nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒05‒02
fifteen papers chosen by
Thomas Andrén

  1. An analysis on optimal taxation and on policy changes in an endogenous growth model with public expenditure By Thomas Renstrom; Luca Spataro
  2. A bird’s eye view on 20 years of tax-benefit reforms in Belgium By André Decoster; Serio Perelman; Dieter Vandelannoote; Toon Vanheukelom; Gerlinde Verbist
  3. Reforming the Tax on Immovable Property: Taking Care of the Unloved By Hansjörg Blöchliger
  4. Tax salience: an experimental investigation By Morone, Andrea; Nemore, Francesco
  5. The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists By Enrico Moretti; Daniel Wilson
  6. Tax Compliance and Information Provision: A Field Experiment with Small Firms By Doerrenberg, Philipp; Schmitz, Jan
  7. Factors Influencing Unincorporated Enterprises to Register under Value Added Tax (VAT): An Analysis with Enterprises Survey Data. By Mukherjee, Sacchidananda; Rao, R. Kavita
  8. The macroeconomic impact of the income tax reductions in Malta By Grech, Aaron George
  9. Many-Person Ramsey Rule and Nonlinear Income Taxation By Stéphane Gauthier; Fanny Henriet
  10. Instruments, rules and household debt: The effects of fiscal policy By Javier Andrés; José E.Boscá; Javier Ferri
  11. Fiscal policy, interest rate spreads,and the zero lower bound By Christian Bredemeier; Falko Juessen; Andreas Schabert
  12. Distributional Effects of Optimal Commodity Taxes Combined with Minimum Income Programs in Brazil By Ana Luiza N. H. Barbosa; Eduardo P. S. Fiuza; Marcel Scharth; Seki Asano
  13. Benefit Reentitlement Conditions in Unemployment Insurance Schemes By Andersen, Torben M.; Kristoffersen, Mark Strom; Svarer, Michael
  14. Optimal Social Assistance and Unemployment Insurance in a Life-Cycle Model of Family Labor Supply and Savings By Haan, Peter; Prowse, Victoria L.
  15. Is There a Link Between Employer-Provided Health Insurance and Job Mobility? Evidence from Recent Micro Data By Chute, Benjamin W.; Wunnava, Phanindra V.

  1. By: Thomas Renstrom (University of Durham (UK)); Luca Spataro (Dipartimento di Economia e Management, University of Pisa (Italy))
    Abstract: In this work we analyse the issue of optimal taxation and of policy changes in an endogenous growth model driven by public expenditure, in the presence of endogenous fertility and labour supply. While normative analysis confirms the Chamley-Judd result of zero capital income tax, positive analysis reveals that the presence of endogenous fertility produces different results as for the effects of taxes on total employment.
    Keywords: Taxation, endogenous fertility, critical level utilitarianism, population
    JEL: D63 E21 H21 J13 O4
    Date: 2015–04
  2. By: André Decoster; Serio Perelman; Dieter Vandelannoote; Toon Vanheukelom; Gerlinde Verbist
    Abstract: Belgium has seen major changes in its tax-benefit system over the past twenty years. These changes have, to a large extent, co-determined the evolution of disposable incomes of Belgian households on one hand, and their incentives to work on the other. In this paper we assess equity and efficiency aspects of changes in tax-benefit policies over the full course of 1992-2012. By simulating effects of current and past tax-benefit policies using the microsimulation model MEFISTO-EUROMOD, we summarize the shifts in policy orientation over this period using two summary measures of redistribution and work incentives. Our three main findings are: 1) the changes in the tax-benefit system have to a large extent been pro-poor and redistribution has been increased; 2) the introduction of an earned income tax credit and the lowering of personal income taxes has contributed to improve work incentives, but this effect was partially eroded by an increase in unemployment benefits since 2000; 3) the results crucially depend on whether one chooses as 'no policy change' counterfactual indexation with inflation or indexation with nominal wage growth.
    Keywords: labour supply, marginal cost of public funds, microsimulation, redistribution, tax-benefit system, taxation
    JEL: H21 H41 J20
    Date: 2015–04
  3. By: Hansjörg Blöchliger
    Abstract: The tax on immovable property recently started to regain its former significance, but the tax yield still remains low, with slightly more than 1% of GDP and wide variation across countries. Against this background this paper surveys property tax policy in OECD countries and analyses the efficiency, distributional and stabilisation properties of property tax. Despite rising house prices, property tax revenues are modest, because tax values of property are set below market values; and because myriads of tax exemptions reduce the tax base and tax revenues further. While property taxes are considered the least harmful to growth, a pure land tax is preferable to a tax on investment. Property taxes can be anything from progressive to regressive, depending on tax incidence and the distribution of immovable property across income groups. Property taxes tend to stabilise house prices, although the effect is rather small. Finally, property taxes can underpin sustainable land use. Political economy factors largely explain resistance against property tax reform, which, among others, might include measures for poor and cash-strapped households. Property taxes are an overwhelmingly sub-national tax, and property tax reforms that include reforms of intergovernmental fiscal frameworks may turn out to be more successful.<P>Réformer la taxe foncière, parent pauvre du régime fiscal<BR>L’impôt sur la propriété immobilière a récemment commencé à regagner de son ancienne importance, mais les recettes qu’il procure restent faibles, à peine plus de 1 % du PIB et avec de larges variations d’un pays à l’autre. Dans ce contexte, ce document examine les politiques en la matière dans les pays de l’OCDE et analyse les propriétés de l’impôt foncier en termes d’efficacité, de redistribution et de stabilisation. Malgré la hausse des prix des logements, les recettes de l’impôt foncier sont modestes, parce que la valeur fiscale des biens immobiliers est fixée à un niveau inférieur aux prix du marché ; et parce qu’une myriade d’exemptions fiscales réduisent l’assiette d’imposition et minorent les recettes. Les impôts fonciers sont considérés comme les moins préjudiciables à la croissance, et une taxe foncière pure est préférable à une taxe sur l’investissement. Les impôts fonciers peuvent être plus ou moins progressifs ou régressifs, en fonction de l’incidence fiscale et de la distribution des biens immobiliers entre groupes de revenus. Les impôts fonciers ont tendance à stabiliser les prix des logements, bien que cet effet soit assez minime. Enfin, les impôts fonciers peuvent favoriser une utilisation durable des terres. Des facteurs liés à l’économie politique expliquent pour une bonne part la résistance à la réforme de la fiscalité immobilière, qui pourrait englober entre autres des mesures visant les ménages pauvres et à court de liquidités. L’impôt foncier est essentiellement un impôt infranational, et les réformes qui s’emploient également à refondre le cadre budgétaire interadministrations seront probablement plus efficaces.
    Keywords: immovable property tax, local taxation, fiscal federalism, fédéralisme budgétaire, fiscalité locale, impôt sur la propriété immobilière
    JEL: H21 H71 H77
    Date: 2015–04–22
  4. By: Morone, Andrea; Nemore, Francesco
    Abstract: A basic principle in public finance is tax incidence equivalence (well known as Liability Side Equivalence Principle, LES). This principle holds that the burden of a unit tax on buyers and sellers is independent of who actually pays the tax. Moreover, economic theory assumes an individual behaviour model in which subjects act as if they have to fully optimize changes in tax policies by correctly processing information in their possession. However, a wide empirical literature focused on some psychological issues that have as yet not been considered theoretically. It is easy to assume that the introduction of tax-inclusive prices and tax-exclusive prices could lead to price misperception. This means that individuals could not perceive the exact burden of a tax when it is not salient (as it could be in the case of tax-exclusive prices). We conduct a laboratory experiment that attempts to answer two relevant questions: (1) Do subjects’ behaviour change with a less salient tax? (2) Is tax incidence independent of the responsibility to pay a more or less salient tax? Based on the results of Mann-Whitney U tests, concerning the first question we conclude that, in accordance to the theory of tax incidence, subjects’ behaviour is not affected by salience. On the other hand, concerning the second question, contrary to theoretical predictions, we report evidence of stark differences in average trading prices for LSE principle analysis. Most notably, we observe that tax-on-seller treatment prices are systematically higher, thus revealing a plausible tax-shifting phenomenon.
    Keywords: Tax incidence; Tax salience; Liability Side Equivalence; choice behaviour; laboratory
    JEL: C91 H2 H21 H30
    Date: 2015
  5. By: Enrico Moretti; Daniel Wilson
    Abstract: Using data on the universe of U.S. patents filed between 1976 and 2010, we quantify how sensitive is migration by star scientist to changes in personal and business tax differentials across states. We uncover large, stable, and precisely estimated effects of personal and corporate taxes on star scientists’ migration patterns. The long run elasticity of mobility relative to taxes is 1.6 for personal income taxes, 2.3 for state corporate income tax and -2.6 for the investment tax credit. The effect on mobility is small in the short run, and tends to grow over time. We find no evidence of pre-trends: Changes in mobility follow changes in taxes and do not to precede them. Consistent with their high income, star scientists migratory flows are sensitive to changes in the 99th percentile marginal tax rate, but are insensitive to changes in taxes for the median income. As expected, the effect of corporate income taxes is concentrated among private sector inventors: no effect is found on academic and government researchers. Moreover, corporate taxes only matter in states where the wage bill enters the state’s formula for apportioning multi-state income. No effect is found in states that apportion income based only on sales (in which case labor’s location has little or no effect on the tax bill). We also find no evidence that changes in state taxes are correlated with changes in the fortunes of local firms in the innovation sector in the years leading up to the tax change. Overall, we conclude that state taxes have significant effect of the geographical location of star scientists and possibly other highly skilled workers. While there are many other factors that drive when innovative individual and innovative companies decide to locate, there are enough firms and workers on the margin that relative taxes matter.
    JEL: H71 J01 J08 J18 J23 R0
    Date: 2015–04
  6. By: Doerrenberg, Philipp (ZEW Mannheim); Schmitz, Jan (University of Lausanne)
    Abstract: We study a field experiment on tax compliance in Slovenia. Small accounting companies were randomly assigned to an untreated control group and two treatment groups. Companies in the first treatment group received a letter that highlighted the importance of paying taxes and informed about the likelihood of becoming subject to an audit. In the second treatment group, tax officers from the tax authorities handed out in person the same letter that companies in the first treatment group received by post. The results indicate that such letters can increase compliance, and trigger even more compliance if handed over in person. These findings are in line with the theoretical predictions that we derive to rationalize the experiment.
    Keywords: tax compliance, audits, randomized field experiment, tax authority, information provision
    JEL: H20 H32 H50 C93
    Date: 2015–04
  7. By: Mukherjee, Sacchidananda (National Institute of Public Finance and Policy); Rao, R. Kavita (National Institute of Public Finance and Policy)
    Abstract: Unincorporated enterprises often bypass formal regulations in general and taxation in particular. However, escaping formal regulations does not always favour business of unincorporated enterprises and attracts multiple sources of exploitation (e.g., paying bribe to local administration, police and politicians). In other words, the benefits of that enterprises could reap by becoming part of the formal regulatory system often exceeds the costs of becoming a formal entity. Bringing unincorporated enterprises under taxation system is a challenge often faces by tax administrators and it is in this regard the present study explores the factors which influence decision of unincorporated enterprises to get registered with State tax authority. However, registration with State tax authority does not imply that the enterprises have to pay taxes and/or file return if they are not active or annual turnover does not exceed the threshold level. The study throws up interesting results for policy makers and tax administrators.
    Keywords: Tax Registration ; Indirect Tax ; Unincorporated Enterprises ; State Sales Tax/VAT Registration ; Partnership Firms ; Proprietary Enterprises ; Probit Model ; India
    Date: 2015–04
  8. By: Grech, Aaron George
    Abstract: This paper presents estimates of the possible macroeconomic impact of the reductions in income tax introduced in the Budgets for 2013 and 2014. The simulations are based on the structural macro-econometric model described in Grech and Micallef (2014). The impact of the reductions on Government revenue, estimated at 0.7% of GDP, is computed using data on chargeable income under the different tax bands from the Inland Revenue Department as at 2013, with future income projected using Central Bank forecasts. The policy should have a positive effect on economic activity, with the impact on GDP peaking at 0.35% in 2016 and stabilizing at just under 0.3% in the medium term. This effect is primarily driven by increased consumption following the boost in disposable income caused by the cuts. While this is complemented by higher investment, the impact is gradually dampened by worsening net exports due to rising domestic prices. Though the policy is in part self-financing as it results in a larger tax base, it should be accompanied by measures to reduce pressure on government finances.
    Keywords: Fiscal Policy, Macro-econometric modelling, Malta
    JEL: C5 E62 H20
    Date: 2015–04
  9. By: Stéphane Gauthier (Paris School of Economics - Centre d'Economie de la Sorbonne); Fanny Henriet (Paris School of Economics - Centre d'Economie de la Sorbonne)
    Abstract: We provide a necessary condition for optimal commodity taxes when agents differ according to labor skill and consumption tastes and when the government can also use a general nonlinear tax on labor income. The discouragement index of commodities in shown to be the sum of (1) the distributive factors over the different income classes and (2) the excess demand of mimickers. The first component arises whenever there is taste heterogeneity within income classes. The second one arises whenever there is taste heterogeneity between income classes. In an empirical application from Canadian microdata we delineate groups of households with homogeneous tastes based on nonviolation of revealed preferences. Assuming that indirect taxes are set optimally, we identify the relevant incentive constraints and provide estimates for social values of the different groups. Redistribution from indirect taxes favors households living in rural Quebec
    Keywords: Taste heterogeneity; commodity taxes; income taxation; redistribution; empirical test for asymmetric information; social weights
    JEL: H21 D12 D82
    Date: 2015–04
  10. By: Javier Andrés; José E.Boscá; Javier Ferri
    Abstract: In this paper we look at the interplay between the level of household leverage in the economy and fiscal policy. When the fiscal rule is defined on lump-sum transfers, government spending or consumption taxes, the impact multipliers of transitory fiscal shocks become substantially amplified in an environment of easy access to credit by impatient consumers. However, when the government reacts to debt deviations by raising distortionary taxes on income, labour or capital, the effects of household debt on the size of the impact output multipliers vanish or even reverse. We also find that differences in fiscal multipliers between high and low indebtedness regimes belong basically to the short run, whereas the long-run multipliers are barely affected by the level of household debt in the economy. Finally, we find that fiscal shocks exert an unequal welfare effect on impatient and patient households that can even be of opposite signs.
    Date: 2015–04
  11. By: Christian Bredemeier; Falko Juessen; Andreas Schabert
    Abstract: This paper questions unconventional fiscal policy effects when the monetary policy rate is at the zero lower bound. We provide evidence for the US that the spread between the policy rate and the US-LIBOR, which is more relevant for private sector transactions, increases with government expenditures. We introduce a corresponding spread into an otherwise standard macroeconomic model which reproduces this observation. The model predicts that the fiscal multiplier takes conventional values, regardless of whether the policy rate follows a standard feedback rule or is at its zero lower bound. Likewise, labor tax increases exert contractionary effects in both cases.
    Keywords: Fiscal multiplier, tax policy, interest rate spreads, zero lower bound, liquidity premium
    JEL: E32 E42 E63
    Date: 2015–04–10
  12. By: Ana Luiza N. H. Barbosa; Eduardo P. S. Fiuza; Marcel Scharth; Seki Asano
    Abstract: Commodity taxes play an important role in Brazil and raise around 60% of the total tax revenue. This heavy reliance renders commodity taxation one of the main tools available to the government for collecting revenue and securing redistribution. In fact, Brazilian income inequity is one of the highest in the world: the wealthiest 1% of population, equivalent to 1.6 million people, earn together as much as the 50% poorest, around 80 million. The purpose of this paper is a partial equilibrium numerical micro-simulation of the distributional effects of optimal commodity taxation combined with minimum income transfers made by the government to households. The approach used to measure households welfare is a money metric indirect utility or equivalent income [King (1983)], obtained from an Almost Ideal Demand System set of parameter estimates. We plug it into the equivalent variation formula to evaluate the equity effects specified in terms of the equivalent income. The data source is a 1995-1996 national household expenditure survey, though estimated parameters come from a sample comprising a 1987-1988 wave as well. We find that our proposed minimum income programs combined with selectiveness in commodity tax structure would be useful as redistribution income instrument among households in Brazil. These results can provide some valuable contribution in the context of the increasing discussion about minimum income programs in Brazil associated with demographic characteristics such as education and family size. Impostos sobre o consumo têm um importante papel no Brasil e arrecadam cerca de 60% da receita tributária total. Essa forte dependência faz com que a tributação sobre o consumo seja um dos principais instrumentos distributivos e de arrecadação do governo na receita tributária. De fato, a desigualdade de renda brasileira é uma das mais altas do mundo: o 1% mais rico da população (o equivalente a 1,6 milhão de pessoas) ganha uma renda igual à dos 50% mais pobres; estes últimos representam cerca de 80 milhões de pessoas. O objetivo deste estudo é realizar uma simulação dos efeitos distributivos da tributação ótima sobre o consumo associada a programas de transferência de renda mínima feitos pelo governo. O arcabouço utilizado para medir o bem-estar dos agentes econômicos é a money metric indirect utility ou renda equivalente [King (1983)], com base nos parâmetros do sistema de demanda quase ideal (Almost Ideal Demand System). Nós adotamos a medida de variação equivalente, especificada em termos de renda equivalente, para avaliar os efeitos de eqüidade. A fonte de dados deste estudo é obtida na Pesquisa de Orçamentos Familiares (POF) do período de 1995-1996, embora a estimação dos parâmetros de demanda também tenha como base a POF de 1987-1988. Os resultados mostram que os programas de renda mínima, combinados com seletividade na estrutura de tributação sobre o consumo, podem ser muito úteis como instrumentos de redistribuição de renda no Brasil. Os resultados apresentados podem ser de valiosa contribuição, principalmente no contexto da crescente discussão sobre programas de renda mínima no Brasil associados com características demográficas, tais como educação e estrutura familiar.
    Date: 2015–01
  13. By: Andersen, Torben M. (Aarhus University); Kristoffersen, Mark Strom (Aarhus University); Svarer, Michael (Aarhus University)
    Abstract: Unemployment insurance schemes include conditions on past employment history as part of the eligibility conditions. This aspect is often neglected in the literature which primarily focuses on benefit levels and benefit duration. In a search-matching framework we show that benefit duration and employment requirements are substitute instruments in affecting job search incentives and thus gross unemployment. We analyse the optimal design of the unemployment insurance system (benefit levels, duration and employment requirements) under a utilitarian social welfare function. Simulations show that a higher insurance motive captured by more risk aversion implies higher benefit generosity and more lax employment requirements but also shortened benefit duration.
    Keywords: reentitlement effects, unemployment insurance, business cycle
    JEL: E32 H3 J65
    Date: 2015–04
  14. By: Haan, Peter (DIW Berlin); Prowse, Victoria L. (Cornell University)
    Abstract: We analyze empirically the optimal design of social insurance and assistance programs when families obtain insurance by making labor supply choices for both spouses. For this purpose, we specify a structural life-cycle model of the labor supply and savings decisions of singles and married couples. Partial insurance against wage and employment shocks is provided by social programs, savings and the labor supplies of all adult household members. The optimal policy mix focuses mainly on Social Assistance, which provides a permanent universal household income floor, with a minor role for temporary earnings-related Unemployment Insurance. Reflecting that married couples obtain intra-household insurance by making labor supply choices for both spouses, the optimal generosity of Social Assistance decreases in the proportion of married individuals in the population. The link between optimal program design and the family context is strongest in low-educated populations.
    Keywords: life-cycle labor supply, family labor supply, unemployment insurance, social assistance, design of benefit programs, intra-household insurance, household savings, employment risk, added worker effect
    JEL: J18 J68 H21 I38
    Date: 2015–04
  15. By: Chute, Benjamin W. (Middlebury College); Wunnava, Phanindra V. (Middlebury College)
    Abstract: This study investigates the prevalence and severity of job immobility induced by the provision of employer-sponsored health insurance – a phenomenon known as 'job-lock'. Using data from the National Longitudinal Survey of Youth from 1994 to 2010, job-lock is identified by measuring the impact of employer-sponsored health insurance on voluntary job turnover frequency. Estimates from a logistic regression with random effects indicate that job-lock reduces voluntary job turnover by 20% per year. These results that are consistent with past research and are also supported by two alternative identification strategies employed in this paper. Our results indicate a persistence of the job-lock effect, despite two major policy interventions designed to mitigate it (COBRA and HIPAA) and signal a fundamental misunderstanding of its causes. Both policies made health insurance more portable between employers, but this paper presents evidence from a quasi-natural experiment to suggest that the problem is a lack of viable alternative private sources of health insurance. In this model, we find evidence that access to health insurance through one's spouse or partner dramatically increases voluntary job turnover. This finding has significant bearing on predicted impacts of the Patient Protection and Affordable Care Act (2010) and the individual health insurance exchanges catalyzed by it; these new markets will create risk pools that may 'unlock' a job-locked individual by providing them a viable alternative to employer-sponsored health insurance.
    Keywords: job-lock, COBRA (1985), HIPAA (1996), Affordable Care Act (2010), random effects, difference-in-difference, voluntary job switch
    JEL: I13 J16 J32 J51
    Date: 2015–04

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