Regulation and Taxation: A Complementarity

I show how quantity regulation can lower elasticities and thereby increase optimal tax rates. Such regulation imposes regulatory incentives for particular choice quantities. Their strength varies between zero (laissez faire) and infinite (command economy). In the latter case, regulation effectively eliminates any intensive behavioral responses to taxes; a previously distortionary tax becomes a lump sum. For intermediate regulation (where some deviation is feasible), intensive behavioral responses are still weaker than under zero regulation, and so quantity regulation reduces elasticities, thereby facilitating subsequent taxation. I apply this mechanism to labor supply and present correlational evidence for this complementarity: hours worked in high-regulation countries are compressed, and these countries tax labor at higher rates.

01. December 2010

Authors Benjamin Schoefer

Whom to contact

For Researchers

Professor Benjamin Schoefer, PhD
Professor Benjamin Schoefer, PhD

If you have any further questions please contact me.

Request per E-Mail

For Journalists

Mitglied der Leibniz-Gemeinschaft LogoTotal-Equality-LogoSupported by the BMWK