nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒08‒13
27 papers chosen by
Thomas Andrén

  1. Aggregate and distributional effects of increasing taxes on top income earners By Brüggemann, Bettina; Yoo, Jinhyuk
  2. Estimating the "Tax Gap" at the State Level: The Case of Georgia's Personal Income Tax By James Alm; Kyle Borders
  3. The impact of short- and long-term participation tax rates on labor supply By Bartels, Charlotte; Pestel, Nico
  4. Debt Policy Rules in an Open Economy By Keiichi Morimoto; Takeo Hori; Noritaka Maebayashi; Koichi Futagami
  5. Optimal Capital and Progressive Labor Income Taxation with Endogenous Schooling Decisions and Intergenerational Transfers By Alexander Ludwig; Dirk Krueger
  6. Shifting Taxes from Labour to Property. A Simulation under Labour Market Equilibrium By Flavia Coda Moscarola; Ugo Colombino; Francesco Figari; Marilena Locatelli
  7. Getting the poor to work: Three welfare increasing reforms for a busy Germany By Jessen, Robin; Rostam-Afschar, Davud; Steiner, Viktor
  8. Optimal Taxation and Public Provision for Poverty Reduction By Kanbur, Ravi; Pirttilä, Jukka; Tuomala, Matti; Ylinen, Tuuli
  9. Value Added Tax policy and the case for uniformity: empirical evidence from Mexico By Laura Abramovsky; Orazio Attanasio; David Phillips
  10. Progressive Taxation as an Automatic Destabilizer under Endogenous Growth By Jang-Ting Guo; Shu-Hua Chen
  11. International Tax Cooperation and Implications of Globalization By Leonce Ndikumana
  12. Income effects and the welfare consequences of tax in differentiated product oligopoly By Rachel Griffith; Lars Nesheim; Martin O'Connell
  13. Tax Basis Determinations, Pass-Through Entities, and Taxpayer Noncompliance By James Alm; Jay A. Soled
  14. Optimal tax progressivity: an analytical framework By Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
  15. Does an Uncertain Tax System Encourage "Aggressive Tax Planning"? By James Alm
  16. On growth-optimal tax rates and the issue of wealth inequalities By Jean-Philippe Bouchaud
  17. Are tax havens good? Implications of the crackdown on secrecy By Weichenrieder, Alfons J.; Xu, Fangying
  18. Tax planning of married couples in East and West Germany By Erbe, Katharina
  19. Estimating Tax Agency Efficiency By James Alm; Denvil Duncan
  20. Ownership, Taxes and Default By Giovanna Nicodano; Luca Regis
  21. Are expenditure cuts the only effective way to achieve successful fiscal adjustment By Rasmus Wiese; Richard Jong-A-Pin; Jakob de Haan
  22. The Distributional Effects of Consumption Taxes in New Zealand By Thomas, Alastair
  23. Inequality and Fiscal Redistribution in Middle Income Countries: Brazil, Chile, Colombia, Indonesia, Mexico, Peru and South Africa By Nora Lustig
  24. Using a temporary indirect tax cut as a fiscal stimulus: evidence from the UK By Thomas Crossley; Hamish Low; Cath Sleeman
  25. Labour supply and taxation with restricted choices By Magali Beffy; Richard Blundell; Antoine Bozio; Guy Laroque; Maxime To
  26. The redistribution and insurance value of welfare reform By Jonathan Shaw
  27. Do Tax Incentives Affect Business Location? Evidence from Motion Picture Production Incentives By Patrick Button

  1. By: Brüggemann, Bettina; Yoo, Jinhyuk
    Abstract: We analyze the macroeconomic implications of increasing the top marginal income tax rate using a dynamic general equilibrium framework with heterogeneous agents and a fiscal structure resembling the actual US tax system. The wealth and income distributions generated by our model replicate the empirical ones. In two policy experiments, we increase the statutory top marginal tax rate from 35 to 70 percent and redistribute the additional tax revenue among households, either by decreasing all other marginal tax rates or by paying out a lump-sum transfer to all households. We find that increasing the top marginal tax rate decreases inequality in both wealth and income but also leads to a contraction of the aggregate economy. This is primarily driven by the negative effects that the tax change has on top income earners. The aggregate gain in welfare is sizable in both experiments mainly due to a higher degree of distributional equality.
    Keywords: Top Income Taxation,Heterogeneous Agents,Incomplete Markets,Income and Wealth Inequality
    JEL: E21 E62 H21 H24
    Date: 2015
  2. By: James Alm (Department of Economics, Tulane University); Kyle Borders
    Abstract: Most studies of the so-called ``tax gap'' (or the amount of taxes that should be collected but are not) focus on national taxes. This study provides several estimates of the ``tax gap'' for the State of Georgia’s personal income tax. The methods use different estimation strategies for each of the three main components (underreporting of income, underpayment of tax liability, and nonfiling of a tax return), and then sum these separate estimates of the tax gap components to yield a range of estimates of the total tax gap in Georgia. The estimated range of the personal income tax gap is \$1.4 billion to \$2.9 billion, for a voluntary compliance rate that ranges from 89.8 percent to 80.8 percent. This study also provides some rough but suggestive estimates of the distributional effects of noncompliance, which indicate that noncompliance as a proportion of income may well be higher in lower income classes.
    Keywords: tax gap, tax evasion, public budgeting, forecasting
    JEL: H2 H26 H61 H68 H71 H83
    Date: 2014–05
  3. By: Bartels, Charlotte; Pestel, Nico
    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
  4. By: Keiichi Morimoto (Department of Economics, Meisei University); Takeo Hori (College of Economics, Aoyama Gakuin University); Noritaka Maebayashi (Faculty of Economics and Business Administration, The University of Kitakyushu); Koichi Futagami (Graduate School of Economics, Osaka University)
    Abstract: In a small open economy model of endogenous growth with public capital accu- mulation, we examine the effects of a debt policy rule under which the government must reduce its debt-GDP ratio if it exceeds the criterion level. To sustain public debt at a finite level, the government should adjust public spending rather than the income tax rate. The long run debt-GDP ratio should be kept sufficiently low to avoid equilibrium indeterminacy. Under sustainability and determinacy, a tighter (looser) debt rule brings welfare gains when the world interest rate is relatively high (low).
    Keywords: Fiscal policy, Public debt, Welfare, Small open economy, Indeterminacy, Limit cycles
    JEL: E62 H54 H63
    Date: 2013–05
  5. By: Alexander Ludwig (Goethe University Frankfurt); Dirk Krueger (University of Pennsylvania)
    Abstract: In this paper we characterize quantitatively the optimal mix of progressive labor income and capital income taxes as well as and education subsidies in a model with endogenous human capital formation, borrowing constraints, income risk. and incomplete financial markets. Progressive labor income taxes provide social insurance against idiosyncratic income risk and redistributes after tax income among ex-ante heterogeneous households. In addition to the standard distortions of labor supply progressive taxes also impede the incentives to acquire higher education, generating a non-trivial trade-off for the benevolent utilitarian government. The latter distortion can potentially be mitigated by an education subsidy. We find that the welfare-maximizing fiscal policy is indeed characterized by a substantially progressive labor income tax code and a positive subsidy for college education. The optimal degree of the education subsidy is larger than in the current U.S. status quo.
    Date: 2015
  6. By: Flavia Coda Moscarola (University of Turin and CeRP-Collegio Carlo Alberto); Ugo Colombino (University of Turin); Francesco Figari (University of Insubria, and ISER University of Essex); Marilena Locatelli (University of Turin)
    Abstract: A tax shifting from labour income to housing taxation is generally advocated on efficiency grounds. However, most of the empirical literature focuses on the distributional implications of property tax reforms without paying much attention to potential consequences on the labour market. The aim of this paper is to fill this gap by investigating the effects of a tax shifting from labour income to property, guaranteeing revenue neutrality, and to assess the consequences of labour market equilibrium, both on occupation rates and income distribution. We propose to consider a hypothetical tax reform in Italy which uses the revenue of the tax on house property (actually implemented in 2012) for increasing tax credits on low incomes and making them refundable. In order to evaluate the reform we have developed a structural model of household labour supply which takes into account the labour market equilibrium conditions. Overall, the simulated policy provides a more effective income support and better incentives to work for low wage households and determines an improvement in inequality indexes.
    Date: 2015–07
  7. By: Jessen, Robin; Rostam-Afschar, Davud; Steiner, Viktor
    Abstract: We study three budget-neutral reforms of the German tax and transfer system designed to improve work incentives for people with low incomes: a feasible flat tax reform that provides a basic income which is equal to the current level of the means tested unemployment benefit, and two alternative reforms that involve employment subsidies to stimulate participation and full-time work, respectively. We estimate labor supply reactions and welfare effects using a microsimulation model based on household data from the Socio-Economic Panel (SOEP) and a structural labor supply model. We find that all three reforms increase labor supply in the first decile of the income distribution. However, the flat tax scenario reduces overall labor supply by 4.9%, the reform scenario designed to increase participation reduces labor supply by 1%, while the reform that provides improved incentives to work full-time has negligible effects on overall labor supply. With equal welfare weights, aggregate welfare gains are realizable under all three reforms.
    Keywords: flat tax,basic income,work incentives,poverty,microsimulation
    JEL: H31 I38 J22 C25
    Date: 2015
  8. By: Kanbur, Ravi; Pirttilä, Jukka; Tuomala, Matti; Ylinen, Tuuli
    Abstract: The existing literature on optimal taxation typically assumes there exists a capacity to implement complex tax schemes, which is not necessarily the case for many developing countries. We examine the determinants of optimal redistributive policies in the context of a developing country that can only implement linear tax policies due to administrative reasons. Further, the reduction of poverty is typically the expressed goal of such countries, and this feature is also taken into account in our model. We derive the optimality conditions for linear income taxation,commodity taxation, and public provision of private and public goods for the poverty minimization case, and compare the results to those derived under a general welfarist objective function. We also study the implications of informality on optimal redistributive policies for such countries, and comment on the potential for minimum wage regulation. The exercise reveals non-trivial differences in optimal tax rules under the different assumptions. The derived formulae also capture the sufficient statistics that the governments need to pay attention to when designing poverty alleviation policies.
    Keywords: commodity taxation; income taxation; poverty; public good provision; redistribution
    JEL: H21 H40 O12
    Date: 2015–07
  9. By: Laura Abramovsky (Institute for Fiscal Studies); Orazio Attanasio (Institute for Fiscal Studies and University College London); David Phillips (Institute for Fiscal Studies)
    Abstract: Value added taxes (VAT) are an important, and in many cases increasing, source of revenue in both developed and developing countries. Unsurprisingly there is an intense academic and policy debate about the appropriate VAT rate structure, for both equity and efficiency reasons. In this paper we examine the distributional and efficiency case for VAT rate differentiation in Mexico, and analyse the effects of the 2010 reforms to Mexico’s tax system, making use of a tax micro-simulation model, MEXTAX. The amendments to the initial proposed reforms were made to make the tax change more ‘progressive’. We find that, measured as a proportion of income or expenditure, poorer households did gain most from the amendments, but that the cash-terms gains were much larger for households with high levels of income and expenditure. In other words, the reduction in tax take from the amendments was weakly targeted at poorer households; even simple universal cash transfers would have been much more beneficial to poor households. This shows the distributional case for zero rates of VAT on goods like food is weak – especially given the growing sophistication of cash transfer programmes in particularly middle income countries. We then examine the efficiency implications of Mexico’s VAT rate structure. We find that deviations from uniformity have a notable effect on spending patterns, but very little effect on aggregate welfare and economic efficiency as estimated by a standard QUAIDS model of consumer demand. We then argue that economic informality may actually provide an efficiency reason for lower rates of tax on goods like food for which informal production and transactions seem to be much more prevalent. This may turn the typical arguments about differential VAT rates on their head. Rather than being justifiable on distributional grounds, but entailing an efficiency cost, the reverse may actually be true.
    Keywords: Indirect taxes, consumer demand, optimal taxation, micro-simulators, Mexico
    JEL: H20 H21 H31 D12 D30
    Date: 2015–02
  10. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Shu-Hua Chen (National Taipei University)
    Abstract: It has been shown that in an otherwise standard one-sector real business cycle model with an indeterminate steady state under laissez faire, sufficiently progressive income taxation may stabilize the economy against aggregate fluctuations caused by agents' animal spirits. We show that this previous finding can be overturned within an identical model which allows for sustained endogenous growth. Specifically, progressive taxation may operate like an automatic destabilizer that leads to equilibrium indeterminacy and sunspot-driven cyclical fluctuations in an endogenously growing macroeconomy. This instability result is obtained under two tractable progressive tax policy formulations that have been considered in the existing literature.
    Keywords: Progressive Income Taxation, Automatic Stabilizer, Equilibrium Indeterminacy, Endogenous Growth.
    JEL: E62 O41
    Date: 2015–07
  11. By: Leonce Ndikumana
    Abstract: Recent developments in globalization raise important issues regarding taxation policy and economic development. First, trends in capital income tax raise concerns about a possible race to the bottom or harmful competition. Second, lack of tax policy coordination results in large losses in tax revenue due to profit shifting by multinational corporations. These practices undermine revenue mobilization in the least developed countries, which also suffer from capital flight and other forms of illicit financial flows. This paper discusses how improved governance of the global financial system and enhanced harmonization in taxation policies may help address these important development problems.
    Keywords: Taxation; tax evasion; globalization; saving; capital; economic development
    JEL: E21 H26 O16 O19 F13
    Date: 2014–12
  12. By: Rachel Griffith (Institute for Fiscal Studies and IFS and Manchester); Lars Nesheim (Institute for Fiscal Studies and cemmap and UCL); Martin O'Connell (Institute for Fiscal Studies)
    Abstract: Random utility models are widely used to study consumer choice. The vast majority of applications make strong assumptions about the marginal utility of income, which restricts income effects, demand curvature and pass-through. We show that flexibly modeling income effects can be important, particularly if one is interested in the distributional effects of a policy change, even in a market in which, a priori, the expectation is that income effects will play a limited role. We allow for much more flexible forms of income effects than is common and we illustrate the implications by simulating the introduction of an excise tax. Supplementary material for this paper is available here.
    Keywords: Income effects; compensating variation; demand estimation; oligopoly; pass-through
    JEL: L13 H20
    Date: 2015–06
  13. By: James Alm (Department of Economics, Tulane University); Jay A. Soled (Rutgers School of Business, Rutgers University)
    Abstract: In the United States, one of the most popular ways to conduct business is to use a pass- through entity such as a partnership, limited liability company, or S corporation. Investor taxpayers in such pass-through entities commonly hold their ownership interest for years or decades. Over this lengthy period of time, a taxpayer’s tax basis in the entity is subject to constant annual adjustments, which generally have no immediate tax consequences. However, when the pass-through entity investment is later sold or liquidated, tax basis determinations are of critical importance, and these determinations enable taxpayers to calculate their concomitant gains or losses. At this pivotal juncture, accurately determining taxpayers’ tax bases in these investments is highly unlikely, and the IRS’s ability to detect taxpayers’ tax basis reporting inaccuracies is virtually nonexistent. This analysis examines the phenomenon of taxpayers who do not know their tax basis in pass-through entity investments and the consequences associated with such ignorance. Also provided are projected revenue losses associated with taxpayers purposefully or inadvertently inflating the tax basis that they have in their pass-through entity investments. To curtail the projected revenue losses associated with tax basis misreporting, we propose several reform measures that Congress should adopt. Such measures include simplifying tax basis computations, enhancing information reporting, and limiting the ability of taxpayers to estimate the tax basis of their pass-through investments.
    Keywords: tax basis, pass-through entities, information reporting
    JEL: H2 H26 K34 K42
    Date: 2014–07
  14. By: Jonathan Heathcote (Institute for Fiscal Studies); Kjetil Storesletten (Institute for Fiscal Studies and University of Oslo); Giovanni L. Violante (Institute for Fiscal Studies)
    Abstract: What shapes the optimal degree of progressivity of the tax and transfer system? On the one hand, a progressive tax system can counteract inequality in initial conditions and substitute for imperfect private insurance against idiosyncratic earnings risk. At the same time, progressivity reduces incentives to work and to invest in skills, and aggravates the externality associated with valued public expenditures. We develop a tractable equilibrium model that features all of these trade-offs. The analytical expressions we derive for social welfare deliver a transparent understanding of how preferences, technology, and market structure parameters influence the optimal degree of progressivity. A calibration for the U.S. economy indicates that endogenous skill investment, flexible labor supply, and the externality linked to valued government purchases play quantitatively similar roles in limiting desired progressivity.
    Date: 2014–10
  15. By: James Alm (Department of Economics, Tulane University)
    Abstract: "Aggressive tax planning" (ATP) is typically characterized as a tax scheme that reduces the effective tax rate of a particular type of income to a level below the one sought by fiscal policy for this income. One motivation often suggested for its use is the uncertainty in tax liabilities introduced by a complicated and ever changing tax system. In this paper, I examine the impact of an uncertainty on the use of such tax schemes; by implication, I also examine how a simpler and more stable tax system that reduced this uncertainty might affect ATP. In this analysis, I draw upon some of my own work on tax avoidance and tax evasion, and then I extend this work to the related but separate area of ATP. Importantly, I introduce and model both individual and group motivations, incorporating insights from behavioral economics in these new analyses. Taxpayers are clearly motivated in part by narrowly defined financial considerations as shaped by the tax, audit, and penalty rates that they face, all of which I classify as individual motivations. However, individuals are also often influenced by many other factors that go beyond self-interest and that have as their main foundation some aspects of social norms, morality, altruism, fairness, or the like. In their entirety, I lump these factors together as group motivations, and I argue that they are shaped by the dynamic social context in which, and the process by which, decisions emerge. My main conclusion is that there is much in theory to suggest that uncertainty leads to more use of ATP, especially when both individual and group motivations are considered.
    Keywords: tax avoidance, tax evasion, uncertainty, risk, behavioral economics, experimental economics
    JEL: H2 H26 D03 C9
    Date: 2014–02
  16. By: Jean-Philippe Bouchaud (Capital Fund Management and Ecole Polytechnique)
    Abstract: We introduce a highly stylized model of the economy, with a public and private sector coupled through a wealth tax and a redistribution policy. The model can be fully solved analytically, and allows one to address the question of optimal taxation and of wealth inequalities. We find that according to the assumption made on the relative performance of public and private sectors, three situations are possible. Not surprisingly, the optimal wealth tax rate is either 0% for a deeply dysfunctional government and/or highly productive private sector, or 100 % for a highly efficient public sector and/or debilitated/risk averse private investors. If the gap between the public/private performance is moderate, there is an optimal positive wealth tax rate maximizing economic growth, even -- counter-intuitively -- when the private sector generates more growth. The compromise between profitable private investments and taxation however leads to a residual level of inequalities. The mechanism leading to an optimal growth rate is related the well-known explore/exploit trade-off.
    Date: 2015–08
  17. By: Weichenrieder, Alfons J.; Xu, Fangying
    Abstract: The pressure on tax haven countries to engage in tax information exchange shows first effects on capital markets. Empirical research suggests that investors do react to information exchange and partially withdraw from previous secrecy jurisdictions that open up to information exchange. While some of the economic literature emphasizes possible positive effects of tax havens, the present paper argues that proponents of positive effects may have started from questionable premises, in particular when it comes to the effects that tax havens have for emerging markets like China and India.
    Keywords: tax haven,secrecy,tax information exchange,China,India
    JEL: H2 H7
    Date: 2015
  18. By: Erbe, Katharina
    Abstract: This study evaluates the tax planning behavior of married couples with regard to the allocation of tax schedules between spouses in the context of the German income tax splitting. The focus lies on the disparities between East and West German couples since they experienced different political regimes until 1990. The analysis utilizes administrative data on German income tax returns for the year 2004 (FAST 2004). The result of an alternative specific conditional logit estimation indicates that East German couples are substantially more likely to choose equal tax schedules than West Germans (between 17.8 and 19.3 percentage points). East German couples are less likely to allocate the advantageous tax bracket to the husband instead of the wife, even when controlling for income and socioeconomic factors. The conclusion of this analysis is that the tax planning behavior of married couples is influenced by the differences in the socialization of people, caused by the fact that before 1990, East Germany had different tax institutions and political regimes compared to West Germany.
    Keywords: Income Tax Splitting,Household Decision,East and West Germany
    JEL: H24 H31
    Date: 2015
  19. By: James Alm (Department of Economics, Tulane University); Denvil Duncan (School of Public and Environmental Affairs, Indiana University-Bloomington)
    Abstract: Empirical work on a tax agency's production process has been plagued by the absence of comparable tax administrative data across countries and years. Such data are now available from the Organisation of Economic Co-operation and Development. This paper uses these data for the years 2007 to 2011, together with an estimation strategy that utilizes data envelopment analysis and stochastic frontier analysis, to determine the relative efficiency of tax agencies in their use of inputs. Overall, the average efficiency scores indicate that countries should be able to collect their current level of revenues with approximately 10 to 16 percent less inputs.
    Keywords: tax administration, tax efficiency, data envelopment analysis, stochastic frontier analysis
    JEL: H2 H26 H61 H83
    Date: 2014–03
  20. By: Giovanna Nicodano (University of Turin); Luca Regis (IMT Lucca Institute for Advanced Studies)
    Abstract: This paper determines ownership and leverage of two units facing a tax-bankruptcy trade-off. Connected units have higher leverage and lower tax burden, because of internal support through both bailouts and corporate dividends. Ownership adjusts to additional tax provisions. A hierarchical group with a wholly-owned subsidiary results from Thin Capitalization rules. The presence of corporate dividend taxes generates horizontal groups, or a Special Purpose Vehicle, or a private equity fund. Combinations of tax provisions contain tax savings, debt and default in connected units. No bailout provisions, such as the Volcker rule, succeed in reducing leverage and default.
    Keywords: Ownership structure, Capital structure, Dividend taxes, Thin Capitalization, Groups, Securitization, Private equity
    JEL: G32 H25 H32 L22
    Date: 2015–07
  21. By: Rasmus Wiese; Richard Jong-A-Pin; Jakob de Haan
    Abstract: We re-examine whether successful fiscal adjustments are characterized by spending cuts. We apply the Bai & Perron structural break filter instead of ad hoc rules to identify fiscal adjustments in 20 OECD countries. Our estimates using conditional fixed effects logit models suggest that we cannot reject the hypothesis that the change in expenditures is equal to the change in revenues in successful fiscal adjustments. Most political-economy variables considered are not robustly related to successful fiscal adjustments. However, we find evidence that the political fragmentation of government affects the likelihood to observe a successful fiscal adjustment.
    Keywords: fiscal adjustment; fiscal consolidation
    JEL: H20 H30 H50 H62
    Date: 2015–07
  22. By: Thomas, Alastair
    Abstract: This paper investigates the distributional effects of the GST in New Zealand, and the case for the introduction of reduced rates to address distributional concerns. The analysis is based on a consumption tax micro-simulation model constructed using expenditure micro-data from the Household Economic Survey for 2012/13. The distributional effects of excise taxes on tobacco, alcohol and petrol are also considered. The paper finds that the lifetime distributional impact of the GST is either proportional or at worst slightly regressive. Excise taxes are also found to be roughly proportional or slightly regressive, though they are of far smaller magnitude than GST burdens. Simulation results show that the introduction of a European-style multi-rate GST system would have a progressive impact on overall GST burdens, but that such a reform would benefit richer households significantly more than poorer households in dollar terms. Given it is the overall progressivity of the tax system that matters, New Zealand’s current approach of providing targeted support to poorer households via the Working for Families tax credit package can be seen as a far more cost effective way of supporting poorer households than the introduction of reduced GST rates for specific expenditure items.
    Keywords: GST, VAT, Excise taxes, Consumption taxes, Distributional effects,
    Date: 2015
  23. By: Nora Lustig (Department of Economics, Tulane University)
    Abstract: This paper examines the redistributive impact of fiscal policy for Brazil, Chile, Colombia, Indonesia, Mexico, Peru and South Africa using comparable fiscal incidence analysis with data from around 2010. The largest redistributive effect is in South Africa and the smallest in Indonesia. Success in fiscal redistribution is driven primarily by redistributive effort (share of social spending to GDP in each country) and the extent to which transfers/subsidies are targeted to the poor and direct taxes targeted to the rich. While fiscal policy always reduces inequality, this is not the case with poverty. Fiscal policy increases poverty in Brazil and Colombia (over and above market income poverty) due to high consumption taxes on basic goods. The marginal contribution of direct taxes, direct transfers and in-kind transfers is always equalizing. The marginal effect of net indirect taxes is unequalizing in Brazil, Colombia, Indonesia and South Africa. Total spending on education is pro-poor except for Indonesia, where it is neutral in absolute terms. Health spending is pro-poor in Brazil, Chile, Colombia and South Africa, roughly neutral in absolute terms in Mexico, and not pro-poor in Indonesia and Peru.
    Keywords: fiscal incidence, social spending, inequality, developing countries
    JEL: H22 D31 I3
    Date: 2015–07
  24. By: Thomas Crossley (Institute for Fiscal Studies and Institute for Fiscal Studies, University of Essex); Hamish Low (Institute for Fiscal Studies and Trinity College, Cambridge); Cath Sleeman (Institute for Fiscal Studies)
    Abstract: This paper evaluates a novel form of fiscal stimulus: a temporary cut in the rate of Value Added Tax (VAT). In December 2008, the UK cut the standard rate of VAT by 2.5 percentage points for 13 months in an effort to stimulate spending. We estimate the effect of the cut on prices and spending using alternative strategies for identifying the counter-factual. Although firms initially passed through the VAT cut by lowering their prices, at least part of the pass through of the VAT cut was reversed after only a few months. Despite this early reversal, the cut raised the volume of retail sales by around 1% which on its own generates a 0.4% increase in total expenditure. The cut raised retail sales by encouraging consumers to bring forward their purchases and we find a significant fall in sales after the VAT cut ended. Thus an indirect tax cut stimulates significant intertermporal substitution in purchases.
    Date: 2014–07
  25. By: Magali Beffy (Institute for Fiscal Studies); Richard Blundell (Institute for Fiscal Studies and IFS and UCL); Antoine Bozio (Institute for Fiscal Studies and Paris School of Economics); Guy Laroque (Institute for Fiscal Studies); Maxime To (Institute for Fiscal Studies)
    Abstract: A model of labour supply is developed in which individuals face restrictions on hours choices. Observed hours reflect both the distribution of preferences and the distribution of offers. In this framework the choice set is limited and observed hours may not satisfy the revealed preference conditions for ‘rational’ choice. We show first that when the offer distribution is known, preferences can be identified. We then show that, where preferences are known, the offer distribution can be fully recovered. We also develop conditions for identification of both preferences and the offer distribution. We illustrate this approach in a labour supply setting with nonlinear budget constraints. The occurrence of nonlinearities in the budget constraint can directly reveal restrictions on choices. This framework is then used to study the labour supply choices of a large sample of working age mothers in the UK, accounting for nonlinearities in the tax and welfare benefit system, fixed costs of work and restrictions on hours choices.
    Date: 2015–01
  26. By: Jonathan Shaw (Institute for Fiscal Studies)
    Abstract: Relatively little is known about the roles that taxes and transfers play in redistributing resources and providing insurance across individuals and across the lifecycle. We embed these alternative roles in a lifecycle model, allowing us to demonstrate what the tax and transfer system achieves from a lifecycle perspective and why it is valuable. We undertake a five-way decomposition of net transfers into a giveaway term and terms corresponding to between- and within-individual redistribution and between- and within-individual insurance. These components are distinguished from perspective of the start of working life, and we consider both the magnitude of net transfers involved and the associated welfare values. Our focus is on females and we also highlight how behavioural responses affect the results. Analysis is conducted for the 2015 UK tax and transfer system relative to a flat-rate baseline, showing what value is provided by the complex tax and welfare entitlement rules in a modern economy. We also consider what is achieved by two important UK benefit reforms--the working families' tax credit (WFTC) reform of 1999 and the universal credit (UC) reform that began in 2013. Our main conclusions are that insurance against wage and family composition shocks is substantial and highly valued by individuals. Within-individual redistribution (i.e. across periods of life) is generally of little value even in the presence of strict borrowing constraints. Behavioural responses tend to increase the size of reform giveaways at the expense of the other components.
    Keywords: tax, insurance, redistribution
    Date: 2014–08
  27. By: Patrick Button (Department of Economics, Tulane University)
    Abstract: Incentives for motion picture production are a recent and popular economic development incentive among U.S. states. I estimate the impacts of state-level motion picture production incentives on filming location, establishments, and employment in the motion picture production industry. Filming locations are highly substitutable while locations for establishments in motion picture production are not substitutable due to agglomeration economies. This provides two very different cases to see how tax incentives affect business location. I quantify impacts on filming location, establishments, and employment using two difference-in-differences methodologies: panel regression analysis and synthetic control case studies of New Mexico and Louisiana, who adopted aggressive incentives early. For incentive data, I created a database of all state incentives from 1980 to 2012 through legal research. For filming location, I use the Internet Movie Database (, which provides 189,598 location choices, and for employment and establishment counts I use the Quarterly Census of Employment and Wages (QCEW). I find that most incentives have a moderate effect on filming location but almost no effects on employment or establishments. These results show that incentives affect location decisions when locations are more substitutable, as in filming, but not otherwise. These results also imply that motion picture production incentives cannot create a local film industry.
    Keywords: tax credits, tax incentive, subsidies, state taxation, firm location, motion picture production, film industry
    JEL: H25 H71 R38 L82 Z11
    Date: 2015–07

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