nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒07‒11
thirteen papers chosen by
Thomas Andrén

  1. Do taxes affect firmsÕ asset write-downs? Evidence from discretionary write-downs of equity investments in Italy By Giampaolo Arachi; Valeria Bucci
  2. The Impact of Short- and Long-Term Participation Tax Rates on Labor Supply By Bartels, Charlotte; Pestel, Nico
  3. A Tax Benefit Model for Policy Evaluation in Luxembourg: LuxTaxBen By Islam, Nizamul; Flood, Lennart
  4. On the optimal provision of social insurance By Krueger, Dirk; Ludwig, Alexander
  5. Shifting taxes from labor to consumption: More employment and more inequality By Pestel, Nico; Sommer, Eric
  6. A bird’s eye view on 20 years of tax-benefit reforms in Belgium By Decoster, André; Perelman, Sergio; Vandelannoote, Dieter; Vanheukelom, Toon; Verbist, Gerlinde
  7. Differentiated property tax and urban sprawl in Italian urbanized areas By Ermini, Barbara; Santolini, Raffaella
  8. A fresh look at an old question: is pro-poor targeting of cash transfers more effective than universal systems at reducing inequality and poverty? By Abigail McKnight
  9. Optimal Wage Redistribution in the Presence of Adverse Selection in the Labor Market By Bastani, Spencer; Blumkin, Tomer; Micheletto, Luca
  10. Wealth Inequality, Family Background, and Estate Taxation By Fang Yang; Mariacristina De Nardi
  11. The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden By J. Kolsrud; Camille Landais; P. Nilsson; Johannes Spinnewijn
  12. Fiscal Policy Spillovers: Points of Employment to Places of Residence By Peter McCrory; Bill Dupor
  13. 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

  1. By: Giampaolo Arachi (Department of Management, Economics, Mathematics and Statistics; University of Salento); Valeria Bucci (Department of Management, Economics, Mathematics and Statistics; University of Salento)
    Abstract: If assets write-downs are tax-deductible from the corporate income tax base, companies could discretionally use them to reduce their tax burden. This paper aims at investigating whether and to what extent taxes affect the firmÕs discretionary choice to write-down long term equity investments. The analysis is based on panel data for Italian companies. In the period 1998Ð2006 the Italian corporate income tax was reformed several times. In particular, the tax deductibility of write-downs of equity investment was repealed in 2004. The paper exploits the ensuing high cross-sectional and timeseries variation in the marginal tax rate (measured before the decision to write-down equity investments) in order to identify tax effects. The econometric analysis delivers strong evidence that taxes affect the decision to write-down. The paper also provides evidence of an interaction between tax minimization, financial reporting costs and agency costs.
    Keywords: corporate taxation, asset impairments, write-downs of equity investments, tax planning, financial reporting, agency relationship
    JEL: H25 H32 K34 M41
    Date: 2013–12
  2. By: Bartels, Charlotte (Freie Universität Berlin); Pestel, Nico (IZA)
    Abstract: Generous income support programs as provided by European welfare states have often been blamed to hamper employment. This paper investigates the importance of incentives inherent in the tax-benefit system for the individual decision to take up work. Using German microdata over the period 1993-2010 we find that recent reforms in Germany increased work incentives at the extensive margin measured by the Participation Tax Rate (PTR), particularly for low-income individuals. Work incentives are even higher if the time horizon is extended to more than one year, pointing at an overestimation of the disincentives by standard measures. Regression analysis reveals that a decrease in the PTR increases the likelihood of taking up work significantly.
    Keywords: labor force participation, work incentives, welfare, unemployment insurance, income taxation
    JEL: H24 H31 J22 J65
    Date: 2015–06
  3. By: Islam, Nizamul (LISER (CEPS/INSTEAD)); Flood, Lennart (University of Gothenburg)
    Abstract: We develop a behavioural micro simulation model (LuxTaxBen) that contains very precise information on income tax rules, as well as eligibility-rules for a number of welfare programs, such as social assistance, housing allowance etc. The model has been built specifically for analysing the Luxembourgish tax-transfer system whereby one can generate disposable income for various combinations of hours of work and welfare. It can be used for calculating accurate (net) household incomes conditional on labour supply while income tax rules and the various welfare benefit-levels are complicated functions of earned and unearned income. The LuxTaxBen is capable to handle almost all parts of the Luxembourg tax and transfer systems. Such a model has a great potential to be used for evaluating the effects of tax-benefit policy reforms and other changes on poverty, inequality, incentives and the governmental budget. It provides the users the opportunity to simulate the new rules in the Luxembourg tax-transfer system. The model consists of a number of modules such as module for child benefit, housing allowance, fees for child care. It is constructed in an integrated way so all the modules can be used together. This means that it is possible to analyses the interaction between the different transfer systems.
    Keywords: micro simulation, distributional and behavioural effect, welfare
    JEL: C8 D31 H24
    Date: 2015–06
  4. By: Krueger, Dirk; Ludwig, Alexander
    Abstract: In this paper we compute the optimal tax and education policy transition in an economy where progressive taxes provide social insurance against idiosyncratic wage risk, but distort the education decision of households. Optimally chosen tertiary education subsidies mitigate these distortions. We highlight the importance of two different channels through which academic talent is transmitted across generations (persistence of innate ability vs. the impact of parental education) for the optimal design of these policies and model different forms of labor as imperfect substitutes, thereby generating general equilibrium feedback effects from policies to relative wages of skilled and unskilled workers. We show that subsidizing higher education has important redistributive benefits, by shrinking the college wage premium in general equilibrium. We also argue that a full characterization of the transition path is crucial for policy evaluation. We find that optimal education policies are always characterized by generous tuition subsidies, but the optimal degree of income tax progressivity depends crucially on whether transitional costs of policies are explicitly taken into account and how strongly the college premium responds to policy changes in general equilibrium.
    Keywords: Progressive Taxation,Education Subsidy,Transitional Dynamics
    JEL: E62 H21 H24
    Date: 2015
  5. By: Pestel, Nico; Sommer, Eric
    Abstract: This paper investigates the effect of shifting taxes from labor income to consumption on labor supply and the distribution of income in Germany. We simulate stepwise increases in the value-added tax (VAT) rate, which are compensated by revenue-neutral reductions in income-related taxes. We differentiate between the personal income tax (PIT) and social security contributions (SSC). Based on a dual data base and a microsimulation model of household labor supply behavior, we find a regressive impact of such a tax shift in the short run. When accounting for labor supply adjustments, the adverse distributional impact persists for PIT reductions, while the overall effects on inequality and progressivity become lower when payroll taxes are reduced. This is partly due to increases in aggregate labor supply, resulting from higher work incentives.
    Keywords: income and payroll taxes,consumption taxes,microsimulation,inequality,Germany
    JEL: C63 D31 H23
    Date: 2015
  6. By: Decoster, André; Perelman, Sergio; Vandelannoote, Dieter; Vanheukelom, Toon; Verbist, Gerlinde
    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.
    Date: 2015–07–02
  7. By: Ermini, Barbara; Santolini, Raffaella
    Abstract: City’s core and suburbans tax differentials can affect sprawl within an urban area. We empirically address this issue by analyzing the pattern of growth of 72 Italian urbanized areas. As a novelty, we investigate the causes of the emerging land development pattern. Our results show that density of urban area declines in response to an increase in the city’s core property tax rate. We find that this effect is due to changes in dwelling size. By contrast, density of urban area significantly rises when suburbans property tax rates increase, making the urban area more compact. This effect is attributable to changes in the improvement effect of property taxation.
    Keywords: differentiated property tax, urban sprawl, functional urban area
    JEL: H3 H30 H71 R1 R10 R14
    Date: 2015–07
  8. By: Abigail McKnight
    Abstract: This paper presents findings on the changing effectiveness of cash transfers and income taxes on inequality and poverty reduction in four EU countries – the UK, Italy, Sweden and France. We use long time series (spanning four decades) to examine trends within countries over time and between countries at different points in time. Recent evidence has suggested that the relationship between concentration of cash transfers and their redistributive effectiveness has become blurred over time. We find much more conclusive evidence of a negative relationship within countries over time. The results show a negative relationship between the concentration of cash transfers net of direct taxes and their effectiveness in terms of reducing poverty and inequality. The strength of the relationship varies between countries and in some cases between the all age and the working age populations. The evidence suggests that caution should be applied to relying on bivariate cross-country estimates and that more should be done to establish and verify empirical relationships within countries over time using the rich data sources that are now available. These findings re-open the debate on the most effective design of cash transfer and direct tax systems.
    Keywords: Inequality, poverty, redistribution, cash transfers, welfare
    JEL: I32 H23 D31
    Date: 2015–06
  9. By: Bastani, Spencer (Uppsala University); Blumkin, Tomer (Ben Gurion University); Micheletto, Luca (University of Milan)
    Abstract: In this paper we allude to a novel role played by the non-linear income tax system in the presence of adverse selection in the labor market due to asymmetric information between workers and firms. We show that an appropriate choice of the tax schedule enables the government to affect the wage distribution by controlling the transmission of information in the labor market. This represents an additional channel through which the government can foster the pursuit of its redistributive goals.
    Keywords: adverse selection, labor market, optimal taxation, pooling, redistribution
    JEL: D82 H21 J31
    Date: 2015–06
  10. By: Fang Yang (Louisiana State University); Mariacristina De Nardi (UCL and Federal Reserve Bank of Chicago)
    Abstract: This paper provides two main contributions. First, it proposes a new theory of wealth inequality that merges two sources of inequality previously proposed: bequests motives and inheritance of ability of across generations, and an earnings process that allows for more earnings risk for the richest. Second, it uses our calibrated framework to study the importance of parental background and the effects of changing estate taxation on inequality, aggregate capital accumulation, intergenerational mobility, welfare, and on family background as a source of inequality. Our calibrated model generates realistically skewed distributions for wealth, earnings, and bequests, and a correlation of lifetime earnings and wealth at retirement that is close to that in the data and is thus a good laboratory to use to study these questions. We find that parental background is a crucial determinant of one's expected lifetime utility. We also find that increasing estate taxation from its effective levels observed over many years, to levels that are closer to the statutory ones observed in year 2000, would significantly reduce wealth concentration in the hands of the richest few and the role of parental background in determining one's lot in life. The implied welfare gains of such a policy would be positive for 71% of the population. For those experiencing losses, their loss would be a one-time cost of the order of 11% of average income.
    Date: 2015
  11. By: J. Kolsrud; Camille Landais; P. Nilsson; Johannes Spinnewijn
    Abstract: This paper provides a simple, yet general framework to analyze the optimal time profile of benefits during the unemployment spell. We derive simple sufficient-statistics formulae capturing the insurance value and incentive costs of unemployment benefits paid at different times during the unemployment spell. Our general approach allows to revisit and evaluate in a transparent way the separate arguments for inclining or declining proles put forward in the theoretical literature. We then estimate our sufficient statistics using administrative data on unemployment,income and wealth in Sweden. First, we exploit duration-dependent kinks in the replacement rate and find that the moral hazard cost of benefits is larger when paid earlier in the spell. Second, we find that the drop in consumption determining the insurance value of benefits is large from the start of the spell, but further increases throughout the spell. On average, savings and credit play a limited role in smoothing consumption. Our evidence therefore indicates that the recent change from a at to a declining benefit profile in Sweden has decreased welfare. In fact, the local welfare gains push towards an increasing rather than decreasing benefit profile over the spell.
    Keywords: Unemployment, Dynamic Policy, Suficient Statistics, Consumption Smoothing
    JEL: H20 J64
    Date: 2015–07
  12. By: Peter McCrory (Federal Reserve Bank of St. Louis); Bill Dupor (Federal Reserve Bank of St. Louis)
    Abstract: In this paper, we study the effects of interregional spillovers from the government spending component of the American Recovery and Reinvestment Act of 2009 (the Recovery Act). Using cross-county Census Journey to Work commuting data, we cluster U.S. counties into local labor markets, each of which we further partition into two subregions. We then compare differential labor market outcomes and Recovery Act spending at the regional and subregional levels using instrumental variables. Among pairs of subregions, we find evidence of fiscal policy spillovers. For example, $1 of Recovery Act spending in a large subregion increases its own wage bill by $0.79 and increases the wage bill in its neighboring subregion by $0.59. We find similar spillover effects when we replace the wage bill with employment as our measure of economic activity. Next, we build a dynamic equilibrium trade model with interregional commuting capable of propagating these spillovers across regions.
    Date: 2015
  13. 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 a quasi-random 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. The policy passes a dynamic cost-benefit calculation, but the costs of the organizational disruption implies that benefits take about six years to exceed the one-off set-up costs making it unattractive for (myopic) policy-makers.
    Keywords: Incentives; public sector; unemployment benefits; performance standards
    JEL: H51 J18
    Date: 2015–04

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