Research day 2012

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Presentation for first year PhD students at Ca' Foscari, Venice. Some research topics were surveyed.

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Research day 2012

  1. 1. Agent-based models Taxation and evasion An ABM model Results Tobin tax Agent-based models: tax evasion and trading Research day 2012 Paolo Pellizzari 1 Dipartimento di Economia Ca’ Foscari - Venezia 19 June 2012
  2. 2. Agent-based models Taxation and evasion An ABM model Results Tobin taxAgent-based models An ABM is a computational model for simulating the actions and interactions of autonomous agents (individual, collective entities, organizations or groups) with a view to assessing their effects on the system as a whole Microsimulation, individual-based models, heterogeneous-agents models... 1 Numerous agents at different scales 2 Decision-making heuristics 3 Learning and adaptation (as opposed as equilibrium) 4 Interaction and environment History: John Conway, The game of life; Thomas Schelling, segregation; Robert Axelrod, repeated prisoner dilemma; Craig Reynolds, flocks...
  3. 3. Agent-based models Taxation and evasion An ABM model Results Tobin taxWhat ABMs are not Equilibrium models (based on infinite rationality and knowledge) 1 How do you get to the equilibrium? 2 Is the equilibrium attainable? 3 Is an equilibrium realistic? Representative agent models 1 All agents are the same or behave as if they are the same 2 The representative agent disagrees with all the agents in the economy (segregation) Analytical models 1 ABMs use numerical methods, simulations, ANT...
  4. 4. Agent-based models Taxation and evasion An ABM model Results Tobin taxTaxation and evasion Allingham and Sandmo (1972): model tax evasion as an individual decision 1 gamble (report or cheat) 2 portfolio choice (safe or risky asset) The taxpayer maximizes E[U] = (1 − q)U(I − τ X ) + qU(I − τ X − f (I − X )), with respect to reported income X “This is hardly public economics; in fact it’s very private”, Kolm from Cowell and Gordon (1988) ABMs (and a massive body of research) take into account public expenditure, heterogeneous taxpayers, distinct opportunities to cheat, networks and contagion, noisy information, bomb crater effects...
  5. 5. Agent-based models It is assumed here that tax compliance can be achieved through increasing levels of Taxation and evasion An ABM model Results Tobin tax power and trust; however, the resulting compliance is enforced in the former case and vol- untary in the latter case. The impact of changes in one dimension is assumed to depend on the level of the other dimension, resulting in the stylized figure shown in Fig. 1. It shows the proposed ‘‘slippery slope’’ framework graphically in a three-dimensional space withThe slippery slope the power of authorities, trust in authorities, and tax compliance as dimensions. We start the description of the characteristics of the framework in the front corner of Fig. 1. In conditions where trust in authorities is low and the power of authorities is weak, it is likely that citizens seek to maximize their individual outcomes by evading taxes, bring- ing compliance to a minimum. (a) Moving along the left edge, along the power dimension Kirchler, Hoelzl, Wahl (2008): compliance depends on under conditions of low trust, compliance increases with the power of the authorities to raise audit and detection probabilities and to inflict severe fines. Taxpayers have less and power of tax authorities and trust in the tax authorities... less incentives to evade, because the expected outcome of non-compliance falls below the expected outcome of compliance. Increasing power of the authorities is likely to result in there is enforced and voluntary compliance enforced compliance. The curvature results from an assumption of diminishing returns: Voluntary tax compliance Enforced tax compliance Maximum Compliance High Minimum Trust in authorities High Power Low of authorities Low Fig. 1. The ‘‘slippery slope’’ framework: enforced tax compliance and voluntary tax compliance depending on the The slippery slope and the tax morale dynamically evolve power of the authorities and trust in the authorities.
  6. 6. Agent-based models Taxation and evasion An ABM model Results Tobin taxAn ABM model N heterogeneous agents have utility Ui = Ui (yi , Gi ). We assume multiplicative utility 1 (1−ρi ) Ui = yi Giαi . 1 − ρi Amount paid by an individual is Ti = τ di Ii = τ Xi . yi after tax income; Gi perceived per capita public expenditure; ρi relative risk aversion parameter; αi relative intensity of preference public/personal; Ii exogenous income; di fraction of declared income.
  7. 7. Agent-based models Taxation and evasion An ABM model Results Tobin taxIndividual behavior: low vs high α Taxation should not exceed one third of wealth. More than that? It’s a robbery. Silvio Berlusconi: low α! Taxes are a beautiful thing because they are a civilized way of contributing to the common good. T. Padoa-Schioppa: shockingly high α.
  8. 8. Agent-based models Taxation and evasion An ABM model Results Tobin taxIndividual behavior: low vs high α Taxation should not exceed one third of wealth. More than that? It’s a robbery. Silvio Berlusconi: low α! Taxes are a beautiful thing because they are a civilized way of contributing to the common good. T. Padoa-Schioppa: shockingly high α.
  9. 9. Agent-based models Taxation and evasion An ABM model Results Tobin taxIndividual behavior: low vs high α Taxation should not exceed one third of wealth. More than that? It’s a robbery. Silvio Berlusconi: low α! Taxes are a beautiful thing because they are a civilized way of contributing to the common good. T. Padoa-Schioppa: shockingly high α.
  10. 10. Agent-based models Taxation and evasion An ABM model Results Tobin taxSocietal slippery slope Figure 3 – Simulated slippery slope: societal compliance rate 1 2 The slope 3 dependsrate =the distribution of individual traits. rate = 30% a) tax on 20% b) tax 4 5 6 7 1 8 0.95 0.9 9 0.85 0.8 0.75 10 0.7 0.65 11 0.6 0.55 12 0.5 0.45 13 0.4 0.35 0.3 14 0.25 0.2 15 0.15 0.1 16 1.0 0.05 0 1.0 17 0.9 1 0.9 0.8 0.9 0.8 0.7 0.8 0.7 0.7 18 trust index 0.6 0.5 0.4 0.4 0.5 0.6 pow er index trust index 0.6 0.5 0.4 19 0.3 0.2 0.1 0.2 0.3 0.3 0.2 0.1 0. 20 21 22 b) with tax rate = 40% c) with tax rate = 50% 23
  11. 11. Agent-based models Taxation and evasion An ABM model Results Tobin tax Societal slippery slopelippery slope: societal compliance rate The slope dependsrate = 30% b) tax on the distribution of individual traits. 1 1 0.95 0.95 0.9 0.9 0.85 0.85 0.8 0.8 0.75 0.75 0.7 0.7 0.65 0.65 0.6 0.6 0.55 0.55 0.5 0.5 0.45 0.45 0.4 0.4 0.35 0.35 0.3 0.3 0.25 0.25 0.2 0.2 0.15 0.15 0.1 0.1 0.05 0.05 0 1.0 0 1 0.9 1 0.9 0.8 0.9 0.8 0.7 0.8 0.7 0.6 0.7 0.6 trust index 0.5 0.6 0.5 pow er index 0.5 pow er index 0.4 0.4 0.4 0.3 0.3 0.3.2 0.2 0.2 0.1 c) with tax rate = 50%
  12. 12. 13 0.35Agent-based models Taxation and evasion An ABM model 0.3 Results Tobin tax 14 0.25 0.2 15 0.15 0.1 16 1.0 0.05 0 1.0 17 0.9 1 0.9Societal slippery slope 18 0.8 trust index 0.7 0.6 0.5 0.4 0.4 0.5 0.6 0.7 0.8 pow er index 0.9 0.8 trust index 0.7 0.6 0.5 0.4 19 0.3 0.2 0.1 0.2 0.3 0.3 0.2 0.1 0.2 20 21 The slope 22 depends tax rate =distribution of individual traits. tax rate = 50% b) with on the 40% c) with 23 24 25 26 27 1 0.95 28 0.9 0.85 29 0.8 0.75 0.7 30 0.65 0.6 31 0.55 0.5 32 0.45 0.4 0.35 33 0.3 0.25 34 0.2 0.15 35 0.1 0.05 36 1.0 0.9 0.8 1 0 1.0 0.9 0.8 0.9 37 trust index 0.7 0.6 0.6 0.7 0.8 trust index 0.7 0.6 0.5 0.5 38 0.4 0.3 0.3 0.4 0.5 pow er index 0.4 0.3 39 0.2 0.2 0.2 0.2 0.1 0.1 40 41 42
  13. 13. 0.4 0.4 Agent-based models0.35 0.3 Taxation and evasion An ABM model 0.35 0.3 Results Tobin tax 0.25 0.25 0.2 0.2 0.15 0.15 0.1 0.1 0.05 0.05 0 1.0 0 0.9 Societal slippery slope 0.5 0.6 0.7 0.8 0.9 1 0.8 trust index 0.7 0.6 0.5 0.5 0.6 0.7 0.8 0.9 1 pow er index 0.4 pow er index 0.4 0.4 0.3 0.3 0.30.2 0.2 0.2 0.1 The slope depends on the = 50% c) with tax rate distribution of individual traits. 1 1 0.95 0.95 0.9 0.9 0.85 0.85 0.8 0.8 0.75 0.75 0.7 0.7 0.65 0.65 0.6 0.6 0.55 0.55 0.5 0.5 0.45 0.45 0.4 0.4 0.35 0.35 0.3 0.3 0.25 0.25 0.2 0.2 0.15 0.15 0.1 0.1 0.05 0.05 0 1.0 0 1 0.9 1 0.9 0.8 0.9 0.8 0.7 0.8 0.7 0.6 0.7 0.6 trust index 0.5 0.6 0.5 pow er index 0.5 pow er index 0.4 0.4 0.4 0.3 0.3 0.30.2 0.2 0.2 0.1
  14. 14. Agent-based models Taxation and evasion An ABM model Results Tobin taxThe Tobin tax “revival”
  15. 15. Agent-based models Taxation and evasion An ABM model Results Tobin taxThe Tobin tax “revival”
  16. 16. Agent-based models Taxation and evasion An ABM model Results Tobin taxThe Tobin tax “revival”
  17. 17. Agent-based models Taxation and evasion An ABM model Results Tobin taxThe Tobin tax “revival”
  18. 18. Agent-based models Taxation and evasion An ABM model Results Tobin taxThe Tobin tax “revival”
  19. 19. Agent-based models Taxation and evasion An ABM model Results Tobin taxTheoretical (vs empirical) side James Tobin proposed a tax on all currency trades. If the idea is applied to financial assets the tax is dubbed transaction tax (TT). The intended effect was originally to put a penalty on short-term speculation and cushion price fluctuations.
  20. 20. Agent-based models Taxation and evasion An ABM model Results Tobin taxTheoretical (vs empirical) side The idea can be traced back to Keynes (1936): The introduction of a substantial Government trans- fer tax on all transactions might prove the most ser- viceable reform available, with a view to mitigating the dominance of speculation over enterprises. . .
  21. 21. Agent-based models Taxation and evasion An ABM model Results Tobin taxTheoretical (vs empirical) side Barack Obama on financial risk-taking, January 20th 2010: The fact is, these kinds of trading operations can crea- te enormous and costly risks. . . This kind of trading of- ten puts banks in direct conflict with their customers’ interests. . . So if these folks want a fight, it’s a fight I’m ready to have.
  22. 22. Agent-based models Taxation and evasion An ABM model Results Tobin tax(theoretical vs) Empirical side There are “few” cases of practical application of a TT, hence ingenuity is needed to assess the empirical evidence Hau (2006) showed that bigger transaction costs do not reduce the volatility of the Paris Bourse Hu (1998), quite politely wrote “the evidence is not consistent with the hypothesis that stock transaction tax can reduce trading and volatility” Umlauf (1993) analyzed the Swedish market where a TT was in place for years. . . almost all trades moved to the London Stock Exchange!
  23. 23. Agent-based models Taxation and evasion An ABM model Results Tobin taxABMs: comparison of Dealership vs CDA Taken from Pellizzari and Westerhoff (2009) 1 Realistic market model Our heterogeneous agents (myopic, F, C, N + switching) produce returns with reasonable stylized facts (not shown) 2 Reconcile theoretical and empirical literature In theory there is infinite liquidity that is instead endogenously fluctuating in real markets 3 Is the tax working?
  24. 24. Agent-based models Taxation and evasion An ABM model Results Tobin taxABMs: comparison of Dealership vs CDA Taken from Pellizzari and Westerhoff (2009) 1 Realistic market model Our heterogeneous agents (myopic, F, C, N + switching) produce returns with reasonable stylized facts (not shown) 2 Reconcile theoretical and empirical literature In theory there is infinite liquidity that is instead endogenously fluctuating in real markets 3 Is the tax working?
  25. 25. Agent-based models Taxation and evasion An ABM model Results Tobin taxABMs: comparison of Dealership vs CDA Taken from Pellizzari and Westerhoff (2009) 1 Realistic market model Our heterogeneous agents (myopic, F, C, N + switching) produce returns with reasonable stylized facts (not shown) 2 Reconcile theoretical and empirical literature In theory there is infinite liquidity that is instead endogenously fluctuating in real markets 3 Is the tax working?
  26. 26. Agent-based models Taxation and evasion An ABM model Results Tobin taxDoes the tax work? 1 Reduction in volume The turnover is notably reduced in all protocols, due to inactivity of most short-term agents 2 Reduction in volatility Reduction in a CDA is negligible (as predicted by empirical papers). However, if exogenous liquidity is provided (Dealership) price fluctuations are dampened 3 Reduction in distortion There is (almost) no effect in both markets. Hence, the tax is unlikely to make prices closer to fundamentals
  27. 27. Agent-based models Taxation and evasion An ABM model Results Tobin taxDoes the tax work? 1 Reduction in volume The turnover is notably reduced in all protocols, due to inactivity of most short-term agents 2 Reduction in volatility Reduction in a CDA is negligible (as predicted by empirical papers). However, if exogenous liquidity is provided (Dealership) price fluctuations are dampened 3 Reduction in distortion There is (almost) no effect in both markets. Hence, the tax is unlikely to make prices closer to fundamentals
  28. 28. Agent-based models Taxation and evasion An ABM model Results Tobin taxDoes the tax work? 1 Reduction in volume The turnover is notably reduced in all protocols, due to inactivity of most short-term agents 2 Reduction in volatility Reduction in a CDA is negligible (as predicted by empirical papers). However, if exogenous liquidity is provided (Dealership) price fluctuations are dampened 3 Reduction in distortion There is (almost) no effect in both markets. Hence, the tax is unlikely to make prices closer to fundamentals
  29. 29. Agent-based models Taxation and evasion An ABM model Results Tobin taxDoes the tax work? 1 Reduction in volume The turnover is notably reduced in all protocols, due to inactivity of most short-term agents 2 Reduction in volatility Reduction in a CDA is negligible (as predicted by empirical papers). However, if exogenous liquidity is provided (Dealership) price fluctuations are dampened 3 Reduction in distortion There is (almost) no effect in both markets. Hence, the tax is unlikely to make prices closer to fundamentals
  30. 30. Agent-based models Taxation and evasion An ABM model Results Tobin taxGood readings 1 Joshua M. Epstein et al., Toward a Containment Strategy for Smallpox Bioterror: An Individual-Based Computational Approach, book, wp... 2 Korobow, A., Johnson, C., Axtell, R. (2007). An Agent-based Model of Tax Compliance with Social Networks, National Tax Journal, vol. 60(3), 589-610 3 Ronald L. Goettler, Christine A. Parlour, Uday Rajan, Equilibrium in a Dynamic Limit Order Market, The Journal of Finance, Vol. 60, No. 5 (Oct., 2005), pp. 2149-2192 Thank you
  31. 31. Agent-based models Taxation and evasion An ABM model Results Tobin taxGood readings 1 Joshua M. Epstein et al., Toward a Containment Strategy for Smallpox Bioterror: An Individual-Based Computational Approach, book, wp... 2 Korobow, A., Johnson, C., Axtell, R. (2007). An Agent-based Model of Tax Compliance with Social Networks, National Tax Journal, vol. 60(3), 589-610 3 Ronald L. Goettler, Christine A. Parlour, Uday Rajan, Equilibrium in a Dynamic Limit Order Market, The Journal of Finance, Vol. 60, No. 5 (Oct., 2005), pp. 2149-2192 Thank you

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