nep-pbe New Economics Papers
on Public Economics
Issue of 2014‒08‒09
twenty-two papers chosen by
Keunjae Lee
Pusan National University

  1. Cross-base tax elasticity of capital gains By Jacob, Martin
  2. Effective Corporate Taxation, Tax Incidence and Tax Reforms: Evidence from OECD Countries By Salvador Barrios; Gaetan Nicodeme; Antonio Jesus Sanchez Fuentes
  3. Bracket Creep Revisited: Progressivity and a Solution by Adjusting the Rich Tax in Germany By Flores Unzaga, Ismael Martin; Zhu, Junyi
  4. Vertical fiscal imbalances and the accumulation of government debt By Aldasoro, Iñaki; Seiferling, Mike
  5. Bailouts and austerity By Baskaran, Thushyanthan
  6. Public Debt Overhang in the Heterogeneous Agent Model By KOBAYASHI Keiichiro
  7. Strictness of tax compliance norms: A factorial survey on the acceptance of inheritance tax evasion in Germany By Abraham, Martin; Lorek, Kerstin; Richter, Friedemann; Wrede, Matthias
  8. The Inequality Deflator: Interpersonal Comparisons without a Social Welfare Function By Nathaniel Hendren
  9. Capital gains taxes and asset prices: The impact of tax awareness and procrastination By Eichfelder, Sebastian; Lau, Mona
  10. Income Tax and retirement Schemes By Philippe Choné; Guy Laroque
  11. Tax sovereignty and feasibility of international regulations for tobacco tax policies By Bräuninger, Michael
  12. Optimal taxation and debt with uninsurable risks to human capital accumulation By Piero Gottardi; Atsushi Kajii; Tomoyuki Nakajima
  13. Information Asymmetry in SME Credit Guarantee Schemes: Evidence from Japan By KOBAYASHI Keiichiro
  14. Taxation trends in the European Union: 2014 edition By European Commission
  15. Public Investment, Time to Buid, and the Zero Lower Bound By Hafedh Bouakez; Michel Guillard; Jordan Roulleau-Pasdeloup
  16. Shake me the money! By Riccardo Trezzi; Francesco Porcelli
  17. Green Technology and Optimal Emissions Taxation By Stuart McDonald; Joanna Poyago-Theotoky
  18. Management incentives under formula apportionment: Tax-induced distortions of effort and compensation in a principal-agent setting By Martini, Jan-Thomas; Niemann, Rainer; Simons, Dirk
  19. How does income distribution affect economic growth? @@@@@--Evidence from Japanese prefectural data-- By Masako Oyama
  20. Financial Activities Taxes, Bank Levies and Systemic Risk By Giuseppina Cannas; Jessica Cariboni; Massimo Marchesi; Gaëtan Nicodème; Marco Petracco Giudici; Stefano Zedda
  21. Fiscal consolidation, public debt and output dynamics in the euro area : lessons from a simple model with time-varying fiscal multipliers By Christophe Blot; Marion Cochard; Bruno Ducoudre; Danielle Schweisguth; Xavier Timbeau; Jérôme Creel
  22. Fiscal Policy Effectiveness in Japan: Experiences from Recent Policies By Tomomi Miyazaki

  1. By: Jacob, Martin
    Abstract: This paper studies the cross-base tax elasticity of capital gains realizations to labor income taxes when capital gains are taxed at a separate proportional tax rate. Using a longitudinal panel of over 265,000 individuals in Sweden, this paper shows in a regression kink design that labor income taxes affect capital gains at the extensive and intensive margins. An increase in the marginal labor income tax rate increases the likelihood of realizing capital gains and the amount of realized capital gains. One implication of this result is that the excess burden of labor income taxation is affected by cross-base tax elasticities. --
    Keywords: Capital Gains,Cross-Base Elasticity,Income Taxes
    JEL: H21 H24
    Date: 2014
  2. By: Salvador Barrios (Joint Research Center of the European Commission); Gaetan Nicodeme (European Commission); Antonio Jesus Sanchez Fuentes (Universidad Complutense Madrid)
    Abstract: The present study provides estimates of the Effective Marginal Tax Rates (EMTRs) for a sample of 17 OECD countries and 11 manufacturing sectors in a single framework encompassing capital, labour and energy taxes. Our cross-country/cross-sector approach allows us comparing the incentives provided by the tax systems and gauging the effects of tax changes taking explicitly into account the possible substitution between factors as well as their tax incidence. Our results suggest that the OECD tax systems provide different incentives for manufacturing activity across countries and that tax systems are relatively neutral with respect to the sectoral composition of manufacturing activities. The impact of potential tax increases on firms´ activity is found to be most attenuated when shifted towards consumers and/or employees rather than energy consumption and/or capital investors. These results are robust to alternative hypotheses regarding the tax incidence parameters, elasticity of substitution between factors and mark-up on final prices. In addition, policy strategies favouring tax increases on energy consumption and lowering taxes on labour can substantially reduce the EMTRs and thus yield substantial efficiency gains for firms. These reforms should in some instances be ambitious enough to produce desired effects on firms’ EMTRs, however.
    Keywords: Taxation; Tax incidence; Effective Taxation
    JEL: H20 H22 H24 H25
    Date: 2014–07
  3. By: Flores Unzaga, Ismael Martin; Zhu, Junyi
    Abstract: This paper studies the redistributive and revenue effects of bracket creep in Germany under various inflation scenarios and evaluates the feasibility to charge a rich tax to fight bracket creep for the income distribution in 2009. Using a tax micro-simulation model developed for the newly available PHF data, we document an inverted U-shaped overall redistribution effect of the tax system with respect to the inflation rate, which contrasts Immervoll (2005) who finds that the fiscal drag always enhances the equalizing property. Delaying indexation might not be better off in terms of inequality. A politically in-between approach is proposed to raise the marginal tax rate for the top bracket to compensate the government revenue loss due to indexing the tax schedule in Germany. The rich tax required for fully financing the indexation can be sizable. Under our simulation environment, this rate can reach above 75% with four years’ inaction on 4% annual inflation. When this rich tax can be fiscally possible, it can totally offset the decrease of global redistribution effect from indexation. Our results echo the inequality indexing proposed by Burman, Shiller, Leiserson, Rohaly and Kennedy (2007) by suggesting institutionalizing a joint adjustment of rich tax and bracket creep / inflation indexing which justifies a pro-growth, risk reducing, revenue-neutral and framing effective policy.
    Keywords: Inflation, Fiscal Drag, Rich Tax, Progressivity of Income Tax, Income Distribution, Micro-simulation, Inequality Indexation
    JEL: C81 D31 H23 H24
    Date: 2014–07–23
  4. By: Aldasoro, Iñaki; Seiferling, Mike
    Abstract: The implications of delegating fiscal decision making power to sub-national governments has become an area of significant interest over the past two decades, in the expectation that these reforms will lead to better and more efficient provision of public goods and services. The move towards decentralization has, however, not been homogeneously implemented on the revenue and expenditure side: decentralization has materialized more substantially on the latter than on the former, creating vertical fiscal imbalances. These imbalances measure the extent to which sub-national governments' expenditures are financed through their own revenues. This mismatch between own revenues and expenditures may have negative consequences for public finances performance, for example by softening the budget constraint of sub-national governments. Using a large sample of countries covering a long time period from the IMF's Government Finance Statistics Yearbook, this paper is the first to examine the effects of vertical fiscal imbalances on fiscal performance through the accumulation of government debt. Our findings suggest that vertical fiscal imbalances are indeed relevant in explaining government debt accumulation, and call for a degree of caution when promoting fiscal decentralization. --
    Keywords: fiscal decentralization,vertical fiscal imbalances,panel data,public debt,GFSY
    JEL: H60 H74 H77 C33
    Date: 2014
  5. By: Baskaran, Thushyanthan
    Abstract: This paper studies with disaggregated budget data how expenditures, revenues, and borrowing evolve in municipalities that receive bailouts. It asks whether higher-level governments enforce austerity measures after bailing out indebted municipalities. The sample consists of 421 municipalities in the German federal state of Hesse over the 1997-2010 period. The results indicate that municipalities cut personnel, construction, and social expenditures, increase tax revenues and property tax rates, and reduce deficits after they receive a bailout from the state government. The state government appears to be both able and willing to enforce austerity after granting a bailout. --
    Keywords: subnational bailouts,soft budget constraints,local fiscal policy
    JEL: H30 H74 H77
    Date: 2014
  6. By: KOBAYASHI Keiichiro
    Abstract: In this paper, I demonstrate that expansionary fiscal policy associated with an increase in public debt can cause a persistent recession. I assume that entrepreneurs have borrowing constraints and that the government issues debt and collects tax from productive entrepreneurs. The government can also transfer resources to workers. Under this setting, an increase in public debt per se can enhance economic growth as it can compensate for the shortage of liquidity. However, output decreases as the transfer increases due to the income effect of the transfer on workers increasing the wage rate. Noticeably, both output and interest rates decline as the transfer and debt become larger. This result challenges the widely accepted view that the negative effect of expansionary fiscal policy on output should be the crowding-out effect that works through a hike in interest rates. It also implies that redistribution from workers to productive agents may enhance economic growth.
    Date: 2014–07
  7. By: Abraham, Martin; Lorek, Kerstin; Richter, Friedemann; Wrede, Matthias
    Abstract: Using the example of the inheritance tax, this paper examines whether and how the strictness of tax compliance norms depends on the interrelation between tax objectives, tax design, and taxed behavior. Building on the literature on tax evasion, optimal inheritance taxation, family economics, and social norms, the paper hypothesizes that a larger non-declared amount of transfer decreases the acceptability of tax evasion and that both an asset with emotional value and a higher degree of kinship increase the acceptance of evasion. Utilizing a survey with an experimental design on the acceptance of inheritance tax evasion that was conducted in Germany in 2012, the paper confirms these hypotheses empirically. The results indicate that violating a compliance norm is justifiable if the tax objectives are not infringed upon by the evasion or if the tax design is not considered useful to accomplish the aim of the tax. In contrast, the norm violation is less acceptable, if the underlying goal is at stake. --
    Keywords: tax compliance,social norms,tax evasion,inheritance tax
    JEL: H21 H24 H26
    Date: 2014
  8. By: Nathaniel Hendren
    Abstract: This paper develops a tractable method for resolving the equity-efficiency tradeoff that modifies the Kaldor-Hicks compensation principle to account for the distortionary cost of redistribution. Weighting measures of individual surplus by the inequality deflator corresponds to searching for local Pareto improvements by making transfers through the income tax schedule. Empirical evidence consistently suggests redistribution from rich to poor is more costly than redistribution from poor to rich. As a result, the inequality deflator weights surplus accruing to the poor more so than to the rich. Regardless of one's own social preferences, surplus to the poor can hypothetically be turned into more surplus to everyone through reductions in distortionary taxation. I estimate the deflator using existing estimates of the response to taxation, combined with a new estimation of the joint distribution of taxable income and marginal tax rates. I show adjusting for increased income inequality lowers the rate of U.S. economic growth since 1980 by roughly 15-20%, implying a social cost of increased income inequality in the U.S. of roughly $400 billion. Adjusting for differences in income inequality across countries, the U.S. is poorer than countries like Austria and the Netherlands, despite having higher national income per capita. I conclude by providing an empirical framework for characterizing the existence of local Pareto improvements from government policy changes.
    JEL: D6 E01 H0
    Date: 2014–07
  9. By: Eichfelder, Sebastian; Lau, Mona
    Abstract: We argue that the impact of capital gains taxation on asset pricing depends on the tax awareness of market participants. While institutional investors should be generally wellinformed about tax regulations, private investors have only limited tax knowledge and resources. As a result, market reactions on tax law changes may be delayed if a considerable fraction of market participants is not fully tax-aware. In line with our argument, we find evidence that the introduction of a previously announced German flat tax on private capital gains in 2009 resulted in a temporarily strong and significant increase of trading volumes, daily returns and asset prices. Our research implies that tax law changes provide an opportunity for well-informed investors to generate arbitrage benefits. Corresponding to our estimate, the capital gains tax resulted in an increase demand for shares of 160 % as well as in an price surplus of about 7.4 % within the last two trading days 2008. --
    Keywords: capital gains tax,asset pricing,tax awareness,tax arbitrage
    JEL: G1 H25 M41
    Date: 2014
  10. By: Philippe Choné (CREST); Guy Laroque (Sciences-Po and UCL)
    Abstract: This article aims at understanding the interplay between pension schemes and tax instruments. The model features extensive labor supply in a stationary environment with overlapping generations and perfect financial markets. Compared with the reference case of a pure taxation economy, we find that taxes become more redistributive when the pension instrument is available, while pensions provide incentives to work
    Date: 2014–03
  11. By: Bräuninger, Michael
    Abstract: Taxation is a fundamental part of national sovereignty. The two dominant components of tax sovereignty are the ability to generate revenue and have full control over fiscal policy. Therefore, the key components of a state's expression of sovereignty are the right to determine tax rates, structures and the use of tax revenues. With a view to implementing of the WHO Framework Convention on Tobacco Control (FCTC) provisions on Article 6 - tax and price measures for tobacco products, Parties did not envisage adopting the guidelines to support the implementation of this article. The main reason behind this decision was that prescriptive obligations were inappropriate and unacceptable, because they would infringe on tax sovereignty, while national tax regulations would not permit an international body or treaty to create obligations in this important area. However, subsequently a decision was made to develop Article 6 guidelines. As a consequence the guidelines' content now deviates significantly from countries' original intentions and the FCTC Treaty. --
    Date: 2014
  12. By: Piero Gottardi; Atsushi Kajii; Tomoyuki Nakajima
    Abstract: We consider an economy where individuals face uninsurable risks to their human capital accumulation, and study the problem of determining the optimal level of linear taxes on capital and labor income together with the optimal path of the debt level. We show both analytically and numerically that in the presence of such risks it is bene cial to tax both labor and capital income and to have positive government debt.
    Date: 2014–06
  13. By: KOBAYASHI Keiichiro
    Abstract: In this paper, I demonstrate that the Laffer curve for a consumption tax increases monotonically and unboundedly in a closed economy in which the supply of one factor of production is fixed. Therefore, in this economy, an arbitrary amount of government debt can be made sustainable by choosing an appropriate tax rate. Tax revenue unboundedly increases due to a matter of accounting—tax revenue is transferred back to households as the redemption of government debt, which is used for the consumption, and is then taxed again.
    Date: 2014–07
  14. By: European Commission
    Abstract: This report contains a detailed statistical and economic analysis of the tax systems of the Member States of the European Union, plus Iceland and Norway, which are Members of the European Economic Area. The data are presented within a unified statistical framework (the ESA95 harmonised system of national and regional accounts), which makes it possible to assess the heterogeneous national tax systems on a fully comparable basis.
    Keywords: European Union, taxation
    JEL: H23 H24 H25 H27 H71
    Date: 2014–07
  15. By: Hafedh Bouakez (Institute of Applied Economics, CIRPEE, HEC Montréal); Michel Guillard (Université d'Evry Val d'essonne); Jordan Roulleau-Pasdeloup (CREST, PSE)
    Abstract: Public investment represents a non-negligible fraction of total public expenditures. Yet, theoretical studies of the effects of public spending when the economy is stuck in a liquidity trap invariably assume that government expenditures are entirely wasteful. In this paper, we consider a new-Keynesian economy in which a fraction of government spending increases the stock of public capital–which is an external input in the production technology–subject to a time-to-build constraint. In this environment, an increase in public spending has two conflicting effects on current and expected inflation: a positive effect due to higher aggregate demand and a negative effect reflecting future declines in real marginal cost. We solve the model analytically both in normal times and when the zero lower bound (ZLB) on nominal interest rates binds. We show that under relatively short time-to-build delays, the spending multiplier at the ZLB decreases with the fraction of public investment in a stimulus plan. Conversely, when several quarters are required to build new public capital, this relationship is reversed. In the limiting case where a fiscal stimulus is entirely allocated to investment in public infrastructure, the spending multiplier at the ZLB is 4 to 5 times larger than in normal times when the time to build is 12 quarters
    Keywords: Public spending, Public investment, Time to build, Multiplier, Zero lower bound
    JEL: E4 E52 E62 H54
    Date: 2014–01
  16. By: Riccardo Trezzi; Francesco Porcelli
    Abstract: During a natural disaster, the negative supply shock due to the destruction of productive capacity is counteracted by a positive demand shock due to public grants for assistance and reconstruction positing an identification issue in empirical work. Focusing on the 2009 ’Aquilano’ earthquake in Italy as a case study, we take advantage of quantified measure of damages for 75,424 buildings to estimate the negative supply shock and of a law issued to allocate reconstruction grants, which resulted in a sharp, exogenous discontinuity in transfers and output behavior across neighboring municipalities to estimate the positive demand shock. Diff-in-diff analysis suggests that local output multipliers of reconstruction grants (net of marginal tax rebates) are below unity. Yet the size of the grants act as a public insurance scheme, preventing a fall in output.
    Keywords: Natural disasters, Fiscal multipliers, Mercalli scale.
    JEL: C36 E62 H70
    Date: 2014–07–23
  17. By: Stuart McDonald (School of Economics, The Universty of Queensland); Joanna Poyago-Theotoky (School of Economics, La Trobe University Rimini Centre for Economic Analysis (RCEA))
    Abstract: We examine the impact of an optimal emissions tax on research and development of emission reducing green technology (E-R&D) in the presence of R&D spillovers. We show that the size and effectiveness of the optimal emissions tax depends on the type of the R&D spillover: input or output spillover. In the case of R&D input spillovers (where only knowledge spillovers are accounted for), the optimal emissions tax required to stimulate R&D is always higher than when there is an R&D output spillover (where abatement and knowledge spillovers exist simultaneously). We also find that optimal emissions taxation and cooperative R&D complement each other when R&D spillovers are small, leading to lower emissions.
    Keywords: Environmental R&D, Green Technology, R&D Spillover, Emissions Tax
    JEL: H23 L11 Q55
    Date: 2014–06
  18. By: Martini, Jan-Thomas; Niemann, Rainer; Simons, Dirk
    Abstract: The introduction of a common consolidated corporate tax base (CCCTB) and tax allocation via formula apportionment (FA) is hotly debated in the European Union (EU) since more than a decade. While the literature has thoroughly analyzed the economic effects of FA from a macro-level perspective, the firm view has been added only recently. Within this micro-level framework discussing possible tax-induced distortions of multi-jurisdictional entities' (MJE) decisions becomes feasible. Anticipating the reactions of MJEs to the introduction of FA requires considering delegation and incentivisation, because management decisions are influenced by principal agent relationships. How FA affects the demand for managerial effort is a hitherto neglected research question. Accordingly, the objective of this paper is to highlight the tax-induced distortions of managerial incentives caused by FA. For this purpose we set up a LEN-type principal-agent model with agents in two different jurisdictions. Compared to the case with separate taxation (ST) the principal demands increased effort and pays an increased compensation to managers in low-tax jurisdictions, if payroll enters the FA formula. Managers in high-tax jurisdictions face the opposite effect. Further, the composition of the compensation packages changes. Overall, net profit increases, because FA offers potential for profit shifting. --
    Keywords: Common Consolidated Corporate Tax Base,Formula Apportionment,Managerial Compensation,Multi-Jurisdictional Entities,Principal-Agent-Problem
    JEL: H25 M41
    Date: 2014
  19. By: Masako Oyama
    Abstract: This paper uses Japanese prefectural panel data to analyze how income distribution affects economic growth. In the fixed effects and the GMM estimations, the income share of the third quintile has positive and statistically significant effects on five-year economic growth rates. On the other hand, the Gini indices have positive and statistically significant effects on both of the five-year and ten-year economic growth rates in the fixed effects estimations, and negative effect on the five-year growth rate in the GMM once. These results can be explained with the modified median voter theory.
    Date: 2014–07
  20. By: Giuseppina Cannas (Joint Research Centre of the European Commission); Jessica Cariboni (Joint Research Centre of the European Commission); Massimo Marchesi (European Commission); Gaëtan Nicodème (European Commission); Marco Petracco Giudici (Joint Research Centre of the European Commission); Stefano Zedda (Joint Research Centre of the European Commission)
    Abstract: The question of additional taxes on banking institutions has recently been debated.At the same time, financial regulation in the banking sector is undergoing many changes aimed at strengthening financial stability. This paper uses SYMBOL, a micro-simulation model of the banking system, to estimate contributions to systemic risk of individual banks under various future regulatory scenarios and compares them to their potential tax liabilities under alternative designs of Financial Activity Taxes and Bank Levies. The results show that when contagion is not avoided, all taxes perform about the same way. However, when contagion is avoided, bank levies outperform FATs.
    Keywords: Taxation; Banks; Financial Activity Tax; Bank levy; Systemic Risk; Regulation
    JEL: F23 G32 H25 R38
    Date: 2014–04
  21. By: Christophe Blot (OFCE); Marion Cochard (OFCE); Bruno Ducoudre (OFCE); Danielle Schweisguth (OFCE); Xavier Timbeau (OFCE); Jérôme Creel (OFCE)
    Abstract: EMU countries have engaged in a consolidation of fiscal policies since 2011. This paper deals with the public debt and output dynamic consequences of this strategy. To this end, we develop a simple macroeconomic model of the Euro area, where fiscal multiplier is time-varying. Recent empirical evidence has indeed shown that fiscal multipliers were higher in time of crisis. We then analyze the ability of EMU countries to comply with the new fiscal rules on public debt. The path of public debt and output gap is simulated according to different hypothesis related to fiscal multiplier, monetary policy and hysteresis effects. Not all EMU countries would be able to reach a 60% debt-to-GDP ratio in 2032. An alternative strategy may be to spread austerity in order to report part of consolidation to periods where the fiscal multiplier will be weaker. The gain of spreading austerity may yet be partly offset by higher risk premium. There is then a need to find institutional arrangements to avoid panics in the sovereign debt markets. Finally, it is shown that it would not be very efficient to implement an expansionary fiscal policy in Germany in order to balance austerity in the Euro area. Since output gap is nearly closed in Germany, the multiplier effect of a positive fiscal stance would be low and spillover effects would not be significant.
    Keywords: Fiscal consolidation; Fiscal multiplier; Public Debt; Macroeconomic performance
    JEL: E61 E62 E47
    Date: 2014–07
  22. By: Tomomi Miyazaki (Graduate School of Economics, Kobe University)
    Abstract: This paper examines the effects of Japanese fiscal policy after the 2008 global financial crisis so called Lehmanfs fall. A mixed vector autoregression (VAR)/event study approach is used for this purpose. We especially focus on the effects of stimulus packages related to environmental-related policy. The empirical results show that the program of eco-car tax break and eco-car subsidy was useful to stimulate the production of automobile industries.
    Date: 2014–03

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