A collateral tax sanction: When does it mimic a welfare-improving tag?
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The suspension of a driver’s license or the revocation of a passport or a professional license are used by the tax authorities as sanctions for failure to comply with tax obligations and are referred to as collateral tax sanctions. In this paper, I propose a new rationale for why it may be beneficial to use collateral tax sanctions for the purpose of tax enforcement. By affecting consumption and providing enforcement targeted to a group, collateral tax sanctions may allow the government to impose punishment correlated with an individual’s earning potential. Such punishment also makes the effective tax rates correlated with an individuals’ earning potential and therefore leads to a more effective redistribution of income. I show that the use of collateral tax sanctions could increase the CES social welfare function when the skill distribution of the targeted group first-order stochastically dominates the skill distribution of the other group and the social welfare function is sufficiently concave.
KeywordsCollateral sanction Tax enforcement Ability Tag
JEL ClassificationH21 H26
I am grateful for comments and advice from Joel Slemrod, Tilman Börgers, Wojciech Kopczuk, James R. Hines Jr., Katherine Cuff, Ron Davies, Mark Phillips, Matthew Rablen, Uday Rajan, Suranjali Tandon, and the two anonymous referees. I wish to thank participants at the Michigan Public Finance Free Lunch and Regular Seminars, the National Tax Association Meeting 2015, and International Institute of Public Finance Annual Congress 2016.
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