nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒04‒25
seventeen papers chosen by
Thomas Andrén

  1. Revenue-Maximising Tax Rates in Personal Income Taxation in the Presence of Consumption Taxes: A note By Sanz-Sanz, José Félix
  2. Tax administration and tax systems By Joel Slemrod
  3. Welfare Effects of Distortionary Tax Incentives under Preference Heterogeneity: An Application to Employer-provided Electric Cars By Alexandros Dimitropoulos; Jos N. van Ommeren; Paul Koster; Piet Rietveld†
  4. Optimal Taxation with Risky Human Capital By Marek Kapicka; Julian Neira
  5. Citizen Candidates and Voting Over Incentive-Compatible Nonlinear Income Tax Schedules By Craig Brett; John A Weymark
  6. When a Price is Enough: Implementation in Optimal Tax Design By Sander Renes; Floris T. Zoutman
  7. Corporate Tax Convergence in Asian and Pacific Economies By Yang Chen; Juan Cuestas; Paulo Regis
  8. Are CEOs incentivized to avoid Corporate Taxes? - Empirical Evidence on Managerial Bonus Contracts By Heiner Schmittdiel
  9. Lobbying and Tax Competition in an Agglomeration Economy: A Reverse Home Market Effect By Kato, Hayato
  10. Government Policy and Labor Supply with Myopic or Targeted Savings Decisions By Louis Kaplow
  11. Fiscal and Economic Aspects of Book Consumption in the European Union By Borowiecki, Karol J.; Navarrete, Trilce
  12. Optimal Fiscal Policy By Jasper Lukkezen; Coen Teulings
  13. An Experimental Investigation of Wage Taxation and Unemployment in Closed and Open Economies By Arno Riedl; Frans van Winden
  14. Intensive and Extensive Margins of Fertility, Capital Accumulation, and Economic Welfare By Akira Momota
  15. Financial Fragility and the Fiscal Multiplier By Sweder van Wijnbergen; Christiaan van der Kwaak
  16. Start-up Costs, Taxes and Innovative Entrepreneurship By Pourya Darnihamedani; Joern Hendrich Block; Jolanda Hessels; Aram Simonyan
  17. Participation Constraints in Pension Systems By Roel Beetsma; Ward Romp

  1. By: Sanz-Sanz, José Félix
    Abstract: This note computes revenue-maximising tax rates in personal income taxes in the presence of consumption taxes. It finds that the traditional Laffer analysis, which neglects the effects of marginal tax rates on consumption, overestimates the magnitude of revenue-maximising tax rates. The bias caused by this oversight is computed.
    Keywords: Marginal tax rates, Laffer curve, Consumption taxes, Tax revenue, Tax behaviour,
    Date: 2015
  2. By: Joel Slemrod (University of Michigan)
    Abstract: This is a review of the so-called "Optimal tax systems" approach to the economic analysis of taxation. This approach acknowledges the bunch of instruments the public sector has to collect revenues, but also the multiple responses of taxpayers to them. In a way, this is a more realistic approach to taxation, and so should provide reliable guides to action.
    Keywords: Optimal taxation, tax administration, multiple behavioral responses
    JEL: H20
    Date: 2015
  3. By: Alexandros Dimitropoulos; Jos N. van Ommeren; Paul Koster; Piet Rietveld† (VU University Amsterdam)
    Abstract: This paper presents an approach for the estimation of welfare effects of tax policy changes under heterogeneity in consumer preferences. The approach is applied to evaluate the welfare effects of current tax advantages for electric vehicles supplied as fringe benefits by employers. Drawing on stated preferences of Dutch company car drivers, we assess the short-run welfare effects of changes in the taxation of the private use of these vehicles. We find that the welfare gain of a marginal increase in the taxation of electric company cars is substantial and even outweighs the marginal tax revenue raised.
    Keywords: Social welfare, Latent class, Stated preference, Company car, Electric vehicle, Plug-in hybrid
    JEL: D12 H23 H24 H31 O33 Q58 R41
    Date: 2014–06–02
  4. By: Marek Kapicka (U.C. Santa Barbara and CERGE-EI); Julian Neira (Department of Economics, University of Exeter)
    Abstract: We study optimal tax policies in a life-cycle economy with risky human capital and permanent ability differences, where both ability and learning effort are private information of the agents. The optimal policies balance several goals: redistribution across agents, insurance against human capital shocks, incentives to accumulate human capital, and incentives to work. We show that, in the optimum, i) high-ability agents face risky consumption in order to elicit learning effort while low-ability agents are insured, ii) high-ability agents face a higher savings tax to discourage them from self-insuring, iii) under certain conditions, the inverse marginal labor income tax rate follows a random walk, and iv) the “no distortion at the top” result does not apply if discouraging labor supply increases incentives to invest in human capital. Quantitatively, we find large welfare gains for the U.S. from switching to an optimal tax system.
    Keywords: optimal taxation, income taxation, human capital
    JEL: E6 H2
    Date: 2015
  5. By: Craig Brett (Mount Allison University); John A Weymark (Vanderbilt University)
    Abstract: Majority voting over the nonlinear tax schedules proposed by a continuum of citizen candidates is considered. The analysis extends the finite-individual model of Röell (unpublished manuscript, 2012). Each candidate proposes the tax schedule that is utility maximal for him subject to budget and incentive constraints. Each of these schedules is a combination of the maxi-min and maxi-max schedules along with a region of bunching in a neighborhood of the proposer's type. Techniques introduced by Vincent and Mason (1967, NASA Contractor Report CR-744) are used to identify the bunching region. As in Röell's model, it is shown that individual preferences over these schedules are single-peaked, so the median voter theorem applies. In the majority rule equilibrium, marginal tax rates are negative for low-skilled individuals and positive for high-skilled individuals except at the endpoints of the skill distribution where they are typically zero.
    Keywords: bunching, citizen candidates, ironing, majority voting, nonlinear income taxation
    JEL: H2 D7
    Date: 2014–09–26
  6. By: Sander Renes (Erasmus University Rotterdam, the Netherlands, and University of Mannheim, Germany); Floris T. Zoutman (Norwegian School of Economics, Norway)
    Abstract: This paper studies the design of tax systems that implement a planner's second-best allocation in a market economy. An example shows that the widely used Mirrleesian (1976) tax system cannot implement all incentive-compatible allocations. Hammond's (1979) "principle of taxation" proves that any incentive-compatible allocation can be implemented through at least one tax system. However, this tax system is often undesirable since it severely restricts the choice space of agents in the economy. In this paper we derive necessary and sufficient conditions to verify whether a given tax system can implement a given incentive-compatible allocation. We show that when an incentive-compatible allocation is on the Pareto frontier, and/or surjective onto the choice space, a tax system that equates the marginal tax rates to the optimal wedges can implement the second best, without restricting the choice space of the agents. It follows that the Mirrleesian tax system can successfully implement the second best in the identified classes. Since the second-best allocation of welfarist planners is always on the Pareto frontier, our results (ex post) validate most tax systems proposed in the literature. Outside of the identified classes, the planner may need to restrict the choice space of agents to implement its second best in the market. This sheds new light on rules, quotas and prohibitions used in real-world tax and benefit systems.
    Keywords: optimal non-linear taxation, redistribution, tax system, market implementation, price mechanism, private information
    JEL: H21 H22 D82 H24
    Date: 2014–09–11
  7. By: Yang Chen; Juan Cuestas; Paulo Regis
    Abstract: Countries in the Asia and Pacific region have shown many macroeconomic similarities such as current account surpluses, exchange rate appreciation, export-oriented economies, growth success, etc. This paper argues that there may be one more macroeconomic feature to add to the list: strong tax convergence. Using data on the statutory corporate tax rate in 15 countries from 1980 to 2014, we identify (i) a significant dynamic tax convergence pattern, and (ii) three tax convergence clubs. The latter consist of the small tax haven economies of Hong Kong and Singapore, the East Asian countries (plus one), and the South and Southeast Asian and Oceania countries. These economies, within groups, have been reducing the tax gaps with their neighbours over time.
    Date: 2014–09–16
  8. By: Heiner Schmittdiel (Erasmus University Rotterdam)
    Abstract: In this paper, we test empirically whether there is a relationship between corporate income taxes and CEO bonus payments. Using Compustat and ExecuComp data from 1992 to 2010, we find mixed results. Looking at the whole sample, the average bonus contract rewards tax savings excessively in comparison to other determinants of corporate net income. A possible explanation is that managers require to be compensated for the additional risk inherent in running an aggressive tax strategy. In accordance with previous literature, we document a substantial heterogeneity in compensation practices across industries. It appears that our main result is driven by firms in the Industrial and Retail sectors. We further find that companies with greater tax planning opportunities, for example by virtue of size or operations abroad, are more likely to condition the CEO’s bonus on corporate income taxes.
    Keywords: CEO incentives, executive compensation, tax avoidance
    JEL: H25 H26 M41 M52
    Date: 2014–04–25
  9. By: Kato, Hayato
    Abstract: This paper analyzes tax competition between politically-motivated governments in a world economy with agglomeration forces. The well-known home-market effect, in which countries with a larger home market are attractive for firms, may be reversed as a result of tax competition played by politically-interested governments. The model economy includes trade costs, internationally mobile firms, and two countries of asymmetric size. Each national government sets its tax rate strategically to maximize the weighted sum of residents’ welfare and political contributions by owners of firms as special interest groups. It is shown that, if the governments heavily care about contributions and trade costs are low, the small country attracts a more than proportionate share of firms by setting a lower tax rate.
    Keywords: Tax/subsidy competition, Lobbying, Market size, Reverse home-market effect, International oligopoly
    JEL: F15 F22 H20 H30
    Date: 2015–04
  10. By: Louis Kaplow
    Abstract: A central justification for social insurance and for other policies aimed at retirement savings is that individuals may fail to make adequate provision during their working years. Much research has focused on myopia and other behavioral limitations. Yet little attention has been devoted to how these infirmities, and government policies to rectify them, influence labor supply. This linkage could be extremely important in light of the large pre-existing distortion due to income and consumption taxation and income-based transfer programs. For example, might myopic individuals, as a first approximation, view payroll taxes and other withholding to fund retirement savings as akin to an income tax, while largely ignoring the distant future retirement benefits that they fund? If so, the distortion of labor supply may be many times higher than otherwise, making savings-promotion policies much more costly than appreciated. Or consider what may be the labor supply implications for an individual who is defaulted into higher savings and, as a consequence, sees concomitantly lower take-home pay. This essay offers a preliminary, conceptual exploration of these questions. In most of the cases considered, savings policies do not act purely like a tax despite individuals’ non-optimizing savings behavior, and in some cases labor supply actually is raised, not lowered, in which event policies that boost savings may be significantly more welfare-enhancing than recognized. Accordingly, there is a compelling need for empirical exploration of the interaction between nonoptimal savings behavior and labor supply.
    JEL: D11 D91 H21 H24 H31 H55 J22 J26
    Date: 2015–04
  11. By: Borowiecki, Karol J. (Department of Business and Economics); Navarrete, Trilce (Department of Business and Economics)
    Abstract: One of the available and yet underappreciated tools in cultural policy at the national level is the reduction of VAT rates for cultural goods and services. We document the standard and reduced VAT rates in EU-28 countries in the period from 1993 to 2013 and explore the underlying determinants. We further introduce a simple theoretical framework to explain how reduced fiscal rates are expected to decrease prices and increase quantities of the consumed cultural goods and services. We then estimate quantitatively that a decrease in the VAT rate for books by one percentage point is associated with an economically significant drop in the price by 2.6 percent. Finally, we show the positive effect of a fiscal rate reduction on the book expenditure of well-off households, where a one percentage point decrease in the VAT rate for books leads to an increase in expenditure by 2.7 percent.
    Keywords: Cultural consumption; book markets; cultural policy; value added tax; fiscal policy
    JEL: H21 H31 I30 K34 Z11
    Date: 2015–04–15
  12. By: Jasper Lukkezen (Utrecht University, and CPB); Coen Teulings (University of Amsterdam, and CPB)
    Abstract: This paper derives and estimates rules for fiscal policy that prescribe the optimal response to changes in unemployment and debt. We combine the reduced form model of the economy from a linear VAR with a non-linear welfare function and obtain analytic solutions for optimal policy. The variables in our reduced form model –growth, unemployment, primary surplus– have a natural rate that cannot be affected by policy. Policy can only reduce fluctuations around these natural rates. Our welfare function contains future GDP and unemployment, the relative weights of which determine the optimal response. The optimal policy rule demands an immediate and large policy response that is procyclical to growth shocks and countercyclical to unemployment shocks. This result holds true when the weight of unemployment in the welfare function is reduced to zero. The rule currently followed by policy makers responds procyclically to both growth and unemployment shocks, and does so much slower than the optimal rule, leading to significant welfare losses.
    Keywords: optimal control, optimal policy, fiscal policy rules, fiscal consolidation, debt sustainability
    JEL: E6 H6
    Date: 2013–05–06
  13. By: Arno Riedl; Frans van Winden (University of Amsterdam)
    Abstract: We investigate experimentally the economic effects of wage taxation to finance unemployment benefits for a closed economy and an international economy. The main findings are the following. (i) There is clear evidence of a vicious circle in the dynamic interaction between the wage tax and unemployment. (ii) Employment is boosted by budget deficits but subsequent tax rate adjustments to balance the budget lead to employment levels substantially lower than theoretically predicted. (iii) A sales risk for producers due to price uncertainty on output markets appears to cause a downward pressure on factor employment. For labor the wage tax exacerbates this adverse effect.<P>This discussion paper resulted in a publication in the <A href=""><I>European Economic Review</I></A>.(51(4) 871-900.)
    Keywords: Experiments; international economics; wage taxation; unemployment
    JEL: C90 D50 E24 F41
  14. By: Akira Momota (University of Tsukuba)
    Abstract: This paper investigates the impact of low fertility on long-term capital accumulation and economic welfare. We find that the impact differs according to whether the low fertility arises from a decrease in the intensive or extensive margin of fertility. We show that an increase in the intensive margin of fertility decreases the capital stock and economic welfare. Conversely, we identify a U-shaped relationship between the extensive margin of fertility and the capital stock because of the existence of two opposing effects, such that the decline in fertility may reduce economic welfare. Furthermore, we show that an intragenerational income redistribution policy can eliminate the welfare loss resulting from the incomplete market.
    Keywords: Childlessness, Economic growth, Extensive margin of fertility, Income redistribution, Intensive margin of fertility, Overlapping generations.
    JEL: H23 J13 O41
    Date: 2015–03
  15. By: Sweder van Wijnbergen (University of Amsterdam); Christiaan van der Kwaak (University of Amsterdam)
    Abstract: We investigate the effectiveness of `Keynesian' fiscal stimuli when government deficits and debt rollovers are (possibly partially) financed by balance sheet constrained financial intermediaries. Because financial intermediaries operate under a leverage constraint, deficit financing of fiscal stimulus packages will cause interest rates to rise as private loans are crowded out by government debt in the credit provision channel. This lowers investment and (future) capital stocks, which affects output negatively for a prolonged period. Anticipations of these future consequences cause the price of capital and bonds to drop immediately when the policy is announced, inflicting capital losses on banks which leads to further tightening of leverage constraints and credit market conditions. This balance sheet effect triggers a negative amplification cycle further lowe ring the fiscal multiplier. Longer maturity debt leads to larger capital losses and lower Keynesian multipliers. When in addition sovereign default risk is introduced, additional capital losses may occur and outcomes deteriorate further after a deficit financed stimulus package, eventually implying a cumulative Keynesian multiplier close to zero or even negative. We do not argue that multipliers are always negative; but financial fragility and sovereign risk problems may severely lower them, possibly to the point of becoming negative.
    Keywords: Financial Intermediation, Macrofinancial Fragility, Fiscal Policy, Sovereign Default Risk
    JEL: E44 E62 H30
    Date: 2014–01–14
  16. By: Pourya Darnihamedani (Erasmus University Rotterdam, the Netherlands); Joern Hendrich Block (University of Trier, Trier, Germany); Jolanda Hessels (Erasmus University Rotterdam, the Netherlands); Aram Simonyan (National Academy of Science of the Republic of Armenia, Yerevan, Republic of Armenia)
    Abstract: Prior research suggests that start-up costs and taxes negatively influence entry into entrepreneurship. Yet, no distinction is made regarding the type of entrepreneurship, particularly innovative versus non-innovative entrepreneurship. Start-up costs, being one-off costs, may reduce the entry of entrepreneurs whose ideas are not very promising, thus increasing the proportion of innovative entrepreneurs. Taxes, being recurring costs, may reduce the “prize” of innovation and the profit from entrepreneurship, discouraging individuals with innovative business ideas from becoming entrepreneurs. Analyzing a dataset of 632,116 individuals, including 43,223 entrepreneurs from 53 countries, we can confirm our main predictions. Our paper contributes to the discussion on how governmental regulation costs and taxes influence innovative entrepreneurship and technological deve lopment.
    Keywords: Innovative entrepreneurship, corporate taxes, personal income taxes, start-up costs, entrepreneurial profit
    JEL: H24 H25 L26 L51 O31
    Date: 2015–01–23
  17. By: Roel Beetsma (University of Amsterdam); Ward Romp (University of Amsterdam)
    Abstract: We explore voluntary participation in pension arrangements. Individuals only participate when participation is more attractive than autarky. The bene􀏐it of participation is that risks can be shared with future generations. We apply our analysis to a pay-as-you-go system, a funded system without buffers and a funded system with buffers. Buffers play a particularly interesting role, because they raise the sensitivity of the contributions to the asset returns. In particular, compared to a system without buffer requirements, they require higher contributions when asset returns are low. Moreover, individual contributions may be increasing or decreasing in the size of the young cohort, depending on whether the fund has more or less reserves than required. We con􀏐ine ourselves to recursive settings and study equilibria characterised by thresholds on the contribution that young generations are prepared to make assuming that the future young apply the same threshold. For standard parameter settings two such equilibria exist, of which only the one with the higher threshold is consistent with the initial young being prepared to start the system. Finally, we explore the social welfare maximising policy parameter settings for various levels of uncertainty and risk aversion.
    Keywords: Participation constraints, pension funds, pay-as-you-go, buffers, risk-sharing
    JEL: E62 H55
    Date: 2013–09–23

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