nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒02‒11
nineteen papers chosen by
Thomas Andrén

  1. Eliciting taxpayer preferences increases tax compliance By Jan-Emmanuel De Neve; Cait Lamberton; Michael I. Norton
  2. Corporate Taxation and Firm Location in Germany By Götz Zeddies
  3. Swedish Taxation Since 1862: An Overview By Henrekson, Magnus; Stenkula, Mikael
  4. Taxes and Private Consumption Expenditure: A Component Based Analysis for Turkey By Kaya, Ayşe; Şen, Hüseyin
  5. The effect of taxes on corporate financing decisions: Evidence from the German interest barrier By Alberternst, Stephan; Sureth, Caren
  6. What Do We Know About Evolution of Top Wealth Shares in the United States? By Kopczuk, Wojciech
  7. Tax and transfer policies and female labor supply in the EU By Kalíšková, Klára
  8. Sovereign Debt vs Redistributive Taxes: Financing Recoveries in Unequal and Uncommitted Economies By Mikhail Golosov; Ali Shourideh; Alessandro Dovis
  9. Labour Force Participation and Tax-Benefit Systems: A Cross-Country Comparative Perspective By Kamil Galuscak; Gabor Katay
  10. Who Would Pay More if the Social Security Payroll Tax Cap Were Raised or Scrapped? By Nicole Woo; Cherrie Bucknor; John Schmitt
  11. Saving for a rainy day: estimating the appropriate size of U.S. state budget stabilization funds By Zhao, Bo
  12. What understanding of capital for tomorrow?. By Gaël Giraud
  13. Essays in financial reporting, tax, and politics By Janssen, W.H.P.
  14. Consumer valuation of fuel costs and the effectiveness of tax policy: Evidence from the European car market By Grigolon, Laura; Reynaert, Mathias; Verboven, Frank
  15. Labour Market Matters - January 2015 By Tran, Vivian
  16. The Social Security Benefits of Sitting Senators in 2015 By Alan Barber; Dean Baker
  17. The Transfer Paradox in Welfare Space By Thomas Demuynck; Bram De Rock; Victor Ginsburgh
  18. Are Recipients of Social Assistance 'Benefit Dependent'? Concepts, Measurement and Results for Selected Countries By Immervoll, Herwig; Jenkins, Stephen P.; Königs, Sebastian
  19. Redistribution by Means of Lotteries. By Stéphane Gauthier; Guy Laroque

  1. By: Jan-Emmanuel De Neve; Cait Lamberton; Michael I. Norton
    Abstract: Two experiments show that eliciting taxpayer preferences on government spending—providing taxpayer agency--increases tax compliance. We first create an income and taxation environment in a laboratory setting to test for compliance with a lab tax. Allowing a treatment group to express nonbinding preferences over tax spending priorities, leads to a 16% increase in tax compliance. A followup online study tests this treatment with a simulation of paying US federal taxes. Allowing taxpayers to signal their preferences on the distribution of government spending, results in a 15% reduction in the stated take-up rate of a questionable tax loophole. Providing taxpayer agency recouples tax payments with the public services obtained in return, reduces general anti-tax sentiment, and holds satisfaction with tax payment stable despite increased compliance with tax dues. With tax noncompliance costing the US government $385billion annually, providing taxpayer agency could have meaningful economic impact. At the same time, giving taxpayers a voice may act as a two-way "nudge," transforming tax payment from a passive experience to a channel of communication between taxpayers and government.
    Keywords: Tax compliance; taxpayer agency; taxpayer satisfaction; government spending
    JEL: D00 H26 H30 H50 I31
    Date: 2014–05
  2. By: Götz Zeddies
    Abstract: German Fiscal Federalism is characterized by a high degree of fiscal equalization which lowers the efficiency of local tax administration. Currently, a reform of the fiscal equalization scheme is on the political agenda. One option is to grant federal states the right to raise surtaxes on statutory tax rates set by the central government in order to reduce the equalization rate. In such an environment, especially those federal states with lower economic performance would have to raise comparatively high surtaxes. With capital mobility, this could further lower economic performance and thus tax revenues. Although statutory tax rates are so far identical across German federal states, corporate tax burden differs for several reasons. This paper tries to identify the impact of such differences on firm location. As can be shown, effective corporate taxation did seemingly not have a significant impact on firm location across German federal states.
    Keywords: fiscal equalization, corporate taxation, surtaxes, firm location
    JEL: H25 H32 H71 H77
    Date: 2015–01
  3. By: Henrekson, Magnus (Research Institute of Industrial Economics (IFN)); Stenkula, Mikael (Research Institute of Industrial Economics (IFN))
    Abstract: This paper examines the development of taxation in Sweden from 1862 to 2013. The examination covers six key aspects of the Swedish tax system: the taxation of labor income, capital income, consumption, inheritance and gift, wealth and real estate. The importance of these taxes varied greatly over time and Sweden increasingly relied on broad-based taxes (such as income taxes and general consumption taxes) and taxes that were less visible to the public (such as payroll taxes and social security contributions). The tax-to-GDP ratio was initially low and relatively stable, but from the 1930s, the ratio increased sharply for 50 years. Towards the end of the period, the tax-to-GDP ratio declined significantly. The analysis is based on a project conducted at the Research Institute of Industrial Economics (IFN) and provides both a unique length and breadth of the development of a national tax system.
    Keywords: Keywords: Income tax; Wealth tax; Inheritance and gift tax; Consumption tax; Real estate tax; Tax reforms
    JEL: H20 H71 N43 N44
    Date: 2015–01–02
  4. By: Kaya, Ayşe; Şen, Hüseyin
    Abstract: The purpose of this paper is to analyze empirically the short- and long-run effects of tax shocks on private consumption expenditure on component basis in Turkey. To do so, first, we decomposed private consumption expenditure into four major sub-categories, including food, education, and transportation, among others. And then, we employed a Structural VAR (SVAR) model which was calibrated to quarterly data set for the period 2003:Q1-2013:Q3. Specifically, our empirical findings show that the effects of tax shocks on the components of private consumption expenditure differ in the short- and long-run. In the short-run, all the taxes which we considered have a significant effect on the components of private consumption expenditure, whereas in the long-run only two taxes the VAT and the personal income tax– affect it. However, it is important to highlight that the components of private consumption expenditure are much more affected by the VAT in the both short- and long-run. In brief, the findings reveal that the effects of tax shocks on private consumption expenditure shows difference, changing according to sorts of taxes, components of the expenditure, and the length of period.
    Keywords: Tax Shocks, VAT, Special Consumption Tax, Personal Income Tax, Private Consumption Expenditure, Fiscal Policy, Turkey.
    JEL: E21 E62 H20 H30
    Date: 2015–02–03
  5. By: Alberternst, Stephan; Sureth, Caren
    Abstract: The theoretical literature suggests that when taking tax effects into account, debt ought to be preferable to equity. However, there are no uniform predictions of the size of this tax benefit (tax shield) in comparison to an opposing increasing cost of debt (especially insolvency costs). The vast body of empirical studies on the impact of taxation on capital structure only provides puzzling effects. We believe the German corporate tax reform in 2008, which introduced an interest barrier as a "quasiexperiment", is a promising opportunity to investigate the effects that arise from a reform of interest deductibility. We study capital structure adjustments empirically using financial statement data from German companies. We consider a study of German tax reform on the basis of German data of general interest because, first, similar tax reforms have been conducted in several countries. Second, the availability of single entity financial statements for German companies allow us to capture tax and capital structure details that have not been available in most prior studies. Third, the major characteristics of the German tax system can be regarded as representative for most European and the major Asian countries. All of this information enables us to contribute to solving the capital structure puzzle in a unique way. With significance at the 5% level, we find evidence that the companies that are affected by the interest barrier reduce their leverage by 3 percentage points more than companies that are not affected. We are the first to employ a detailed matching approach to the underlying rich dataset, which enables us to overcome some of the limitations of previous studies. While many prior empirical studies on capital structure have provided mixed results on capital structure reactions, we find robust evidence for the impact of tax reforms on corporations' financing decisions.
    Keywords: financing decisions,German tax reform,interest barrier,leverage, taxation,thin capitalisation rules
    JEL: H21 H24 H25 C54
    Date: 2015
  6. By: Kopczuk, Wojciech
    Abstract: I discuss available evidence about the evolution of top wealth shares in the United States over the last one hundred years. The three main approaches – Survey of Consumer Finances, estate tax multiplier techniques and capitalization method – generate generally consistent findings until mid-1980s but diverge since then, with capitalization method showing a dramatic increase in wealth concentration and the other two methods showing at best a small increase. I discuss strengths and weaknesses of different approaches. The increase in capitalization estimates since 2000 is driven by a dramatic and surprising increase in fixed income assets. There is evidence that estate tax estimates may not be sufficiently accounting for mortality improvements over time. The non-response and coverage issues in the SCF are a concern. I conclude that changing nature of top incomes and the increased importance of self-made wealth may explain difficulties in implementing each of the methods and account for why the results diverge.
    Keywords: wealth inequality
    JEL: D31
    Date: 2015–01
  7. By: Kalíšková, Klára
    Abstract: This study contributes to the female labor supply responsiveness literature by measuring the effect of tax-benefit policies on female labor supply based on a broad sample of 26 European countries in 2005-2010. The tax-benefit microsimulation model EUROMOD is used to calculate a measure of work incentives at the extensive margin-the participation tax rate, which is then used as the main explanatory variable in a female employment equation. This allows me to deal with the endogeneity of income in a new way by using a simulated instrumental variable based on a fixed EU-wide sample of women. Results suggest that a 10 percentage point increase in the participation tax rate decreases the female employment probability by 2 percentage points. The effect is higher for single mothers, for women in the middle of the skills distribution, and in countries that have lower rates of female employment.
    Date: 2015–01–26
  8. By: Mikhail Golosov (Princeton University); Ali Shourideh (University of Pennsylavnia); Alessandro Dovis (Penn State)
    Abstract: In this paper, we study optimal design of taxes and debt in the medium term in presence of domestic inequality and lack of commitment. We study an OLG economy in which individuals work and save for retirement when young. Government of the small open economy provides transfers to both the young and the old while it can decide to finance its spending via taxation of labor income as well as borrowing from the rest of the world. We show that in such environment, government has two different motives to renege on its past promises: 1. `Domestic default' to reduce domestic wealth inequality, 2. `Sovereign default' to reduce transfers to foreign lenders. We show that episodes of high income inequality create strong incentive for sovereign default. We show that this interaction between the domestic and sovereign default motive leads to oscillatory dynamics in the model. That is, it is optimal for such economies to periodically raise taxes above and below its long-run levels during an episode of economic recovery. Moreover, the level of after tax income inequality is time-varying: When the government is repaying foreign debt it is optimal to allow for more inequality.
    Date: 2014
  9. By: Kamil Galuscak; Gabor Katay
    Abstract: This paper investigates the extent to which cross-country differences in aggregate participation rates can be explained by divergence in tax-benefit systems. We take the example of two countries, the Czech Republic and Hungary, which – despite a lot of similarities – differ markedly in labour force participation rates. We first replicate for Czech household-level data the labour supply estimation for Hungary presented in Benczur et al. (2014) and use the two perfectly comparable estimates to simulate how the aggregate participation rate would change in one country if the other country's tax and social welfare system were adopted. Our estimation results yield similar labour supply elasticities for both countries, suggesting that individual preferences are essentially identical. The simulation results show that about one-half of the total difference in the participation rates of the 15–74 years old population can be explained by differences in the tax-benefit systems. The highest response is obtained for married women or women of childbearing age. This is related to the more generous maternity benefit system in place in Hungary as compared to the Czech Republic.
    Keywords: Cross-country comparison, labour supply, microsimulation, participation rate, tax-benefit systems
    JEL: C63 H24 I38 J22 P50
    Date: 2014–12
  10. By: Nicole Woo; Cherrie Bucknor; John Schmitt
    Abstract: On January 1st, the maximum amount of annual earnings subject to the Social Security tax – a.k.a. the payroll tax cap – increased to $118,500. Every year, this cap is adjusted to keep up with inflation. However, many American workers are not aware that any wages above the cap are not taxed by Social Security. This issue brief analyzes Census Bureau data to determine how many workers would be affected if the Social Security payroll tax cap were raised or phased out. We find that the richest 6.1 percent of workers (less than 1 in 15) would pay more if the cap were scrapped. Only the top 1.5 percent (1 in 67) and 0.7 percent (1 in 140) would be affected if the tax were applied to earnings over $250,000 and $400,000, respectively. When we look at the wage earners according to gender, race or ethnicity, age, or state of residence, the share of workers who would be affected by increasing or phasing out the cap varies widely. Keywords: CPI, social security, social security cap, inequality, payroll tax cap,
    Keywords: social security, social security cap, earnings
    JEL: H H5 H55 H2 H3
    Date: 2015–01
  11. By: Zhao, Bo (Federal Reserve Bank of Boston)
    Abstract: Rainy day funds (RDFs) are potentially an important countercyclical tool for states to stabilize their budgets and the overall economy during economic downturns. However, U.S. states have often found themselves exhausting their RDFs and having to raise tax rates or reduce expenditures while still experiencing a downturn. Therefore, how much each state should save in its RDF has become an increasingly important policy question. To address this issue, this paper applies several new methodologies to develop target RDF levels for each U.S. state, based on the estimated short-term revenue component associated with business cycles and also on policymakers' preferences for stable tax rates and expenditures.
    Keywords: rainy day funds; budget stabilization funds; revenue cyclicality
    JEL: E32 E63 H71 H72
    Date: 2014–10–01
  12. By: Gaël Giraud (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This paper discusses the thesis put forward by Piketty (2014a) stressing the risk of an explosion of wealth inequality because capital accumulates faster than labor income in several countries, especially in the U.US. Although the overall empirical conclusion on the rise of inequalities is indisputable, I point out that the economic modeling underlying this approach exhibits several important shortcomings. Moreover, there are more effective policy recommendations to fight against inequality than the one highlighted in the book —namely, a world-wide global tax on capital.
    Keywords: Capital, capitalism, inequality, Kaldor, Solow, capital tax.
    JEL: B22 B4 H20 N10
    Date: 2014–09
  13. By: Janssen, W.H.P. (Tilburg University, School of Economics and Management)
    Abstract: This dissertation contains three essays on financial reporting, tax, and politics. The first essay explores whether the tax authority is able to generate spillover effects for auditors. The IRS can generate spillover effects for auditors, as a strong IRS increases manager’s incentives to comply with tax regulations, which causes auditors to reduce the assessment of audit risk. The main result in this essay is consistent with this prediction, as auditors demand lower audit fees in IRS districts where firms report higher GAAP effective tax rates. The second essay explores whether a firm’s commitment in providing disaggregated accounting information disciplines managers such that they provide more disaggregated forward looking disclosures. As of 1998, SFAS 131 allows US firms to withhold audited profitability accounting information on geographical segments. The results in this essay are consistent with a disciplining role for geographical segment information as the results indicate that firms that do not show commitment in continuing to provide segmented profitability accounting information reduce their disaggregated forward looking disclosures on foreign operations in the MD&A. The third essay explores whether firms use executive compensation to compensate managers for contributing their personal money to the political process. The results seem consistent with this expectation as firms that used corporate funds for contributing to politics, but were unable to do so after the adoption of the Bipartisan Campaign Reform Act (BCRA) in 2002, increased their executive cash compensation. These firms increase salaries even more when investors react very negatively to the adoption of BCRA.
    Date: 2015
  14. By: Grigolon, Laura; Reynaert, Mathias; Verboven, Frank
    Abstract: To what extent do car buyers undervalue future fuel costs, and what does this imply for the effectiveness of alternative tax policies? To address both questions, we show it is crucial to account for consumer heterogeneity in mileage and other dimensions. We use detailed product-level data for a long panel of European countries, and exploit variation in fuel prices by engine type. We find there is only modest undervaluation of fuel costs. As a consequence, fuel taxes are unambiguously more effective in reducing fuel usage than product taxes based on fuel economy, because fuel taxes better target high mileage consumers.
    Keywords: effectiveness of tax policy; European car market; fuel cost valuation
    JEL: H23 L62
    Date: 2014–12
  15. By: Tran, Vivian
    Abstract: Income inequality has risen significantly since the 1980s, with the share of income among the top 1% increasing by 27% between 1980 and 2005. While the widening gap between the rich and poor is concerning, CLSRN affiliates Abigail Payne (McMaster University) and Justin Smith (Wilfrid Laurier University) examine whether the rate of charitable giving may increase as income inequality rises in a new study entitled “Does Income Inequality Increase Charitable Giving?†(CLSRN Working Paper no. 150). The study finds that rising income inequality results in overall increases in charitable giving. During the 1990s, an increase in the number of immigrants and their rising poverty rates (low-income rates) accounted for much of the increase in the overall Canadian poverty rate. However, this pattern changed in the 2000s, when little of the change in the Canadian poverty rates or income inequality was associated with immigration. A study entitled “Immigration, Low Income and Income Inequality in Canada: What’s New in the 2000s†(CLSRN Working Paper no. 148) by CLSRN affiliates Garnett Picot (Queen’s University, Citizenship and Immigration Canada) and Feng Hou (Statistics Canada), examines the direct effect of immigration on low income and family-income inequality. The study finds that overall, the rising immigrant population over the 2000s had little impact on Canadian economic indicators such as the low-income rate, high income rate, income inequality and earnings inequality. These results differ from those observed during the 1990s.
    Keywords: charitable giving, donations, income inequality, immigrants, low income, high income, income inequality
    JEL: H3 H44 J38 J31 J61
    Date: 2015–01–29
  16. By: Alan Barber; Dean Baker
    Abstract: This issue brief presents the scheduled Social Security benefit for each current member of the Senate. The issue brief is intended to inform Senators -- and the general public -- about Social Security and, assuming no changes to current policy, demonstrate that it will pay full benefits through 2030 and roughly 75 percent of benefits from 2031 on.
    Keywords: social security, social security cap, earnings, senators
    JEL: H H5 H55 H2 H3
    Date: 2015–01
  17. By: Thomas Demuynck; Bram De Rock; Victor Ginsburgh
    Abstract: The transfer paradox describes a situation in which a transfer ofendowments between two agents results in a welfare decrease for therecipient and a welfare increase for the donor. It is known that ina two-agent regular exchange economy with an arbitrary number ofgoods, the transfer paradox occurs only if the price equilibrium isunstable. In this paper, we show that in the space of welfare weights,the set of stable equilibria and the set of no-transfer paradox equilibriacoincide. As a corollary we also obtain that for two agents and anarbitrary number of goods, the index of an equilibrium in price spacecoincides with its index in welfare space.
    Keywords: welfare equilibrium; exchange economy; transfer paradox
    JEL: D51 D60
    Date: 2015–01
  18. By: Immervoll, Herwig (OECD, Paris); Jenkins, Stephen P. (London School of Economics); Königs, Sebastian (OECD)
    Abstract: Means-tested Social Assistance (SA) benefits play an important role as social protection floors supporting households in financial difficulties. This paper presents evidence on the patterns of SA benefit receipt in a selection of OECD and EU countries. It provides an overview of the role of SA benefits in social protection systems and assesses the generosity of benefit payments. It then studies the dynamics of SA benefit receipt based on micro-level data describing trends in aggregate receipt and transition rates and presenting new evidence on spell durations and repeat spells. The final part of the paper summarizes recent empirical evidence on state dependence (or 'scarring effects') in benefit receipt and discusses its possible sources and policy implications.
    Keywords: social assistance, welfare benefits, state dependence, benefit dependence, scarring
    JEL: I38 J60 J64 C23
    Date: 2015–01
  19. By: Stéphane Gauthier (Centre d'Economie de la Sorbonne - Paris School of Economics); Guy Laroque (Sciences-Po, University College London and Institute for Fiscal Studies)
    Abstract: A government designs transfers to agents in the absence of information on their preferences. The second-best allocation is equal sharing among citizens when the awards are deterministic. We provide a necessary and sufficient condition under which lotteries improve upon the egalitarian outcome. The condition requires that the citizens with large social weights have low risk aversion, and that the left tail of the distribution of risk aversion be sufficiently dispersed.
    Keywords: Lerner egalitarianism, random redistribution, incentives, qualified constraints.
    JEL: H21 H23 H26
    Date: 2015–01

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