TY - JOUR AU - Kleven,Henrik Jacobsen AU - Kreiner,Claus Thustrup AU - Saez,Emmanuel TI - Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries JF - National Bureau of Economic Research Working Paper Series VL - No. 15218 PY - 2009 Y2 - August 2009 UR - http://www.nber.org/papers/w15218 L1 - http://www.nber.org/papers/w15218.pdf N1 - Author contact info: Henrik Kleven Department of Economics & STICERD LSE Houghton Street London WC2A 2AE United Kingdom E-Mail: H.J.kleven@lse.ac.uk Claus Kreiner Department of Economics University of Copenhagen Oster Farimagsgade 5 Building 26 DK-1353 Copenhagen K Denmark Tel: 4535323020 Fax: 4535323000 E-Mail: claus.thustrup.kreiner@econ.ku.dk Emmanuel Saez Department of Economics University of California, Berkeley 530 Evans Hall #3880 Berkeley, CA 94720 Tel: 510/642-4631 Fax: 510/642-6615 E-Mail: saez@econ.berkeley.edu AB - 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. ER -