nep-pbe New Economics Papers
on Public Economics
Issue of 2014‒08‒25
eighteen papers chosen by
Keunjae Lee
Pusan National University

  1. Positional Preferences for Housing: Income Taxation as a Second-Best Policy? By Aronsson, Thomas; Mannberg, Andrea
  3. The Redistributive Benefits of Progressive Labor and Capital Income Taxation By Fabian Kindermann; Dirk Krueger
  4. Capital gains taxes and asset prices: The impact of tax awareness and procrastination By Eichfelder, Sebastian; Lau, Mona
  5. Progressive Taxation in a Tournament Economy By Carpenter, Jeffrey P.; Matthews, Peter Hans; Tabb, Benjamin
  6. Social Identity, Education and Tax Policy By Aronsson, Thomas; Heidrich, Stefanie; Wikström, Magnus
  7. The Henry George Theorem in a second-best world By Kristian Behrens; Yoshitsugu Kanemoto; Yasusada Murata
  8. Evidence on book-tax differences and disclosure quality based on the notes to the financial statements By Evers, Maria Theresia; Finke, Katharina; Matenaer, Sebastian; Meier, Ina; Zinn, Benedikt
  9. Restructuring Corporate Income Tax and Value Added Tax in Vietnam : An Analysis of Current Changes and Agenda for the Future By World Bank
  10. Zipf’s Law, Pareto’s Law, and the Evolution of Top Incomes in the U.S. By Shuhei Aoki; Makoto Nirei
  11. Promoting Growth in the Caribbean : Tax Incentives in Theory and in Practice By Martin Bes; Daniel Alvarez-Estrada
  12. The Effect of Corporate Tax Rate Reduction: A simulation analysis with a small open economy DSGE model for Japan (Japanese) By HASUMI Ryo
  13. A system of regionalized public accounts for Spain Methodology and results for 2005 By Ángel de la Fuente; Ramón Barberán; Ezequiel Uriel
  14. Tax Reforms and the Capital Structure of Banks By Thomas Hemmelgarn; Daniel Teichmann
  15. Fiscal multipliers in recessions and expansions : does it matter whether government spending is increasing or decreasing ? By Riera-Crichton, Daniel; Vegh, Carlos A.; Vuletin, Guillermo
  16. Corporate Taxes and Capital Structure: A Long-Term Historical Perspective By Francis A. Longstaff; Ilya A. Strebulaev
  17. Dealing with a liquidity trap when government debt matters: Optimal time-consistent monetary and fiscal policy By Burgert, Matthias; Schmidt , Sebastian
  18. James Buchanan's theory of federalism: From fiscal equity to the ideal political order By Feld, Lars P.

  1. By: Aronsson, Thomas (Department of Economics, Umeå School of Business and Economics); Mannberg, Andrea (Department of Economics, Umeå School of Business and Economics)
    Abstract: This paper analyzes whether marginal taxation of labor and capital income might be useful second best instruments for internalizing the externalities caused by conspicuous housing consumption, when the government is unable to implement a first best corrective tax on housing wealth. The rationale for studying income taxation in this particular context is that first best taxes on housing wealth may be infeasible (at least in a shorter time perspective), while income taxes indirectly affect both the level and composition of accumulated wealth. We show that a suboptimally low tax on housing wealth provides an incentive for the government to subsidize financial saving and tax labor income at the margin.
    Keywords: Relative consumption; housing; taxation; behavioral economics
    JEL: D62 H21 H23
    Date: 2014–08–19
  2. By: Ida, Tomoya (Faculty of Economics); Wilhelmsson, Mats (Centre for Banking and Finance)
    Abstract: We empirically reexamine the dominance of tax externalities in Sweden for the period of 2000 through 2011. Where hierarchical governments share a mobile tax base, a tax externality can arise not only horizontally across the same level of government but also vertically between different levels of government. A horizontal externality shifts tax rates toward a level that is too low, whereas a vertical externality pushes them toward a level that is too high. The net outcome of these competing effects is theoretically unclear within benevolent federal government systems. Brülhart and Jametti (2006) implemented a pioneering empirical test of the issue using Swiss data. Their empirical setting, however, assumes a single tax instrument, which contradicts the fiscal system in Switzerland. This inconsistency would theoretically distort their estimation. By contrast, our study investigates the pure dominance of tax externality in a sample of Swedish jurisdictions that can tax only personal income. We find a vertical externality to be relatively dominant.
    Keywords: Interregional tax competition; Horizontal and vertical tax externalities; Benevolent governmental systems; Personal income taxes; Swedish tax system; Housing market
    JEL: H21 H24 H71 R39
    Date: 2014–04–28
  3. By: Fabian Kindermann; Dirk Krueger (University of Pennsylvania)
    Abstract: In this paper we argue that a capital income tax is an effective tool for redistribution and insurance even when progressive labor income taxes are available to the policy maker. To make this point we construct a large scale Overlapping Generations Model with uninsurable income risk, show that it has a wealth distribution that matches the data well, and then use it characterize fiscal policies that achieve a desired degree of redistibution in society. We find that it is suboptimal to rely exclusively on progressive labor income taxes to achieve any given level of redistribution in society, and thus that a positive capital income tax should be part of a government policy aimed at redistributing welfare across ex ante homogenenous, but ex post heterogeneous households. We finally characterize the optimal Rawlsian poliy and find that it includes a significantly positive capital in addition to a redistributive labor income tax.
    Date: 2014
  4. 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 well-informed 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: G01 H25 M41
    Date: 2014
  5. By: Carpenter, Jeffrey P. (Middlebury College); Matthews, Peter Hans (Middlebury College); Tabb, Benjamin (Middlebury College)
    Abstract: Not enough is known about the responsiveness of individuals, in particular those who tend to work under different incentives, to changes in marginal tax rates. We ask whether changes in marginal tax rates are less distortionary for workers engaged in a contest. To examine this potential rationale for a more progressive tax code, we first model the effort decisions of workers faced with progressive taxation under tournaments and piece rates. Because of the difficulty identifying any distortion that may be induced by the tax code in naturally occurring data, we then report on the results of a real-effort experiment based on this model. Consistent with a behavioral approach to public finance, we find that tournament workers are less sensitive, and conclude with a tentative evaluation of the welfare benefits of progressive taxation in tournament economies.
    Keywords: taxation, tournaments, public good, real effort experiment
    JEL: H20 H41 J22 J33 C91
    Date: 2014–08
  6. By: Aronsson, Thomas (Department of Economics, Umeå School of Business and Economics); Heidrich, Stefanie (Department of Economics, Umeå School of Business and Economics); Wikström, Magnus (Department of Economics, Umeå School of Business and Economics)
    Abstract: This paper analyzes the implications of social identity and self-categorization in the context of optimal redistributive income taxation. A two-type model is supplemented by an assumption that individuals select themselves into social categories, in which norms are formed and education effort choices partly depend on these norms. Optimal tax policy is analyzed under two different assumptions about the social objective function: a welfarist objective based on consumer preferences and a paternalist objective that does not reflect the consumer preference for social identity. We show how the welfarist government implements a tax policy to internalize the externalities arising from social norms, while the paternalist government uses tax policy to make individuals behave as if their preferences for social identity were absent.
    Keywords: Optimal income taxation; education; social identity; self-categorization
    JEL: D03 H21 I21 Z13
    Date: 2014–08–19
  7. By: Kristian Behrens (Université du Québec à Montréal(UQAM)); Yoshitsugu Kanemoto (National Graduate Institute for Policy Studies); Yasusada Murata (National Graduate Institute for Policy Studies)
    Abstract: The Henry George Theorem (HGT) states that, in first-best economies, the fiscal surplus of a city government that finances the Pigouvian subsidies for agglomeration externalities and the costs of local public goods by a 100% tax on land is zero at optimal city sizes. We extend the HGT to distorted economies where product differentiation and increasing returns are the sources of agglomeration economies and city governments levy property taxes. Without relying on specific functional forms, we derive a second-best HGT that relates the fiscal surplus to the excess burden expressed as an extended Harberger formula.
    Date: 2014–08
  8. By: Evers, Maria Theresia; Finke, Katharina; Matenaer, Sebastian; Meier, Ina; Zinn, Benedikt
    Abstract: The German Accounting Law Modernization Act (BilMoG) represents a change in paradigm with regard to the traditionally close relationship between financial and tax accounting in Germany. At the same time, requirements on the disclosure of deferred taxes were revised considerably. We make use of these new disclosure provi-sions to disaggregate firms' deferred tax position and to analyze the components of temporary book-tax differences that add to the reporting gap in Germany. To this end, we apply a unique dataset of hand-collected information from individual financial statements for the fiscal year 2010. We find considerable differences between financial and tax accounting and observe that temporary book-tax differences are mainly associ-ated with mandatory differences in accounting for provisions. The scope and quality of tax-related disclosures vary substantially and the overall disclosure quality is low. In order to identify the determinants of the heterogeneity of disclosure quality, we con-struct an index for voluntary and mandatory disclosure of deferred tax information and conduct multivariate analyses to explain firms' disclosure decisions. We show that the recognition of deferred tax assets and liabilities on the face of the balance-sheet is sig-nificantly and positively related with disclosure quality in the notes to the financial statements. Further, our results suggest that larger firms are more likely to have high-quality tax disclosures and that high implementation costs could also explain the ob-served shortfalls in disclosure quality. Moreover, we find that different reporting incen-tives might apply if reporting on losses is assessed in isolation. We use these insights to derive implications for the discussion about whether and how to reform disclosure re-quirements under German GAAP. --
    Keywords: book-tax conformity,book-tax differences,deferred taxes,disclosure quality,tax reporting
    JEL: H20 H25 K34 M41
    Date: 2014
  9. By: World Bank
    Keywords: Law and Development - Tax Law Macroeconomics and Economic Growth - Investment and Investment Climate Private Sector Development - Emerging Markets Finance and Financial Sector Development - Debt Markets Taxation and Subsidies
    Date: 2014–01
  10. By: Shuhei Aoki; Makoto Nirei (Institute of Innovation Research, Hitotsubashi University)
    Abstract: This paper presents a tractable dynamic general equilibrium model of income and firm-size distributions. The size and value of firms result from idiosyncratic, firm-level productivity shocks. CEOs can invest in their own firms’ risky stocks or in risk-free assets, implying that the CEO’s asset and income also depend on firm-level productivity shocks. We analytically show that this model generates the Pareto distribution of top income earners and Zipf’s law of firms in the steady state. Using the model, we evaluate how changes in tax rates can account for the recent evolution of top incomes in the U.S. The model matches the decline in the Pareto exponent of income distribution and the trend of the top 1% income share in the U.S. in recent decades. In the model, the lower marginal income tax for CEOs strengthens their incentive to increase the share of their firms’ risky stocks in their own asset portfolios. This leads to both higher dispersion and concentration of income in the top income group.
    Keywords: income distribution; wealth distribution; Pareto exponent; top income share; firm size distribution; Zipf’s law
    JEL: D31 L11 O40
    Date: 2014–04
  11. By: Martin Bes; Daniel Alvarez-Estrada
    Keywords: Law and Development - Tax Law Macroeconomics and Economic Growth - Investment and Investment Climate Private Sector Development - Emerging Markets Finance and Financial Sector Development - Debt Markets Taxation and Subsidies
    Date: 2013–06
  12. By: HASUMI Ryo
    Abstract: This paper studies the short-term and long-term effects of tax policy changes on the Japanese economy by using a small open economy dynamic stochastic general equilibrium (DSGE) model with endogenous stochastic trends. The parameters of the model are estimated by a usual Bayesian method based on Japanese quarterly macroeconomic data from 1980 to 2010. A simulation analysis of a 1% to gross domestic product (GDP) scale corporate tax reduction has been implemented, in which fiscal neutrality is kept by raising the consumption tax rate. The real GDP increases by about 1.1% and the consumer price index (CPI) (excluding the effect of the consumption tax change) rises by about 0.2% within two years. This result suggests that such tax policy change induces short-term increases in the growth and inflation rate.
    Date: 2014–08
  13. By: Ángel de la Fuente; Ramón Barberán; Ezequiel Uriel
    Abstract: This paper develops a methodology for the construction of a System of Regionalized Public Accounts (SRPA) using a burden-benefit approach and applies this methodology to the year 2005. The SRPA provides a detailed picture of the regional distribution of the tax burden and of the benefits arising from public expenditure and can be used to make homogeneous comparisons across regions in terms of many budgetary aggregates. This new statistical tool allows a much richer analysis of the regional incidence of public sector activity than the standard approach based on the calculation of regional net fiscal balances that has been used in many previous studies.
    Date: 2014–08
  14. By: Thomas Hemmelgarn (European Commission); Daniel Teichmann
    Abstract: The paper studies the link between corporate income tax reforms and domestic bank entities' financing decisions. We use a dataset of corporate income tax (CIT) reforms and estimate the effect of tax rate changes on leverage, dividend policies and earnings management of banks. The results suggest that taxation influences all three variables in the first three years after the reform. Leverage increases with the CIT rate. The reason is that the statutory CIT rate determines the value of the debt tax shield. A higher tax rate increases incentives to use debt finance when interest payments are deductible from the CIT base. The tax effects we find are statistically and economically significant but considerably lower than those found in previous research. Also, dividend pay-outs increase after an increase of CIT rates. This could indicate that banks actively manage their pay-out policies around tax reforms and adjust their capital structure with changes in dividends. Furthermore, banks increase loss loan reserves in anticipation of tax rate cuts since losses become less valuable with lower CIT rates. In the context of the current regulatory reform in the financial sector, which focuses strongly on improving equity ratios of banks, our results suggest that future tax policies should focus on eliminating the favourable treatment of debt for banks. The reason is that this distortion at least partly undermines the regulatory objectives of increasing (regulatory) capital.
    Keywords: Corporate income tax, tax reform, debt-equity bias, leverage, banks.
    JEL: G21 H25 H32
    Date: 2013–10
  15. By: Riera-Crichton, Daniel; Vegh, Carlos A.; Vuletin, Guillermo
    Abstract: Using non-linear methods, this paper finds that existing estimates of government spending multipliers in expansion and recession may yield biased results by ignoring whether government spending is increasing or decreasing. For industrial countries, the problem originates in the fact that, contrary to one's priors, it is not always the case that government spending is going up in recessions (i.e., acting countercyclically). In almost as many cases, government spending is actually going down (i.e., acting procyclically). Since the economy does not respond symmetrically to government spending increases or decreases, the"true"long-run multiplier for bad times (and government spending going up) turns out to be 2.3 compared to 1.3 if we just distinguish between recession and expansion. In the case of developing countries, the bias results from the fact that the multiplier for recessions and government spending going down (the"when-it-rains-it-pours"phenomenon) is larger than when government spending is going up.
    Keywords: Urban Economics,Economic Stabilization,Public Sector Fiscal Adjustment,Debt Markets,Public Sector Corruption&Anticorruption Measures
    Date: 2014–07–01
  16. By: Francis A. Longstaff; Ilya A. Strebulaev
    Abstract: We study the relation between leverage and corporate tax rates using an extensive data set constructed from all corporate income tax returns filed with the IRS from 1926 to 2009. This data set includes financial statement data from millions of private and public corporations of all sizes. We show that corporate leverage has increased significantly over the past century. We find strong evidence that changes in corporate leverage are directly related to changes in corporate tax rates for all but the smallest firms. These results are robust to the inclusion of control variables for the costs of financial distress, corporate liquidity, and capital market and macroeconomic conditions. The adjustment of leverage to changes in corporate tax rates is slower for smaller firms facing financial constraints. We find that the capital structures of the smallest firms are driven much more by external shocks than is the case for larger firms.
    JEL: G32 G38
    Date: 2014–08
  17. By: Burgert, Matthias; Schmidt , Sebastian
    Abstract: How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, we employ a small stochastic New Keynesian model with a zero bound on nominal interest rates and characterize optimal time-consistent stabilization policies. We focus on two policy tools, the short-term nominal interest rate and debt-financed government spending. The optimal policy response to a liquidity trap critically depends on the prevailing debt burden. While the optimal amount of government spending is decreasing in the level of outstanding government debt, future monetary policy is becoming more accommodative, triggering a change in private sector expectations that helps to dampen the fall in output and inflation at the outset of the liquidity trap. --
    Keywords: Monetary Policy,Fiscal Policy,Deficit spending,Discretion,Zero nominal interest rate bound,New Keynesian model
    JEL: E31 E52 E62 E63 D11
    Date: 2013
  18. By: Feld, Lars P.
    Abstract: The distinct characteristic in James Buchanan's thinking about federalism in contrast to the traditional theory of fiscal federalism is his view about fiscal competition. In this paper, it is demonstrated that this thinking went through three stages. From the 1950s to the beginning of the 1970s, his analyses were well embedded in the traditional fiscal federalism literature and concerned with equity and efficiency issues. In the Leviathan approach starting from the midseventies, he considered competition between jurisdictions as a means to restrict Leviathan governments. In his interpretation of federalism as an ideal political order, Buchanan binds these perspectives together and adds a procedural view: Federalism enables citizens to exert political control, it raises their interest in politics because one vote has more influence, and it facilitates to act morally within their moral capacity. --
    Keywords: James Buchanan,Fiscal Equity,Fiscal Competition,Federalism as Political Order
    JEL: H77 B31 D78
    Date: 2014

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