Essays on taxation and income measurement

The thesis is about household income taxation and consists of three essays. Chapter 1 investigates the implications of the design of income tax schedules for the distribution of household income and work incentives from the cross-national perspective. Using microsimulation techniques, we evaluate the distributional effects of replacing existing graduated rate schedules in Western European countries with flat tax schemes. Our simulations show that in specific circumstances a revenue neutral flat tax reform can increase income equality and improve work incentives; in most cases, however, there is an equity-efficiency trade-off. We show that the specific flat tax design and the welfare state regime play a key role. Chapter 2 estimates the determinants and extent of income tax compliance in a novel way, using income survey data linked with tax records at the individual level for Estonia. I model jointly two processes contributing to discrepancies in employment income between these data sources - tax evasion and (survey) measurement error. The results indicate a number of socio-demographic and labour market characteristics which are associated with non-compliance. Overall, about 12% of wages and salaries are underreported, which is very substantial for a major income source subject to third party reporting and tax withholding. Chapter 3 follows on Chapter 2, extending the scope of analysis from employees to the self-employed. It uses the same data source but an alternative method by Pissarides and Weber (1989), where the scale of income underreporting is inferred from the comparison of income and expenditure patterns across different population groups. Results confirm substantial underreporting of earnings by private employees and indicate large underreporting by the self-employed on the basis of register income, while a much smaller scale of non-compliance is detected for the self-employed and no underreporting for private employees using survey incomes.