nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒07‒25
eleven papers chosen by
Thomas Andrén

  1. The Ends Against the Middle. Attitudes Towards Taxation By Ana I. Moro Egido; Angel Solano Garcia
  2. Progressive Taxation, Endogenous Growth, and Macroeconomic (In)stability By Jang-Ting Guo; Shu-Hua Chen
  3. Corruption and Tax Evasion: Reflections on Greek Tragedy By Anastasia Litina; Theodore Palivos
  4. Tax Debt Enforcement: Theory and Evidence from a Field Experiment in the United States By Ugo Troiano; Ricardo Perez-Truglia
  5. Broadening the State: Policy Responses to the Introduction of the Income Tax By Mark Dincecco; Ugo Troiano
  6. Negative Income Tax and Labor Market Participation: A Short Run Analysis By Samir Amine; Pedro Lages Dos Santos
  7. Managing tax complexity: the institutional framework for tax policy-making and oversight By Judith Freedman
  8. A Procedure for the Ex-Ante Assessment of Compulsory Municipal Amalgamation Programs By Dino Rizzi; Michele Zanette
  9. Learning and (or) Doing: Human Capital Investments and Optimal Taxation By Stefanie Stantcheva
  10. The Effect of the Earned Income Tax Credit in the District of Columbia on Poverty and Income Dynamics By Bradley L. Hardy; Daniel Muhammad; Rhucha Samudra
  11. Internet and taxation in the European Union: A primer By Luigi Bernardi

  1. By: Ana I. Moro Egido (Department of Economic Theory and Economic History, University of Granada.); Angel Solano Garcia (Department of Economic Theory and Economic History, University of Granada.)
    Abstract: Recent tax evasion scandals have brought into question the progressivity of taxation in many EU countries. In this paper we analyze the effect of the concern about tax evasion on people’s attitudes towards taxation in EU countries. We find that concern about tax evasion may produce a U-shaped relationship between an individual’s income and preferences for taxation in line with recent theoretical studies. Moreover, we find that the perceived level of tax evasion, the perceived waste of public resources and the intensity of tax enforcement reduce public support for taxation. In contrast, concern about fairness in tax compliance favours it.
    Keywords: attitudes, taxation, tax evasion, multilevel models
    JEL: H3 H26
    Date: 2015–07–22
  2. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Shu-Hua Chen (National Taipei University)
    Abstract: In the context of a standard one-sector AK model of endogenous growth, we show that the economy exhibits equilibrium indeterminacy and belief-driven aggregate fluctuations under progressive taxation of income. When the tax schedule is regressive or flat, the economy's balanced growth path displays saddle-path stability and equilibrium uniqueness. These results imply that in sharp contrast to a conventional automatic stabilizer, progressive income taxation may destabilize an endogenously growing macroeconomy by generating cyclical fluctuations driven by agents' self-fulfilling expectations or sunspots.
    Keywords: Progressive Income Taxation, Endogenous Growth, Equilibrium (In)determinacy.
    JEL: E62 O41
    Date: 2015–07
  3. By: Anastasia Litina (University of Luxembourg); Theodore Palivos (Athens University of Economics and Business)
    Abstract: We provide empirical support and a theoretical explanation for the vicious circle of political corruption and tax evasion in which countries often fall into. We address this issue in the context of a model with two distinct groups of agents: citizens and politicians. Citizens decide the fraction of their income for which they evade taxes. Politicians decide the fraction of the public budget that they peculate. We show that multiple self-fulfilling equilibria with different levels of corruption can emerge based on the existence of strategic complementarities, indicating that “corruption” may corrupt. Furthermore, we find that standard deterrence policies cannot eliminate the multiplicity of equilibria. Instead, policies that impose a strong moral cost on tax evaders and corrupt politicians can lead to a unique equilibrium.
    Keywords: Corruption; Tax Evasion; Multiple Equilibria; Social Stigma
    JEL: D73 E62 H26
    Date: 2015–06
  4. By: Ugo Troiano (University of Michigan); Ricardo Perez-Truglia (Microsoft)
    Abstract: We present theory and evidence about the enforcement of tax delinquencies, which are tax debts incurred with the government. In our model, the tax agency relies on a financial penalty and a social penalty that involves publishing the names of tax delinquents online, a policy that is becoming increasingly common. We show that, when the tax agency cares about social welfare as well as revenues, the optimal policy involves a mix of financial and social penalties. We conducted a field experiment with 35,000 tax delinquents who owed half a billion dollars in three U.S. states. We find that increasing the salience of both financial and social penalties reduces tax delinquencies. We also provide suggestive evidence that, as predicted by our model, the effectiveness of social and financial penalties depends on the debtor's income garnishability.
    Date: 2015
  5. By: Mark Dincecco; Ugo Troiano
    Abstract: We present new evidence about a mechanism – the broadening of the tax base – through which governments increase state capacity. Our difference-in-differences identification strategy exploits the staggered introduction of the income tax across twentieth-century US states. We find that tax broadening is associated with 1) a significant increase in total revenues and 2) a significant increase in total government expenditures, and in particular spending on public goods in education and health. We show suggestive evidence that political ideology affects policy responses to the broadening of the tax base.
    JEL: D78 H11 H41 H75 N0 N21 N22 N41 N42
    Date: 2015–07
  6. By: Samir Amine; Pedro Lages Dos Santos
    Abstract: This article examines the effects of the Negative Income Tax, in a matching model, on labor market participation. We show that the introduction of such instrument reduces unemployment and improves the situation of the poorest. But, amazingly, it provokes a fall on labor market participation principally because the agents are then less selective. We find another surprising result: despite the rise on participation, the increasing of unemployment benefits improves the situation of the firms at the expense of workers.
    Keywords: Matching, participation, negative income tax.,
    JEL: D63 H21 J41 J64
    Date: 2015–07–13
  7. By: Judith Freedman (Centre for Business Taxation, University of Oxford)
    Abstract: There is a widespread view that tax systems are too complex and that simplification would be a desirable outcome. Complexity leads to cost, uncertainty, avoidance opportunities and the inability to engage in tax issues. There is a point at which complexity becomes so great and unmanageable that it begins to undermine the rule of law, because it does not enable individuals to regulate their affairs properly. This paper does not take issue with the view that complexity is undesirable, but accepts that it is, to some extent, inevitable. The thesis here is that complexity should be reduced wherever possible, but that simplification cannot be the only, or even the main, driver of reform. Where simplicity cannot be achieved consistently with other objectives, there should be mechanisms to help taxpayers and revenue authorities to navigate through the remaining intricacies. Improved institutions could assist in providing ways of managing uncertainty and increasing understanding, as well as leading to improvements in the tax system. In the UK, however, lack of clear thought about the operation of our relevant institutions means that they do not play the part they should do in improving tax law. In the UK there is a proliferation of institutional approaches and, in particular, the Office of Tax Simplification (OTS) was created specifically to tackle the issue of complexity, but new institutions need to tackle the problems at root and it is not clear that the OTS or any of the other new institutions created over recent years have been able to do that. The paper concludes that there remains a need for institutional reform in the UK and suggests the transformation of the Office of Tax Simplification into a well resourced Office of Tax Policy, with wider scope than simplification and answerable to a Joint Committee of Parliament on Taxation Policy.
    Date: 2015
  8. By: Dino Rizzi (Department of Economics, University Of Venice Cà Foscari); Michele Zanette (Department of Economics, University Of Venice Cà Foscari)
    Abstract: The aim of the paper is to develop a procedure that allows policy makers to make an ex-ante assessment of a general compulsory amalgamation policy, providing quantitative indications about the possible financial effects. The amalgamation of small municipalities is a widespread practice all over the world. This policy is based on the assumption that local public service provision is characterized by economies of scale and economies of scope. However, population size is not the only determinant of economies of scale, which depend on many other factors. For these reasons, the expected effects of any amalgamation program are uncertain, and ex-post empirical analyses are unable to offer unambiguous indications to policy makers since all programs differ. After a brief discussion of the relevant issues concerning amalgamation, we present the procedure used to simulate the economics and administrative effects of a general compulsory amalgamation policy. The procedure is tested with reference to the municipalities of Veneto, a region of Italy and we provide the results of a number of simulations under alternative amalgamation policies. The main result is that amalgamation policies based only on the a priori rule that small municipalities should merge may be very inefficient because the expenditure reduction following an amalgamation policy may depend to a considerable extent on other territorial and socio-economic characteristics of the municipalities involved.
    Keywords: Tax municipality, amalgamation, local government expenditure, economies of scale
    JEL: H11 H72 H77 R51
    Date: 2015
  9. By: Stefanie Stantcheva
    Abstract: This paper considers a dynamic taxation problem when agents can allocate their time between working and investing in their human capital. Time investment in human capital, or "training," increases the wage and can interact with an agent's intrinsic, exogenous, and stochastic earnings ability. It also interacts with both current and future labor supply and there can be either "learning-and-doing" (when labor and training are complements, like for on-the-job training) or "learning-or-doing" (when labor and training are substitutes, like for college). Agents' abilities and labor supply are private information to them, which leads to a dynamic mechanism design problem with incentive compatibility constraints. At the optimum, the subsidy on training time is set so as to balance the total labor supply effect of the subsidy and its distributional consequences. In a one-period version of the model, particularly simple relations arise at the optimum between the labor wedge and the training wedge that can also be used to test for the Pareto efficiency of existing tax and subsidy systems. In the limit case of learning-by-doing (when training is a direct by-product of labor) or in the case in which agents who are more able at work are also more able at training, there are important modifications to the labor wedge.
    JEL: H21 H23 H24 H53 J24
    Date: 2015–07
  10. By: Bradley L. Hardy (American University); Daniel Muhammad (District of Columbia Government); Rhucha Samudra (American University)
    Abstract: Using unique longitudinal administrative tax panel data for the District of Columbia (DC), we assess the combined effect of the DC supplemental earned income tax credit (EITC) and the federal EITC on poverty and income dynamics within Washington, DC, from 2001 to 2011. The EITC in DC merits investigation, as the DC supplement to the federal credit is the largest in the nation. The supplemental DC EITC was enacted in 2000, and has been expanded from 10 percent of the federal credit in 2001 to 40 percent as of 2009. To implement the study, we estimate least squares models with 0/1 dependent variables to estimate the likelihood of net-EITC income above poverty and near-poverty thresholds. We also estimate the likelihood of earnings growth and income stabilization from the EITC. To identify the effect of the EITC, we exploit variation in the EITC subsidy rate from 2008 to 2009, when an additional EITC bracket of 45 percent was added for workers with three or more dependent children, up from 40 percent in the previous year for workers with two or more children. We also estimate a model examining the impact of city-level changes to the EITC. The structure and richness of our data enable us to control for tax filer fixed effects, an important innovation from many previous EITC studies. Overall, we find that the combined EITC raises the likelihood of net-EITC income above poverty and near poverty by as much as 9 percent, with the largest consistent effects accruing to single-parent families.
    Keywords: Poverty, Social Welfare Policy, Tax Expenditures, Labor Supply
    JEL: I38 H24 J38
    Date: 2015–06
  11. By: Luigi Bernardi (Università di Pavia)
    Abstract: The purpose of this paper is to offer a primer on certain important features and issues concerning Internet and taxation in the European Union. After a general introduction concerning the origins of the matter, the paper discusses why a tax on the huge profits made by the big US digital MNEs in Europe was not substantially reflected in the tax policy of EU members, notwithstanding the large tax gap among EU countries resulting from the shift in profits by the (US digital) MNE towards lower or no taxation countries. Then the main directives on Internet and taxation introduced by the EU (and also by the OECD) since the late 1990s are discussed: the EU especially focusses on establishing the due place of taxation on electronic commerce, while the OECD (more recently together with the G20) has placed the emphasis on regulating Transfer Prices and contrasting Base Erosion and Profits’ Shifting (BEPS).
    Keywords: web tax, e-commerce, profits shifting, Europe, OECD
    JEL: H20 H24 H25 H26

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