NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries

Henrik Jacobsen Kleven, Claus Thustrup Kreiner, Emmanuel Saez

NBER Working Paper No. 15218
Issued in August 2009
NBER Program(s):   PE

This paper presents a simple agency model to explain why third-party income reporting by employers dramatically improves income tax enforcement. Modern firms have a large number of employees and carry out complex production tasks, which requires the use of accurate business records. Because such records are widely used within the firm, any single employee can denounce collusive tax cheating between employees and the employer by revealing the true records to the government. We show that, if a firm is large enough, such whistleblowing threats will make tax enforcement successful even with low penalties and low audit rates. Embedding this agency model into the standard Allingham-Sandmo tax evasion model, we show that third-party reporting improves tax enforcement if the government disallows self-reported losses or audits such losses more stringently, which fits with actual tax policy practices. We also embed the agency model into a simple macroeconomic growth model where the size of firms grows with exogenous technological progress. In early stages of development, firms are small, tax rates are severely constrained by enforcement, and the size of government is too small. As firm size increases, the enforcement constraint is slackened, and government size is growing. In late stages of development, firm size is sufficiently large to make third-party tax enforcement completely effective and government size is socially optimal.

download in pdf format
   (370 K)

email paper

This paper is available as PDF (370 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15218

Users who downloaded this paper also downloaded these:
Kleven, Knudsen, Kreiner, Pedersen, and Saez w15769 Unwilling or Unable to Cheat? Evidence from a Randomized Tax Audit Experiment in Denmark
Saez, Slemrod, and Giertz w15012 The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review
Congdon, Kling, and Mullainathan w15328 Behavioral Economics and Tax Policy
Chetty and Saez w14836 Teaching the Tax Code: Earnings Responses to an Experiment with EITC Recipients
Slemrod and Yitzhaki w7473 Tax Avoidance, Evasion, and Administration
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us