nep-pbe New Economics Papers
on Public Economics
Issue of 2014‒04‒18
fourteen papers chosen by
Keunjae Lee
Pusan National University

  1. Where Has the Currency Gone? And Why? The Underground Economy and Personal Income Tax Evasion in the U.S., 1970-2008 By Cebula, Richard
  2. Tax smoothing in a business cycle model with capital-skill complementarity By Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
  3. Dividend taxes and income shifting By Alstadsæter, Annette; Jacob, Martin
  4. Environmental Levies, Distortionary Taxation and Increasing Returns By Wenli Cheng; Dingsheng Zhang; CEMA
  5. Real tax effects and tax perception effects in decisions on asset allocation By Fochmann, Martin; Hemmerich, Kristina
  6. “Interrelation among Economic Growth, Income Inequality, and Fiscal Performance: Evidence from Anglo-Saxon Countries” By Karen Davtyan
  7. Capital Taxation under Political Constraints By Florian Scheuer; Alexander Wolitzky
  8. Household debt and the dynamic effects of income tax changes By Cloyne, James; Surico, Paolo
  9. Optimal Environmental Tax-Subsidy Regime in the Presence of Increasing Returns By Wenli Cheng; Dingsheng Zhang; CEMA
  10. Free-Riding in Tax Credits For Home Insulation in France: An Econometric Assessment Using Panel Data By Marie-Laure Nauleau
  11. Fiscal consolidation: Dr Pangloss meets Mr Keynes By Miller, Marcus; Zhang, Lei
  12. Environmental Research Joint Ventures and Time-Consistent Emission Tax By Yasunori Ouchida; Daisaku Goto
  13. An Analysis of Regional Business Cycles using Prefectural Composite Indexes in Japan By Asako, Kazumi; Onodera, Takashi; Ueda, Atsuko
  14. Income Growth, Inequality and Poverty Reduction: A Case Study of Eight Provinces in China By Xiao Luo; Chor-Ching Goh; Nong Zhu

  1. By: Cebula, Richard
    Abstract: Unaccounted for currency in the U.S. is argued to reflect the presence of widespread income tax evasion. This empirical study seeks to identify determinants of the underground economy in the U.S. in the form of federal personal income tax evasion over the period 1970-2008. In this study, we use the most recent data available on personal income tax evasion, data that are derived from the General Currency Ratio Model and measured in the form of the ratio of unreported AGI (adjusted gross income) to reported AGI. Other studies of federal income tax evasion for the U.S. are dated and do not use data this current. It is found that personal income tax evasion was an increasing function of the maximum marginal federal personal income tax rate, the percentage of federal personal income tax returns characterized by itemized deductions, and unpopular military engagements, in this case, the War in Iraq, and a decreasing function of the Tax Reform Act of 1986 (during its first two years of being implemented), the ratio of the tax free interest rate yield on high grade municipals to the interest rate yield on ten year Treasury notes (as a measure of the incentive effect of a better return to tax avoidance, which is legal), and higher audit rates of filed federal income tax returns (as a measure of risk from tax evasion) by IRS personnel.
    Keywords: underground economy; tax evasion; tax rates; audit rates
    JEL: H24 H26 H31 K42
    Date: 2014–04–12
  2. By: Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
    Abstract: This paper undertakes a normative investigation of the quantita- tive properties of optimal tax smoothing in a business cycle model with state contingent debt, capital-skill complementarity, endogenous skill formation and stochastic shocks to public consumption as well as total factor and capital equipment productivity. Our main …nding is that an empirically relevant restriction which does not allow the relative supply of skilled labour to adjust in response to aggregate shocks, signi…cantly changes the cyclical properties of optimal labour taxes. Under a restricted relative skill supply, the government …nds it optimal to adjust labour income tax rates so that the average net returns to skilled and unskilled labour hours exhibit the same dynamic behaviour as under exible skill supply.
    Keywords: skill premium, tax smoothing, optimal …scal policy
    JEL: E13 E32 E62
    Date: 2014–03
  3. By: Alstadsæter, Annette; Jacob, Martin
    Abstract: This paper analyzes whether a dividend tax cut for owner-managers of closely held corporations encourages income shifting, income generation, or both. We use rich, micro data from Sweden for the period 2000 - 2011 comprising the entire Swedish population, as well as firmand individual-level data for all owner-managers in closely held corporations, partnerships, and self-employed. We find robust evidence of extensive income shifting across tax bases in response to the 2006 dividend tax cut. Relative to owners of unincorporated businesses, owner-managers of closely held corporations do not increase total income. Instead, they relabel earned income as dividend income. The income shifting effect is stronger for owner-managers with tax incentives and with easier access to income shifting through a high ownership share. --
    Keywords: income shifting,income generation,dividend taxes,closely held corporations,owner-managers
    JEL: H21 H25 H3
    Date: 2014
  4. By: Wenli Cheng; Dingsheng Zhang; CEMA
    Abstract: In this note, we introduce increasing returns to Bovenberg and Mooij’s (1994) model as generalised in Fullerton (1997) and use an example to show that (1) even with a distortionary labor tax, the optimal environmental levy is greater than the Pigouvian rate; (2) the difference between tax on the “dirty” good and the “clean” good is also greater than the Pigouvian tax; (3) under certain circumstances, the government can optimally use the environmental levy to both meet its revenue requirement and subsidize the “clean” goods with increasing returns.
    Keywords: environmental levies, distortionary taxation, increasing returns
    JEL: H23
    Date: 2014–04
  5. By: Fochmann, Martin; Hemmerich, Kristina
    Abstract: We test the predictions of the theoretical literature initiated by the study of Domar and Musgrave (1944) with a laboratory experiment in which subjects have to decide on the composition of an asset portfolio. Our simple design enables us to distinguish between Real Tax Effects and Perception Effects when a proportional income tax, with and without a full loss offset provision, is introduced. Observed investment behavior is partially inconsistent with the theoretical predictions if we do not control for the Perception Effects. However, if we consider these effects, we find support for the theory. The isolated Perception Effects can explain the unexpected behavior observed in previous studies and has both scientific and political implications. --
    Keywords: Taxation,Domar-Musgrave Effect,Tax Perception,Risk Taking Behavior,Portfolio Choice,Behavioral Taxation
    JEL: C91 D14 H24
    Date: 2014
  6. By: Karen Davtyan (Faculty of Economics, University of Barcelona)
    Abstract: The interrelation among economic growth, income inequality, and fiscal performance is very complex. The paper provides the analysis of the interrelations among these variables jointly by the structural VAR methodology, examining also transmission channels among them. This approach allows exploring dynamic interactions among them and feedback effects on each other. The empirical analysis is implemented for the Anglo-Saxon countries, the UK, the USA, and Canada. We find that income inequality has negative effect on economic growth in the case of the UK. The effect is positive in the cases of the USA and Canada. The increase in income inequality worsens fiscal performance for all the countries.
    Keywords: economic growth, income inequality, fiscal performance, VAR JEL classification: C32, D31, E62, O47
    Date: 2014–02
  7. By: Florian Scheuer; Alexander Wolitzky
    Abstract: This paper studies optimal dynamic tax policy under the threat of political reform. A policy will be reformed ex post if a large enough political coalition supports reform; thus, credible policies are those that will continue to attract enough political support in the future. If the only credible reform threat is to fully equalize consumption, we find that optimal marginal capital taxes are U-shaped, so that savings are subsidized for the middle class but are taxed for the poor and rich. If ex post the government may strategically propose a reform other than full equalization in order to secure additional political support, then optimal capital taxes are instead progressive throughout the income distribution.
    JEL: D31 D82 E62 H21
    Date: 2014–04
  8. By: Cloyne, James (Bank of England); Surico, Paolo (London Business School)
    Abstract: Using a long span of expenditure survey data and a new narrative measure of exogenous income tax changes for the United Kingdom, we show that households with mortgage debt exhibit large and persistent consumption responses to changes in their income. Homeowners without a mortgage, in contrast, do not appear to react, with responses not statistically different from zero at all horizons. Splitting the sample by age and education yields more limited evidence of heterogeneity as the distributions of these demographics tend to overlap across housing tenure groups. We interpret our findings through the lens of traditional and more recent theories of liquidity constraints, providing a novel interpretation for the aggregate effects of tax changes on the economy.
    Keywords: mortgage debt; narrative tax changes; liquidity constraints
    JEL: E21 E62 H31
    Date: 2014–03–28
  9. By: Wenli Cheng; Dingsheng Zhang; CEMA
    Abstract: This paper develops a set of three models to study the optimal tax-subsidy regime in an economy characterised by two deviations from the perfect competition model – negative externality from pollution by the “dirty” industry, and increasing returns in the “clean” industry. Its main conclusions are: (1) the optimal single pollution tax is higher than the Pigouvian level; (2) a combination of pollution tax and quantity subsidy increases consumer welfare at a lower level of pollution tax; (3) the optimal pollution tax can be further lowered and consumer welfare further increased if the quantity subsidy is supplemented by a lump-sum subsidy.
    Keywords: optimal pollution tax, clean subsidy, increasing returns, monopolistic competition
    JEL: H23
    Date: 2014–04
  10. By: Marie-Laure Nauleau (CIRED)
    Abstract: This econometric study assesses the efficiency of the income tax credit system implemented in France in 2005 on households’ retrofitting investment decisions, focusing on insulation measures. A logit model with random individual effects is estimated using an unbalanced panel of 23,879 households surveyed over the period 2002-2011. An estimation in difference is performed to identify the impact of the policy. The tax credit had no significant effect during the first two years, suggesting a latency period related to inertia in households’ investment decisions, possibly due to the complexity of the tax credit scheme. The tax credit had an increasing, significant positive effect from 2007 to 2010, before slightly decreasing in 2011. This is in line with changes in the tax credit rates, suggesting a correlation with the level of subsidy. Defined as the situation in which the subsidized household would have invested even in the absence of the subsidy, free-riding progressively decreased over the period and was lower for insulation of opaque surfaces (roofs, walls, etc.) than for insulation of windows. The estimated average proportion of free-riders varies between 40% and 85% after 2006. Finally, we assess the potential bias caused by time-varying unobservable variables and conclude that our estimates of the impacts of the policy are conservative.
    Keywords: Energy Conservation, Residential Sector, Thermal Insulation, Tax Credit, Free-Riding, Difference Estimation, Panel Data, France
    JEL: Q48 R22 D12
    Date: 2014–03
  11. By: Miller, Marcus (University of Warwick); Zhang, Lei (University of Warwick)
    Abstract: A simple dynamic framework is used to show how consolidation plans that are robust and effective at capacity output can be undermined by demand failure. If the market panics and interest rates rise, the process can indeed become dynamically unstable. Tightening fiscal policy to reassure financial markets can lead to a low level “consolidation trap”, however. Better that the Central Bank acts to keep interest rates low; and that fiscal consolidation efforts be state contingent – allowing room for economic stabilisation. The pro-cyclicality of fiscal policy could also be reduced if, as Shiller has argued, debt amortization were state contingent, being indexed to GDP. Debt; Deficits; Fiscal Consolidation; Economic Stabilisation
    Date: 2013
  12. By: Yasunori Ouchida (Department of Economics, Hiroshima University); Daisaku Goto (Graduate School for International Development and Cooperation Hiroshima University)
    Abstract: This paper presents an examination of the socially efficient formation of environmental R&D in Cournot duopoly in a setting where a regulator has no precommitment ability for an emission tax. The results reveal that if the environmental damage is slight, alternatively, given severe environmental damage and large inefficiency in environmental R&D costs, then environmental research joint venture (ERJV) cartelization is socially efficient. However, if environmental damage is severe, and if a firm’s R&D costs are limited, then, in stark contrast to results of previous studies, environmental R&D competition is socially more efficient than the other three scenarios (i.e., environmental R&D cartelization, ERJV competition, and ERJV cartelization), although R&D competition is the case of “NO information sharing and NO R&D coordination.”
    Keywords: Environmental Research Joint Venture, Environmental R&D, Time-consistent Emission Tax, Competition Policy, Cournot Duopoly
    JEL: O32 L13 Q55 Q58
    Date: 2014–03
  13. By: Asako, Kazumi; Onodera, Takashi; Ueda, Atsuko
    Abstract: The purpose of this paper is to analyze regional business cycle movements in Japan. We construct regional monthly composite indexes by 47 prefectures over the period 1985-2010. In order to characterize the deviation of regional economies from the nationwide economy, we propose a method to match each prefectural composite index sequence to the national composite index sequence. High performance of the matching analysis indicates that regional deviations involve leads and lags in both the timing of the business cycle and time trends, although certain disparities remain for some prefectures. The analysis also suggests that there is a structural change between the post-bubble era of the 1990s and the long expansion phase of 2002-2008. Only a limited number of prefectures show better performance than the national average, while the majority tend to fall behind during the expansion phase. Also, we investigate the factors that exert influence on prefectural economies, and find that fiscal and monetary measures possibly help stimulate regional economies.
    Keywords: regional business cycle, composite index, structural change, public investment
    JEL: E32 R11
    Date: 2014–03
  14. By: Xiao Luo; Chor-Ching Goh; Nong Zhu
    Abstract: This paper examines the growth performance and income inequality in eight Chinese provinces during the period of 1989-2004 using the China Health and Nutrition Survey data. It shows that income grew for all segments of the population, and as a result, poverty incidence has fallen. However, income growth has been uneven, most rapidly in coastal areas, and among the educated. A decomposition analysis based on household income determination suggests that income growth can largely be attributed to the increase in returns to education and to the shift of employment into secondary and tertiary sector.
    Keywords: Income growth, Inequality, Poverty, China,
    JEL: O15 O53 P36
    Date: 2014–01–01

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