nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒04‒04
sixteen papers chosen by
Thomas Andrén

  1. Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach By Kory Kroft; Kucko Kavan; Etienne Lehmann; Johannes Schmieder
  2. Corporate Tax: A brief assessment of some exemptions. By Rao, R. Kavita; Tandon, Suranjali; Mukherjee, Sacchidananda
  3. The Optimal Distribution of Income Revisited By Ray C. Fair
  4. Pareto-Improving Optimal Capital and Labor Taxes By Katharina Greulich; Sarolta Laczó; Albert Marcet
  5. Female Labor Supply, Human Capital and Welfare Reform By Richard Blundell; Monica Costa Dias; Costas Meghir; Jonathan Shaw
  6. Revenue and Incentive Effects of Basis Step-Up at Death: Lessons from the 2010 "Voluntary" Estate Tax Regime By Robert Gordon; David Joulfaian; James Poterba
  7. Optimal unemployment insurance for older workers By Jean-Olivier Hairault; François Langot; Sébastien Ménard; Thepthida Sopraseuth
  8. Productivity Gaps and Tax Policies Under Asymmetric Trade By Lucas Bretschger; Simone Valente
  9. Taxing Pensions By Cremer, Helmuth; Pestieau, Pierre
  10. What Has Been Happening to UK Income Inequality Since the Mid-1990s? Answers from Reconciled and Combined Household Survey and Tax Return Data By Richard V. Burkhauser; Nicolas Hérault; Stephen P. Jenkins; Roger Wilkins
  11. How Do Fiscal and Labor Policies in France Affect Inequality? By Raphael A. Espinoza; Esther Perez Ruiz
  12. The Welfare Multiplier of Public Infrastructure Investment By Giovanni Ganelli; Juha Tervala
  13. The effect of local taxes on firm performance: evidence from geo referenced data By Federico Belotti; Edoardo di Porto; Gianluca Santoni
  14. Taxing and Regulating Vices By Annamaria Menichini; Giovanni Immordino; Maria Grazia Romano
  15. Unemployment Insurance with Limited Commitment Wage Contracts and Savings By Rigas OIKONOMOU
  16. Social Investment Funds in Sweden: Status and Design Issues By Hultkrantz, Lars; Vimefall, Elin

  1. By: Kory Kroft (University of Toronto - University of Toronto); Kucko Kavan (Boston University [Boston]); Etienne Lehmann (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - UP2 - Université Panthéon-Assas - M.E.N.E.S.R. - Ministère de l'Éducation nationale, de l’Enseignement supérieur et de la Recherche - CNRS - Centre National de la Recherche Scientifique); Johannes Schmieder (Boston University [Boston])
    Abstract: This paper reassesses whether the optimal income tax program features an Earned Income Tax Credit (EITC) or a Negative Income Tax (NIT) at the bottom of the income distribution, in the presence of unemployment and wage responses to taxation. The paper makes two key contributions. First, it derives a sufficient statistics optimal tax formula in a general model that incorporates unemployment and endogenous wages. This formula nests a broad variety of structures of the labor market, such as competitive models with fixed or flexible wages and models with matching frictions. Our results show that the sufficient statistics to be estimated are: the macro employment response with respect to taxation and the micro and macro participation responses with respect to taxation. We show that an EITC-like policy is optimal provided that the welfare weight on the working poor is larger than the ratio of the micro participation elasticity to the macro participation elasticity. The second contribution is to estimate the sufficient statistics that are inputs to the optimal tax formula using a standard quasi-experimental research design. We estimate these reduced-form parameters using policy variation in tax liabilities stemming from the U.S. tax and transfer system for over 20 years. Using our empirical estimates, we implement our sufficient statistics formula and show that the optimal tax at the bottom more closely resembles an NIT relative to the case where unemployment and wage responses are not taken into account.
    Keywords: optimal income, taxation, unemployment
    Date: 2015–11
  2. By: Rao, R. Kavita (National Institute of Public Finance and Policy); Tandon, Suranjali (National Institute of Public Finance and Policy); Mukherjee, Sacchidananda (National Institute of Public Finance and Policy)
    Abstract: Government of India proposes to reduce the number of tax incentives built into the corporate tax regime and alongside reduce the statutory tax rate on corporate tax to 25 percent. Beneficiaries of the incentive regime tend to argue that these regimes provide tangible benefits which induce higher level of activity within the economy and hence, phasing these out can be detrimental for the Indian economy. An attempt is made in this paper to briefly assess what can be inferred from available evidence on the effectiveness of the incentive regimes. The focus is on three such schemes, incentives provided for investment in backward areas, incentives for special economic zones and incentives provided for expenditure on research and development.
    Keywords: Area based exemption ; SEZ ; R D ; Corporate tax
    JEL: H25 E62 H32
    Date: 2016–03
  3. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper revisits the optimal distribution of income model in Fair (1971). This model is the same as in Mirrlees (1971) except that education is also a decision variable and tax rates are restricted to lie on a tax function. In the current paper the tax-rate restriction is relaxed. As in Fair (1971), a numerical method is used. The current method uses the DFP algorithm with numeric derivatives. Because no analytic derivatives have to be taken,it is easy to change assumptions and functional forms and run alternative experiments. Gini coefficients are computed, which provides a metric for comparing the redistributive effects under different assumptions. Ten optimal marginal tax rates are computed per experiment corresponding to ten tax brackets. The sensitivity of the results to the four main assumptions of the model are examined: 1) the form of the social welfare function that the government maximizes, 2) the form of the utility function that each individual maximizes, 3) the distribution of ability across individuals, and 4) the rate of return to education. The changes in the Gini coefficient from before-tax income to after-tax income for the experiments are compared to actual changes from various countries. Experiments using a lognormal distribution of ability match the data better than those using a lognormal distribution with a Pareto tail---there is less actual redistribution than a Pareto tail implies. The numerical approach in this paper has advantages over the use of analytic expressions. When functional forms are changed, it may be easier to run a new numerical experiment then use an analytic expression, which can be complicated. Also, although not done in this paper, individual heterogeneity is straightforward to handle. The coding can have a different utility function for each individual. And different assumptions about education can be easily incorporated. The approach also shows the problematic nature of assuming a quasi-linear utility function---a utility function with no income effects.
    Keywords: optimal taxation, income distribution
    JEL: H21
    Date: 2016–03
  4. By: Katharina Greulich; Sarolta Laczó; Albert Marcet
    Abstract: We study Pareto-optimal fiscal policy in a model with agents who are heterogeneous in their labor productivity and wealth. We show a natural modification of the standard Ramsey problem to guarantee that long-run capital taxes are zero. We focus on Pareto-improving policies and we find that a gradual reform is crucial in achieving a Pareto improvement: labor taxes should be cut and capital taxes should remain high for a very long time before reaching zero. Therefore, the long-run optimal tax mix is the opposite of the short- and medium-run one. This policy redistributes wealth in favor of workers so that all agents benefit, and it favors quick capital growth after the reform. The labor tax cut is financed by deficits which lead to a positive level of government debt in the long run, reversing the standard prediction that the government accumulates savings in models with optimal capital taxes. The welfare benefits from the tax reform are relatively large and they can be shifted entirely to capitalists or workers by varying the length of the transition. We address a number of technical issues such as sufficiency of Lagrangian solutions in a Ramsey problem, relation of Pareto-improving allocations with welfare functions, asymptotic behavior, and solution algorithms.
    Keywords: fiscal policy, Pareto-improving tax reform, redistribution
    JEL: E62 H21
    Date: 2016–03
  5. By: Richard Blundell (University College London); Monica Costa Dias (Institute for Fiscal Studies and CEF-UP at the University of Porto); Costas Meghir (Cowles Foundation, Yale University); Jonathan Shaw (Institute for Fiscal Studies and University College London)
    Abstract: We estimate a dynamic model of employment, human capital accumulation - including education, and savings for women in the UK, exploiting tax and benefit reforms, and use it to analyze the effects of welfare policy. We find substantial elasticities for labor supply and particularly for lone mothers. Returns to experience, which are important in determining the longer-term effects of policy, increase with education, but experience mainly accumulates when in full-time employment. Tax credits are welfare improving in the UK and increase lone-mother labor supply, but the employment effects do not extend beyond the period of eligibility. Marginal increases in tax credits improve welfare more than equally costly increases in income support or tax cuts.
    Keywords: Female labor supply, Welfare reform, Tax credits, Education choice, Dynamic discrete choice models, Life cycle models
    JEL: H2 H3 J22 J24
    Date: 2013–04
  6. By: Robert Gordon; David Joulfaian; James Poterba
    Abstract: In 2010, the U.S. estate tax expired and executors of wealthy decedents were not required to file estate tax returns. In the absence of the estate tax, beneficiaries received assets with carryover rather than stepped-up basis. Unrealized capital gains accounted for 44 percent of the fair market value of non-cash assets in estates that chose the carryover basis regime, and an even higher percentage for some asset categories. Many of the largest gains were on assets that had been held for at least two decades.
    JEL: H24
    Date: 2016–03
  7. By: Jean-Olivier Hairault (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); François Langot (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics); Sébastien Ménard (TEPP - Travail, Emploi et Politiques Publiques - UPEM - Université Paris-Est Marne-la-Vallée - CNRS - Centre National de la Recherche Scientifique, GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Université du Maine); Thepthida Sopraseuth (CEPREMAP - Centre pour la recherche économique et ses applications, THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique)
    Abstract: At the end of working life, as well as reducing unemployment benefits, the unemployment-insurance agency could apply pension tax instead of wage tax. First, the pension tax provides greater incentives as the value of re-employment is tax-free. Second, the short job duration before retirement implies that the budgetary return and search incentives associated with the pension tax are considerable. By way of contrast, younger workers have greater search intensity and their future pension taxes are more remote and therefore more heavily-discounted: for them the wage tax is more efficient than is the pension tax. Finally, even in the special case where search intensity is zero close to retirement, perfect risk-sharing across unemployment and retirement is welfare-improving thanks to the pension tax.
    Keywords: Unemployment insurance, Retirement, Recursive contracts, Moral Hazard
    Date: 2016–03–22
  8. By: Lucas Bretschger (ETH Zürich, Switzerland); Simone Valente (University of East Anglia, United Kingdom)
    Abstract: We build a two-country model of endogenous growth to study the welfare effects of taxes on tradable primary inputs when countries engage in asymmetric trade. We obtain explicit links between persistent gaps in productivity growth and the incentives of resource exporting (importing) countries to subsidize (tax) domestic resource use. The exporters' incentive to subsidize hinges on slower productivity growth and is disconnected from the importers' incentive to tax resource inflows i.e., rent extraction. Moreover, faster productivity growth exacerbates the im- porters' incentive to tax, beyond the rent-extraction motive. In a strategic tax game, the only equilibrium is of Stackelberg type and features, for a wide range of parameter values, positive exporters' subsidies and importers' taxes at the same time. The model predictions concerning the impact of resource taxes on relative income shares are supported by empirical evidence.
    Keywords: Productivity Gaps, Endogenous Growth, International Trade, Tax Policy
    JEL: O40 F43
    Date: 2016–03
  9. By: Cremer, Helmuth (Toulouse School of Economics); Pestieau, Pierre (CREPP, Université de Liège)
    Abstract: There exists a wide variety of tax treatments of pensions across the world. And the reasons for such a range of regimes are not clear. This note reviews the general principles of pension taxes and analyses the theoretical foundations of why pension incomes ought to be taxed specifically. To do this, one has to distinguish between public and private pensions. The design of public pensions cannot be separated from the one of taxation. Regarding private pensions, the key issue is whether or not pension saving ought to be treated differently from other forms of saving.
    Keywords: private pensions, deferred tax, social security, retirement
    JEL: H21 H55
    Date: 2016–03
  10. By: Richard V. Burkhauser (Department of Policy Analysis and Management, Cornell University); Nicolas Hérault (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Stephen P. Jenkins (Department ofSocial Policy, London School of Economics); Roger Wilkins (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: Estimates of UK income inequality trends differ substantially according to whether estimates are based on household survey data (used for official statistics) or tax return data (used in the top incomes literature). We reconcile differences in variable definitions and combine survey and tax return data in order to take advantage of the much better coverage of top incomes in the latter, and provide improved estimates of UK inequality trends since the mid-1990s. We show there was a marked increase in income inequality in the early 2000s that survey-based estimates do not reveal, and our conclusions are robust to changes in the definitions of income, income-sharing unit, and summary inequality measure. In addition, our reconciled and combined data provide more comparable estimates of UK-US inequality trends than the top incomes literature to date. Classification-D31, C81
    Keywords: Inequality, income inequality, top income shares, HBAI, SPI, top incomes, tax return data, survey data
    Date: 2016–02
  11. By: Raphael A. Espinoza; Esther Perez Ruiz
    Abstract: This paper explores the impact of fiscal and labor market policies on efficiency, inequality, and fiscal outcomes in France. We extend the general equilibrium model calibrated for France by Alla and others (2015), with measures of labor and capital income for different groups in the economy (the unemployed, unskilled workers, skilled workers, public servants). For each of these groups we combine data on the income distribution with the outcomes of policy simulations to assess the impact of a suite of stylized policies on output, the fiscal balance, the Gini coefficient, and the shape of the Lorenz curve. We find that most types of fiscal expansions, while adding to the deficit and debt in the near term, generally reduce inequality, the main exception being capital income tax cuts. A reduction of the minimum wage has an ambiguous impact on the income distribution: the Gini coefficient increases, but the lowest income quintile improves its relative position in the income distribution thanks to positive employment effects. The paper also finds scope for “win-win†policy packages that could improve overall efficiency, inequality, and fiscal outcomes, for instance if targeted labor tax reductions are offset by cuts in the public wage bill.
    Keywords: Government expenditures and welfare programs;France;Europe;redistribution, market income inequality, labor market policies, fiscal policies, labor, unemployment, minimum wage, workers, income distribution, Personal Income and Wealth Distribution, Factor Income Distribution, Equity, Justice, Inequality, and Other Normative Criteria and Measurement, Government Policy and Regulation, General, Provision and Effects of Welfare Programs,
    Date: 2016–02–29
  12. By: Giovanni Ganelli; Juha Tervala
    Abstract: We analyze the welfare multipliers of public spending (the consumption equivalent change in welfare for one dollar change in public spending) in a DSGE model. The welfare multipliers of public infrastructure investment are positive if infrastructure is sufficiently effective. When the medium-term output multipliers are consistent with the empirical estimates (1-1.4), the welfare multiplier is 0.8. That is, a dollar spent by the government for investment raises domestic welfare by equivalent of 0.8 dollars of private consumption. This suggests that the welfare gains of public infrastructure investment, if chosen wisely, may be substantial.
    Keywords: Public investment;Welfare;Public Infrastructure, investment, consumption, multipliers, elasticity, Open Economy Macroeconomics, Publicly Provided Private Goods, Infrastructures, All Countries,
    Date: 2016–02–29
  13. By: Federico Belotti; Edoardo di Porto; Gianluca Santoni
    Abstract: This paper investigates the impact of business property taxation on firms' performance using a panel of italian manufacturing firms. To account for endogeneity in local taxation, we exploit a pairwise spatial differenced generalized method of moments estimator. As well as providing robust inference, we also improve on existing work by exploiting the exogenous variation in local taxes generated by the political alignment of each local government with the central one. We find that property taxation exerts a negative impact on firms' employment, capital and sales to such an extent as to significantly affect total factor productivity.
    Keywords: local taxation;endogeneity;spatial differencing;two-way clustering
    JEL: H22 H71 R38
    Date: 2016–02
  14. By: Annamaria Menichini (CSEF, Università di Salerno); Giovanni Immordino (Università di Napoli Federico II and CSEF); Maria Grazia Romano (University of Salerno and CSEF)
    Abstract: We study the sin taxes and regulatory measures that it is optimal to implement when consumers are time-inconsistent and there are inefficiencies associated with the use of either instrument. For high inefficiency of regulation, only taxation is used and it may be higher or lower than the first-best depending on the price elasticity of demand. For high inefficiency of taxation, only regulation is used to an extent which depends on its effectiveness in terms of quantity reduction relative to the disutility it generates. For moderate inefficiency of either instrument, taxation and regulation are both optimally used.
    Keywords: Hyperbolic preferences, Taxation, Regulation, Consumption restrictions, Sin goods
    JEL: D03 H21 L51
    Date: 2016–03–25
  15. By: Rigas OIKONOMOU (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Center for Operations Research and Econometrics (CORE))
    Abstract: I present a model of optimal contracts between firms and workers, under limited commitment and with worker savings. In the model, firms provide insurance against unemployment through targeting a frontloaded path of wages which encourages wealth accumulation. I provide analytical results characterising the wage and savings schedules and the path of consumption during employment and unemployment. I then consider how unemployment benefits affect risk sharing through private markets. I find that benefits should be frontloaded; the government has the incentive to drive the allocation to the point where the firm's participation constraint binds. At this point wages are equal to productivity in every period, wealth exceeds the buffer stock level, and consumption and savings drop over time. The drop in the level of consumption during unemployment is mitigated. Finally, I compare the optimal contract model to the standard heterogeneous agent model whereby wealth is utilized for self-insurance purposes. I show that the two models are equivalent under the optimal UI policy.
    Keywords: Unemployment Insurance, Incomplete Markets, Optimal Contracts, Limited Commitment, Household Self-Insurance
    JEL: D52 E21 H31 H53 J41
    Date: 2016–02–29
  16. By: Hultkrantz, Lars (Örebro University School of Business); Vimefall, Elin (Örebro University School of Business)
    Abstract: Long-term investments in individual and social human capital, such as preschool, school, family support, early-intervention for youth at risk and other programmes that are part of the welfare services provided by local government in Sweden are generally managed with one-year-ahead budget planning. Against criticism that the resulting resource allocation is biased by short-sightedness, silo mentality and risk aversion, more than a fifth of Swedish municipalities have in recent years established “social investment funds” for promoting investment and innovation views on such measures. This article provides a background on the motives and current status of these funds at the national level and describes in more detail the design and project funding in two cases. Two critical design issues are discussed; whether investment returns should be paid back to the fund and whether assessment should be made of other societal benefits than avoided costs.
    Keywords: social investments; investing in children; cost-benefit analysis
    JEL: D61 D73 H53 I38
    Date: 2016–03–21

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