nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒12‒20
twenty-one papers chosen by
Thomas Andrén

  1. Economic Integration, Corporate Tax Incidence and Fiscal Compensation By Nelly Exbrayat; Benny Geys
  2. Implication of Recent Federal Personal Income Tax Increases for Income Tax Evasion, Tax Revenues, and Budget Deficits By Boylan, Robert; Cebula, Richard; Foley, Maggie; Izard, Douglass
  3. Compliance, Informality and Contributive Pensions By Marie-Louise Leroux; Dario Maldonado; Pierre Pestieau
  4. Tax competition in Europe: Europe in competition with other world regions? By Streif, Frank
  5. Taxation and distribution of income in Brazil: new evidence from personal income tax data By Sérgio Wulff Gobetti; Rodrigo Octávio Orair
  6. Heterogenous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds By Babina, Tania; Jotikasthira, Chotibhak; Lundblad, Christian T; Ramadorai, Tarun
  7. Inequality Effects of Fiscal Policy: Analysing the Benefit Incidence on Health Sector in India By Bhadra, Kaushik K.
  8. How can South Africa's tax system meet revenue raising challenges? By Christine Lewis; Theresa Alton
  9. The Incidence of Financial Transactions Taxes By Dean Baker; Nicole Woo
  10. Let's stay in touch - evidence on the role of social learning in local tax interactions By Blesse, Sebastian; Martin, Thorsten
  11. Capital Income Taxation and Welfare under DSGE Framework By Unal, Umut
  12. The welfare effect of at income tax reform: the case of Bulgaria. Technical Appendix By Vasilev, Aleksandar
  13. Lost in Fiscal Space: Some Simple Analytics of Macroeconomic Policy in the Spirit of Tinbergen, Wicksell and Lerner By J.W. Mason; Arjun Jayadev
  14. Public policies over the life cycle: a large scale OLG model for France, Italy and Sweden By Alessandro Bucciol; Laura Cavalli; Igor Fedotenkov; Paolo Pertile; Veronica Polin; Nicola Sartor; Alessandro Sommacal
  15. Adjusting fiscal balances for the business cycle: New tax and expenditure elasticity estimates for OECD countries By Robert W.R. Price; Thai-Thanh Dang; Jarmila Botev
  16. Welfare gains from the adoption of proportional taxation in a general-equilibrium model with a grey economy: the case of Bulgaria's 2008 at tax reform. Technical Appendix By Vasilev, Aleksandar
  17. Formula apportionment: Factor allocation and tax avoidance By Eichfelder, Sebastian; Hechtner, Frank; Hundsdoerfer, Jochen
  18. The Behavioral Impacts of Poverty Tax Relief: Salience or Framing? By John Yinger; Phuong Nguyen-Hoang
  19. Disability Benefit Generosity and Labor Force Withdrawal By Mullen, Kathleen J.; Staubli, Stefan
  20. Measuring and understanding behavior, welfare, and poverty By Deaton, Angus
  21. Household Economic Inequality in Australia By Rosetta Dollman; Greg Kaplan; Gianni La Cava; Tahlee Stone

  1. By: Nelly Exbrayat (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Benny Geys (BI Norwegian School of Management - BI Norwegian School of Management)
    Abstract: Higher corporate taxes are often argued to depress wages (a tax incidence effect), while higher wages may require compensation via lower corporate tax rates (a fiscal compensation effect). Yet, existing empirical evidence ignores that i) both effects are likely to occur simultaneously (necessitating a joint estimation approach), and ii) capital mobility might play a critical moderating role for the strength of both effects. Using a panel dataset comprising 24 OECD countries over the period 1982-2007, we address both these deficiencies. This clearly illustrates the simultaneous existence of tax incidence and fiscal compensation effects. Moreover, capital mobility (and the ensuing relative bargaining power of economic agents) has a significant influence on both the prevalence and strength of these effects.
    Keywords: Wage bargaining, Corporate taxation, Fiscal Compensation,Tax Incidence, Capital mobility
    Date: 2015
  2. By: Boylan, Robert; Cebula, Richard; Foley, Maggie; Izard, Douglass
    Abstract: In this study, we present evidence which strongly suggests that personal income tax evasion has been an increasing function of the maximum marginal federal personal income tax rate over the period 1970-2008, which constitutes the most current data currently available on aggregate personal income tax evasion. This evidence leads us to conclude that the federal personal income tax increases implemented effectively in 2013 under provisions of American Taxpayer Relief Act of 2012 and the Patient Protection and Affordable Care Act of 2010 will result in increased tax avoidance behavior. Among other things, this public-policy-induced increase in personal income tax evasion implies that the federal budget deficits in coming years will be greater than projected by the CBO and various government agencies. We also find that tax avoidance activity is an increasing function of the unemployment rate, the interest rate yield on three year Treasury Notes, and per capita real GDP (adopted as a measure of per capita real income), and a decreasing function of the Tax Reform Act of 1986 (during its first two years of being implemented), the IRS audit rate, and the ratio of the tax free interest rate yield on high grade municipals to the interest rate yield on ten year Treasury Notes. Thus, there is also evidence that persistently high unemployment rates may increase tax evasion and the size of federal budget deficits, although increasing the audit rate by IRS personnel may raise tax compliance to some extent.
    Keywords: underground economy, tax evasion, tax rate increases, tax revenues, budget deficit
    JEL: H24 H26 M42
    Date: 2014–07–12
  3. By: Marie-Louise Leroux; Dario Maldonado; Pierre Pestieau
    Abstract: We consider a political economy model in which agents have the possibility to hide part of their earnings in order to avoid taxation. Taxation is exclusively used to finance a pension system. If the pension system is implemented, agents in their old age receive a benefit which includes both a Bismarkian and a Beveridgian component. We show that in the absence of compliance costs, agents are indifferent to the tax rate level as in response, they can perfectly adapt their level of compliance. The public pension system is found to be at least partially contributory in order to increase compliance and thus to increase the tax base. When compliance costs are introduced, perfect substitutability between compliance and taxation breaks down. Depending on the relative returns from public pensions and private savings as well as on the elasticity of compliance to income, we obtain that the preferred tax rate should be increasing or decreasing in income. The majority voting tax rate is more likely to be positive when the median income is low and when the return from public pensions dominates that of private savings. The level of the Bismarkian pillar will now be chosen so as to account for increased political support, for increased direct redistribution toward the worst-off agent, and increased tax base.
    Keywords: Compliance costs, majority voting, public pensions, tax evasion,
    JEL: H55 I13 D91
    Date: 2015–12–10
  4. By: Streif, Frank
    Abstract: Corporate tax levels have fallen substantially in Europe during the last decades. A broad literature has identified tax competition as one reason for this decline in corporate tax levels. However, none of these studies explicitly asks the question whether tax competition within regions is different from tax competition across regions, e.g. due to global regionalism of foreign direct investments. This is a crucial question to answer in order to discuss the desirability of tax harmonization in a distinct region, for example, within the European Union. Therefore, the study aims to give hints on the question whether the decline in corporate tax levels in Europe is mainly driven by tax competition between EU member states or by pressure from other world regions. The results of this study, which makes use of tax reaction functions, indicate that there is evidence for tax competition within Europe, whereas there is no robust evidence that European countries compete with countries from other world regions.
    Keywords: corporate taxes,tax competition,tax harmonization,Europe
    JEL: H2 H77 H87
    Date: 2015
  5. By: Sérgio Wulff Gobetti (IPC-IG); Rodrigo Octávio Orair (IPC-IG)
    Abstract: "Brazil is one of the countries that, due to a lack of sufficient fiscal transparency, were excluded from the study by economists Anthony Atkinson and Thomas Piketty (2010) which provides a global perspective of the distribution of top incomes using tax data. Fortunately, in 2015 the Department of Federal Revenue of Brazil (RFB) made available to the public more detailed information regarding income tax declarations, making it possible, for example, to identify the Brazilians in the top 0.05 per cent of the income distribution?approximately 71,000 people who earned, on average, BRL4.1 million (EUR1.5 million) in 2013.." (?)
    Keywords: taxation, distribution, Brazil, tax, data
    Date: 2015–12
  6. By: Babina, Tania; Jotikasthira, Chotibhak; Lundblad, Christian T; Ramadorai, Tarun
    Abstract: Heterogeneity in the taxation of asset returns can create ownership clienteles. Using a simple model, we demonstrate that an important consequence of tax-policy-induced ownership segmentation is to limit risk-sharing, creating regions of the aggregate demand curve for the asset that are "downward-sloping.'' As a result, the constraints of the ownership clientele impact the asset price response to variations in asset supply and demand, and make the asset's price more sensitive to movements in idiosyncratic risk. We test these predictions on U.S. municipal bonds, where cross-state variation in state tax privilege policies results in different levels of home-state-biased ownership of local municipal bonds. In states with high tax-induced ownership segmentation, we find greater susceptibility of municipal bond yields to demand and supply variation, heightened sensitivity of muni yields to local political uncertainty, and greater difficulties in raising capital for public projects.
    Keywords: clientele effects; fire sales; government debt; municipal bonds; ownership segmentation; public finance; Taxes
    JEL: F30 G12 G15 H63
    Date: 2015–12
  7. By: Bhadra, Kaushik K. (National Institute of Public Finance and Policy)
    Abstract: Analysing inequality effect of fiscal policy is an elusive area of research in public economics. Using the unit record data of two recent NSS rounds on health, this paper analyses the benefit incidence of public health spending on inpatient service delivery, categorised by region, gender and economic class. Inpatient morbidity data among quintile-wise MPCE classes across three Indian states - Bihar, West Bengal and Kerala - are examined to decipher whether the benefit incidence of public health expenditure is pro-poor. The concentration curves and computed unit costs followed by polarisation ratios and odds-ratios reveal significant regional and gender differentials in access and utilisation of health services at sub national levels. West Bengal has remained unchanged in both the rounds in case of both the differentials - gender and region while Bihar has shown a significant improvement in bringing down regional differential. Kerala, however, explicate a different scenario where poor `voted with feet' from public sector. The co-existence of private and public service provisioning in health sector may be one of the reasons for this behavioural `exit' in Kerala, however, it is equally interesting to note the `voice' elements when the targeting of public spending is pro-rich.
    Keywords: Benefit Incidence Analysis ; Concentration Curve ; Public Health Expenditure
    JEL: H51 H77 I14
    Date: 2015–12
  8. By: Christine Lewis; Theresa Alton
    Abstract: Reforms over the past two decades have produced a well-balanced, modern tax system. However, considerable revenues will be needed in the years ahead to expand social spending and infrastructure in order to raise growth and well-being. The challenge is to generate these revenues without penalising growth or exacerbating inequality. Income taxes represent around half of total tax revenue but are levied on small tax bases, partly reflecting the distribution of income. A revenue source less detrimental to growth is consumption taxes, which are mostly raised by the relatively broad value-added tax. Nonetheless, there is some scope to raise further revenue, particularly through broadening the base of these taxes further. Revenues from property taxation are currently limited by the inefficient municipal rates system, which does not function well. An important additional source of revenue is environmentally related taxes. In the design of the tax system, consideration should also be given to the appropriate taxation of the natural resources sector, which remains an important issue for a resource-rich country like South Africa.<P>Le système fiscal en Afrique du Sud face à la nécessité de trouver des recettes<BR>Les réformes menées au cours des deux dernières décennies ont abouti à un système fiscal équilibré et moderne. Toutefois, des recettes considérables vont s’avérer nécessaires dans les années à venir pour renforcer les dépenses sociales et les infrastructures afin de favoriser la croissance et le bien-être. Toute la difficulté consistera à trouver ces recettes sans peser sur la croissance ni exacerber les inégalités. Les impôts sur le revenu représentent environ la moitié des recettes fiscales totales, mais leur assiette est étroite, ce qui s’explique pour partie par la distribution des revenus. Les impôts sur la consommation constituent une source de recettes moins pénalisante pour la croissance. Le principal impôt sur la consommation est la taxe sur la valeur ajoutée, qui est dotée d’une assiette assez large. Toutefois, il serait possible d’obtenir davantage de recettes, notamment en élargissant l’assiette de ces impôts. Les recettes tirées des impôts fonciers sont limitées, pour l’heure, par le système fiscal en place à l’échelon municipal, qui ne fonctionne pas de façon satisfaisante. Les taxes liées à l’environnement constituent une autre source importante de recettes. Dans le cadre de la conception du système fiscal, il faudrait aussi s’efforcer d’imposer judicieusement le secteur des ressources naturelles ; cette question reste importante pour un pays tel que l’Afrique du Sud, où ces ressources sont considérables.
    Keywords: income tax, South Africa, consumption tax, business taxes, property tax, natural resource taxation, tax systems, green taxation, fiscalité verte, fiscalité, impôt sur le revenu, impôt sur les sociétés, système fiscal, Afrique du Sud
    JEL: H20 H23 H24 H25 H27
    Date: 2015–12–14
  9. By: Dean Baker; Nicole Woo
    Abstract: As financial transactions taxes (FTT) have moved to be part of the mainstream debate on tax policy, there has been increased attention to the incidence of such taxes. This is an important aspect to the debate, since the merits of the tax will depend to a substantial extent on who will end up bearing the burden.
    Keywords: financial transactions tax, incidence, wall street, stock market, elasticity
    JEL: G G2 G28
    Date: 2015–12
  10. By: Blesse, Sebastian; Martin, Thorsten
    Abstract: This paper exploits detailed information on local political and socioeconomic networks and a reform of local fiscal equalization in North Rhine-Westphalia (NRW) to identify the role of learning in local tax rate interactions. Using this policy change in spatial lag IV regressions, we find that institutions like counties and jointly used administrations yield significant positive tax interactions whereas geographical neighbors do not react to each other. Common local media trigger tax policy interactions as well. Short-lived reform effects support our findings that social learning within certain networks intensifies tax rate interactions via coordination of local decision makers.
    Keywords: Tax mimicking,Local business tax,Social learning,Institutions,Tax competition,Fiscal equalization schemes
    JEL: H20 H71 H77
    Date: 2015
  11. By: Unal, Umut
    Abstract: This paper develops a dynamic stochastic general equilibrium (DSGE) model for analyzing the impact of various capital income tax policies in a small open economy that is populated by households possessing endogenous time preferences. We contribute to the literature by studying the impacts of: i) anticipated tax shocks under stochastically growing output, ii) stochastic tax shocks under deterministic output, on our dynamic general equilibrium framework. With our model's specifications, this is the first attempt to integrate uncertainty in the study of taxation and welfare. Our results suggest that only under certain conditions welfare paradoxes may exist, in the sense that increases in tax instruments may improve welfare.
    Keywords: Endogenous time preference, adjustment costs, perturbation methods, stochastic shocks.
    JEL: E62 F4
    Date: 2015
  12. By: Vasilev, Aleksandar
    Keywords: taxation,reform
    JEL: H22
  13. By: J.W. Mason; Arjun Jayadev
    Abstract: The interest rate and the fiscal balance can be thought of as two independent instruments to be assigned to two targets, the path of output and the path of public debt. Under what we term a ’sound finance rule’ the interest rate targets output while the fiscal balance targets public debt; under a ‘functional finance rule’ the budget balance is assigned to the output gap and the interest rate to the debt ratio. The same unique combination of interest rate and fiscal balance will be consistent with output at potential and a constant debt-GDP ratio regardless of which instrument is assigned to which target The stability characteristics of the two rules differ, however. At low levels of debt, both rules converge, but at high levels of debt, only the functional finance rule converges. So contrary to conventional wisdom, the case for countercyclical fiscal policy becomes stronger, not weaker, when the ratio of public debt to GDP is already high. We apply our framework to describe policy generated cycles in the US over the past five decades.
    Date: 2015–12
  14. By: Alessandro Bucciol (Department of Economics (University of Verona)); Laura Cavalli (Department of Economics (University of Verona)); Igor Fedotenkov (Department of Economics (University of Verona)); Paolo Pertile (Department of Economics (University of Verona)); Veronica Polin (Department of Economics (University of Verona)); Nicola Sartor (Department of Economics (University of Verona)); Alessandro Sommacal (Department of Economics (University of Verona))
    Abstract: The paper presents a large scale overlapping generation model with heterogeneous agents, where the family is the decision unit. We calibrate the model for three European countries - France, Italy and Sweden - which show marked differences in the design of some public programs. We examine the properties in terms of annual and lifetime redistribution of a number of tax-benefit programs, by studying the impact of removing from our model economies some or all of them. We find that whether one considers a life-cycle or an annual horizon, and whether behavioral responses are accounted for or not, has a large impact on the results. The model may provide useful insights for policy makers on which kind of reforms are more likely to achieve specific equity objectives.
    Keywords: Redistribution, Fiscal policy, Computable OLG models
    JEL: H2 H3
    Date: 2015–11
  15. By: Robert W.R. Price; Thai-Thanh Dang; Jarmila Botev
    Abstract: This paper re-estimates the elasticities of government revenue and expenditure items with respect to the output gap for OECD countries. These elasticities are used by the OECD to calculate cyclically adjusted fiscal balances. The study updates the earlier 2005 study using the most recent datasets and tax codes, the coverage being confined in this paper to 35 countries, the 34 OECD member states and Latvia. The same two-step methodology is retained: revenue and expenditure elasticities with respect to the output gap being defined as the product of, first, the elasticities of individual revenue and expenditure items with respect to their bases and, second, the elasticities of these bases with respect to the output gap. A number of refinements and methodological improvements are made relative to the 2005 study. The revisions to individual elasticities relative to the 2005 vintage are significant in a number of cases but do not follow a clear pattern across countries, except for the elasticities of corporate income tax revenue which are revised up in most cases.<P>Correction des soldes budgétaires en fonction des variations cycliques : Nouvelles estimations d'élasticités des impôts et des dépenses pour les pays de l'OCDE<BR>Cet article estime les élasticités des composantes de revenus et de dépenses des administrations publiques par rapport aux écarts de production pour les pays de l’OCDE. Ces élasticités sont utilisées par l’OCDE pour calculer les soldes financiers des administrations publiques corrigés du cycle économique. Cette étude est une mise à jour des travaux parus en 2005, elle utilise les données et les codes d’impôts les plus récentes , et couvre 35 pays, à savoir les 34 pays membres ainsi que la Lettonie. La méthode en deux étapes a été conservée : les élasticités par rapport aux écarts de production étant définies comme le produit , dans un premier temps, des élasticités des composantes individuelles de recettes et de dépenses par rapport à leurs assiettes , et dans un deuxième temps des élasticités de ces assiettes par rapport aux écarts de production. Des modifications et des améliorations méthodologiques ont été apportées depuis l’étude de 2005. Les révisions d’élasticités par rapport à la version de 2005 sont importantes dans certains cas mais ne suivent pas un schéma type pour tous les pays, à l’exception des élasticités des impôts sur les bénéfices des sociétés qui ont été révisées à la hausse dans la plupart des cas.
    Keywords: budget elasticity, fiscal surveillance, automatic stabilisers, cyclically adjusted, ajustement cyclique, stabilisateurs automatiques, élasticité budgétaire, surveillance fiscale
    JEL: E62 H30 H60
    Date: 2015–12–14
  16. By: Vasilev, Aleksandar
    Keywords: taxation
    JEL: H22
    Date: 2015
  17. By: Eichfelder, Sebastian; Hechtner, Frank; Hundsdoerfer, Jochen
    Abstract: This paper addresses the question of how firms react to tax incentives in a formula apportionment (FA) tax regime. Under FA, profits of all consolidated entities of a business group are summed and then allocated according to a formula based on FA factors. We hypothesize that firms may change the allocation of real production factors and/or manipulate the FA factor through tax avoidance strategies. Analyzing FA tax effects of the German local business tax with payroll expense as the exclusive FA factor, we find empirical evidence consistent with both hypotheses. Regarding the allocation of production factors, we observe significant tax effects on labor input at the intensive margin but not on labor input at the extensive margin. In addition, we find evidence of an indirect FA spillover effect on capital investment. Our findings on tax avoidance proxies are consistent with tax-induced manipulations of payroll expense as FA factor in order to save tax payments.
    Keywords: Factor Allocation,Formula Apportionment,Profit Shifting,Tax Avoidance
    JEL: H32 H71 H73 J61
    Date: 2015
  18. By: John Yinger (Center for Policy Research, Maxwell School, Syracuse University, 426 Eggers Hall, Syracuse, NY 13244); Phuong Nguyen-Hoang (School of Urban and Regional Planning, University of Iowa, Iowa City, IA 52242)
    Abstract: New York State’s School Tax Relief Program, STAR, provides state-funded exemptions from school property taxes. From 2006-07 to 2008-09, these exemptions were supplemented with rebates, which arrived as a check in the mail. The purpose of this paper is to determine whether these two algebraically equivalent but administratively distinct policies of tax relief led to different behavioral responses. Drawing on behavioral economics, we explore the impact of STAR on the price elasticity of demand for school quality based on the concepts of salience and framing. Our main results are that the behavioral impact of the STAR provisions are larger (1) when they are most salient and (2) when they are framed as a property tax reduction instead of as unlabeled income. We also show that salience and framing can help to explain flypaper effects linked to state educational aid and to the resources that are freed up by a decline in the price of education.
    Keywords: Property Tax Relief; Demand for Education; Salience; Framing; Flypaper Effect
    JEL: H31 H71 H75
    Date: 2015–12
  19. By: Mullen, Kathleen J.; Staubli, Stefan
    Abstract: A key component for estimating the optimal size and structure of disability insurance (DI) programs is the elasticity of DI claiming with respect to benefit generosity. Yet, in many countries, including the United States, all workers face identical benefit schedules, which are a function of one’s labor market history, making it difficult to separate the effect of the benefit level from the effect of unobserved preferences for work on individuals’ claiming decisions. To circumvent this problem, we exploit exogenous variation in DI benefits in Austria arising from several reforms to its DI and old age pension system in the 1990s and 2000s. We use comprehensive administrative social security records data on the universe of Austrian workers to compute benefit levels under six different regimes, allowing us to identify and precisely estimate the elasticity of DI claiming with respect to benefit generosity. We find that, over this time period, a one percent increase in potential DI benefits was associated with a 1.2 percent increase in DI claiming.
    Keywords: Benefit Generosity; Claiming Elasticity; Disability Insurance; Labor Force Withdrawal
    JEL: H55 J14 J22
    Date: 2015–12
  20. By: Deaton, Angus (Princeton University)
    Abstract: Angus Deaton delivered his Prize Lecture on Tuesday 8 December 2015, at the Aula Magna, Stockholm University. These are the lecture slides.
    Keywords: Consumption; Development
    JEL: D10 O10
    Date: 2015–12–08
  21. By: Rosetta Dollman (Reserve Bank of Australia); Greg Kaplan (Reserve Bank of Australia); Gianni La Cava (Reserve Bank of Australia); Tahlee Stone (Reserve Bank of Australia)
    Abstract: We document some new stylised facts about consumption and income inequality (or 'economic inequality') among households in Australia. Based on household-level information from the Household Expenditure Survey we find that consumption inequality is lower on average than income inequality, but that income and consumption inequality have both increased a little since the early 1990s, with income inequality increasing by more. These findings are broadly similar to the changes in income and consumption inequality documented in other developed economies. We provide insight into the welfare implications of these changes using panel data from the Household, Income and Labour Dynamics in Australia Survey. We decompose the broad trends in income inequality into four statistical components: (i) changes in observed household characteristics; (ii) changes in the returns to unobserved skills; (iii) changes in the size of persistent income shocks (reflecting events such as promotions and long-term unemployment); and (iv) changes in the size of transitory income shocks (reflecting events such as bonuses, short-term unemployment and short-term illness). The reported trends in income inequality do not appear to be due to changes in observed household characteristics, but rather to changes in the size of persistent and transitory income shocks. Since the middle of the 2000s, at least some of the increase in income inequality has been due to persistent factors, a conclusion that is consistent with the rise in consumption inequality over the corresponding period.
    Keywords: inequality; income; consumption; imputed rent
    JEL: D6 D12 D31 E21 H31
    Date: 2015–12

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