nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒05‒09
nineteen papers chosen by
Thomas Andrén

  1. Mental accounting in tax evasion decisions: An experiment on underreporting and overdeducting By Fochmann, Martin; Wolf, Nadja
  2. Boon or bane of advance tax rulings as a measure to mitigate tax uncertainty and foster investment By Diller, Markus; Kortebusch, Pia; Schneider, Georg; Sureth, Caren
  3. Tax compliance and information provision: A field experiment with small firms By Doerrenberg, Philipp; Schmitz, Jan
  4. Tax attractiveness and the allocation of risk within multinationals By Dinkel, Andreas
  5. Tax evasion and measurement error: An econometric analysis of survey data linked with tax records By Paulus, Alari
  6. Why Finance Ministers Favor Carbon Taxes, Even if They Do not Take Climate Change into Account By Max Franks; Ottmar Edenhofer; Kai Lessmann
  7. Taxation and the International Mobility of Inventors By Akcigit, Ufuk; Baslandze, Salomé; Stantcheva, Stefanie
  8. Measuring Income and Wealth at the Top Using Administrative and Survey Data By Bricker, Jesse; Henriques, Alice M.; Krimmel, Jacob; Sabelhaus, John
  9. Income Effects in Labor Supply: Evidence from Child-Related Tax Benefits By Philippe Wingender; Sara LaLumia
  10. The additionality effects of R&D tax credits across sectors: A cross-country microeconometric analysis By Isabel Bodas Freitas; Fulvio Castellacci; Roberto Fontana; Franco Malerba; Andrea Vezzulli
  11. Heterogeneous Consumers and Fiscal Policy Shocks By Emily Anderson; Atsushi Inoue; Barbara Rossi
  12. Risk, Recession, and Declining Popular Demand for the Welfare State By Barnes, Lucy; Hicks, Timothy
  13. Does ownership affect the impact of taxes on firm behavior? Evidence from China By Fuest, Clemens; Liu, Li
  14. The political economy of the distributional character of the Greek taxation system (1995–2008) By Ioannidis, Yiorgos
  15. Aging and Deflation from a Fiscal Perspective By Mitsuru Katagiri; Hideki Konishi; Kozo Ueda
  16. Unemployment Accounts - A Finnish Application By Määttänen, Niku; Salminen, Tomi
  17. The role of lenders' trust in determining borrowing conditions for sovereign debt: An analysis of one-period government bonds with default risk By Guo, Yanling
  18. Long-term fiscal sustainability in advanced economies By Alan J. Auerbach
  19. Trends in the Swedish Social Investment Welfare State: ‘The Enlightened Path’ or ‘The Third Way’ for ‘the Lions’? By Joakim palme; Axel Cronert

  1. By: Fochmann, Martin; Wolf, Nadja
    Abstract: Although there is already a variety of papers analyzing tax evasion decisions, only little focus is put on tax evasion of gains and losses. As taxpayers can evade taxes by either underreporting their income or by overdeducting expenses, we study whether there is a significant difference if subject are confronted with a gain or a loss scenario. We find that individuals evade more in the first than in the latter case. As a consequence, subjects are more willing to evade taxes by underreporting income than by overdeducting expenses. We show that this finding can be explained by mental accounting and an asymmetric evaluation of tax payments and tax refunds. Our result is robust to treatment variation. However, if individuals have to complete only one tax declaration (but still decide on gains and losses) and we therefore expect subjects to use only one mental account, the effect vanishes. This provides strong evidence that mental accounting plays an important role in tax evasion decisions. Further results are presented and discussed.
    Keywords: tax evasion,tax compliance,prospect theory,mental accounting,behavioral taxation,experimental economics
    JEL: C91 D14 H24
    Date: 2015
  2. By: Diller, Markus; Kortebusch, Pia; Schneider, Georg; Sureth, Caren
    Abstract: Tax uncertainty often negatively affects investment. Advance tax rulings (ATRs) are commonly used as a measure to provide tax certainty. Rulings are currently controversially discussed in the context of tax planning activities of multinational firms (Luxembourg Leaks). We analyze ATRs as tax uncertainty shields from both the taxpayers' and the tax authorities' perspectives. In general, tax authorities charge ATR fees and investors request ATRs provided the fee does not exceed a certain threshold. We assume risk neutral investors and that tax authorities integrate investors' reasoning in their decision on whether and at what price to offer ATRs. We find for uniformly distributed cashflows that tax authorities offer ATRs at a prohibitively high fee. However, extending our model framework we find that ATRs are offered if the ATR enables tax authorities either to significantly reduce their tax audit costs, or to increase the probability of detecting ambiguous tax issues, or to increase their revenues by attracting more investment. ATRs may foster investment and are hence potentially beneficial for both tax authorities and taxpayers if the investment projects in question generate relatively small net returns but high tax uncertainty. This pattern is typical for aggressive tax planning strategies, e.g., in tax havens. Our findings are threefold. First, we find that even risk neutral investors will pay for tax certainty. Second, they enable us to explain the enormous demand for rulings for tax-aggressive strategies and illustrate the tax authorities' opportunity cost of offering ATRs free of charge to attract taxaggressive foreign MNGs. Third, our results provide new explanations for why ATRs, even if the fee is rather low, are not as frequently requested by taxpayers with substantial investments, as expected in settings with high tax uncertainty. Our paper elaborates the theoretical foundation that is essential when planning to use ATR fees as a new measure for tax uncertainty in future empirical tests.
    Keywords: Advance Tax Rulings,Fee Design,Investment Effects,Tax Aggressiveness,Tax Planning,Tax Risk,Tax Rulings,Tax Uncertainty
    JEL: H21 H25 M41 M42 M48
    Date: 2015
  3. By: Doerrenberg, Philipp; Schmitz, Jan
    Abstract: We study tax compliance in Slovenia using data generated in a field experiment. 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
  4. By: Dinkel, Andreas
    Abstract: This paper analyzes the impact of countries' tax attractiveness on the allocation of risk within multinational groups. Our dataset contains subsidiaries located in 32 European countries and owned by parents from 90 different countries globally. We show that tax symmetry positively influences the relative amount of risk allocated to subsidiaries. Both time and amount limitations of loss offset rules matter. Higher statutory corporate tax rates in the country of the subsidiary decrease the relative amount of risk taken.
    Keywords: International taxation,Tax attractiveness,Location decision,Multinational enterprise,Risk allocation
    JEL: F23 G32 H25
    Date: 2015
  5. By: Paulus, Alari
    Abstract: We use income survey data linked with tax records at the individual level for Estonia to estimate the determinants and extent of income tax compliance in a novel way. Unlike earlier studies attributing income discrepancies between such data sources either to tax evasion or survey measurement error, we model these processes jointly. Focussing on employment income, the key identifying assumption made is that people working in public sector cannot evade taxes. The results indicate a number of socio-demographic and labour market characteristics, which are associated with non-compliance. Overall, people in the bottom and the top part of earnings distribution evade much more and about 12% of wages and salaries in total are underreported, which is very substantial for a major income source subject to third party reporting and tax withholding.
    Date: 2015–05–07
  6. By: Max Franks (Potsdam Institute for Climate Impact Research and Berlin Institute of Technology); Ottmar Edenhofer (Mercator Research Institute on Global Commons and Climate Change, Berlin Institute of Technology and Potsdam Institute for Climate Impact Research); Kai Lessmann (Potsdam Institute for Climate Impact Research)
    Abstract: Fiscal considerations may shift governmental priorities away from environmental concerns: Finance ministers face strong demand for public expenditures such as infrastructure investments but they are constrained by international tax competition. We develop a multi-region model of tax competition and resource extraction to assess the fiscal incentive of imposing a tax on carbon rather than on capital. We explicitly model international capital and resource markets, as well as intertemporal capital accumulation and resource extraction. While fossil resources give rise to scarcity rents, capital does not. With carbon taxes the rents can be captured and invested in infrastructure, which leads to higher welfare than under capital taxation. This result holds even without modeling environmental damages. It is robust under a variation of the behavioral assumptions of resource importers to coordinate their actions, and a resource exporter's ability to counteract carbon policies. Further, no green paradox occurs - instead, the carbon tax constitutes a viable green policy, since it postpones extraction and reduces cumulative emissions.
    Keywords: Carbon Pricing, Green Paradox, Infrastructure, Optimal Taxation, Strategic Instrument Choice, Supply-Side Dynamics, Tax Competition
    JEL: F21 H21 H30 H73 Q38
    Date: 2015–04
  7. By: Akcigit, Ufuk; Baslandze, Salomé; Stantcheva, Stefanie
    Abstract: This paper studies the effect of top tax rates on inventors' mobility since 1977. We put special emphasis on "superstar" inventors, those with the most and most valuable patents. We use panel data on inventors from the United States and European Patent Offices to track inventors' locations over time and combine it with international effective top tax rate data. We construct a detailed set of proxies for inventors' counterfactual incomes in each possible destination country including, among others, measures of patent quality and technological fit with each potential destination. We find that superstar top 1% inventors are significantly affected by top tax rates when deciding where to locate. The elasticity of the number of domestic inventors to the net-of-tax rate is relatively small, between 0.04 and 0.06, while the elasticity of the number of foreign inventors is much larger, around 1.3. The elasticities to top net-of-tax rates decline as one moves down the quality distribution of inventors. Inventors who work in multinational companies are more likely to take advantage of tax differentials. On the other hand, if the company of an inventor has a higher share of its research activity in a given country, the inventor is less sensitive to the tax rate in that country.
    Keywords: income taxes; innovation; inventors; migration; taxation
    JEL: F22 H24 H31 J44 J61 O31 O32 O33
    Date: 2015–05
  8. By: Bricker, Jesse (Board of Governors of the Federal Reserve System (U.S.)); Henriques, Alice M. (Board of Governors of the Federal Reserve System (U.S.)); Krimmel, Jacob (Board of Governors of the Federal Reserve System (U.S.)); Sabelhaus, John (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Administrative tax data indicate that U.S. top income and wealth shares are substantial and increasing rapidly (Piketty and Saez 2003, Saez and Zucman 2014). A key reason for using administrative data to measure top shares is to overcome the under-representation of families at the very top that plagues most household surveys. However, using tax records alone restricts the unit of analysis for measuring economic resources, limits the concepts of income and wealth being measured, and imposes a rigid correlation between income and wealth. The Survey of Consumer Finances (SCF) solves the under-representation problem by combining administrative and survey data (Bricker et al, 2014). Administrative records are used to select the SCF sample and verify that high-end families are appropriately represented, and the survey is designed to measure comprehensive concepts of income and wealth at the family level. The SCF shows high and rising top income and wealth shares, as in the ad ministrative tax data. However, unadjusted, the levels and growth based on administrative tax data alone appear to be substantially larger. By constraining the SCF to be conceptually comparable, we reconcile the differences, and show the extent to which restrictions and rigidities needed to estimate top income and wealth shares in the administrative data bias up levels and growth rates.
    Keywords: Administrative data; survey data; top income shares; top wealth shares
    JEL: D31 D63 H20
    Date: 2015–04–28
  9. By: Philippe Wingender (International Monetary Fund); Sara LaLumia (Williams College)
    Abstract: A parent whose child is born in December can claim child-related tax benefits when she files her tax return a few months later. Parents of children born in January must wait more than a year before they can receive child-related tax benefits. As a result, families with December births have higher after-tax income in the first year of a child's life than otherwise similar families with January births. This paper estimates the corresponding income effect on maternal labor supply, testing whether mothers who give birth in December work and earn less in the months following birth. We use data from the American Community Survey, the Survey of Income and Program Participation, and the 2000 Decennial Census. We find that December mothers have a lower probability of working, particularly in the third month after a child's birth. Earnings data from the SIPP indicate that an additional dollar of child-related tax benefits reduces annual maternal earnings in the year following a child's birth by approximately one dollar.
    Date: 2015–04
  10. By: Isabel Bodas Freitas (Grenoble School of Management); Fulvio Castellacci (TIK Centre, University of Oslo); Roberto Fontana (Bocconi University); Franco Malerba (Bocconi University); Andrea Vezzulli (Bocconi University)
    Abstract: Do the additionality effects of R&D tax credits vary across sectors? The paper presents a microeconometric analysis of this question for three countries: Norway, Italy and France. We use a panel of firm-level data from three waves of the Innovation Surveys carried out in these countries, referring to the years 2004, 2006 and 2008 respectively. The study estimates input and output additionality effects of R&D tax credits in each of these economies, and it investigates how these effects differ across sectors characterized by different R&D orientation and competition conditions. The results point out that firms in industries with high R&D orientation and in sectors with high market concentration are on average more responsive to fiscal incentives to R&D.
    Date: 2015–04
  11. By: Emily Anderson; Atsushi Inoue; Barbara Rossi
    Abstract: This paper studies empirical facts regarding the effects of unexpected changes in aggregate macroeconomic fiscal policies on consumers that are allowed to di¤er depending on their individual characteristics. We use data from the Consumption Expenditure Survey (CEX) to estimate individual-level impulse responses as well as multipliers for government spending. The main empirical finding of this paper is that unexpected fiscal shocks have substantially different effects on consumers depending on their income and age levels. In particular, the wealthiest individuals tend to behave according to the predictions of standard RBC models, whereas the poorest individuals tend to behave according to standard IS-LM (non-Ricardian) models, most likely due to credit constraints. Furthermore, government spending policy shocks tend to decrease consumption inequality.
    JEL: E4 E52 E21 H31 I3 D1
    Date: 2015–02
  12. By: Barnes, Lucy (University of Kent); Hicks, Timothy (University College London)
    Abstract: How do individual preferences over welfare spending respond to economic hard times? In this paper we reconcile two prominent, opposing expectations : that recessions lead to a `hunkering down' such that individuals become less favorable to taxation and expenditure; and that downturns, being associated with increases in risk, should lead to increased demand for government expenditure. We present a simple formal model rooted in the risk/insurance literature, to demonstrate that these two intuitions both capture important effects. While the labor market risk literature correctly predicts that individual-level insecurity increases support for welfare expenditure, our model shows that it also predicts that poor macroeconomic performance has the opposite e ect. The government budget constraint links the two levels, and we demonstrate that concern about budget balance is the mechanism driving declines in support for tax-and-spend. We test our argument using British individual-level panel data from before and during the Great Recession, and use Eurobarometer data from 32 countries to probe our de cit-based mechanism. The evidence is supportive of our claims on both counts.
    Date: 2015
  13. By: Fuest, Clemens; Liu, Li
    Abstract: Does ownership affect the way firms react to corporate taxation? This paper exploits key features of recent corporate tax reforms in China to shed light on the differential impact of taxation on firms under different ownership regimes including private, collectively owned and state owned companies. Employing a difference-in-difference estimation approach, we find that the increase in the deductibility of wage costs in 2006 has led to a sizable increase of wages per worker in private firms and an even larger increase in collective-owned enterprises. In contrast, there is no significant wage response in state owned enterprises. The decrease in the statutory tax rate for domestic firms since 2008 has induced collectivley owned enterprises and private firms to reduce debt while there is no significant response SOEs. Our results also suggest that the 2008 reform has reduced tax induced investment round tripping through Hong Kong, Macao and Taiwan.
    Date: 2015
  14. By: Ioannidis, Yiorgos
    Abstract: The period between 1995 and 2008 is one of the fundamental transformations in the Greek economy. In that sense, we would expect an equally drastic change to have taken place in the structure of the taxation system. Nevertheless, no such change occurred. The explanation of this seeming paradox should be sought in the peculiar distributive (as opposed to redistributive) character of the Greek taxation system. The aim of this paper is to provide evidence for this phenomenon from a political economy perspective. The first section examines the general trends of taxation in Greece during the period 1995–2008 and the structure of personal income taxation. The second section delineates the basic features of the reform in income taxation and land taxation effected by the conservative government; lastly, the third part provides some critical commentary on the data as well as an interpretive context for the peculiar features of the Greek taxation system
    Keywords: Greece; taxation; political economy
    JEL: H00 H20 H24 H26
    Date: 2015
  15. By: Mitsuru Katagiri (Bank of Japan); Hideki Konishi (Faculty of Political Science and Economics, Waseda University); Kozo Ueda (Faculty of Political Science and Economics, Waseda University)
    Abstract: Negative correlations between inflation and demographic aging were observed across developed nations recently. To understand the phenomenon from a politico-economic perspective, we embed the fiscal theory of the price level into an overlapping-generations model. In the model, successive short-lived governments choose income tax rates and bond issues considering the political influence of existing generations and the policy response of future governments. The model sheds new light on the traditional debate about the burden of national debt. Because of price adjustments, the accumulation of government debt does not become a burden on future generations. Our analysis reveals that the effects of aging depend on its causes. Aging is deflationary when caused by an increase in longevity but inflationary when caused by a decline in birth rate. Numerical simulation shows that aging over the past 40 years in Japan generated deflation of about 0.6 percentage points annually.
    Keywords: Fiscal theory of the price level, Politico-economic equilibrium
    JEL: D72 E30 E62 E63 H60
    Date: 2014–11
  16. By: Määttänen, Niku; Salminen, Tomi
    Abstract: We consider a reform that would replace the current Finnish unemployment insurance (UI) scheme with individual unemployment accounts. The reform would provide additional pensions for individuals who end up with a positive account balance at retirement age without restricting unemployment benefits relative to the current system. At the same time, the reform is likely to improve labour supply incentives, at least for some individuals. The question is whether such a reform would be self-financing. The fiscal effects of the reform depend crucially on the distribution of lifetime unemployment and the extent to which the reform would increase labour supply. We use a micro panel comprising a representative sample of 1/3 of the Finnish population and covering the period 1988-2010 to estimate the distribution of lifetime unemployment and to simulate how the unemployment accounts would evolve. We assume that the reform improves labour supply incentives only via the extensive margin and find that it is likely to be self-financing if the labour supply elasticity at the extensive margin is about 0.16 or higher. We also experiment with integrating UI with the pension system.
    Keywords: unemployment insurance, unemployment accounts, lifetime unemployment
    JEL: H53 H55 J65
  17. By: Guo, Yanling
    Abstract: In this paper, the author considers the sovereign debt in the form of one-period government bonds with default risk, which can be purchased by and traded among domestic and foreign investors. She shows that the weight assigned to the lenders' interest by the borrowing government at the time of debt repayment, which captures the lenders' trust in the government's propensity to repay the debt and is denoted as », also determines the default risk: a higher » means a lower default risk ceteris paribus which leads to a lower risk premium, and vice versa. Since this relationship only holds in the "good equilibrium", the author further shows that the "good equilibrium" is the only stable equilibrium under some quite general assumptions while the "bad equilibrium" is an unstable one - a possible reason why in practice rather a negative correlation between » and the default risk as well as the corresponding risk premium is observed.
    Keywords: Public debt,sovereign debt,sovereign default,domestic debt,external debt,fiscal policy,government bond,government borrowing
    JEL: F34 H63 H74 H62 H6 H87
    Date: 2015
  18. By: Alan J. Auerbach
    Abstract: This paper provides an evaluation of the long-term fiscal sustainability of advanced economies, based on current estimates of these economies’ current-policy fiscal trajectories. As will be quite evident, for many countries short-term fiscal measures, such as the debt-GDP ratio and the current budget deficit as a share of GDP, bear little relationship to the sustainability of policy. Some countries appear to be on relatively sustainable paths despite challenging short-run statistics, while for others benign short-term measures mask very large long-term problems. Of course, the future is uncertain while the present is known, so one may be tempted to discount negative long-term projections. But, based as they are on a demographic transition that is surely underway, one can discount particular estimates but not their general direction.
    Keywords: Fiscal Sustainability, public debt, Fiscal Gap
    JEL: H62 H63 H68
    Date: 2015–04
  19. By: Joakim palme; Axel Cronert
    Abstract: The concept of social investment has gained ground on the EU-level, manifested among other things in the launching of the ‘Social investment package’ by the EU Commission in 2013 and subsequent engagement in the follow up of that initiative. In this context, the Nordic experience has no doubt played an important role and Sweden is an interesting case in point for discussing the social investment approach. We argue that Sweden has long tradition of social investment which has contributed to a number of positive outcomes, such as low poverty and high employment. However, our examination of more recent trends suggests that the achievements are now jeopardised by the trend towards a cheaper ‘Third Way’ version of the social investment approach. Since the investment quality of policy interventions has been diluted, not least in the field of active labour market policy, and old redistribution policies are at drift, it has become difficult to combat old as well as new inequalities and social divisions. Still, a more enlightened development path is open but requires serious recasting of the social investment policy package.
    Keywords: Social investment, welfare state, Swedish reforms, poverty, redistribution, work intensity
    JEL: H53 I32 I38 J21
    Date: 2015–04

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