarat, Karnataka, Kerala, Maharashtra, and West Bengal.

The selection of the study period is primarily driven by the argument provided by Rao and Rao ( 2006 ) that after the market-oriented economic reform of 1991, more systematic and long-term goal-oriented tax reforms were initiated in state level for India. The economic reform also brings rapid growth in India and it becomes very interesting to look at the tax–growth nexus after the economic reform. The second restriction related to the use of long data span is the availability of data for each tax head for each of the states under this study.

3.1 Unit root

Pool Mean Group (PMG) specification is very fruitful and widely used model to capture the dynamic behaviour of policy variables. This model is very powerful as it can investigate both I (0) and I (1) variables in a single autoregressive distributive lag (ARDL) model setup. A necessary condition in the ARDL model is that the model cannot deal with the I(2) variables. Thus, the investigation of stationarity becomes a compulsion. We used popular panel unit root tests like LLC (Levin et al. 2002 ), the IPS (Im et al. 2003 ), the ADF-Fisher Chi square (Maddala and Wu 1999 ) and PP-Fisher Chi square (Choi 2001 ) in this study.

3.2 Panel PMG model

The Mean Group (MG) estimator was developed by Pesaran and Smith ( 1995 ) to solve the issue of bias related to heterogeneous slopes in dynamic panels. Traditional panel models like instrumental variables’ estimator of Anderson and Hsiao ( 1981 , 1982 ) and Arellano and Bond ( 1991 ) may produce inconsistent results in a dynamic panel framework (Pesaran et al. 1999 ). MG estimator takes the average value of every cross-section and provides the long-run estimate for ARDL or PMG. On the other hand, Pooled Mean Group (PMG) estimator developed by Pesaran et al. ( 1999 ) assumes slope homogeneity in the long run but heterogeneous slopes in the short run for cross-section units. Dynamic Fixed Effect (DFE) also works like PMG and restricts cointegrating vector to be equal across all panels and restricts the speed of adjustment to be equal.

Under these assumptions, PMG is more efficient estimator than to MG and DFE estimator. The prime requirement for PMG estimator is that T should be sufficiently large to N. Panel ARDL or PMG works through maximum likelihood. Our basic PMG begins with the following equation.

Here, x it is the vector explanatory variables and y i is the lag dependent variable. X it allows the inclusion of both I (0) and I (1) variables. State fixed effect is captured through μ i . Above equation can be re-parameterized to ARDL format.

ɸ i measures the state-specific speed of adjustment and known as Error Correction Term. Β i is the vector of long-run relationships and α ij and θ ij are the vectors of short-run dynamic relationships. Pesaran et al. ( 1999 ) did not provide any statistical test for checking long-run relationship but it can be concluded form sign and magnitude of Error Correction Term (ECT). If it is negative and less than − 2, a long-run relationship can be established.

4 Results and discussion

Panel unit root test results from Table 1 suggest that in the case of Model 1 & 2, the Growth rate of Per Capita Net State Domestic Product (PC-NSDP), Property tax and commodity taxes are stationary at level. Gross investment and total tax revenue share to GDP are stationary at the 1st difference in all models and income tax share is also stationary at the same order.

5 PMG model results

We have reported MG, PMG and DFE estimation in the Tables  2 and 3 . The Hausman test indicates that the PMG model is the best model for our data than to MG model. Negative and significant error correction terms in all the models show the long-run relationship in between variable. One major issue related to the tax–growth equation is the problem of endogeneity of the variables. As growth in per capita GDP is our dependent variables, there is a possibility that tax collections behave along with business cycles. Therefore, we tested the weak/strong exogeneity of the tax variables through the correlation analysis between business cycles and tax shares. Business cycles have been calculated using the Hodrick-Prescott (HP) Filter. We have found that all the tax instruments are very weakly related to the business cycles movement and thus, we conclude that variables are not truly endogenous.

The speed of adjustment in PMG model 1, 2 and 3 are 78.9%, 78.4% and 79.6%, respectively. For the sake of completeness, we have reported MG and DFE Footnote 5 model results also. But we are more concerned with the results of PMG estimator as Hausman test suggested that PMG is a better model than to MG. The sign of the property tax is positive and significant in the long run as well as in the short run. Results are in line with the findings of Acosta-Ormaechea and Yoo ( 2012 ). Property tax generally considered a good revenue source for state and municipal governments for providing economic and social services in the city. This tax is also able to establish cost–benefit linkages and feasible decisions for the citizens. The positive impact of property taxes indicates that the revenue generation and productive utilization of these revenues exceed the distortionary effect in these states. As we expected, the tax burden is negatively associated with growth performance in both long run and short run. The relationship is showing the distortionary effect of the tax collection in the state economy. In all models, gross investment enhancing the growth in per capita SDP in the long run. Signs are readily justified as enlargement of capital formation has a positive impact on output and employment which channelized to the development outcomes (Swan 1956 , Solow 1956 ).

Commodity and service taxes are negatively related to the growth in per-capita SDP in the long run as well as in short run and findings are similar to the work of Ojede and Yamarik ( 2012 ). Footnote 6 This tax now comes under the Goods & Services taxes, but in the pre-GST period, commodity and service taxes are reducing growth in per capita NSDP. Commodity taxes are indirect taxes and state own tax revenues mostly come from indirect taxes. As indirect taxes, it has certain disadvantages like inflationary pressure in the economy and regressive to the poor section of the society. Our results also support the same hypothesis that increased commodity tax share is harmful. In India, commodity and service tax includes central sale tax, state excise duty, vehicle tax, goods & passenger tax, electricity duty and entertainment tax. Central sale tax was imposed on interstate trade of commodities which is now transformed to Inter-State GST (IGST). According to Das ( 2017 ), if the IGST rate is high to the Revenue Neutral Rate, it will harm the aggregate demand in the economy through the reduction of disposable income. Heavy vehicle and passenger tax collections are creating an abysmal environment for industrial activities. The tax burden variable is also carrying a negative sign in both long run and short run and magnitude is very similar to model 1. Income tax share has become insignificant and positive in the long run and negative insignificant in the short run.

After examining the linear relationships, we extended our analysis to the examination of a non-linear relationship with the use of PMG estimation model. The result from Tables  4 and 5 indicates the existence of a non-linear relationship between tax structure and growth performance for Indian states. The linear coefficient for property taxes has now become negative and the square of it turns out to be positive. Thus, the property taxes show a ‘U’-shaped relationship with states’ growth performance which implies that a rise in property taxes is bad for growth initially and after a threshold point, it becomes growth enhancing. The threshold point for property taxes is 1.88 which indicates that more than 80.77% observation is more than to threshold point.

In the case of commodity and service taxes, both the linear and non-linear coefficients are significant with different signs. However, the coefficient magnitudes are abnormally large and this is due to the inclusion of both linear and quadratic terms into the single equation. The small commodity and service taxes are very bad for the state economy, whereas the large amount of it shows a positive relation. The threshold point for this tax is 4.45 which implies that 79.95% observation lies above the threshold. This is a very interesting result as high commodity and service taxes could lead to high inflation in the economy and high inflation regarded as atrocious for growth. Further investigation of these findings is highly recommendable. As like linear panel regression, the income tax shows no relation in our non-linear regression model also. However, the short-run coefficient for income tax is significant and shows a negative relationship. Income tax is considered to be distortionary tax to the economy in the presence of income and substitution effect (Kotlan 2011 ). Income tax mostly impacts the savings of the households and labour supply which is regarded as an engine of growth.

6 Conclusions and recommendations

In this study, we try to find out the long-run and short-run relationship between different tax structure and economic growth in states of India. Empirical evidence from linear regression suggests that the property tax enhancing growth and commodity & service taxes reduce it. The non-linear regression validates these findings for property taxes where high property taxes are good for growth. In the case of commodity & service taxes, the results become opposite after the threshold point and affecting the growth negatively. Interestingly, we do not find any significant impact of income taxes on growth in both linear and non-linear regressions in the long run.

As far as the total tax burden is concerned, negative relation with the growth performance is verified and results are in line with Arnold et al. ( 2011 ). The negative effect of commodity and service taxes in the short run is expected to be neutralized through the implementation of GST in India. Promotion of growth performance at the state level concerning income taxes is also very crucial. Income tax has a direct effect on individuals and their saving and investment behaviour. On the other side, tax revenues should be placed in productive investments. With the spending, the government can promote inclusive growth, equality and efficiency in the economy.

The most promising path emerged through this study for long-run growth performance in Indian states is to lower the total tax burden and shifting from income and commodity taxes to property tax for revenue generations. The conclusion may be debatable on various grounds as the studied variables do not take into account institutional quality, administrative efficiency in tax collection, fiscal balance and condition of the states and existence of informal sectors. Future research can be done to incorporate these issues.

Availability of data and materials

Dataset analysed in this study is available from the corresponding author on reasonable request.

One can see the writings of Rao and Rao ( 2006 ) for brief discussion.

This is the proxy for total tax burden in the economy with certain limitations. It does not include informal economy and expenditure policies.

Telangana state was established in 2014. We merged the data of Andhra Pradesh and Telangana to achieve aggregate data for undivided Andhra Pradesh.

Data for Income tax are available for ten states, but inclusion of these states made the model inconsistent due to huge fluctuations in tax revenue collections.

Most of the coefficients of PMG and DFE are in similar range and smaller than to MG estimator. This is due to MG estimator only takes the information of each state time series to estimate long-run and short-run coefficients.

They use sale tax, where our study takes aggregate revenue for commodity and services. However, inference can be drawn as sale tax and is one of the dominant contributors in total commodity and service tax revenue in India.

Abbreviations

Net state domestic product

Goods and service tax

Foreign direct investments

• Pool mean group

Dynamic fixed effect

Auto-regressive distributed lag

The organization for economic co-operation and development

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Hidden benefits and dangers of carbon tax

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Affiliation Department of Sociology and Institute for Policy Research, Northwestern University, Chicago, IL, United States of America

• Monica Prasad

Published: July 7, 2022

• https://doi.org/10.1371/journal.pclm.0000052
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Many scholars argue that revenue from carbon taxes should be used to replace other taxes, such as taxes on capital or labor, in order to minimize economic damage or compensate for the regressive nature of carbon tax. Advocates of this approach argue that the carbon tax could produce a “double dividend,” reducing emissions while also increasing GDP by allowing other taxes to be lowered. This paper suggests caution before adopting this approach, for two reasons. First, the scholarly literature systematically understates the benefits of carbon taxes, and overstates their costs, by simply ignoring the possible environmental benefits of carbon taxes. The result is a one-sided scholarship that exaggerates the damage from carbon taxes and should be understood as providing a lower bound for the benefits of the tax, not a rigorous guide to policy. Second, carbon taxes, unlike other taxes, will produce less revenue as technologies improve and cleaner-burning fuels develop. Thus, if carbon taxes replace other taxes, over time the tax base of the state will wither, and the programs those taxes pay for will be threatened. This paper elaborates these claims and then discusses carbon tax policy designs that would take both points into consideration.

Citation: Prasad M (2022) Hidden benefits and dangers of carbon tax. PLOS Clim 1(7): e0000052. https://doi.org/10.1371/journal.pclm.0000052

Editor: Olivier Damette, Universite de Lorraine and Climate Economic Chair Paris Dauphine, FRANCE

Copyright: © 2022 Monica Prasad. This is an open access article distributed under the terms of the Creative Commons Attribution License , which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

Funding: The author(s) received no specific funding for this work.

Competing interests: The authors have declared that no competing interests exist.

Carbon taxes, like all taxes, raise two sets of design questions. The first set of questions is on how to levy the tax: what the rate should be, on whom it should be levied, and whether there should be any exceptions. The second set of questions is how to spend the revenue, such as whether it should become part of general revenue or should be reserved for dedicated purposes, and if dedicated, then whether it should be dedicated to environmental purposes or other purposes.

There is disagreement on all these questions. On how to levy the tax, the World Bank’s Carbon Pricing Leadership Coalition’s Report of the High-Level Commission on Carbon Prices concluded that achieving the Paris climate targets would require a price on carbon of US $50–100 per ton of CO2 emissions by 2030 [ 1 ]. In 2014 William Nordhaus calculated that a price of $7.40 per ton of CO2 would be optimal in terms of balancing costs and benefits of carbon tax [ 2 ]. A few years later, however, and in the face of several more years of inaction on carbon tax around the world, Nordhaus concluded that the social costs of carbon are over $30/ton of CO2 [ 3 ]. Many studies suggest starting with a lower rate in order to give households and firms time to adjust to the tax and make longer-term changes, and incrementally increasing the rate over time. The theoretical literature is clear that the optimal tax would be a flat tax on carbon that is levied equally on all sectors, but in practice, it is common for existing carbon taxes to exempt politically influential sectors and/or sectors vulnerable to international competition, even in the most environmentally ambitious countries. Finland and the Netherlands have had a carbon tax since 1990, Sweden and Norway since 1991, and Denmark since 1992. In all of these countries some sectors are hit by the tax and some are exempt, and the affected sectors have changed over time [ 4 ]. For example, in Sweden, much higher tax rates in transportation have led to emissions reductions in transportation, but lower rates are levied on oil and natural gas and have thus not led to lower emissions in those sectors [ 5 ]; in Norway only about 60% of emissions are taxed, with exemptions being given to the most energy-intensive industries [ 6 , 7 ].

If there is disagreement on the specific rate and exemptions, there is much more disagreement on how to spend the revenue, and several different approaches have been proposed: merging the revenue with tax revenue from other sources, returning the revenue to households in a lump sum, using the revenue to cut other existing taxes, using the revenue to lessen the regressivity of the carbon tax, using the revenue to subsidize environmentally beneficial technologies or policies, or using the revenue to reduce debt [ 8 ].

The problem is that these different uses of the revenue respond to different—and potentially conflicting—concerns. Different design features have different consequences for three goals, all of which may be seen as relevant to carbon taxes: economic growth, distributional consequences, and the environment. If the goal is to minimize economic costs , many scholars argue the revenue from carbon tax should be used to lower other taxes. For example, [ 9 ] argue that because any tax introduces distortion and economic cost, adding a carbon tax on top of existing taxes magnifies the economic cost: “As firms pass CO2 taxes forward into higher energy prices, this drives up product prices in general, thereby depressing the real return to work effort and savings…Reducing the buying power (real returns) to capital and labor depresses labor supply and capital accumulation.” Therefore, as many scholars argue, the goal should be to minimize the economic damages of carbon tax by cutting other taxes. The most substantial recent study in this vein is [ 10 ], which examines several different revenue scenarios, including using the revenue to reduce the deficit or cut taxes on labor or capital, and finds that if the carbon tax is used to cut capital tax rates, it can actually increase GDP (see also [ 11 – 14 ]). Minimizing economic costs and using the revenue to cut capital taxes is also useful politically, to bring on board political actors who might not otherwise be convinced of the need for a carbon tax, because the broader public debate revolves around the perceived economic costs of these policies. British Columbia uses revenue from its carbon tax to fund a reduction in the corporate tax rate and taxes on small businesses, among other uses [ 15 ]. Although there are certainly criticisms of the argument that tax cuts for capital lead to significant benefits for the economy (e.g. [ 16 ]), a recent review found that “almost all studies agree that recycling the revenue through capital or corporate tax cuts is preferable, from an efficiency perspective, in the long term” [ 17 ].

On the other hand, a different goal may be distributional . A carbon tax is generally held to be regressive, because lower-income households spend much larger shares of their income on energy costs ([ 18 , 19 ]. It is not fair for lower-income households to bear a disproportionate share of the burden of climate change mitigation, and therefore—some argue—the revenue from the carbon tax should be returned to low-income households ([ 20 , 18 ]. The Carbon Pricing Leadership Coalition report is clear that lessening the regressivity of the tax may be necessary to generate political coalitions in its favor. However, some scholars argue that this goal conflicts with the goal to minimize the economic damage from the tax. For example, [ 18 ] conclude that a lump sum rebate is the policy that most improves the fortunes of the bottom three quintiles, while “recycling revenue to reduce capital taxes is the most efficient policy, but we caution that it makes carbon pricing, which is already regressive, even more so.” They suggest as a middle option using carbon tax revenues to reduce labor taxes. They worry that “if the rebate policy is viewed as an attempt to reduce inequality, this might introduce a controversial policy sub-plot to an already polarized debate.” Moreover, recycling revenue to lower income households could be a selling point for carbon taxes in some circumstances but could be politically unpopular in other cases. The ultimate political consequences are unclear. The Australian carbon tax reserved a significant share of its revenue to be returned as dividends to lower and middle-income households, but this was not enough to overcome the political opposition that eventually saw the tax repealed [ 15 ]. Other authors dispute the equity-efficiency tradeoff of carbon tax entirely, finding that economic efficiency and distributional concerns need not always be in conflict [ 21 , 22 ].

Cost-and-no-benefit analysis

If the goals of economic efficiency and distributional justice are potentially in conflict, at least the literature is aware of these two goals, examines the extent to which they are in conflict, and tries explicitly to reconcile them. But on the question of environmental benefits , the literature is surprisingly silent. Because environmental consequences are hard to measure, the peer-reviewed econometric literature assessing the consequences of carbon taxes generally ignores environmental consequences. A World Bank report examined 30 years of scholarship on carbon taxes in peer-reviewed journals and found only a handful that examine their effects on the environment. Even fewer studies attempt to include the environmental benefits in an overarching assessment of the costs and benefits of carbon tax [ 23 ].

This is because of the inherent difficulty of modeling climate harms and benefits. Marron and Toder note:

Carbon dioxide emissions stay in the atmosphere for decades. Their environmental and economic impacts depend nonlinearly on the stock of greenhouse gases, which will depend on future economic developments, domestic climate policies, and policies elsewhere in the world. Estimating the marginal social cost of carbon thus requires complex modeling and assumptions about the trajectory of carbon emissions, climate sensitivity, and the impacts of any climate changes, all of which are uncertain. The cost may depend critically on controversial assumptions, such as what value to place on low-probability, catastrophic outcomes and what discount rate to apply in valuing damages far in the future [ 19 ]

As a result, the estimates of environmental costs are wildly different, with a mean of $196 per metric ton of carbon but a standard deviation of $322. Examining the social costs of carbon has become more common in governmental cost-benefit analyses in the U.S. over the last decade, because a court case in 2008 concluded that governmental analysts could not assume that carbon emissions reductions have no value [ 24 , 25 ]. Nevertheless, this literature generally ends with a wide range of measurements and an acknowledgment of uncertainty, since there are parameters that will forever remain outside the bounds of any attempt at calculation, such as the actions of future governments, and parameters that do not generate any consensus, such as the discount rate. Tol, in a metareview of these studies, concludes that “estimates of the social cost of carbon or the Pigouvian tax are highly uncertain and are very sensitive to the researcher’s assumptions about people’s attitudes toward the distant future, faraway lands, and remote probabilities” [ 26 ]. Governmental calculations have seen drastic revisions, ranging from $-10 to over $100, and changing from one year to the next the conclusion of the benefits of particular policies ([ 24 , 27 ]. Pindyck argues that the conclusions of these models are almost entirely a function of an arbitrarily chosen discount rate, and that these exercises “create a perception of knowledge and precision that is illusory, and can fool policy-makers into thinking that the forecasts the models generate have some kind of scientific legitimacy” [ 26 ].

Because of this uncertainty, rather than attempt to model the environmental benefits of carbon tax, most cost-benefit analyses of carbon tax take the approach of beginning with a specific emissions reduction target and determining only what is the most cost-effective way of reaching it, a goal which demands less information and therefore affords more certainty [ 19 ]. While this approach is sensible given the uncertainties and political controversies surrounding the measurement of environmental harm, it leaves the literature disproportionately oriented to economic costs, and silent on the possible environmental benefits of carbon tax: “Since existing empirical studies on carbon tax do not account for the benefits of mitigating climate change, the common findings are carbon taxes cause the economy to shrink … While the magnitude of carbon tax varies significantly [depending on] how the carbon tax revenue is recycled to the economy, the direction of impact is always negative, with few exceptions” [ 23 ].

For example, one study argues “Substituting carbon taxes for other sources of revenue or using the proceeds to reduce deficits or finance expenditures are the keys to integration of carbon taxes with proposals for fiscal reform” [ 11 ]. But the authors do not assess whether using the revenue to facilitate the development of alternative energy would result in more or less abatement of carbon emissions, examining only how cuts in tax rates or returning the revenue in a lump sum would affect abatement. And they do not include the environmental benefits in their conclusion: “We focus on the market consequences of the carbon tax and recycling policies. We do not consider the avoided damages and climate benefits that would accompany such policies”. Similarly, another study argues for using carbon tax revenues to reduce capital taxation [ 10 ]. The authors find that the carbon tax reduces CO2 emissions, but they do not include the benefits of this reduction in assessing the costs and benefits of the tax, and they do not assess whether using the revenue for environmental purposes could lead to greater reductions in CO2 emissions. Because the environmental benefits are out of the equation, these authors ignore the question of whether using carbon tax revenue for environmental purposes would lead to even greater emissions abatement and thus to even greater overall benefit.

As Nemet, Holloway, and Meier write, because these benefits are not considered in economic studies “the focus on cost minimization—rather than comparison of benefits and costs—diminishes the role of benefits in general”[ 28 ]. They note that targets for abatement levels are specified exogenously and treated as given in many carbon tax studies, and thus “the marginal damages of climate change do not influence choices among policy options” and “The resulting marginalization of climatic benefits has had the effect of excluding quantitative representation of benefits in general.”

Perhaps most striking is that the focus on quantifiable costs leads these scholars to criticize the policies that may be precisely the ones to have the most environmental benefits. For example, the success of carbon tax in the Nordic countries has been attributed to their use of carbon tax revenue to subsidize research and development into clear energy technologies. One study cites “compelling technological contingences or breakthroughs…a continued phase out of nuclear power; a rapid ramping up of onshore and offshore wind energy; a spectacular diffusion of electric vehicles; a massive increase in bioenergy production; and the commercialization of industrial scale carbon capture and storage” as the relevant factors in explaining the energy transition in the Nordic countries [ 29 ]. Other authors emphasize the development of substitute fuels as a primary factor in the reduction of climate emissions [ 4 , 30 ]. Using carbon tax revenue to subsidize research and development into clean energy technologies could thus be a means of accelerating technological innovation that gives firms the ability to reduce carbon emissions [ 31 ]. As Liscow and Karpilow argue, because innovations are non-linear and can build over time in a “snowballing” fashion, “To address social harms like climate change, government policy should encourage innovation in targeted areas” [ 32 ], giving clean energy technologies a “big push” that would fundamentally alter the trajectory of innovation.

But Timilsina [ 23 ] notes that when carbon tax revenues are used to subsidize renewable electricity and efficiency improvements, the existing models, which are not equipped to consider the environmental benefits, show only economic costs, because the policy is only “recycling the revenue from one distortionary policy (i.e., carbon tax) to finance another distortionary policy (i.e., clean technology subsidy).” The policies most likely to lead to the development and adoption of substitute cleaner-burning fuels are precisely the ones that are deemed too distortionary by the existing models, because their benefits—particularly the nonlinear benefits of rapid technology improvement—are not visible in the models.

The motivations behind decisions to leave out environmental benefits are understandable given the impossibility of calculating them, but the result is a scholarship that thoroughly explores the costs of carbon taxes to economic growth but is unable to consider the possible benefits to the environment. This leads to policy suggestions that may not be the most effective in reducing carbon emissions.

The new starve the beast

If the literature on carbon tax misses hidden benefits of carbon tax, it also misses a hidden danger: the carbon tax generates revenue only if individuals or firms are paying the tax, that is, if they are emitting carbon. To the extent that they are able to bypass the tax by substituting to lower-carbon substitutes—or to the extent that lower-carbon emitting firms drive out higher carbon-emitting firms—revenues from the tax fall. If those revenues have been used to substitute for other taxes, when revenues fall the programs funded with those revenues come under threat.

One study, for example, in analyzing the effect of carbon taxes in Canadian provinces, assumes fixed elasticities of response of fuel use to carbon taxes [ 33 ]. But given the immense research and development infrastructure that has been generated around environmental technologies, this assumption of fixed elasticities is questionable, and it may be necessary to model also the elasticity of the elasticity—that is, it may become much easier to improve energy efficiency or substitute renewable fuels than it is now. For example, the price per watt of solar photovoltaic cells has dropped from over $70 in 1977, to under 70 cents today. That kind of non-linear development in technology is common in the rapidly developing green technology sector, but it is not incorporated in the current models. Indeed, the most ambitious countries have aimed to become 100% free of fossil fuel, and in the Nordic countries 63% of electricity already comes from renewable energy [ 34 ; see also 30 ].

Consider McKibbin et al.’s argument for using carbon tax revenues to reduce capital taxation: “In that case, investment rises, employment and wages rise, and overall GDP is significantly above its baseline through year 25” [ 10 ]. But what happens when one introduces non-linear technological development, of the kind seen in the development of solar energy, into the model? The environmental benefits would of course be dramatic, but the revenues from the carbon tax would fall, because these newer technologies emit less carbon and thus generate less tax revenue. If capital taxes or other taxes have been cut, then the programs that were supported by the carbon tax revenue can only be financed through deficits, through new taxes, or through cuts in spending, none of which are included in the optimistic model about economic benefits. These developments may reduce some of those economic benefits. Stern and Stiglitz [ 1 ] argue that this would only happen over the very long run, but it is hard to be confident of this prediction given the rapid development of clean energy technologies.

In a sense, using carbon tax revenue to replace other tax revenue pits the goal of reducing environmental emissions against the goal of preserving revenue for government programs, because efforts to reduce carbon emissions will starve the government of funds. Of course, taxes could always be raised in the future if and when this problem arises, and Gillis [ 35 ] suggests tax cuts are often reversed or undone in subtle ways. However, in the American context, cutting taxes has become an important electoral tool, and politicians therefore have an incentive to spotlight and campaign against tax increases, making maintenance of tax revenue more difficult than in other countries [ 36 ]. Carbon taxes could thus become a new means of reducing the size of government by changing the default situation to one of declining tax revenues.

One strategy to mitigate this problem would be to incrementally raise the price of carbon emissions to keep government revenue fixed. For example, one study notes that the Swiss carbon tax “establishes a clear link between the rate and pre-defined quantitative reduction targets of CO2 emissions. In case reduction targets are not achieved an increase in the CO2 levy rate is triggered” [ 30 ]. Similar policies could be adopted to preserve government revenue, although these would make the carbon tax tougher to implement politically. Some scholars worry that policymakers will in fact privilege the preservation of revenue over the reduction of carbon emissions, keeping carbon emissions high in order to keep revenue high ([ 37 , 28 ]). A strategy to avoid this would be to avoid using the revenue for general government purposes altogether.

Policy implications

In Cents and Sensibility , Morton Schapiro tells the story of a World Bank report that evaluated a World Health Organization program to counteract river blindness in Africa. The WHO considered the program highly successful, as there was progress in stamping out the disease in 90% of the areas covered by the program, without going over budget. But when the World Bank tried to analyze the success of the program using traditional economic principles of cost-benefit analysis, the result was inconclusive. Schapiro writes: “If you count value in economic terms—changes in earnings discounted back to the present—the answer is, alas, not all that much [value generated] in areas with high unemployment and low educational achievement” [ 38 ]. Because the beneficiaries could not be expected to be particularly productive in economic terms, the economic benefits were not as large as they would be for those in contexts where the beneficiaries could be expected to earn more. The authors of the report noted “there are humanitarian benefits associated with reducing the blindness and suffering” but “these benefits are inherently unmeasurable, and we will not account for them here.” The benefits of curing blindness for large numbers of people simply do not enter the cost-benefit analysis.

In a way, this hesitation to tread where one’s methods do not go can be seen as admirable modesty. If the mandate is to measure the calculable benefits of a program, then clearly things that are not calculable are outside of one’s remit, and one should not try to force them into calculability. These calculations are best thought of as exercises, designed to shed light on some issues but not to provide a wholesale judgment on programs.

The problem arises when policymakers make decisions based on these partial analyses as if they were complete analyses. This behavior, too, is understandable: policymakers who care about evidence and analysis and rigor (which does not constitute the entirety of the population of policymakers) will gravitate toward studies that claim to provide it and may let themselves be guided by such studies. But if scholars are unwilling to consider incalculable benefits, policymakers who pay attention to scholars will be making decisions based on overestimations of costs and underestimations of benefits.

This phenomenon seems to be occurring today with the study of carbon tax. Decision-makers should be wary of relying on the economic scholarship for this reason.

Simply pointing out the insufficiency of these approaches, however, does not give us alternative principles for policy analysis and selection. Thus, rather than completely ignoring cost-benefit calculations, a better principle is that we should always examine cost-benefit calculations with an eye toward whether the unmeasurable factors are symmetrical or asymmetrical. If both costs and benefits have equal degrees of difficulty of measurement, cost-benefit analysis cannot be a guide to action. However, where, as in this case, there is a strong tendency for unmeasurable factors to be in one direction—the calculation of benefits—cost-benefit analysis can be a guide to action if it is taken as providing a lower bound. Despite the difficulties of measurement, the implications for policy in this case are clear: carbon tax is a more promising policy than cost-benefit calculations would lead us to believe. More precise measurement is not necessary to reach that conclusion.

But if there are unmeasurable benefits to carbon tax, there is also a hidden danger. If carbon taxes are substituted for other taxes, then the tax base of the state becomes dependent on the revenue from carbon taxes continuing. If that revenue declines—as it surely must, given the rapid development of alternative energy and energy efficiency technologies, which will make it easier for firms and individuals to reduce carbon emissions and therefore no longer need to pay the tax—then the tax base of the state declines.

Of course, there will be many who would celebrate the decline of the tax base and the pressure it puts on government to reduce spending. However, voters who are concerned about climate change and would be willing to support a carbon tax tend to be on the progressive part of the political spectrum. It cannot be assumed that they will be sanguine about a shrinking tax base. If carbon tax is to avoid losing support among such voters, a general principle is that it should not lead to an unintentional weakening of state capacity in future.

In the absence of the ability to measure and take into account environmental benefits, policy proposals cannot be made by drawing on precise measurements, but rather by drawing on general principles. The general principle to avoid unintentionally weakening state capacity gives us one way to evaluate various policy proposals for the use of carbon tax revenue.

• (1) Using the revenue to cut other existing taxes The discussion in the paper argues against this approach, because revenues from carbon tax are destined to—indeed, intended to—decline. In fact, this is the main approach that should not be adopted according to the principles suggested in this paper. For example, a popular suggestion is to reduce taxes on labor to lessen the regressivity of carbon tax. However, taxes on labor such as payroll taxes fund highly popular programs, including Social Security and Medicare in the U.S., and other welfare programs in other countries. Pinning these programs on a revenue base that is destined to shrink is a stealth politics of shrinking the welfare state.
• (2) Merging the revenue with tax revenue from other sources Similarly, if the revenue from carbon tax has been merged into general revenue, general revenues will eventually decline. While they would be declining from a higher base given the addition of the carbon tax revenue, and asymptotically to the same level as before, the danger is that necessary programs will come to depend on carbon tax revenue and will eventually be threatened as revenues decline. If carbon tax revenues are not clearly distinguished from other revenue sources, there will be no structural ability for policymakers to protect necessary programs from what is in fact a temporary tax base.
• (3) Using the revenue to reduce debt Using carbon tax revenue to reduce debt is a plausible use of the revenue. In an ideal scenario, by the time carbon tax revenues start to decline, significant headway will have been made in eliminating or substantially reducing debt, leading to benefits for the economy. The temporary nature of carbon tax revenues is not a disadvantage in this case because they will have contributed to reduction in the stock of debt. They can be seen as transitional revenues with a temporally limited purpose, lowering levels of debt. This may not be the best use of carbon tax revenue, however, if interest rates remain low. This approach also seems to be unpopular with the American public [ 39 ].
• (4) Using the revenue to lessen the regressivity of the carbon tax Carbon tax revenue could be used to carve out exemptions to the carbon tax for lower-income households. This does not violate the principle of preserving state capacity, and because the decline of carbon tax revenue implies that the costs the tax inflicts are declining, the exemptions become less necessary as revenue declines. However, this approach lowers incentives for emissions reductions among households who have been given exemptions.
• (5) Returning the revenue to households in a lump sum For that reason, it may be better to collect the revenue without exemptions, and then return it to lower-income households, or to all households, as “carbon dividends.” Returning it to lower income households would lessen regressivity, while returning it to all households would increase the proposal’s popularity. As carbon tax revenue declines, these dividends would decline, but no other aspect of state capacity would be threatened. Many have argued that this approach would be the one most likely to generate broad political support among the public [ 17 ], and [ 40 ] show that even a universal dividend not targeted to the poor would disproportionately benefit the poor, because the wealthy produce more carbon emissions and would pay more of the tax.
• (6) Using the revenue to subsidize environmentally beneficial technologies or policies Finally, one strategy would be to implement carbon tax but use the revenues to promote the growth of energy efficiency and alternative energy technologies. In Denmark, which boasts perhaps the most successful carbon tax, 40% of tax revenue was used in ways that led to the promotion of clean energy technology [ 31 ]. Polls find this use of carbon tax revenue to be the most popular among the American public, even generating majority support among Republicans [ 39 , 41 ]. There are several concerns to consider in designing such a policy: if not designed carefully, policies to promote green technology can end up benefiting the wealthy [ 42 ]; not all governments have been as successful as Denmark in using carbon revenue for productive clean energy purposes [ 35 ]; and clean energy technologies can be funded through measures other than carbon tax. Nevertheless, if designed carefully such a policy could help to reach climate goals that cannot be reached directly through carbon tax. For example, there are some areas where individuals or businesses may be unable to reduce carbon emissions because cleaner-burning fuels are not available; carbon tax revenue could be used for research and development in such areas [ 8 ]. Industries exposed to trade may also require government assistance to reduce emissions [ 43 ].

This paper thus argues for ways that policymaking can be informed by evidence but not led astray by the false precision of cost-benefit estimates. As this discussion shows, even without precise measurements, we can develop principles that can lead us to favor carbon taxes, but to reject the option of using carbon tax revenues to reduce other taxes, and to be wary of merging carbon tax revenue into general revenue, the first two of the six options above. While options three and four respect the principle of integrity of the tax base, they have other disadvantages.

The last two options combined—carbon dividends plus funding for green technology—could produce an emissions reduction policy that generates public support, follows the advice of economists, takes into account the hidden as well as visible benefits of carbon tax, and also responds to the basic principle suggested here: don’t use a temporary source of revenue to make permanent changes in the tax code.

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A thorough understanding of taxation involves drawing from multiple sources to understand its goals, strategies, techniques, standards, applications, and many types. Tax dissertations require extensive research across a variety of areas and sources to reach a conclusive result. It is important to be able to understand and present tax dissertation themes well since they deal with technical matters.

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• Why establishing a taxation system is essential for a country’s growth
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• What is the most significant investment made using tax revenue by the government?
• Is it feasible for the government to create diverse social welfare policies without having the people pay the appropriate taxes?
• How tax avoidance by people leads to an imbalance in the government budget
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• Workers of the tax department’s role in facilitating tax evasion through corruption
• Investigate the changes that should be made to the current taxation system. A case study based on the most recent UK taxes studies
• Examine the variables that affect the amount of income tax UK people are required to pay
• An analysis of the effects of intellectual capital on the expansion and development of large businesses and multinationals. An Apple case study
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• A critical analysis of how the administration of higher institutions is impacted by small business budgeting
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• How the state might expand its revenue base by focusing on new taxing areas. Gaining knowledge of the digital content creation and freelance industries
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• What are the existing problems that prevent the government systems from using the tax money they receive effectively and completely?
• What are people’s opinions of those who frequently avoid paying taxes?
• Explain the part tax officials play in facilitating tax fraud by accepting small bribes
• How do taxes finance the growth and financial assistance of the underprivileged in the UK?
• Is it appropriate to criticise the government for not providing adequate services when people and businesses fail to pay their taxes?
• A comprehensive comparison of current taxes and the Islamic zakat system is presented. Which one is more beneficial and effective for reducing poverty?
• A critical evaluation of the regulatory organisations was conducted to determine the tax percentage on different income groups in the UK
• An investigation into tax evasion: How do wealthy, influential people influence the entire system?
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Tax research methodology: a guide to tax research techniques.

Introduction – Tax Research Methodology

In order to properly optimize your accounting firm’s overall efficiency, efficiency, effectiveness, and productivity in connection to researching and resolving a tax issue and determining the sustainability of the tax return filing position per Circular 230, the appropriate tax research processes must be meticulously designed, implemented, and executed. The subsequent comprehensive steps will guide you in establishing an all-inclusive tax research effort on behalf of your entire client base while properly ascertaining the likelihood of success should a tax position(s) taken on a tax return be challenged by the Internal Revenue Service (hereinafter the “Service”) upon examination.

Establish The Facts And Circumstances

The first step in the tax research process is to establish all the facts and circumstances provided by your client in order to determine which tax laws apply to your client’s fact pattern. At this initial stage, it is imperative not to omit nor overlook any of your client’s facts and circumstances whether appearing material or immaterial. Always be guided by the axiom that facts and circumstances appearing to be immaterial individually may, in fact, be material in the aggregate.

Determine All the Issues

The second step in the tax research process entails determining all the tax issues affecting your client’s specific facts and circumstances and any and all mitigating factors. Normally, complex tax issues evolve through several stages of development. For instance, an experienced tax professional based upon his or her prior knowledge of the tax laws, can normally determine most of the initial pertinent issues in terms of general tax laws. However, after performing an initial search of the authorities to answer the initial issues, a tax professional often discovers that one or more additional specific technical questions of interpretations must be resolved before the initial issues can be fully addressed. Consequently, at this stage, a tax professional may also encounter the need to obtain additional facts from the client. Accordingly, the tax research process may have to move back from step two to step one. In addition, you the tax professional may learn at this stage that facts initially not considered to be important may in fact prove critical to the resolution of all your client’s tax issues.

Identify Statutory, Administrative, And Judicial Authority

The third step in the tax research process entails identifying the specific authorities to support all of your client’s tax issues while appropriately weighing authorities that may be contrary to your supporting position. Generally, this process begins with consulting statutory authority (e.g., the Internal Revenue Code) and quickly expands to encompass administrative authority (e.g., Proposed Treasury Regulations, Temporary Treasury Regulations, Final Treasury Regulations, Revenue Rulings, Revenue Procedures, Private Letter Rulings, Technical Advice Memorandum, General Counsel Memorandum, Chief Counsel Advice Memorandum, Circular 230, Internal Revenue Manual, Internal Revenue Bulletins, IRS Field Service Advice Memorandum, IRS Determination Letters, and IRS Notices, etc.) and judicial authority (e.g., judicial interpretations decided by the U.S. Tax Court, the U.S. District Court, the U.S. Court of Federal Claims, the U.S. Circuit Court of Appeals, the U.S. Court of Appeals for the Federal Circuit, and the U.S. Supreme Court). In addition, at times, you the tax professional may have to consult the legislative history (e.g., the Public Laws and Congressional Committee Reports from the House of Representatives and the Senate) of a particular Internal Revenue Code section to fully address what Congress’s intent was in passing a particular bill. Lastly, you may also want to consult the voluminous range of editorial interpretations (e.g., published white papers, published articles, etc.) available to assist in the interpretation a particular tax issue. However, it must be duly noted that editorial interpretations are impermissible sources of authority before the Service and the judicial system. For clarification purposes, the subsequent synopsis will elaborate upon the aforementioned statutory, administrative, and judicial interpretations:

Statutory Authority

The Internal Revenue Code

All federal level tax statutes passed by Congress into law are compiled and published in Title 26 of The United States Code. As it should be recalled, Title 26 of The United States Code contains the specific statutes that authorize the Service to collect taxes for the federal government. Generally, the tax research process begins with consulting the Internal Revenue Code and quickly expands to encompass administrative and judicial authorities based upon the complexity of the tax issue under analysis.

Administrative Authority

The Treasury Regulations

The Treasury Regulations provide the official interpretations of the Internal Revenue Code by the Treasury Department and have the force and effect of law. The most common forms of Treasury Regulations include:

• Proposed Treasury Regulations (e.g., binding only on the Service and not the taxpayers);
• Temporary and Final Treasury Regulations (e.g., binding on both the Service and the taxpayers); and
• Preambles  (e.g., treated just like legislative histories to demonstrate congressional intent and may underlie either type of the aforementioned treasury regulations regardless of status as Proposed, Temporary, or Final).

Revenue Rulings

A Revenue Ruling is an official interpretation by the Service of the tax laws. Initially, Revenue Rulings are published in the weekly Internal Revenue Bulletin. The same rulings later appear in the permanently bound Cumulative Bulletin, a semi-annual publication of the Government Printing Office. Revenue Rulings hold less weight than the Treasury Regulations because they are intended to cover only specific fact patterns. Regardless, Revenue Rulings can provide valid precedent but only if your client’s facts and circumstances are substantially identical.

Revenue Procedures

A Revenue Procedure is a statement of procedure that affects the rights or duties of taxpayers or other members of the public under the Code. Similar to Revenue Rulings, Revenue Procedures are less authoritative than Treasury Regulations. However, Revenue Procedures should be binding on the Service and may be relied upon by taxpayers.

Private Letter Rulings

Private Letter Rulings (hereinafter “PLR”) are issued directly to taxpayers who formally request and pay for advice about the tax consequences applicable to a specific business transaction. Such PLR request have been employed frequently by either taxpayers themselves or the taxpayer’s representatives (e.g., a taxpayers’ representation through a CPA Firm or Law Firm) to assure themselves of a pre-planned tax result before they consummate a transaction and as a subsequent aid in the preparation of the tax return’s filing position. When the IRS issues a PLR it is understood that the PLR is limited in scope and application to the taxpayer making the request.

Technical Advice Memorandum

A Technical Advice Memorandum (hereinafter “TAM”) is a special after-the-fact ruling that may be requested from the taxpayer or the technical staff of the Service. For instance, if a disagreement arises in the course of an audit between the taxpayer or the taxpayer’s representative and the revenue agent, either side may request formal technical advice on the issues(s) through the District Director. Under certain circumstances, TAM’s can be used as a basis for the issuance of a Revenue Ruling and can also be subsequently published as a PLR.

General Counsel Memorandum

General Counsel Memorandum (hereinafter “GCM”) are legal memorandum that are prepared by the IRS Chief Counsel’s Office. GCM’s analyze proposed Revenue Rulings, Private letter Rulings, and Technical Advice Memorandum. GCM’s that were issued after 1981 constitute substantial authority for purposes of the penalty assessed for the substantial understatement of income tax.

Circular 230

Circular 230 is an IRS publication that sets forth the requirements and responsibilities of professionals (e.g., Attorneys, Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries) admitted to practice before the Service.

Internal Revenue Manual

The Internal Revenue Manual (hereinafter “IRM”) is an official compilation of policies, procedures, instructions, and guidelines for the organization, function, operation and administration of the Service. It is not legally binding, and the policies are not mandatory. The IRM guidelines do not confer any rights on taxpayers.

IRS Field Service Advice

IRS Field Service Advice (hereinafter “FSA”) are taxpayer specific rulings furnished by the IRS National Office in response to requests made by the taxpayers or IRS Officials.

IRS Determination Letters

A Determination Letter is issued by the IRS at the taxpayer’s request to outline the Service’s position on a particular transaction that has already been completed. Generally, Determination Letters are issued only when a determination can be made on the basis of clearly established rules in the statute or regulations.

IRS Notices

When prompt guidance concerning an item of the tax law is needed, the IRS publishes notices in the Internal Revenue Bulletin. These notices are intended to be relied upon by the taxpayers to the same extent as a Revenue Ruling or Revenue Procedure.

Judicial Authority

U.S. Tax Court

The U.S. Tax Court is an independent 19 judge federal administrative agency that functions as a court to hear appeals by taxpayers from adverse administrative decisions by the Service.

U.S. District Court

The U.S. District Court hears civil actions against the United States for the recovery of any tax alleged to have been erroneously or illegally assessed or collected by the Service. Trial by jury is available at the preference of either the petitioner or defendant.

U.S. Court of Federal Claims

The U.S. Court of Federal Claims is a Washington D.C. based appellate-level court in which a taxpayer may sue the government for a refund of overpaid taxes.

U.S. Circuit Court of Appeals

The U.S. Court of Appeals is one of thirteen courts including the District of Columbia and the Federal Circuit Courts, to which appeals from a trial court, such as the U.S. Tax Court, are directed.

U.S. Court of Appeals For The Federal Circuit

The U.S. Court of Appeals for the Federal Circuit hears appeals from the U.S. Court of Federal Claims.

U.S. Supreme Court

The U.S. Supreme Court is the highest appellate court in the federal court system and in most states. The U.S. Supreme Court, under its certiorari procedure authority, reviews the constitutionality of a tax law and a small number of tax decisions by the Court of Appeals.

The subsequent chart illustrates the geographic boundaries of The United States Courts of Appeals and the United States District Courts:

Resolve the Issues

The fourth step in the tax research process entails the resolution of your client’s tax issues after identifying, analyzing, and interpreting all of the applicable authorities. It cannot be overstated that you should have provided, as needed, reasonable statutory, administrative, and judicial support to demonstrate that your tax return filing position could be upheld if challenged by the Service upon the fruition of an examination and that you exercised due diligence and acted in good faith. Furthermore, at times, positions taken on tax returns may need to be disclosed on Form 8275 entitled “Disclosure Statement” or Form 8275-R entitled “Regulation Disclosure Statement” depending upon the complexity and controversial nature of the tax issue. Noting, by disclosing positions on your client’s tax returns you may be able to avoid paid preparer penalties should your position be disallowed and avoid the application of the six-year statutory period for assessment under I.R.C. § 6501(e).

From a risk management perspective, in order to mitigate or avoid income tax return paid preparer penalties pursuant to I.R.C. § 6694 (e.g., penalties that are assessed on both paid tax return preparers and tax advisers that are deemed paid tax return preparers due to their consulting on matters that constitute a substantial portion of their client’s tax returns even if they were not engaged to prepare nor review the tax return), a “More-Likely-Than-Not” standard should be satisfied.

The subsequent standards of the applicable levels of opinions should be scrupulously analyzed when assessing your tax return filing position:

• “Will” Standard: Generally, a 95% or greater probability of success if challenged by the IRS. A “Will” opinion generally represents the highest level of assurance that can be provided by an opinion;
• “Should” Standard: Generally, a 70% or greater probability of success if challenged by the IRS. A “Should” opinion provides a lower level of assurance than is provided by a “Will” opinion, but a higher level of assurance than is provided by a “More-Likely-Than- Not” opinion;
• “More-Likely- Than- Not” Standard: A greater than 50% probability of success if challenged by the IRS. The “More-Likely-Than-Not” standard is the highest level of accuracy required for purposes of avoiding the accuracy-related penalties under I.R.C. 6662A;
• “Substantial Authority” Standard: Typically, greater than a “Realistic Possibility of Success” standard and lower than “More-Likely-Than-Not” standard (i.e., 40% probability of success);
• “Realistic Possibility of Success” Standard: Approximately a one-in-three or greater possibility of success if challenged by the Service;
• “Reasonable Basis” Standard: Significantly higher than the “Not Frivolous” standard (i.e., that is, not deliberately improper) and lower than the “Realistic Possibility of Success” standard. The position must be reasonable based on at least one tax authority that can be cited as valid legal authority;
• “Non-Frivolous” Standard: Approximately a 10% chance of being upheld upon examination by the Service and accordingly under no circumstance should a tax professional ever render services with this level of comfort; and
• “Frivolous” Standard: Approximately a percentage less than a 10% chance of being upheld upon examination by the Service and accordingly under no circumstances should a tax professional ever render services with this level of comfort.

It should be duly noted that each of the aforementioned standards above has a relevant meaning to both the taxpayers and tax professionals when evaluating a tax position and the related disclosure requirements. Noting, the percentages listed for “More-Likely-Than-Not” and “Realistic Possibility of Success” are specifically provided for and discussed in the treasury regulations. In contrast, the percentages for “Substantial Authority”, “Reasonable Basis”, “Non-Frivolous”, “Frivolous” have been developed based upon their relative importance in the hierarchy of standards of opinion as principally provided for in congressional committee reports. Moreover, while not mathematically calculable, the percentages are still practical in demonstrating the relative strength of one level as opposed to another level.

Communicate With Your Client

The fifth and final step in the tax research process entails communicating the conclusion to your client. Your client, of course, must ultimately make the final decision concerning what course of action to take, even though the client’s decision is guided by and often dependent upon the conclusions reached by you, the tax professional. It is strongly recommended that this tax advice be rendered to your client in a written format, as opposed to verbal communication, and preferably in a formal tax advice memorandum format (e.g., Facts & Circumstances Section; Issue(s) Section; Analysis Section; and Conclusion Section) meticulously discussing the applicable statutory, administrative, and judicial authority to suitably document your due diligence in assessing the tax issues(s) and resolving them satisfactorily to reach a strong tax return filing position (e.g., “More-Likely-Than-Not”, “Should”, “or “Will” filing positions). Finally, caveat language in the form of a disclaimer should be documented within the tax advice memorandum for any areas of the tax law that were not within the scope and application of your tax research analysis (e.g., the scope and application of our tax advice memorandum is in connection to the U.S. Federal-Level tax consequences only and does not provide any advice or analysis in connection to any U.S. Multi-State tax consequences nor any advice in connection to Financial Statement Reporting Standards under United States GAAP nor International Financial Reporting Standards).

By following the preceding all-inclusive practical steps in the tax research process you should be able to render your tax research services to your entire client base in a more efficient, effective, and productive manner while adequately weighing risk management concerns in connection to the sustainability of tax return filing positions. As a final reminder, the guidance contained in this article should be applied with due professional care including seeking further professional advice from a subject matter expert should it be deemed warranted based upon both the complexity and contentious nature (e.g., taking a tax position contrary to a Treasury Regulation on Form 8275-R, etc.) of the tax matter under review.

Have a question? Contact Peter J Scalise , Prager Metis, New York.

About the Author Peter J. Scalise serves as the National Partner-in-Charge of the Federal Tax Credits and Incentives Practice at SAX CPAs LLP. Peter is a highly distinguished member of the Accounting Today Top 100 Influencers and has approximately thirty years of progressive Big 4 and Top 100 public accounting firm experience developing, managing, and leading large scale tax advisory practices on a regional, national, and global level. Peter also serves as a passionate philanthropist and a member of several Boards of Directors and Boards of Advisors for local, regional, and national charities in connection with poverty and hunger alleviation; economic development; environmental conservation; health and social services; supporting veteran and military service personnel along with preserving arts and cultural programs.

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Rethinking the Ethics of Tax Deductions

More from our inbox:, a welcome move on aid to ukraine, firearms safety on the set, when plastics recycling releases pollutants.

To the Editor:

Re “ Make a Difference This Tax Season ,” by Matthew Desmond (Opinion guest essay, April 14):

Mr. Desmond is, of course, right that tax rates and tax deductions are heavily skewed to favor the very wealthy. One of the solutions he offers, however, asks the somewhat wealthy to imitate the very wealthy: Take your deduction and give to your favorite charities.

That’s how the taxpayers end up subsidizing — through deductible philanthropy — huge bequests to operas, billionaires’ alma maters, vanity art collections and other pet projects.

If people just didn’t take the deductions, as Mr. Desmond also proposes, the savings could help fund main government responsibilities like schools, safety, health care and the like.

Better yet, reform the deductions.

Claude S. Fischer Berkeley, Calif. The writer is a professor of sociology at the University of California, Berkeley.

If I forgo a few thousand dollars in tax deductions to which I am legally entitled, can I tell the government please add this to the low-income housing budget and don’t spend it on the F135 fighter jet engine?

I believe that I should pay higher taxes, and so should everyone as rich as I am, or richer. If they did, I would happily pay my share. Until the tax laws require this, I would rather take the deduction and contribute to the Economic Policy Institute or United for a Fair Economy, two nonprofits that are working for a fair tax system.

John L. Hammond New York The writer is professor emeritus of sociology at Hunter College and Graduate Center, CUNY.

Matthew Desmond questions whether it is ethical for those with high incomes to take advantage of many tax deductions they are legally able to take under the tax code.

It’s unreasonable to suggest that paying one’s taxes in compliance with the tax laws is unethical. He also fails to mention that people with the top 1 percent of income pay approximately 46 percent of federal income taxes — more than people with the lowest 90 percent of income combined.

According to Philanthropy Roundtable , the top 1 percent of earners give approximately a third of all charitable contributions. In addition, individuals with a net worth in the top 1.4 percent give approximately 86 percent of the charitable bequests made upon death.

Michael Sherman Wynnewood, Pa.

Thank you for this thought-provoking opinion piece. I often hear about long-term solutions to address poverty but appreciate the suggestions for what we can do on an individual level now as well as a broader collective response. It’s empowering and a good reminder that there are probably many viable strategies within reach.

April Stevens Quincy, Mass.

I am grateful for Matthew Desmond’s commentary. I would add that we should decline the deduction for charitable donations. These are gifts, not transactions , so spare us the tax write-offs, our names on the building, our names in the symphony program.

We are blessed to be leading comfortable lives in a nation with unconscionable disparities of wealth and opportunity. Giving has its own inherent rewards.

Michael Rooke-Ley San Francisco

I found Matthew Desmond’s opinion piece incredibly refreshing and on the mark. A country that overwhelmingly shovels its wealth to its rich, and especially to its very, very rich, is a morally and opportunistically bankrupt one. I believe it is also a foolish one that ignores the potential joy and community that a more equal country could have.

Together, we would be much better off if we emulated the Nordic nations, taxed the rich as we did in the 1950s (top rate of 91 percent), and enjoyed a society rich in community, fairness and a wide diversity of friendships.

R. Peter Wilcox Portland, Ore.

Re “ Speaker Sets Weekend Vote on Package for Long-Stalled Israel and Ukraine Aid ” (news article, April 18):

After resisting attempts to pass a foreign aid package that would provide vital military assistance to a desperate Ukraine, Speaker Mike Johnson finally appears ready to act, striking a deal that would alienate far-right Republicans while likely gaining support from Democrats to salvage his precarious position as speaker.

For months, Mr. Johnson was shamelessly doing the bidding of former President Donald Trump, who stonewalled House passage of a popular bill that combined President Biden’s plan for border security with a broad aid package for Ukraine, Israel and Taiwan.

The refusal to vote for critically important military assistance in the face of Ukraine’s rapidly deteriorating defensive position has been outrageous and comes from a vocal fringe minority of isolationist House Republicans who have completely politicized foreign policy.

Mr. Johnson seems to have done an about-face, possibly daring to enlist the help of Democrats to support his speakership along with their vote to pass the aid package.

In a dysfunctional Congress, it’s pathetic that such a deal is a novel idea, but it would be a long-delayed and welcome fresh start.

Roger Hirschberg South Burlington, Vt.

Re “ ‘Rust’ Armorer Is Sentenced to 18 Months for Involuntary Manslaughter ” (news article, April 17):

In the future, it would be prudent if the employment of set armorers is limited to retired law enforcement or military firearms instructors or shooting range control officers. These people have lived and breathed every aspect of firearms safety for many years and have the experience to ensure that tragedies like this do not happen again.

Lloyd Westerman New York

“ Recycling of Plastic Falls Short of Promise ” (news article, April 6) captures well the petrochemical industry’s failure to deliver any real solutions to the plastics crisis it has created.

Most “advanced recycling” methods are hardly new, but rather they use an incineration technology that has been around for decades. Petrochemical companies are greenwashing the process as “recycling” or “manufacturing” in an effort to exempt it from solid waste incineration rules under the Clean Air Act.

These facilities release dioxins, PFAS, flame retardants, benzene, formaldehyde, particulate matter and heavy metals. They also generate pyrolysis oil, a material so toxic that boat fuels made from it could cause cancer in every person exposed over a lifetime, according to a risk assessment by E.P.A. scientists .

The PureCycle “advanced recycling” facility in Ohio uses a different but equally problematic solvent-based process. As you describe, PureCycle has been riddled with technical and economic failures.

“Advanced recycling” is the centerpiece of an untenable campaign to make plastic waste disappear from sight — by turning it into air pollution — while the industry proceeds to triple or even quadruple production.

Cynthia Palmer Arlington, Va. The writer is a senior analyst for petrochemicals at Moms Clean Air Force.

174 Tax Research Topics to Write About

Are you looking for interesting tax topics for research? StudyCorgi has collected the most exciting tax research paper topics on corporate and personal income taxes, tax law, and other taxation aspects. Read on to get inspired!

🏆 Best Tax Research Topics

🔎 easy tax research paper topics, 👍 good tax topics for research paper, 🌶️ hot tax topics for presentation, 🎓 most interesting tax topics to write about, 💡 simple taxes essay ideas, ❓ tax research questions.

• High Taxes’ Benefits for Education and Healthcare
• Fair Trade: Japan – Taxes on Alcoholic Beverages
• Tax Incentives and Their Benefits to Communities
• Tax Reform as a Solution of Economic Problems
• Tax Information Exchange Agreements and Mutual Legal Assistance Treaties in Kenya
• The Pink Tax: Inequality Should Be Outlawed
• Combating Recessions with Spending Hikes Rather Than Tax Cuts
• Tax Reforms From a Judeo-Christian Perspective Tax is a primary method used by most governmental organizations to collect revenue. Tax cuts are the depletion and changes made to taxes paid by citizens, saving taxpayers money.
• Effect of Soda and Plastic Bag Tax Policies Within modern society, it is crucial to be acknowledged the core principles of the economic theory and its implications on every aspect of daily life.
• Collaboration Agreement: A Partnership for Tax Purposes A collaboration agreement between A Corporation and B Corporation is a partnership for tax purposes under the current regulations.
• Amazon Inc.’s Consolidation Process and Tax Benefits The paper applies theoretical information on consolidation to Amazon, Inc., by describing its corporate structure, the consolidation process, and tax benefits.
• The Regressive Tax System in Texas Texas’s regressive tax system is unfair to low-income earners as it heavily taxes them compared to high-income earners.
• A Black Tax Phenomenon: Economic and Social Perspectives A black tax is a phenomenon that makes Black society feel uncomfortable living. Examining the black tax from an economic and social perspective is essential.
• Multijurisdictional Tax Planning Multijurisdictional tax planning has become an integral part of all financial matters in the trading industry.
• State vs. Federal Taxes: Which Must Be Abolished The purpose of this paper is to examine the unique benefits of federal and state taxes and propose a new model whereby one of the two is abolished.
• McDonald’s Company: The Flawed Fast Food Tax McDonalds is one of the world’s leading fast food restaurants serving more than 57 million customers daily with branches all over the major cities.
• Fat Taxes in the US The paper defends the position that the levies are a practical means through which cases of obesity can be significantly reduced in countries such as America.
• The Role of Tax System, Tax Reform in Hong Kong The major revenue for Hong Kong has been extremely volatile with the amounts approximated to the nearest billion.
• Softron Tax Company’s Segmentation Issues The main issue identified for Softron Tax is low awareness and the need to establish a strong customer base in Ottawa; the issue is directly associated with segmentation.
• Oil and Energy Companies in the US: The Windfall Profits Tax Although a windfall gains tax would not alter the demand for oil, it may make it more difficult for companies to recoup the costs of new production.
• Tax Research: A Like-Kind Exchange According to US tax law, a like-kind exchange is a single transaction that permits the sale of one asset and the purchase of a different replacement asset.
• Tax Policy on Cryptocurrencies Despite the viability of cryptocurrency for future business stability, the tax policy imposed on it will continue to hinder its vast adoption in the market.
• Implementation of Environmental Tax and Related Economic Instruments It is disadvantageous for the government to control the road, making the people pay double toll fees such as those involved in the construction and maintenance.
• Tax Issues Relating to Multinational Corporations in America The paper examines tax issues related to multinational partnerships in America provides an analysis of the facts and applicable tax laws and how they affect the activities.
• Gasoline Consumption and Tax Effects Consumers respond to gasoline tax increases like changes in gasoline prices, which usually result in a reduction in gasoline consumption.
• Setup of Minimum or Base Federal Tax Rate The paper considers the possibility of creating a minimum or base federal tax rate for all taxpayers, and illustrates the approach for different income levels.
• 1031 Exchanges in the New Tax Environment Investors and business people have the opportunity to benefit from the deferred taxation of exchange by section 1031 of the tax code during transactions.
• The Best Tax System in Personal Opinion Taxation primarily imposes mandatory levies on entities and individuals through countries’ governments globally.
• Tax Inequality in America While the American tax model is intended to remain progressive, little gains have been recorded so far since the level of tax inequality has remained the same over the years.
• Landline Service Taxes and Impact on Markets Governments have imposed high tax rates on landline usage. The essay discusses why landlines are heavily taxed and their impact on the markets.
• Earmarking Taxes for Improving the Health Sector This paper aims to examine policies regarding earmarking taxes on luxury goods, such as oil and tobacco, in favor of healthcare improvements.
• Aspects of Obama’s Tax Reforms This essay discusses the taxation policies proposed during the Obamas administration, their implementation, and an evaluation of the policies’ achievements.
• Cutting Taxes, Increasing Tax Revenue, and Fiscal Policy This annotated bibliography reviews three articles devoted to three different topics: cutting taxes, increasing tax revenue, and fiscal policy.
• Raising Taxes: Is It Really Necessary? An increase in taxes on the number of individuals is not a compulsory measure but only one of the options for solving the country’s financial problems.
• Tax Use and Budget Financial Plan of New York City The cost of living is equally high, with dirty subways, underfunding public schools, and high numbers of homeless people, beating the logic of such high taxes.
• Tax Law Reforms and Individual Tax Burden Two tax reforms that were discussed in the podcast by AICPA are the reduction in corporate tax rates and qualified business income deductions.
• Taxes Analysis in the State of Arizona Arizona’s state income tax is 2% of an individual income based on the payroll statement, while Arizona’s sales tax is 8.6% of the total amount of goods purchased.
• Human Resource Management at Vigo County Tax and Municipal Services Office Compensation and benefits administration should be considered by the HRM in Vigo County Tax & Municipal Services Office, as the information clerks are not motivated enough.
• Tax Research Problem Parent Corporation The parent corporation must raise its ownership to eighty percent for it to qualify for the non-recognition requirement before the full liquidation of the subsidiary corporation.
• Aspects of Corporation Tax The paper discusses taxes. They normally decrease the amount of wage the employees take home. In most situations the taxation effects are evident.
• Source Income and Foreign Tax Credits All passive incomes are taxed at a flat rate of 30 percent and neither deductions nor exemptions are allowed on the income.
• The Value Added Tax in the United Kingdom In the United Kingdom, value added tax is the main source of the government revenue. The value added tax finances the largest fraction of the government spending.
• Tax Model in Hong Kong Tax Reform The Hong Kong tax system provides practical evidence for developed country`s tax legislation. Hong Kong does not impose a tax on the general income tax nor does its taxation rates.
• Systems of Hong Kong Tax Reform The purpose of taxation can be summarized as very straightforward and understandable, for a good performance of a state.
• International Tax Treaties for Multinational Firms Companies engage in business to make profits after which they either reinvest back into the company to expand the company.
• Contemporary Taxation Issue: Green Tax System The paper debates the objectives of environmental taxes, assesses the arguments on a green tax shift, and examines the approach the UK has adopted in the past two decades.
• Obamacare’s Impacts on Taxes The Obamacare insurance scheme is meant to ensure that even the low-income families in the United States of America can secure a health insurance plan.
• Proposed Tax on Sugary Beverages A recent debate concerning the proposal of Tax on Sugary Beverages has created a huge controversy and divided opinion.
• Is the United States Earned Income Tax Credit Fair? The United States Earned Income Tax Credit (EITC) refers to a government initiative that aims to improve the financial stability of citizens by giving tax refunds to citizens.
• Tax Research Problem of Selling Rare Coins According to the definition advanced by IRC, capital assets include assets that are held by the taxpayer either for personal or business use.
• S-Corporations and C-Corporations Transition and Taxes After transiting from a C-corp to an S-corp the S-corp might find itself in tax consequences from earning and also profits that have accumulated from the time of regular taxation.
• Cigarette Tax Policy and Health Care The purpose of this paper is to discuss the health and financial effects of a proposed policy to increase the excise tax on cigarettes.
• Tax Issues Affecting Non-US Citizens The purpose of the research paper will be to look at taxation issues that affect non-US citizens in the country.
• Tax Research Problem: Determination of Taxable Income This document examines the facts, issues, and authorities involved in determining taxable income in situations where property improvements are being made.
• Tax Research Problem of Espionage Fees Mr. Towers is liable for failing to pay tax for the one million he withdrew from the account provided by the Soviet Union.
• Tax Planning for Executive Compensation The efficiency of executive compensation for shareholders is something that boards of directors and companies strive to achieve by maximizing their tax deductibility.
• The Sources of Tax Revenue in the US From an economic perspective, taxes fall on the one who caters to their burden, be it an establishment such as a business or consumers of manufactured goods.
• Towards a Successful Personal Income Tax System in Hong Kong It is the purpose of this paper to critically evaluate how a successful personal income tax system can be implemented in Hong Kong.
• Hong Kong’s Tax System Any country will adopt a particular tax system as a way of solving most of the social and economic problems faced by the nation.
• Personal Income Tax in Hong Kong and China This paper assesses the salary taxes in Hong Kong in relation to those in the US giving a close analysis to the willingness of the respective citizens to pay up for the taxes.
• Tax System for Decrease of Cigarette Consumption This paper seeks to determine the effectiveness of the taxation system in controlling cigarette consumption behaviors through an economic analysis.
• Tax Research Memo and Calculations This paper can confidently say that since the financial institution bought this annuity from Barry at a discount, the proceeds they would get from this annuity until maturity.
• The US Estate Tax Reform The controversy around the estate tax reflects the conflict between individual property rights and democratic notions of equality.
• Tax Forecasting for the Republic of Vardar This paper seeks to revise a tax collection in the Republic of Vadar, make recommendations and build the forecast.
• CPA Firm: Outsourcing the Basic Tax Revenues Outsourcing the company using basic tax returns affects the effectiveness and efficiency of the company, since the prices of services raise and increase income and investments.
• Tax Cuts and the Economy Even though tax cut draws a lot of arguments for and against them, the tax cut could be really influential in the recovery process of the economy.
• Walmart Organizational Specifications: Increasing Taxes and Lack of Proper Treatment for Employees The essay describes the organizational problems of Walmart company, such as increased taxes on the products and firing the employees without any pension.
• Political Science: Tax Cuts in America: Are They Good? Americans argue about the increases in taxes. Some believe that tax cuts to all income brackets help to stimulate economic growth.
• Income Tax versus National Sales Tax The question of the best kind of taxation system favorable for use has raised great concerns to many people and governments.
• US Tax System: Deferred Compensation Definition The concept of deferred compensation is an essential maneuver in order to alter the tax value. Despite the ongoing theoretical synthesis of various aspects of taxation, there is no specific concept.
• Sugary Drink Tax as a Public Health Policy This paper concentrates on the initial stage of the initiation of the tax on sugary drinks and the part played by a nursing professional in the process.
• Tax Reform: Corporate Tax Reduction and Its Consequences The paper is aimed to discuss the reduction of corporate tax, and the role of the state in corporate relations.
• Fiscal Policy: Federal Investment and Taxes The main instruments of fiscal policy are the revenues and expenditures of the state budget, which are taxes and government spending.
• How Taxes Affect Deadweight Loss? Deadweight loss is the loss in social surplus that occurs when a market produces an inefficient quantity. Deadweight loss appears in case demand and supply are unbalanced.
• Tax Benefits and Social Security Welfare economics lays significance on how the health of citizens contributes to economic growth and development.
• Carbon Tax Role in Enhancing Environmental Sustainability Environmental sustainability involves making decisions and engaging in activities aimed at protecting nature. Emphasis is placed on preserving the earth’s capability to support life.
• “Alberta Should Tax Its Way Out of the Hole” by Lamphier Lamphier’s “Alberta Should Tax its Way out of the Hole” offers suggestions on how to deal with the Canadian province of Alberta’s revenue deficit.
• The US Highway Trust Fund and Federal Fuel Tax The current paper provides an overview of the US Highway Trust Fund’s existing issues and identifies several solutions that may address the problem.
• Tax Incentives Functions and Application The paper discusses probable approaches for the application and utilization of the tax incentives to enhance the social and economic condition of the community.
• Economics: Carbon Tax vs. Cap-and-Trade System The carbon tax discourages the usage of environmentally hazardous vehicles. Cap-and-trade system involves a smooth transition from one type of energy production to another.
• Carbon Tax and Cap-and-Trade System The problem of carbon emission into the atmosphere is highly associated with the greenhouse effect that has become a paradox in the world’s environmental economics.
• Taxes in Australian Gambling Industry The increase in taxes in the gambling industry in Australia cannot directly respond to the problem of gambling costs as well as to many social and moral issues.
• Australian Tax Office’s Transformation Program The Australian Tax Office initiated a 10-year transformation program that was aimed at overhauling its IT platform to enhance its ability to serve its clientele in the year 2000.
• Accofirm Bookkeeping and Tax Compliance Services This report focuses on how the company to be established will help small and medium-sized firms tackle issues from bookkeeping, financial management, auditing, and tax compliance.
• Inflation and Capital Gains Taxes in a Small Open Economy
• International Experiences With Securities Transaction Taxes
• Income Taxes and Dividend Policy
• Corporate Taxes, Strategic Default, and the Cost of Debt
• Debt Policy, Corporate Taxes, and Discount Rates
• Culture and Taxes: Towards Identifying Tax Competition
• Direct and Indirect Taxes in India
• Integrating Business and Personal Income Taxes
• Interdependent Behavior and the Effect of Taxes
• Europe`S New Border Taxes
• Effective Property Taxes and Tax Capitalization
• Corporate Leverage and Taxes in the U.S. Economy
• Flat Taxes and Effective Tax Planning
• Demography and the Composition of Taxes: Evidence From International Panel Data
• Economic Development: Raising Revenues Without Increasing Taxes
• Disability, Taxes, Transfers, and the Economic Well-being of Women
• Energy Taxes and Aggregate Economic Activity
• Federal Taxes Are Used to Fund the Government
• Customs Unions and Domestic Taxes
• Environmental Taxes and Industry Monopolization
• Deferred Taxes, Earnings Management, and Corporate Governance: Malaysian Evidence
• Inflation, Taxes, and the Durability of Capital
• Estate Taxes, Consumption Externalities, and Altruism
• Labor Taxes, Productivity and Tax Competition
• Company Dividends and Taxes in the UK
• Inflation, Taxes, and Interest Rates
• Income Taxes and Urban Spatial Structure
• Domestic Taxes and the External Debt Laffer Curve
• Interest Rates, Income Taxes, and Anticipated Inflation
• Income Taxes and the Composition of Pay
• Insurance and Corrective Taxes in the Health Care Market
• Business Cycles With Distorting Taxes and Disaggregated Capital Markets
• Liquidity, Taxes, and Short-term Treasury Yields
• Inflation, Taxes, and the Composition of Business Investment
• Comparing Progressive and Regressive Taxes
• Deferred Taxes and Bond Ratings: A Canadian Case
• Fiscal Federalism and Optimal Income Taxes
• Interest Rates, Taxes, and Corporate Financial Policies
• Fiscal Competition Over Taxes and Public Inputs
• Inflation, Income Taxes, and Owner-occupied Housing
• Aging, Taxes, and Pensions in Switzerland
• Income Taxes, Sorting, and the Costs of Housing
• House Prices and Local Taxes in the UK
• Environmental Taxes and the Double Dividend
• Government Deficits, Distortionary Taxes, and the Current Account
• Estate and Gift Taxes and Incentives for Inter Vivos Giving in the US
• Globalization and the Mix of Wage and Profit Taxes
• Income Taxes and Entrepreneur’ Use of Labor
• Energy Taxes and Greenhouse Gas Emissions in Australia
• Fiscal Federalism Spending and Taxes
• Capital Income Taxes and the Benefit of Price Stability
• Financial Activities Taxes, Bank Levies and Systemic Risk
• Corporate Taxes, Leverage, and Business Cycles
• Government Spending, Taxes, and Economic Growth
• Government Revenue Sources Are Taxes and Borrowing Money
• Contribution Ceilings and the Incidence of Payroll Taxes
• Income Taxes, Property Values, and Migration
• Deferred Taxes and Cost of Debt: Evidence From Japan
• Inflation, Taxes, and the Public Debt
• Marginal Taxes and the Asset Portfolios of Swedish Households
• Have State and Local Taxes Contributed to the South’s Economic Rise?
• Are Progressive Income Taxes Stabilizing?
• Should Rich People Pay More Taxes Than Poor People?
• Are Consumption Taxes Really Better Than Income Taxes?
• How Different Are Income and Consumption Taxes?
• Would Cutting Payroll Taxes on the Unskilled Have a Significant Effect on Unemployment?
• Can Capital Income Taxes Survive in Open Economies?
• Are Canadian Provincial Tax Systems Becoming More Regressive?
• Why Didn’t the Tax Reform Act of 1986 Raise Corporate Taxes?
• Can Fat Taxes and Package Size Restrictions Stimulate Healthy Food Choices?
• Are High Taxes Restricting Indiana’s Growth?
• How Effective Are Emissions Taxes in an Open Economy?
• Can Green Car Taxes Restore Efficiency?
• Are Corporate Tax Burdens Racing to the Bottom in the European Union?
• Can Increasing Taxes Reduce the Budget Deficit?
• Should the Government Increase Taxes for Companies That Are Heavy Polluters?
• Are Corporate Tax Reductions Real Benefits Under Imputation Systems?
• How Does State Ownership Affect Optimal Export Taxes?
• Can Taxes Stabilize the Economy in the Presence of Consumption Externalities?
• Are Current Tax and Spending Regimes Sustainable in Developing Asia?
• Does Business Development Raise Taxes?
• What Advantages Might Indirect Taxes Have Over Direct Taxes?
• Are Family Firms More Tax Aggressive Than Non-family Firms?
• Does Paying Taxes Improve the Quality of Governance?
• Are Local Tax Rates Strategic Complements or Strategic Substitutes?
• What Are the Major Arguments for and Against Cutting Taxes?
• Did Tax Policies Mitigate US Business Cycles?
• Are Multinational Corporate Tax Rules as Important as Tax Rates?
• Why Should Property Taxes Be Lowered for Farmers?
• Does Culture Influence Tax Morale?

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StudyCorgi . "174 Tax Research Topics to Write About." March 1, 2022. https://studycorgi.com/ideas/taxes-essay-topics/.

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These essay examples and topics on Tax were carefully selected by the StudyCorgi editorial team. They meet our highest standards in terms of grammar, punctuation, style, and fact accuracy. Please ensure you properly reference the materials if you’re using them to write your assignment.

This essay topic collection was updated on January 9, 2024 .