nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒06‒25
sixteen papers chosen by
Thomas Andrén

  1. How do small firms respond to tax schedule discontinuities? Evidence from South African tax registers By Wian Boonzaaier; Jarkko Harju; Tuomas Matikka; Jukka Pirttilä
  2. Understanding the Recent Trend of Income Inequality in China By Juzhong Zhuang; Shi Li
  3. Taxing pensions and retirement benefits in Germany By Börsch-Supan, Axel; Quinn, Christopher
  4. Optimal Automatic Stabilizers By Alisdair McKay; Ricardo Reis
  5. Taxing cross-border intercompany transactions: are financing activities fungible? By Kayis-Kumar, Ann
  6. Saving and taxation in a voluntary pension system: Toward an agent-based model By Balazs Kiraly; Andras Simonovits
  7. Real and Imagined Threats to the Welfare State By LINDERT, Peter H.
  8. Income Instability and Fiscal Progression By Garcia-Medina Cecilia; Jean-Francois Wen
  9. Labour Supply: the Roles of Human Capital and the Extensive Margin By Michael P. Keane; Nada Wasi
  10. Taxation, industry integration and production efficiency By Simone Moriconi
  11. Do fiscal multipliers depend on fiscal positions? By Raju Huidrom; M. Ayhan Kose; Jamus J. Lim; Franziska L. Ohnsorge
  12. Monetary and Fiscal Policy Switching with Time-Varying Volatilities By Libo Xu; Apostolos Serletis
  13. Taxing high-income earners: tax avoidance and mobility By Alejandro Esteller; Amedeo Piolatto; Matthew Rablen
  14. Implementing Tax Coordination and Harmonization through Voluntary Commitment By Grégoire ROTA-GRAZIOSI
  15. Top-Down vs. Bottom-Up? Reconcilling the Effects of Tax and Transfer Shocks on Output By Sebastian Gechert; Christoph Paetz; Paloma Villanueva
  16. Job Insecurity, Unemployment Insurance and On-the-Job Search: Evidence from Older American Workers By Italo Gutierrez

  1. By: Wian Boonzaaier; Jarkko Harju; Tuomas Matikka; Jukka Pirttilä
    Abstract: In this paper we study the effects of various tax schedule discontinuities on the behavior of small firms using high-quality and population-wide tax register data from South Africa. We use the bunching method to analyse how these discontinuities affect the firm-size distribution. We first examine how the value-added tax threshold affects the sales distribution of firms. We also study the effects of two separate corporate income tax rate kinks. We find sizable bunching at each of these thresholds. The elasticity estimates for the corporate tax kink points are large, ranging from 0.7 to 1.6, whereas the elasticity of the value added is below 0.1. We find some suggestive evidence that part of the response is driven by tax evasion.
    Keywords: developing countries, value-added tax, corporate tax, VAT threshold, corporate tax kink, bunching, small firms
    Date: 2016
  2. By: Juzhong Zhuang (Asian Development Bank, also associate of Department of Economics, SOAS, University of London, UK); Shi Li (Beijing Normal University, China)
    Abstract: This paper examines underlying factors that could explain the decline in income inequality in China since 2008 and inquires whether the decline indicates Chinaís income inequality has peaked following the Kuznets hypothesis. The paper first identifies four key drivers of rising income inequality in China since the mid-1980: rising skill premium, declining share of labor income, increasing spatial inequality, and widening inequality in the distribution of wealth. It then provides evidence that the reversal of these drivers, with the exception of wealth inequality, could partly explains the decline in income inequality since 2008. The paper argues that since part of the reversal of these drivers is policy-induced, it is important that the policy actions continue for income inequality to decline further. The paper further argues that a critical factor underlying the Kuznets hypothesis is that taxation and transfers play a bigger role in income redistribution as a country becomes more developed, while their role is still limited in China, the future path of Chinaís income inequality may not be one-directional, and may stay high before personal income tax plays a bigger role.
    Keywords: Income inequality, the Chinese economy, Kuznets hypothesis
    JEL: D31 D63 N35
    Date: 2016–06
  3. By: Börsch-Supan, Axel; Quinn, Christopher (Munich Center for the Economics of Aging (MEA))
    Abstract: The paper motivates and describes the tax treatment of German retirement benefits and pensions after the 2005 reform initiated by the German Federal Constitutional Court. The main question is whether this reform has produced a “level playing field†among the many instruments generating retirement income in Germany. The paper briefly outlines rational principles for the taxation of retirement benefits and pensions and compares these with current practice in Germany and abroad.
    Date: 2015–11–27
  4. By: Alisdair McKay; Ricardo Reis
    Abstract: Should the generosity of unemployment benefits and the progressivity of income taxes depend on the presence of business cycles? This paper proposes a tractable model where there is a role for social insurance against uninsurable shocks to income and unemployment, as well as inefficient business cycles driven by aggregate shocks through matching frictions and nominal rigidities. We derive an augmented Baily-Chetty formula showing that the optimal generosity and progressivity depend on a macroeconomic stabilization term. Using a series of analytical examples, we show that this term typically pushes for an increase in generosity and progressivity as long as slack is more responsive to social programs in recessions. A calibration to the U.S. economy shows that taking concerns for macroeconomic stabilization into account raises the optimal unemployment benefits replacement rate by 13 percentage points but has a negligible impact on the optimal progressivity of the income tax. More generally, the role of social insurance programs as automatic stabilizers affects their optimal design.
    JEL: E62 H21 H30
    Date: 2016–06
  5. By: Kayis-Kumar, Ann
    Abstract: The Organisation for Economic Cooperation and Development (‘OECD’) is currently considering best practice approaches to designing rules to prevent base erosion and profit shifting (‘BEPS’) by multinational enterprises (‘MNEs’). However, the OECD makes a distinction between combating BEPS and reducing distortions between the tax treatment of various methods of financing. Yet, an unequal tax treatment can create distortions, which incentivises tax planning behaviour. Accordingly, this paper aims to improve the tax design of anti-avoidance rules governing MNEs’ cross-border intercompany deductions by introducing the concept of the tax-induced cross-border funding bias. To date, the literature has focussed on the debt bias, which arises from the distortion in the tax treatment between debt and equity financing. On the other hand, the funding bias also includes licensing and leasing activities in addition to debt and equity financing. This presents a novel contribution to the literature. This paper examines the conceptual case for why is might be appropriate and feasible to restrict the tax deductibility of cross-border intercompany interest, dividends, royalties and lease payments given their mobility and fungibility. Specifically, it examines whether it is preferable for MNEs to be subject to economic rent taxation, as is attained through reform proposals such as the Allowance for Corporate Equity (‘ACE’), in this context. This presents a novel proposal for taxing cross-border intercompany economic rents which aligns with the main aim of corporate tax harmonisation; namely: to reduce, if not remove, distortions relating to the taxation of cross-border intercompany activities.
    Keywords: OECD, BEPS, Transfer pricing, Multinational, Economic rent taxation
    JEL: C6 C61 H2 H20 H25 H26 K0 K00
    Date: 2015–07–24
  6. By: Balazs Kiraly (Institute of Physics of Budapest University of Technology, Budapest); Andras Simonovits (Institute of Economics - Centre for Economic and Regional Studies, Hungarian Academy of Sciences also Mathematical Institute of Budapest University of Technology, Budapest)
    Abstract: Mandatory pension systems only partially replace old-age income, therefore the government also operates a voluntary pension system, where savings are matched by government grants. Accounting for the resulting tax expenditure, our models describe the income flow from shortsighted to farsighted workers. 1. In rational models, explicit results are obtained, showing the limited learning of shortsighted workers. 2. In agent-based models, this learning is improved and this raises the shortsighted workers' saving and reduces perverse income redistribution.
    Keywords: life-cycle savings, overlapping generations, mandatory pensions, voluntary pensions, agent-based models
    JEL: H55 D91
    Date: 2016–02
  7. By: LINDERT, Peter H.
    Abstract: The traditionally, and wrongly, imagined vulnerabilities of the welfare state are economic. The true threats are demographic and political. The most frequently imagined threat is that the welfare state package reduces the level and growth of GDP. It does not, according to broad historical patterns and non-experimental panel econometrics. Large-budget welfare states achieve a host of social improvements without any clear loss of GDP. The paper elaborates on how this "free lunch" is gained in practice. Other threats to the welfare state are more real, however. Two demographic-political clouds loom on the horizon in the twenty-first century, though neither cloud reveals an economic flaw specific to the welfare state. One cloud is the rise of anti-immigrant backlash. If combined with heavy refugee inflows, this could destroy future public support for universalist welfare state programs, even though they seem to remain economically sound. The other, and more certainly rain-bearing, cloud is that population aging poses a serious problem for financing old age, either publicly or privately. Pension deficits threatens to crowd out more productive social spending. Only a few countries have faced this issue very well.
    JEL: H10 H50 N32 N34
    Date: 2016–06
  8. By: Garcia-Medina Cecilia; Jean-Francois Wen
    Abstract: We construct the ratio of the post-fisc to the pre-fisc transitory component of the variance of family incomes in Canada from 1993 and 2008. The ratio measures how much the tax and transfer system attenuates market income instability. It is shown that the ratio of variances is equivalent theoretically to the concept of residual income progression. The fiscal system became less stabilizing beginning in the late 1990s, especially for families headed by main earners with less than high school education. The trend is attributable to personal income tax reforms and reductions in transfers for lower income families.
    Keywords: Income Instability; Progressive Taxation; Employment Insurance
    JEL: H22 H53 J38
    Date: 2016–06
  9. By: Michael P. Keane (University of Oxford and University of New South Wales); Nada Wasi (University of Michigan, Survey Research Center)
    Abstract: In this paper we specify and estimate a life-cycle labour supply model that expands on earlier work by simultaneously including human capital accumulation, saving and bequests, an active extensive margin, a realistic specification of the Social Security system, an accounting for private pensions and health expenditures, and a realistic specification of the progressive tax structure. By accounting for all these features, we develop new insights into how taxes affect life-cycle labour supply. For instance, we find that labour supply elasticities vary in important ways with age, education and the tax structure itself. We also show how human capital affects elasticities on the intensive vs. extensive margins.
    Date: 2015–08–05
  10. By: Simone Moriconi (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: Taxes levied on production processes (e.g. VAT), are today a very important source of government revenues in developed economies. Theories of optimal taxation conclude that these taxes are detrimental to production efficiency, when firms operate in perfectly competitive markets. These theories draw on the neoclassical approach, which regards firms as single production units. The present paper investigates the effects of taxation on production efficiency, accounting for the organization of an industry. The model shows that a lump-sum tax does not have any effect on the organization of the industry, while a non lump-sum tax can be designed that induces an organizational change of the industry. The paper shows that the effect of this ”tax induced organizational change” on production efficiency ultimately depends on the characteristics of the market.
    Keywords: taxation, organizational change, vertical integration, and production efficiency.
    JEL: H21 L22 H32
    Date: 2016–06
  11. By: Raju Huidrom; M. Ayhan Kose; Jamus J. Lim; Franziska L. Ohnsorge
    Abstract: This paper analyzes the relationship between fiscal multipliers and fiscal positions of governments using an Interactive Panel Vector Auto Regression model and a large dataset of advanced and developing economies. Our methodology permits us to trace the endogenous relationship between fiscal multipliers and fiscal positions while maintaining enough degrees of freedom to draw sharp inferences. We report three major results. First, the fiscal multipliers depend on fiscal positions: the multipliers tend to be larger when fiscal positions are strong (i.e. when government debt and deficits are low) than weak. For instance, the long run multiplier can be as large as unity when fiscal position is strong, while it can be negative when the fiscal position is weak. Second, these effects are separate and distinct from the impact of the business cycle on the fiscal multiplier. Third, the state-dependent effects of the fiscal position on multipliers is attributable to two factors: an interest rate channel through which higher borrowing costs, due to investors'increased perception of credit risks when stimulus is implemented from a weak initial fiscal position, crowd out private investment; and, a Ricardian channel through which households reduce consumption in anticipation of future fiscal adjustments.
    Keywords: Fiscal multipliers, fiscal position, state-dependency, Ricardian channel, interest rate channel, business cycle
    JEL: E62 H50 H60
    Date: 2016–06
  12. By: Libo Xu (University of Calgary); Apostolos Serletis (University of Calgary)
    Abstract: This paper extends the ongoing literature on regime change. The extension allows time variation in disturbance variances of interest rate rules for monetary policy and tax rules for Â…fiscal policy that switch stochastically between two regimes. We achieve superior modelings of monetary and Â…fiscal policy rules with quarterly U.S. data.
    Date: 2016–06–13
  13. By: Alejandro Esteller (Institute for Fiscal Studies and Barcelona Economics Institute, University of Barcelona); Amedeo Piolatto (Institute for Fiscal Studies and Barcelona Economics Institute, University of Barcelona); Matthew Rablen (Institute for Fiscal Studies and Brunel University)
    Abstract: The taxation of high-income earners is of importance to every country and is the subject of a considerable amount of recent academic research. Such high-income earners contribute substantial amounts of tax and generate signifi cant positive spillovers, but are also highly mobile: a 1% increase in the top marginal income tax rate increases out-migrations by around 1.5 to 3%. We review research into taxation of high-income earners to provide a synthesis of existing theoretical and empirical understanding. We o ffer various avenues for potential future theoretical and empirical research.
    Keywords: high-income earners, mobility, tax avoidance
    Date: 2016–04–22
  14. By: Grégoire ROTA-GRAZIOSI (Centre d'Etudes et de Recherches sur le Développement International(CERDI))
    Abstract: Pareto-improving tax coordination, and even tax harmonization, are Nash implementable between sovereign countries without any supranational tax authorities. Following Schelling's approach, we consider voluntary commitment, which constrains countries' respective tax rate choices. We develop a commitment game where countries choose their strategy sets in preliminary stages and play consistently during the final one. We determine the set of tax rates, which are implementable by commitment. This allows countries to reach Pareto-improving equilibriums. We also establish that complete tax harmonization may emerge as the subgame perfect Nash equilibrium of the commitment game as long as the asymmetry between countries remains limited. Our analysis contributes to the rationale of tax ranges and, more broadly, of non binding but self-enforcing commitments (not equivalent to cheap talk) in the context of tax competition.
    Keywords: Tax coordination, Commitment.
    JEL: C72 H30
    Date: 2016–06
  15. By: Sebastian Gechert; Christoph Paetz; Paloma Villanueva
    Abstract: Using the bottom-up approach of Romer and Romer (2010), we construct a rich narrative dataset of net-revenue fiscal shocks for Germany by reconstructing and extending the tax shock series of Hayo and Uhl (2014) and coding a shock series for social security contributions, benefits and transfers. Based on quarterly data for 1974q1 to 2013q4 we estimate the multiplier effects of shocks to net-revenues, taxes, social security contributions and benefits in a proxy SVAR framework (Mertens and Ravn 2013) and compare them with estimates of the top-down identification inspired by Blanchard and Perotti (2002). We find multiplier effects of net-revenue components for Germany between 0 and 1 for both the top-down and bottom-up approaches. These estimates are on the lower end of the scale given in the literature and we discuss the differences.
    Keywords: Narrative Record Identification, Action-Based Approach, Fiscal Multipliers, Revenue Elasticities
    JEL: E62 H20 H30
    Date: 2016
  16. By: Italo Gutierrez
    Abstract: In this study I estimate that about 23% to 47% of older American on-the-job seekers search for another job because they feel insecure at their current employment. I also analyze whether unemployment insurance (UI) affects this relationship between job insecurity and on-the-job search. I find evidence that UI discourages on-the-job search, which in turn reduces the probability of starting a new job at a different employer. The average estimated effects are moderate but they mask important heterogeneities. On one hand, UI does not affect the search behavior of workers who do not believe to be at risk of job loss. These workers make up the majority of the employed population over 50. On the other hand, however, the effects can be substantial for workers with high levels of job insecurity.
    Keywords: on-the-job search, unemployment benefits; job loss expectations, control function methods
    JEL: J64 J65 D84
    Date: 2015–08

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