Tax Simplicity and Heterogeneous Learning

Abstract

We study how strongly individuals respond to tax simplicity and how they learn about the complexities of the tax system. We use new French tax returns data on the self-employed from 1994 to 2012. France has three fiscal regimes for the self-employed, which differ in their monetary tax incentives and in their tax simplicity. These regimes are subject to eligibility thresholds: we find large excess masses (bunching) right below the latter. The regimes impact different agents heterogeneously and have changed extensively over time. We estimate a large value for tax simplicity of up to 650 euros per year per individual. Tax complexity has sizable costs: agents are not immediately able to understand what the right regime choice is, leave significant money on the table, and learn over time. These costs are “regressive”, impacting more the uneducated, low income, and low skill agents.

Keywords: Taxation, personal income and business taxes, tax evasion, income elasticity

JEL Classification: H21, H24, H25, H26