Smith, Kate; (2022) Essays in tax design. Doctoral thesis (Ph.D), UCL (University College London).

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Abstract

This thesis contains four self-contained papers on topics relating to the design of an effective tax system. Each paper brings together economic theory, rich data and frontier econometric methods to understand how agents respond to tax incentives and the scope for improvements to policy design. The first chapter provides an introduction, summarising the state of the existing literature and the contribution of each paper. Chapters 2 and 3 study the effect of tax policy on small businesses. In Chapter 2, we combine novel linked administrative data with bunching and difference-in-differences analysis to unpack how owner-managers of incorporated businesses respond to tax changes. We show that all of their responsiveness can be explained by the shifting of taxable income across time, rather than reductions in real business activity. In Chapter 3, we build on this by developing and estimating a dynamic model of business ownership. The model allows for a range of responses of business owners -- including entry, exit, investment, incorporation and income shifting -- to a rich set of tax incentives. We show that policies that target specific aspects of small business behaviour, as opposed to broadly applied lower tax rates, increase investment \textit{and} tax revenue, while reducing income shifting and distortions to the choice of legal form. Chapters 4 and 5 consider the design of tax policy aimed at correcting for externalities. In Chapter 4, we study tax design in the alcohol market. We show that correlation between consumers' marginal externalities and their product-level demands provides a rationale for varying tax rates across different types of alcohol. In Chapter 5, we show how market power alters the optimal design of taxes on sugar-sweetened beverages. We extend the canonical optimal tax framework to allow for strategic firms that compete imperfectly and show how the optimal externality-correcting tax depends on price-cost margins, substitution patterns and the distribution of profit holdings. We implement this empirically by estimating a detailed model of supply and demand in the UK market for drinks.

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