Empirical Evidence and Tax Design∗

This paper examines the role of evidence in drawing up the recommendations for tax reform in the Mirrlees Review. The arguments are organised loosely under five related headings: (i) Key margins of adjustment, (ii) Measurement of effective tax rates, (iii) The importance of information and complexity, (iv) Evidence on the size of responses, and (v) Implications from theory for tax design. Although the Mirrlees Review focusses on all aspects of tax reform, the focus is this paper is on the taxation of earnings with some examples drawn from the taxation of consumption and savings. How should evidence be used in the study of tax design? What is the appropriate balance between theory and empirics? These questions lay at the heart of the Mirrlees Review. Motivated by the aim to develop a broad set of principles for what makes a ‘good tax system’, the Review was an attempt to build a base for tax reform from the large body of economic theory and empirical evidence. It was inspired by the Meade Report (1978) with idea to review tax design from first principles for modern open economies in general and for the UK in particular. The UK over the past thirty years would be the working laboratory. The Review was published in two volumes, Dimensions of Tax Design (Mirrlees et. al., 2010) bringing together expert evidence across a wide range of aspects of tax reform, and Tax by Design (Mirrlees et. al., 2011) setting out the conclusions and recommendations. This paper examines the role of evidence used in the derivation of the recommendations for reform. It also examines the linkages between theory and empirical evidence. To keep consistency and coherence in the discussion the focus here will be on the taxation of earnings although the Review itself concerned all aspects of the tax system. The discussion is organised loosely under five related headings: (i) Key margins of adjustment (ii) Measurement of effective tax rates (iii) The importance of information and complexity ∗I would like to thank the editor Manuel Arellano and participants at the World Congress panel session for comments. I am also grateful to Antoine Bozio, Andrew Shephard, Guy Laroque, and my collegues on the Mirrlees Review for their many discussions over the course of the Review and for allowing me to draw on joint work. †University College London and Institute for Fiscal Studies, email: [email protected].