nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒05‒22
nineteen papers chosen by
Thomas Andrén

  1. The fiscal effects of work-related tax expenditures in Europe. By Salvador Barrios; Serena Fatica; Diego Martínez-López; Gilles Mourre
  2. Fiscal federalism and tax enforcement By Bönke, Timm; Joachimsen, Beate; Schröder, Carsten
  3. The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists By Moretti, Enrico; Wilson, Daniel J
  4. Changes in the income tax system during the economic crisis of 2010/2014 By Ivan Reiner
  5. The impact of tax changes on the short-run investment behaviour of New Zealand firms By Richard Fabling; Richard Kneller; Lynda Sanderson
  6. Optimal Income, Education, and Bequest Taxes in an Intergenerational Model By Stefanie Stantcheva
  7. Keeping up with the Joneses, the Smiths and the Tanakas: On International Tax Coordination and Social Comparisons By Aronsson, Thomas; Johansson-Stenman, Olof
  8. Measuring the Impact of Financial Taxation on Capital By Correa, Juan; Lorca, Miguel; Parro, Francisco
  9. Can a poverty-reducing and progressive tax and transfer system hurt the poor? By Sean Higgins; Nora Lustig
  10. Dodging the Taxman: Firm Misreporting and Limits to Tax Enforcement By Carrillo, Paul; Pomeranz, Dina; Singhal, Monica
  11. VAT Notches By Liu, Li; Lockwood, Ben
  12. Misperceiving Inequality By Vladimir Gimpelson; Daniel Treisman
  13. Changing income inequality and panel income changes By Robert Duval Hernandez; Gary S. Fields; George H. Jakubson
  14. Social Insurance, Payroll Tax Structure, and Saving Rates: An International Comparison for OECD Countries By Simin Mozayeni
  15. Optimal Social Assistance and Unemployment Insurance in a Life-Cycle Model of Family Labor Supply and Savings By Peter Haan; Victoria Prowse
  16. On the Double Taxation of Corporate Profits By Alexis Anagnostopoulos; Orhan Erem Atesagaoglu; Eva Carceles-Poveda
  17. Can helping the sick hurt the able? Incentives, information and disruption in a disability-related welfare reform By Nitika Bagaria; Barbara Petrongolo; John Van Reenen
  18. Basic and Applied Research: A Welfare Analysis By Kunihiko Konishi
  19. Liquidity in Retirement Savings Systems: An International Comparison By John Beshears; James J. Choi; Joshua Hurwitz; David Laibson; Brigitte C. Madrian

  1. By: Salvador Barrios; Serena Fatica; Diego Martínez-López; Gilles Mourre
    Abstract: The paper examines the fiscal impacts, and the associated welfare cost, of marginal reforms to work-related tax relief in five European countries. We combine a theoretical model of labour supply with micro-simulation results from an EU-wide model, which allows us to capture the interaction between the specific tax incentive and other relevant provisions of the tax-benefit system along the entire earnings distribution. We find that changes in labour supply decisions – both at the extensive (participation) and at the intensive margin (hours worked) – have significant impacts on the revenue gain from the simulated reforms. Our results suggest that at least one-fourth of the extra tax revenues collected through a reduction in work-related tax incentives is washed away following labour supply adjustment, notably due to lower participation by individuals most at risk of exclusion. In some instances, the erosion of the initial revenue gain becomes substantial. For policies strongly targeted at the bottom of the earnings distribution, the reform might even bring about a net revenue loss, depending on the calibration of the labour supply elasticities to reflect heterogeneity across types of workers. The welfare effect of contractions to these tax schemes could be far from negligible.
    Keywords: tax expenditures, labour supply, marginal welfare costs.
    JEL: H24 H31 J20
    Date: 2015–05
  2. By: Bönke, Timm; Joachimsen, Beate; Schröder, Carsten
    Abstract: In many countries organized as federations, fiscal-equalization schemes have been implemented to mitigate vertical or horizontal imbalances. Such schemes usually imply that the member states of the federation can only partly internalize marginal tax revenue before redistribution. Aside from this internalized revenue, referred to as the marginal tax-back rate, the remainder is redistributed. We investigate the extent to which extent state-level authorities in such federation under-exploit their tax bases. By means of a stylized model we show that the member states have an incentive to align the effective tax rates on their residents with the level of the tax-back rate. We empirically test the model using state-level and micro-level taxpayer data, OLS regressions and natural experiments. Our empirical findings support the results from our theoretical model. Particularly, we find that states with a higher marginal tax-back rate exploit the tax base to a higher extent.
    Keywords: fiscal federalism,fiscal externalities,natural experiment,treatment analysis,statistical matching
    JEL: C21 H21 H77
    Date: 2015
  3. By: Moretti, Enrico; Wilson, Daniel J
    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.
    Keywords: economic geography; innovation; taxes
    JEL: H2 J01
    Date: 2015–05
  4. By: Ivan Reiner (Faculty of law, University of Zagreb)
    Abstract: The paper has the intention to display a systematic and continuous changes in the taxation of personal income since the beginning of the economic crisis that engulfed the Republic of Croatia in 2009-the year, and even today does not indicate its direction and move into a phase of recovery of the national economy.Emphasis will be upon the changes in tax rates (the percentage and number of tax rates in the application), and nontaxable part of personal income, which leads to different heights nominal tax liability.Such an attitude derives from the fact that the Republic of Croatia has a synthetic form of income tax (introduced in 1994) with the application of several progressive tax rates in the slice system progression.I want to determine whether changes are in accordance with the announced program of the legislator, to reduce the tax burden for individual (per different economic strength) taxpayers, and whether such changes are aiming for social benefits and relieving the pressure on taxpayers or have the sole objective of fiscal revenue collection for the government, and (via surtax on income tax), local budgets.
    Keywords: taxation of personal income, changes, slice system, progression tax rates
  5. By: Richard Fabling (Motu Economic and Public Policy Research); Richard Kneller (University of Nottingham); Lynda Sanderson (New Zealand Treasury)
    Abstract: This paper examines firm-level investment responses to exogenous changes in the forward looking user cost of capital associated with reforms to the corporate and personal tax system over the last decade. Adjustments to personal tax rates and fiscal depreciation allowances provide a direct lever through which government policy can affect the cost of capital faced by firms. The effect of these tax adjustments differs across firms according to their asset structure, providing both inter-temporal and inter-firm variation in UCCs and enabling an assessment of the short-run impact of UCC changes on investment behaviour. This analysis shows that while tax-induced changes in the UCC have significantly affected investment behaviour among some firms, the aggregate impacts are likely to have been negligible as the industries in which investment impacts are observed make a very small contribution to aggregate investment.
    Keywords: Tax, Depreciation, User Cost of Capital
    Date: 2015–05
  6. By: Stefanie Stantcheva
    Abstract: This paper considers dynamic optimal income, education, and bequest taxes in a Barro-Becker dynastic setup. Parents can transfer resources to their children in two ways: First, through education investments, which have heterogeneous and stochastic returns for children, and, second, through financial bequests, which yield a safe, uniform return. Each generation's productivity and preferences are subject to idiosyncratic shocks. I derive optimal linear formulas for each tax, as functions of estimable sufficient statistics, robust to underlying heterogeneities in preferences, and at any given level of all other taxes. It is in general not optimal to make education expenses fully tax deductible and the optimal education subsidy, income tax and bequest tax can, but need not, move together at the optimum. I also show how to derive optimal formulas using “reform-specific elasticities” that can be targeted to empirical estimates from existing reforms. I extend the model to an OLG model with altruism to study the effects of credit constraints on optimal policies. Finally, I solve for the fully unrestricted policies and show that, if education is highly complementary to children's ability, it is optimal to distort parents' trade-off between education and bequests and to tax education investments relative to bequests.
    JEL: H21 H24 H31 I24
    Date: 2015–05
  7. By: Aronsson, Thomas (Dept of Economics, Umeå School of Business and Economics, Umeå University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Much evidence suggests that between-country social comparisons have become more important over time due to globalization. This paper analyzes optimal income taxation in a multi-country economy, where consumers derive utility from their relative consumption compared with both other domestic residents and people in other countries. The optimal tax policy in our framework reflects both correction for positional externalities and redistributive aspects of such correction due to the incentive constraint facing each government. If the national governments behave as Nash competitors to one another, the resulting tax policy only internalizes the externalities that are due to within-country comparisons, whereas the tax policy chosen by the leader country in a Stackelberg game also to some extent reflects between-country comparisons. We also derive globally efficient tax policies in a cooperative framework, and conclude that there are potentially large welfare gains of international tax policy coordination resulting from cross-country social comparisons.
    Keywords: Optimal taxation; relative consumption; inter-jurisdictional comparison; asymmetric information; status; positional goods.
    JEL: D03 D62 D82 H23
    Date: 2015–05
  8. By: Correa, Juan; Lorca, Miguel; Parro, Francisco
    Abstract: Using panel data from Chilean manufacturing plants, we present an empirical model to measure the impact of a financial transaction tax on capital stock. Our results show a statistically significant negative effect of the tax on the stock of capital. We also find that the impact on plants is heterogeneous, depending on the intensity of different types of capital held by plants. Indeed, plants with a higher percentage of infrastructure assets, such as land and buildings, are affected relatively less by the tax.
    Keywords: financial transaction tax, stock of capital, manufacturing industry
    JEL: H20 L60
    Date: 2015–04
  9. By: Sean Higgins (Department of Economics, Tulane University, USA); Nora Lustig (Department of Economics, Tulane University, USA)
    Abstract: Whether the poor are helped or hurt by taxes and transfers is generally determined by comparing income distributions before and after fiscal policy using stochastic dominance tests and measures of progressivity and horizontal inequity. We formally show that these tools can fail to capture an important aspect: that a substantial proportion of the poor are made poorer (or non-poor made poor) by the tax and transfer system. We call this fiscal impoverishment, and axiomatically derive a measure of its extent. An analogous measure of fiscal gains of the poor is also derived, and we show that changes in the poverty gap can be decomposed into our axiomatic measures of fiscal impoverishment and gains. We also establish dominance criteria for unambiguous comparisons of fiscal impoverishment and gains under the current system to that under a proposed reform, for a range of possible poverty lines. We illustrate using Brazilian data.
    Date: 2015–04
  10. By: Carrillo, Paul; Pomeranz, Dina; Singhal, Monica
    Abstract: Reducing tax evasion is a key priority for many governments, particularly in developing countries. A growing literature argues that cross-checks of taxpayer reports against third-party information are critical for effective tax enforcement. However, such cross-checks may have limited effectiveness if taxpayers can make offsetting adjustments on other margins. We present a simple framework demonstrating conditions under which this occurs and empirical evidence from a natural experiment in Ecuador. When firms are notified about detected revenue discrepancies, they increase reported revenues - but also reported costs (by 96 cents per dollar of revenue adjustment), resulting in minor increases in tax collection.
    Keywords: Ecuador; evasion; tax
    JEL: H25 H26 O23 O38
    Date: 2015–05
  11. By: Liu, Li; Lockwood, Ben
    Abstract: We develop a conceptual framework which captures the effect of the VAT system on profit by two effective taxes. This allows (i) predictions of the determinants of voluntary registration and bunching at the registration threshold; (ii) develops a formula for estimating the elasticity of value-added with respect to the statutory tax. We show that the marginal excess burden of the tax on suppliers is measured by this elasticity, extending Feldstein's analysis of the elasticity of taxable income to an indirect tax setting. We bring the theory to the data, using linked administrative VAT and corporation tax records in the UK from 2004-2009. Consistently with the theory, voluntary registration is positively related to the intensity of input use and negatively related to the share of B2C transactions. There is bunching at the VAT threshold, and the amount of bunching is negatively related to the intensity of input use and positively related to the share of B2C transactions, again consistently with the theory. We provide an estimate of the elasticity of the VAT tax base in the range of 0.09 and 0.18.
    Keywords: bunching; elasticity; tax notches; VAT; voluntary registration
    JEL: H25 H32
    Date: 2015–05
  12. By: Vladimir Gimpelson; Daniel Treisman
    Abstract: Since Aristotle, a vast literature has suggested that economic inequality has important political consequences. Higher inequality is thought to increase demand for government income redistribution in democracies and to discourage democratization and promote class conflict and revolution in dictatorships. Most such arguments crucially assume that ordinary people know how high inequality is, how it has been changing, and where they fit in the income distribution. Using a variety of large, cross-national surveys, we show that, in recent years, ordinary people have had little idea about such things. What they think they know is often wrong. Widespread ignorance and misperceptions of inequality emerge robustly, regardless of the data source, operationalization, and method of measurement. Moreover, we show that the perceived level of inequality—and not the actual level—correlates strongly with demand for redistribution and reported conflict between rich and poor. We suggest that most theories about political effects of inequality need to be either abandoned or reframed as theories about the effects of perceived inequality.
    JEL: D31 D63 D83 H24 I30 P16
    Date: 2015–05
  13. By: Robert Duval Hernandez (UCY and CIDE); Gary S. Fields (Cornell University, USA, and IZA); George H. Jakubson (Cornell University, USA)
    Abstract: When economic growth (or economic decline) takes place, who benefits and who is hurt how much? The more traditional way of answering this question is to compare two or more comparable cross sections and gauge changing income inequality among countries or individuals. A newer way is to utilize data on a panel of countries or a panel of people and assess the pattern of panel income changes. How do these two approaches relate to one another? This paper shows, first, that it is possible to have all four combinations - rising or falling inequality and divergent or convergent panel income changes, and second, under what conditions, for various measures of rising/falling inequality and various measures of divergent/convergent income changes, each of the four possible combinations can arise.
    Keywords: Income inequality, economic mobility.
    JEL: J31 D63
    Date: 2015–04
  14. By: Simin Mozayeni (SUNY New Paltz)
    Abstract: The motivation for this research is to examine the debate about the effect of social insurance on private savings, Feldstein [1974] and Leimmer and Lesony [1982]. I use time series data and alternative models to examine the hypothesis. With this objective I use an estimation model, as I describe below. Since programs and demographic among the OECD counties are significantly different, I first analyze and compare them, with special attention to similarities among the members of the European Union, which share common markets and have reciprocity programs for social security. In this context, I compare the basic statistics for wage income thresholds subject to payroll tax, their lower and upper thresholds, the marginal tax rates, and the respective shares of the employee-employer contributions for the countries in the sample. Since some OECD countries allow a maximum contribution and possible additional contributions, and have different provisions for deductibility of the payroll tax, these features of the programs are also compared. Since there are variations in social insurance tax rates for self-employed, we also compare them. Furthermore, we compare age eligibility, work history requirements, and the social security income and health care benefits across those countries. Since some countries have reciprocity for social security program in the European Union, their policies will also be considered. With such fundamental investigations, we then develop the model for empirical investigation, which is a multivariate. Both linear and log-linear specifications are considered. The dependent variable is household saving rates [per National Income and Product Account], during 1992-2011 [will be expand the time as data become available). The independent variables are: social security contributions as percentage of GDPs, (for comparison, the percentage of total tax revenues, in comparison to the OECD average are also considered), and relevant population demographics, macroeconomic factors such as the real rate of interest and the terms of trade, the Gini Coefficient, and expected social security benefits upon eligibility. We pay attention to the possibility of Collinearity and heteroscedasticity in our variables. Our preliminary results reject the hypothesis that social insurance replaces private savings. We have reviewed the relevant literature for theories of saving behaviors and social security. Our research is a new empirical contribution to the literature.
    Keywords: Social Insurance, Social Security, Household Saving Behavior, OECD Social Insurance Programs
    JEL: D19 D10 I30
  15. By: Peter Haan; Victoria Prowse
    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
  16. By: Alexis Anagnostopoulos; Orhan Erem Atesagaoglu; Eva Carceles-Poveda
    Date: 2014
  17. By: Nitika Bagaria; Barbara Petrongolo; John Van Reenen
    Abstract: Disability rolls have escalated in developed nations over the last 40 years. The UK, however, stands out because the numbers on these benefits stopped rising when a welfare reform was introduced that integrated disability benefits with unemployment insurance (UI). This policy reform improved job information and sharpened bureaucratic incentives to find jobs for the disabled (relative to those on UI). We exploit the fact that policy was rolled-out quasi-randomly across geographical areas. In the long-run the policy improved the outflows from disability benefits by 6% and had an (insignificant) 1% increase in unemployment outflows. This is consistent with a model where information helps both groups, but bureaucrats were given incentives to shift effort towards helping the disabled find jobs and away from helping the unemployed. Interestingly, in the short-run the policy had a negative impact for both groups, suggesting important disruption effects. We estimate that it takes about six years for the estimated benefits of the reform to exceed its costs, which is beyond the time horizon of most policy-makers.
    JEL: H53 I13 I38 J14 J18 J64
    Date: 2015–05
  18. By: Kunihiko Konishi (Graduate School of Economics, Osaka University)
    Abstract: This study constructs a variety expansion growth model that integrates basic research to analytically examine its effects on household welfare. In our approach, the research sector consists of applied and basic research components. The former creates blueprints and expands the variety of goods available for consumption, whereas the latter adds to the stock of public knowledge. The two sectors interplay through knowledge spillovers. The analysis reveals two key results. First, the steady-state welfare-maximizing level of basic research is below the steady-state growth-maximizing level. Second, a reduction in the level of basic research raises household welfare if the level of basic research is initially at the steady-state welfare-maximizing level.
    Keywords: Basic research, Innovation, Endogenous growth, Welfare analysis
    JEL: H41 O31 O41
    Date: 2015–05
  19. By: John Beshears; James J. Choi; Joshua Hurwitz; David Laibson; Brigitte C. Madrian
    Abstract: What is the socially optimal level of liquidity in a retirement savings system? Liquid retirement savings are desirable because liquidity enables agents to flexibly respond to pre-retirement events that raise the marginal utility of consumption. On the other hand, pre-retirement liquidity is undesirable when it leads to under-saving arising from, for example, planning mistakes or self-control problems. This paper compares the liquidity that six developed economies have built into their employer-based defined contribution (DC) retirement savings systems. We find that all of them, with the sole exception of the United States, have made their DC systems overwhelmingly illiquid before age 55.
    JEL: D14 H3 H31
    Date: 2015–05

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