nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒10‒17
eighteen papers chosen by
Thomas Andrén

  1. Present State of Goods and Services Tax (GST) Reform in India. By Mukherjee, Sacchidananda
  2. The End of the Flat Tax Experiment in Slovakia By Michal Horváth; Matúš Senaj; Zuzana Siebertová; Norbert Švarda
  3. Investment effects of wealth taxes under uncertainty and irreversibility By Niemann, Rainer; Sureth-Sloane, Caren
  4. Effective Tax Rates on Consumption and Factor Incomes: a quarterly frequency estimation for Brazil By Cyntia Freitas Azevedo; Angelo Marsiglia Fasolo
  5. How does fiscal decentralization affect within-regional disparities in well-being? Evidence from health inequalities in Italy By Di Novi, C.;; Piacenza, M.;; Robone, S.;; Turati, G.;
  6. SIMTASK: A Microsimulation of the Slovak Tax-Benefit System By Zuzana Siebertová; Norbert Švarda; Jana Valachyová
  7. Under the Radar: The Effects of Monitoring Firms on Tax Compliance By Almunia, Miguel; Lopez-Rodriguez, David
  8. Taxes: Price of Civilization or Tribute to Leviathan? - Working Paper 412 By Lant Pritchett, Yamini Aiyar
  9. On the role of the property tax in financing local expenditure: the case of Italy By Ernesto Longobardi
  10. Tax(i)ing the poor? Commuting costs in South Africa By Andrew Kerr
  11. Capital In the 21st Century: A Review By malikane, christopher
  12. Does legality matter? The case of tax avoidance and evasion By Blaufus, Kay; Braune, Matthias; Hundsdoerfer, Jochen; Jacob, Martin
  13. Jobless Capital? The Role of Capital Subsidies By Carlianne E. Patrick
  14. To Work or Not to Work? Updated Estimates of Labour Supply Elasticities By Matúš Senaj; Zuzana Siebertová; Norbert Švarda; Jana Valachyová
  15. Tax-benefits policies jointly run by the social partners: Labour market implications of the Bipartite Sectoral Funds By Giuseppe Croce
  16. Consumption, Poverty, and Welfare By Prize Committee, Nobel
  17. Monetary Policy, Fiscal Policy, and Secular Stagnation at the Zero Lower Bound. A View on the Eurozone By Kleczka, Mitja
  18. Wealth-income ratios in a small, late-industrializing, welfare-state economy: Sweden, 1810–2014 By Waldenström, Daniel

  1. By: Mukherjee, Sacchidananda (National Institute of Public Finance and Policy)
    Abstract: To remove cascading effect of taxes and provide a common nation-wide market for goods and services, India is moving towards introduction of Goods and Services Tax (GST). Under the proposed indirect tax reform both Central and State Governments will have concurrent taxation power to levy tax on supply of goods and services. It is expected that the proposed regime will improve tax collection and minimize leakage, as both Central and State Tax Administrations will monitor and assess same set of taxpayers. There are several challenges before introduction of GST and these can be classified into two broad heads - a) GST Design and Structure related, and b) GST Administration and Institutional. On design related issues, broad consensus on choice of revenue neutral rates (RNRs), harmonization of GST rate(s) across States, harmonization of list of exempted and excluded goods and services and thresholds for mandatory GST registration across States are yet to be reached. Similarly, there are several issues involved in tax administration (between Central and State Tax Administrations and also across State Tax Administrations) which are not yet solved. Taking cognizance of discussion available in the public domain this paper attempts to provide a broad contour of the proposed GST regime and highlights major challenges which require immediate attention of the Governments.
    Keywords: Goods and Services Tax ; Value Added Tax ; Design and Administration of Taxation ; Fiscal Federalism ; Indirect Taxation ; India.
    JEL: H25 H71 H77
    Date: 2015–09
  2. By: Michal Horváth; Matúš Senaj; Zuzana Siebertová; Norbert Švarda
    Abstract: The paper provides a quantitative assessment of the consequences of departing from a flat-tax system in the context of Slovakia. A behavioural microsimulation model of the labour supply is embedded into a general equilibrium framework with search and matching frictions. Some recently implemented changes in the tax system leave aggregate labour market indicators as well as inequality measures virtually unaffected. We also examine hypothetical revenue-neutral reforms that would significantly increase the progressivity of the system through graduated marginal tax rates. We find that there are narrow limits to what policy makers could accomplish through such reforms in terms of employment and equality of income. Hence, an income tax reform should at best be seen as a complementary tool to other initiatives promoting such objectives. Moreover, we highlight an important trade-off: income tax reforms that promote employment may harm growth.
    Keywords: flat tax, microsimulation, general equilibrium, search and matching, labour supply elasticity
    JEL: E24 H24 H31 J22
    Date: 2015–10–05
  3. By: Niemann, Rainer; Sureth-Sloane, Caren
    Abstract: The growing dissatisfaction with perceived distributional inequality and budgetary constraints gave rise to a discussion on the (re-)introduction of wealth taxes. Wealth taxes are typically levied on private wealth, in some countries also on corporate wealth. To avoid misleading statements concerning possible distributional consequences of wealth taxes, preceding analyses of the economic and particularly investment effects are necessary. As investments drive job creation, tax-induced changes in investment timing may significantly affect the income and wealth distribution. We analyze the impact of wealth taxes on investment timing under uncertainty and irreversibility and the propensity to carry out risky projects. Using a Dixit/Pindyck type real options model we find that wealth taxes have real effects. This means that higher wealth tax rates can either stimulate or depress the propensity to invest in risky projects. We find that apparently paradoxical wealth tax effects (accelerated investment due to higher wealth tax rates) are more likely for low interest rates and for high-risk investments. Using either historical cost or fair value accounting may affect investment timing ambiguously. Thus, the design of wealth taxes is crucial for the resulting delay or acceleration of investment. Although our model takes an individual perspective, our findings are also relevant for the current tax policy discussion on the introduction of wealth taxes. Our results indicate that wealth taxes are particularly harmful for specific classes of investments, for example low-risk investments.
    Keywords: wealth tax,investment decisions,real options,timing flexibility,uncertainty,irreversibility
    JEL: H25 H21
    Date: 2015
  4. By: Cyntia Freitas Azevedo; Angelo Marsiglia Fasolo
    Abstract: This paper estimates time series of effective tax rates for consumption and factor incomes for Brazil, following the spirit of Mendoza et al (1994). The procedure to generate quarterly estimates of the tax base, using microdata from populational surveys, and the tax revenues seems to be appropriate, despite its simplicity, as the time series of the tax burden and the effective tax rates are in line with the historical Brazilian experience on fiscal policy. The estimated tax burden identifies a positive trend over time, despite the partial interruption after the international crisis in 2008. The paper also provides preliminary evidence on the properties of the computed effective tax rates and their relation with the business cycles
    Date: 2015–09
  5. By: Di Novi, C.;; Piacenza, M.;; Robone, S.;; Turati, G.;
    Abstract: This paper aims at investigating empirically the impact of fiscal decentralization reforms on inequality in well-being. In particular, we look at the effects on health inequalities following the assignment of larger tax power to the Italian Regions for financing their health expenditure, starting from the end of the Nineties. Exploiting large differences in the size of the tax base across Regions, we find that fiscal decentralization processes that attribute a greater tax power to lower government tiers, besides reducing inefficiencies of healthcare policies, seem to be effective in reducing also within-regional disparities in health outcomes. However, thedegree of economic development – on which depends the actual fiscal autonomy from Central government – significantly affects the effectiveness of these reforms and highlights the importance to take properly into account the specific features of the context where the decentralization of power is implemented.
    Keywords: fiscal decentralization; regional governments; healthcare policy; health inequalities;
    JEL: H75 I14 I1 R50
    Date: 2015–09
  6. By: Zuzana Siebertová; Norbert Švarda; Jana Valachyová
    Abstract: In this paper we introduce a microsimulation model of the Slovak tax and transfer system SIMTASK. It presents a complex toolkit for static microsimulations. Compared to earlier version of the CBR microsimulation model, simulated results are closer to reality. This has been achieved by recalibrating sample weights of the input database, where the income distribution has been taken into account directly. The improved fit is documented by validating the tax and transfer aggregates using both the original sample weights and the new ones against external data. Along with some other refinements to the model and external data considerations, the paper concludes that the validity of SIMTASK improved in terms of personal income tax simulations, social security contributions simulations, as well as simulations of family related benefits.
    Keywords: microsimulation, EUROMOD, tax and transfer policy, Slovakia
    JEL: C81 I38 H24
    Date: 2015–10–05
  7. By: Almunia, Miguel (Department of Economics and CAGE University of Warwick); Lopez-Rodriguez, David (Banco de España)
    Abstract: This paper analyzes the effects on tax compliance of monitoring the information trails generated by firms’ activities. We exploit quasi-experimental variation generated by a Large Taxpayers Unit (LTU) in Spain, which monitors firms with more than 6 million euros in reported revenue. Firms strategically bunch below this threshold in order to avoid stricter tax enforcement. This response is stronger in sectors where transactions leave more paper trail, implying that monitoring effort and the traceability of information reported by firms are complements. We calculate that there would be substantial welfare gains from extending stricter tax monitoring to smaller businesses.
    Keywords: tax enforcement ; firms ; bunching ; Spain ; Large Taxpayers Unit (LTU)
    JEL: H26 H32
    Date: 2015
  8. By: Lant Pritchett, Yamini Aiyar
    Abstract: There are two dominant narratives about taxation. One is taxes are the “price we pay for a civilized society” (Oliver Wendell Holmes Jr.). In this view taxes are not a necessary evil (as in the pairing of “death and taxes” as inevitable) but a positive good: more taxes buy more “civilization.” The other view is that taxes are “tribute to Leviathan”—a pure involuntary extraction from those engaged in economic production to those who control coercive power producing no reciprocal benefit. In this view taxes are a bane of the civilized. We consider the question of taxes as price versus tribute for contemporary India and make three points. First, most discussions of government budgets focus on allocations across sectors and activities, focusing on the accounting cost of services provided. But if the accounting cost exceeds the economic cost (the minimum at which the good or service could have been provided), then the difference can be considered “tribute.” Second, to the extent that government engages in activities which would not have otherwise been carried out at all but which citizens value, the “price of civilization” is maximized. In contrast, when government budgets produce private goods at such low quality they are valued at zero by many, then those taxpayers consider this tribute. Third, the structure of social spending between “insurance”-like programs which benefit all individuals at various states or stages of life, and sharply targeted transfer programs determines whether most taxpayers consider taxes to fund these expenditures a price or tribute. The notion of a “compulsory purchase” versus “tax” helps elucidate this difference, and sharp targeting is seen as raising the price to any given individual of a given degree of individual benefit. Taken together we argue India needs more taxes as price of civilization but less taxes as tribute, which currently dominate. There is currently a sharp contradiction between the needs for greater revenue mobilization for India to continue its progress and provide the increasingly sophisticated “civilization” demanded with higher productivity and incomes, and the perception of the “middle class” that most taxes are tribute. This contradiction is created by a costly and yet ineffective state the solution to which can neither be a weaker state on the one hand nor more tribute paid to dysfunction on the other, but rather a better state.
    JEL: H2 H21 H71
    Date: 2015–08
  9. By: Ernesto Longobardi (University of Bari)
    Abstract: The paper discusses some issues concerning the local property tax in the light of the Italian experience. The main developments concerning the municipal property tax in Italy, since its introduction and until the most recent events, are briefly described. Then three main issues regarding the local property tax are addressed. First, the question whether there is any economic rationality in exempting owner occupied houses, a theme that has been central in the Italian debate and in the political arena in the last years; second, the long debated issue of whether the local property tax is a good benefit tax; and, finally, the possibility that a “residence tax”, levied on the occupant of the dwelling, would represent a better opportunity for implementing the benefit principle than the traditional property tax levied on the owners.
    Keywords: property tax, benefit principle, tax reform, political economy
    JEL: H2 H71 H77 D7
    Date: 2015–10
  10. By: Andrew Kerr (DataFirst and SALDRU, University of Cape Town)
    Abstract: In this paper I describe the monetary and time costs of commuting to work in South Africa. I find that these costs are high and that monetary costs of commuting have increased faster than inflation, mainly through a shift away from walking and towards minibus taxis and driving. Journey times are substantially higher than the OECD country average. Using a method suggested by Hausmann (2013) I estimate the effective tax on hourly earnings that the time and monetary costs of commuting impose. I find high effective tax rates, which are a disincentive to working far from home. This only deepens the puzzle of why South Africa's informal sector is so small, since more than half of the informally self-employed work at home and pay no transport costs. I show that whilst minibus taxis conveyed around 71% of commuters that used public transport in 2013, the industry receives less than 1% of the direct public transport subsidy provided by the South African government. I find that the subsidy accrues mainly to bus and train users in the lower middle part of the labour income distribution.
    Date: 2015
  11. By: malikane, christopher
    Abstract: This paper reviews Thomas Piketty's Capital in the Twenty-First Century. Piketty's Capital seeks to bring the issue of inequality back to the centre of social analysis and to encourage discussion about the evolution of wealth and inequality with a view to inform policy. The book uses data stretching as far back as the 1700's. The main thesis of the book is that capitalism automatically generates inequality and wealth concentration since the rate of return on capital always exceeds the growth rate of income. To resolve this problem, the book proposes a progressive tax on wealth and income. I show that Piketty's book is based on a misunderstanding of classical political economy, particularly Marx. Piketty's view of the development and phases of capitalism is inadequate. His tax proposals, though progressive, will not resolve the inequality problem. Lastly, his conclusion that modern economic growth made it possible to avoid the Marxist apocalypse is not borne out by his data.
    Keywords: Capital, inequality, wealth concentration, falling rate of profit.
    JEL: B12 B14 B16 B51 P1 P16 P26
    Date: 2015–10–09
  12. By: Blaufus, Kay; Braune, Matthias; Hundsdoerfer, Jochen; Jacob, Martin
    Abstract: Previous research argues that law expresses social values and could, therefore, influence individual behavior independently of enforcement and penalization. Using three laboratory experiments on tax avoidance and evasion, we study how legality affects individuals' decisions. We find that, without any risk of negative financial consequences, the qualification of tax minimization as illegal versus legal reduces tax minimization considerably. Legislators can thus, in principle, affect subjects' decisions by defining the borderline between legality and illegality. However, once we introduce potential negative financial consequences, legality does not affect tax minimization. Only if we use moral priming to increase subjects' moral cost do we again find a legality effect on tax minimization. Overall, this demonstrates the limitations of the expressive function of law. Legality appears to be an important determinant of behavior only if we consider activities with no or low risk of negative financial consequences or if subjects are morally primed.
    Keywords: Expressive Law,Legality,Moral Appeals,Tax Avoidance,Tax Evasion,Real Effort Experiment
    JEL: M41 M48 H20 H30 Z18
    Date: 2015
  13. By: Carlianne E. Patrick (Georgia State University)
    Abstract: Using tax abatements, financial incentives, and public investments to attract (or retain) firms is the primary economic development tool for many local governments. Often local job creation policies focus on increasing capital through grants, low-interest financing, and other economic development incentives. Theory predicts that capital subsidies induce firm behaviors that limit their job creation effects. This paper employs the Incentives Environment Index, constructed from state constitutional provisions that limit and structure the ability of state and local governmental entities to aid private enterprises, and five-year county panels to test theoretical predictions on county capital expenditure and input mixes as well as industry establishment shares. The results indicate the act of increasing capital subsidy tools is associated with capital-labor substitution, decreased employment density, and changes in local industry mix. Results are robust to alternative empirical specifications and measures of capital subsidy availability.
    Keywords: economic development incentives, capital subsidies, capital-labor substitution
    JEL: R32 H25 R11
    Date: 2015–10
  14. By: Matúš Senaj; Zuzana Siebertová; Norbert Švarda; Jana Valachyová
    Abstract: This paper provides a revised microeconometric analysis of extensive margin labour supply elasticities in Slovakia. Compared to earlier analysis, we estimate the elasticities for males and females separately. We find that a one percent increase in net wage increases the probability of economic activity by 0.21 and 0.4 percentage points for males and females, respectively. Taking into account tax and transfer system details valid in Slovakia in 2009-2012, a one percent increase in transfers decreases the semi-elasticity of labour force participation by 0.03 percentage points for males and 0.05 percentage points for females. These results are broadly in line with the elasticities usually reported in the literature. Our results show that low-skilled, females and the elderly are the groups that are particularly responsive to changes in taxes and transfers. Labour market policies aimed to boost employment should concentrate on increasing marginal gains to work, especially for low-educated individuals and women.
    Keywords: labour supply elasticity, extensive margin, Heckman model, probit
    JEL: H31 H53 I38 J21
    Date: 2015–10–05
  15. By: Giuseppe Croce
    Abstract: This paper focuses on the employment effects of tax-benefit policies implemented by Bipartite Sectoral Funds (BSFs), institutions established by workers’ unions and employers’ organisations, and conducts a preliminary theoretical analysis of their implications for employment based on a model of wage bargaining which includes the basic elements of a tax-benefit policy and allows for the internalization of benefits. The intuition is that the peculiar institutional profile of BSFs may favour the internalization of social benefits by the unions. If this actually occurs, it can be expected that the costs of the benefits will be shared between the employers and the workers. However the exact institutional profile of the funds crucially affects the degree of internalization. It is argued that this may actually occur provided that the exchange between wage and benefits is actually feasible in the context of current industrial relations, the workers attach a sufficiently high value to the benefits, and BSFs are autonomous from government interference.
    Keywords: Bipartite sectoral funds, tax-benefit policy, internalization, labour taxation, social contributions
    JEL: H22 I38 J52 J53
  16. By: Prize Committee, Nobel (Nobel Prize Committee)
    Abstract: The consumption of goods and services is a fundamental determinant of human welfare. The distribution of consumption among individuals has a bearing on many important issues – including inequality and poverty – in society’s economic, political and social domains. In most countries, aggregate consumption is the largest component of aggregate demand and, as such, accounts for much of the time variation in economic activity. For a given level of income, consumption determines savings and thus investment through the supply of capital. It is thus quite natural that consumption has been at the center of economic research throughout the last century.
    Keywords: Consumption; Development
    JEL: D10 O10
    Date: 2015–10–12
  17. By: Kleczka, Mitja
    Abstract: This paper delivers a contemporary estimate of the Eurozone’s natural real rate of interest. While it is found that the natural real rate has declined substantially between 1997 and 2015, it has not become negative. Thus, even in the presence of low inflation and nominal interest rates at the zero lower bound, the Eurozone does not face an acute threat of secular stagnation as defined by Lawrence Summers. Similarly, it is deemed unlikely that a number of ‘headwinds’ or a demise of technological growth will lead to a secular decline of the Eurozone’s economic growth. At the same time, it is found that the Eurozone faces a rather profound threat of ‘diversity stagnation’, as large inter-state differences impair the efficiency of its single monetary policy. Combined with the insufficient enforcement of fiscal rules, this erodes the Eurozone’s economic potential as well as its stability. Far-reaching reforms of the monetary and fiscal framework could overcome the detrimental status quo. However, conflicting economic and political incentives among the different member states and governments render the implementation of a necessary reform unlikely.
    Keywords: Secular stagnation; natural rate of interest; zero lower bound; land; headwinds; innovation stagnation; Taylor rule; public debt; tragedy of the commons.
    JEL: E42 E5 H6
    Date: 2015–09–30
  18. By: Waldenström, Daniel (Uppsala Center for Fiscal Studies)
    Abstract: This paper uses new data on Swedish national wealth over a period of two hundred years to study whether the patterns in wealth-income ratios previously found by Piketty and Zucman (2014) for some very rich and large Western economies extend to smaller countries that were historically backward and developed a different set of political and economic institutions during the twentieth century. The findings point to both similarities and differences. In the pre-industrial era, Sweden had much lower wealth levels than the rest of Europe, and the main explanation is that the Swedes were too poor to save their income. Over the twentieth century, Swedish aggregate trends and levels are much more similar to those of the rest of Europe, but the structure of national wealth differs. In Sweden, government wealth grew much faster and became more important, not least through its relatively large public pension system. This suggests an explicit role of historical economic and political institutions for the long-run evolution of wealth-income ratios.
    Keywords: Wealth-income ratios; National wealth; Household portfolios; Pension wealth; Welfare state; Institutions; Economic history
    JEL: D30 E01 E02 N30
    Date: 2015–10–07

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