Rationale

Tax systems are typically too complex to be captured by one single model. They are also too labile to last in an unchanged form until research project produces deliverables. Thus, any efforts in that field need to be general enough to retain applicability despite the tax system change, but also specific
enough to be policy relevant at all. The DSGE “machinery” combined with microeconometrics – as employed in this project – permits to answer three types of questions, thus the project and deliverables are organized along three themes.

Theme 1. The role of tax compliance in firm performance and survival.

From a firm perspective tax is a cost and thus – if of optimized – may actually be a source of a comparative advantage. Effective income tax rates differ considerably across industries and across different forms of ownership, but it is not guaranteed ex ante that indeed the performance of the firm depends on them. Using an adequate empirical strategy we will inquire the causal effect of taxes on firm survival and performance.

Theme 2. Optimality of tax rates if firms are heterogeneous.

It is evident that depending on sector (as well as potentially other characteristics) the effective tax rates may differ, especially the consumption tax (VAT). If indeed the distribution of effective tax rates is bimodal, the findings from an analysis with homogenous firms deliver misleading implications. Namely, theoretically it may be possible that for all types of firms the slope of the Laffer curve is still positive but the average is already beyond the
maximum point. It remains an open question if empirically indeed that is the truth. Hence, the purpose of this theme is to extend the standard framework to comprise sector heterogeneity.

Theme 3. Implicit tax avoidance.

Tax avoidance is hard to capture – if at all, it is best measured at microeconomic level. However, if taxes are considered wedges, one could also consider tax avoidance as an additional (positive or negative) wedge. This reformulation – to the best of our knowledge the first in the literature – allows to “measure” tax avoidance from the macroeconomic perspective as well. This approach permits also ex ante evaluations of the changes in nominal tax rates.

This research is innovative from both modeling and econometric perspective. Although the question concerning the optimality of taxation is already 50 years old, the real-world applications are scarce, almost inexistent in the case of CEECs and transforming economies. We thus contribute to the science by developing new frameworks and to the society by providing insights into some extremely policy relevant questions.

Full project description