Certain Effects of Uncertain Taxes
This paper explores the implications of tax rate uncertainty, identifying circumstances in which revenue-neutral tax rate variability increases profitability, economic activity, and the efficiency of resource allocation. Furthermore, with heterogeneous taxpayers, tax rate variability is shown to perform an efficiency-enhancing screening function, imposing heavier expected tax burdens on less responsive taxpayers. And while efficient tax uncertainty enables governments to reduce average costs of taxation, it necessarily increases the marginal cost of taxation over some ranges of expected revenue, so may reduce efficient levels of government spending.
We thank Andreas Pieschl, Joel Slemrod, Stefanie Stantcheva, and seminar participants at the University of Michigan, ETH Zurich, and the National Tax Association annual conference for helpful comments on earlier drafts and Saida Khamidova for excellent research assistance. Views and opinions are ours alone, and should not be attributed to the management or Executive Board of the International Monetary Fund. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.