nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒07‒23
fourteen papers chosen by
Thomas Andrén

  1. Demographic Change and Fiscal Sustainability in Asia By Lee, Sang-Hyop; Kim, Jungsuk; Park, Donghyun
  2. The effects of replacing income tax with consumption tax on the state and the individual: a Canadian example By Jim Fischer
  3. Beggar-Thy-Neighbour Tax Cuts: Mobility after a Local Income and Wealth Tax Reform in Switzerland By Martinez, Isabel Z.
  4. Tax Design for Inclusive Economic Growth By Bert Brys; Sarah Perret; Alastair Thomas; Pierce O’Reilly
  5. Optimal automatic stabilizers By Alisdair McKay; Ricardo Reis
  6. Corporate Taxation and Firm Location in Germany By Zeddies, Götz
  7. The challenge of measuring UK wealth inequality in the 2000s By Facundo Alvaredo; Anthony B. Atkinson; Salvatore Morelli
  8. Understanding Recent Trends in Income Inequality in the People’s Republic of China By Zhuang, Juzhong; Li, Shi
  9. Intergovernmental transfers and expenditure arrears By Paolo Chiades; Luciano Greco; Vanni Mengotto; Luigi Moretti; Paola Valbonesi
  10. Impacts from Delaying Access to Retirement Benefits on Welfare Receipt and Expenditure: Evidence from a Natural Experiment By Umut Oguzoglu; Cain Polidano; Ha Vu
  11. How important is precautionary labor supply? By Jessen, Robin; Rostam-Afschar, Davud; Schmitz, Sebastian
  12. Tax burden inequality of population in Georgia and conceptual – methodological problems of evaluation By Tamar Kbiladze; David Kbiladze
  13. The impact of labour tax costs on the company strategic decision making and internal action plan to control ta By Biruta Pule; Gunta Innuse
  14. On the Distribution of the Welfare Losses of Large Recessions By Krueger, Dirk; Mitman, Kurt; Perri, Fabrizio

  1. By: Lee, Sang-Hyop (University of Hawaii at Manoa); Kim, Jungsuk (Sogang University); Park, Donghyun (Asian Development Bank)
    Abstract: Changes in the population age structure can have a significant effect on fiscal sustainability since they can affect both government revenues and expenditures. For example, population aging will increase expenditures on the elderly while reducing potential growth and hence revenues. In this paper, we project government revenue, expenditure, and fiscal balance in developing Asia up to 2050. Using a simple stylized model and the National Transfer Accounts data set, we simulate the effect of both demographic changes and economic growth. Rapidly aging economies like the Republic of Korea; Japan; and Taipei,China, are likely to suffer a tangible deterioration of fiscal sustainability under their current tax and expenditure system. On the other hand, rapid economic growth can improve fiscal health in poorer economies with relatively young populations and still-growing working-age populations. Overall, our simulation results indicate that Asia’s population aging will adversely affect its fiscal sustainability, pointing to a need for Asian economies to further examine the impact of demographic shifts on their fiscal health.
    Keywords: Asia; fiscal balance; fiscal projection; population aging; public spending; tax
    JEL: H20 H50 H62 J11 J14
    Date: 2016–04–08
  2. By: Jim Fischer (Mount Royal University)
    Abstract: Consumption tax has been lauded as an alternative to income tax, in that it promotes savings and investment, and enables increased consumption over time. Despite these claims, no state has opted to replace income tax with consumption tax as the prime source of revenue. It is proposed that when consumption tax replaces income tax as the means of financing the state, investment increases, individuals are able to consume more over a lifetime, and levels of government revenue can be maintained. This study compares an average Canadian taxpayer in Canada’s current hybrid tax regime with a taxpayer in a hypothetical consumption tax regime. The rate of consumption tax is calculated to provide the equivalent amount of revenue the Canadian government currently receives. Comparisons are made between the two regimes in three scenarios to reflect different taxpayer behavior: holding investment steady, holding consumption steady, and maximizing the use of current tax shelters. The study concludes that in any scenario, individuals are able to enjoy more total consumption and purchasing power over time, adjusted for inflation, when a consumption tax substitutes for income tax. On the other hand, government revenue received from the average taxpayer in some scenarios is less when consumption tax replaces income tax, and is more in others. Government revenue was more when comparisons were made between taxpayers in the income tax regime who made use of current tax shelters, and those in the consumption tax regime who maximized their investment. This is the ideal behavior one would expect of taxpayers who are left with more disposable income. Opportunities for further study are suggested.
    Keywords: consumption tax, income tax, government revenue, tax policy
    JEL: H27 E21 D31
  3. By: Martinez, Isabel Z.
    Abstract: Tax competition raises the question to which extent taxpayers respond to differences in income tax rates by migrating to low-tax areas. This paper analyzes a large, two-step tax reform in the canton of Obwalden in central Switzerland in 2006 and 2008. The canton first introduced a regressive income tax scheme with the explicit purpose of attracting affluent taxpayers, followed by a flat rate tax, thereby lowering taxes for all taxpayers. DiD estimations comparing Obwalden and two neighboring cantons confirm that the reform was successful in increasing the canton’s tax base by increasing the share of rich and their average income. Using individual tax data I apply a 2SLS approach to estimate how responsive migration was to the tax reduction. I find an elasticity of the stock of rich taxpayers in the canton with respect to the average net-of-tax rate of 1.9–2.4. The elasticity of the inflow of rich taxpayers is even larger, ranging from 5 to 12. These large elasticities can be explained by (i) the large pool of intentionally treated in the present institutional setting, which puts almost no restrictions on taxpayers to take advantage of the low tax, and (ii) the initially low share of rich taxpayers in Obwalden combined with the small size of the canton. A small number of rich taxpayers relocating therefore translates into a large elasticity. DiD estimates of cantonal revenue, however, suggest that the tax cuts despite attracting and retaining a substantial number of rich taxpayers, did not lead to an increase
    Keywords: Tax-induced mobility; Personal income tax; Local taxes; Tax competition; Elasticity of taxable income ETI
    JEL: H71 H73 R23 H31 H24
    Date: 2016–05
  4. By: Bert Brys; Sarah Perret; Alastair Thomas; Pierce O’Reilly
    Abstract: This paper examines how the design features of countries’ tax systems can be strengthened to support inclusive economic growth. In the context of the OECD’s New Approaches to Economic Challenges (NAEC) initiative, this paper seeks to re-assess the policy recommendations stemming from the 2008 Tax and Economic Growth report, which focused on the impact of taxes on economic growth from an efficiency perspective, to more explicitly take account of equity considerations. Drawing on recent developments in the academic literature and in countries’ tax policies, the paper examines how the basic design aspects of each tax can be improved to better achieve inclusive growth. It also looks at how the interactions of taxes with other factors – both within and beyond tax systems – affect their efficiency and equity outcomes. The paper more generally emphasises the need to look at tax and benefit systems as a whole to fully assess the efficiency and equity implications of tax policies. The inclusive design of domestic tax policies needs to go hand in hand with the implementation of international tax rules and mechanisms that prevent tax evasion and tax avoidance. It also requires measures that strengthen the functioning of the tax administration and incentivise agents to operate within the formal economy. The paper lays the groundwork for future empirical work to support tax design for inclusive growth. Fiscalité et croissance économique inclusive Ce document analyse comment les pays peuvent améliorer la conception de leur système fiscal de manière à soutenir une croissance économique inclusive. Dans le contexte de l’initiative de l’OCDE relative aux nouvelles approches face aux défis économiques (NAEC), ce document s’attache à réévaluer les recommandations d’action découlant du rapport de 2008 sur la fiscalité et la croissance économique, qui examinait l’incidence des impôts sur la croissance du point de vue de l’efficience, en prenant plus spécifiquement en compte les questions d’équité. En s’appuyant sur les évolutions récentes dans les ouvrages universitaires et dans les politiques fiscales nationales, ce rapport examine comment améliorer les aspects conceptuels fondamentaux de chaque impôt pour favoriser la croissance inclusive. Il étudie également les interactions des impôts avec d’autres facteurs – au sein des systèmes fiscaux et au-delà – et leurs effets sur les résultats en matière d’efficience et d’équité. Plus généralement, ce document souligne la nécessité d’appréhender les systèmes de prélèvements et de prestations dans leur globalité afin de mesurer précisément l’incidence des politiques fiscales sur l’efficience et l’équité. La conception inclusive des politiques fiscales nationales doit aller de pair avec la mise en oeuvre de règles et mécanismes fiscaux internationaux permettant d’empêcher la fraude fiscale et d’inciter les agents à investir la sphère de l’économie formelle, conjugués à des mesures visant à renforcer le fonctionnement des administrations fiscales. Ce document jette les bases des travaux empiriques que l’OCDE entreprendra à l’appui d’une conception des impôts au service de la croissance inclusive.
    Date: 2016–07–18
  5. By: Alisdair McKay; Ricardo Reis
    Abstract: Should the generosity of unemployment benefits and the progressivity of income taxes de- pend 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.
    Keywords: Counter-cyclical fiscal policy; redistribution; distortionary taxes.
    JEL: E62 H21 H30
    Date: 2016–06–17
  6. By: Zeddies, Götz
    Abstract: German Fiscal Federalism is characterized by a high degree of fiscal equalization which lowers the efficiency of local tax administration. Currently, a reform of the fiscal equalization scheme is on the political agenda. One option is to grant federal states the right to raise surtaxes on statutory tax rates set by the central government in order to reduce the equalization rate. In such an environment, especially those federal states with lower economic performance would have to raise comparatively high surtaxes. With capital mobility, this could further lower economic performance and thus tax revenues. Although statutory tax rates are so far identical across German federal states, corporate tax burden differs for several reasons. This paper tries to identify the impact of such differences on firm location. As can be shown, effective corporate taxation did seemingly not have a significant impact on firm location across German federal states.
    Abstract: Der deutsche Länderfinanzausgleich ist durch eine starke Nivellierung der Finanzkraft der Bundesländer gekennzeichnet. Dies geht mit negativen Anreizen für die Finanzverwaltungen der Bundesländer einher. Mit Blick auf das Auslaufen des Länderfinanzausgleichs im Jahr 2019 werden derzeit Reformoptionen diskutiert, unter anderem eine Erhöhung der Steuerautonomie der Bundesländer, in deren Rahmen den Ländern ein Zuschlagsrecht bei der Einkommensteuer eingeräumt und im Gegenzug der Ausgleichstarif im Länderfinanzausgleich verringert werden könnte. Eine derartige Reform würde jedoch bedeuten, dass gerade die finanzschwachen Bundesländer relativ hohe Zuschlagssätze erheben müssten, um ähnlich hohe Einnahmen je Einwohner zu erzielen wie die finanzstarken Länder. Sofern sich dies negativ auf die Unternehmensansiedlungen in finanzschwachen Bundesländern auswirkt, würde deren Finanzkraft weiter geschwächt. Vor diesem Hintergrund untersucht der vorliegende Beitrag, ob bereits bestehende Unterschiede in der effektiven Steuerlast zwischen den Bundesländern die Unternehmensansiedlung beeinflussen. Im Ergebnis zeigt sich, dass ein solcher Einfluss in den vergangenen Jahren nicht bestand.
    Keywords: fiscal equalization,corporate taxation,surtaxes,firm location,Länderfinanzausgleich,Besteuerung,Zuschlagsrechte,Standortwahl
    JEL: H25 H32 H71 H77
    Date: 2015
  7. By: Facundo Alvaredo; Anthony B. Atkinson; Salvatore Morelli
    Abstract: The concentration of personal wealth is now receiving a great deal of attention – after having been neglected for many years. One reason is the growing recognition that, in seeking explanations for rising income inequality, we need to look not only at wages and earned income but also at income from capital, particularly at the top of the distribution. In this paper, we use evidence from existing data sources to attempt to answer three questions: (i) What is the share of total personal wealth that is owned by the top 1 per cent, or the top 0.1 per cent? (ii) Is wealth much more unequally distributed than income? (iii) Is the concentration of wealth at the top increasing over time? The main conclusion of the paper is that the evidence about the UK concentration of wealth post-2000 is seriously incomplete and significant investment in a variety of sources is necessary if we are to provide satisfactory answers to the three questions.
    Keywords: wealth inequality; estate multiplier; investment income
    JEL: D3 H2
    Date: 2016–03–31
  8. By: Zhuang, Juzhong (Asian Development Bank); Li, Shi (Beijing Normal University)
    Abstract: This paper examines underlying factors that could explain the decline in income inequality in the People’s Republic of China (PRC) since 2008 and inquires whether the decline indicates that the PRC’s income inequality has peaked following the Kuznets hypothesis. The paper first identifies four key drivers of rising income inequality in the PRC since the mid-1980s: 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 explain 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 the PRC, the future path of the country’s income inequality may not be one directional; and reducing income inequality significantly may require personal income tax and transfers to play a greater role over time.
    Keywords: income inequality; Kuznets hypothesis; the PRC economy
    JEL: D31 D63 N35
    Date: 2016–07–06
  9. By: Paolo Chiades (Bank of Italy); Luciano Greco (University of Padova); Vanni Mengotto (Bank of Italy); Luigi Moretti (University of Bologna); Paola Valbonesi (University of Padova)
    Abstract: Local governments may increase expenditure arrears to relax the financial constraints induced by intergovernmental transfer cuts. We assess this hypothesis using information from accounting and financial reports from Italian municipalities for the period 2003-2010. By exploiting the long-lasting effect of the 1977-1978 structural reform of Italian local public finance, we employ an instrumental variable approach to address endogeneity concerns. We find robust empirical evidence that the lower the intergovernmental grants, the larger the use of arrears in public investment expenditures by municipalities. We argue that, when local governments are not subject to effective controls on the formation of arrears but fiscal rules impose binding budget constraints, a cut in intergovernmental transfers can partially diminish the effectiveness of fiscal consolidation at local level.
    Keywords: local public finance, fiscal consolidation, fiscal rules, instrumental variables
    JEL: H30 H72 H77 C33 C36
    Date: 2016–07
  10. By: Umut Oguzoglu (Department of Economics, University of Manitoba, and; Institute for the Study of Labor (IZA)); Cain Polidano (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Ha Vu (Department of Economics, Deakin University)
    Abstract: Governments are responding to fiscal pressures associated with aging populations by increasing the eligibility age for publicly-funded retirement benefits. However, recent studies show large resulting increases in the receipt of disability and unemployment benefits, which raises concern that welfare savings are offset by increased inflows into alternative payments. Using administrative data to examine the impacts of female eligibility age increases in Australia, we find little evidence of this. Instead, most of the increase is because the delay mechanically extends the receipt time of people already on alternative payments. The implication is that fiscal savings are not jeopardized by opportunistic behaviour.
    Keywords: Welfare substitution, retirement, aging population
    JEL: H53 J26 J01
    Date: 2016–07
  11. By: Jessen, Robin; Rostam-Afschar, Davud; Schmitz, Sebastian
    Abstract: We quantify the importance of precautionary labor supply using data from the German Socio- Economic Panel (SOEP) for 2001-2012. We estimate dynamic labor supply equations augmented with a measure of wage risk. Our results show that married men choose about 2.5% of their hours of work or one week per year on average to shield against unpredictable wage shocks. This implies that about 26% of precautionary savings are due to precautionary labor supply. If self-employed faced the same wage risk as the median civil servant, their hours of work would reduce by 4%.
    Keywords: Wage Risk,Labor Supply,Precautionary Saving,Life Cycle,Dynamic Panel Data
    JEL: D91 J22 C23
    Date: 2016
  12. By: Tamar Kbiladze (Ivane Javakhishvili Tbilisi State University); David Kbiladze (David Agmashenebeli University of Georgia, Guram Tavartkiladze Teaching University)
    Abstract: Fairly determined taxes and tax burden of population is one of the most important criteria for living standards evaluation. Should tax rates be the same for everyone? This is the challenge which every government meets and successful decision regarding this issue is very important for sustainable development of the economy. The aim of the conducted research is to propose methodology and evaluate existing tax burden of population in Georgia. Empirical study was performed in order to reveal heaviness and lightness of population tax burden. On the basis of empirical research, we conclude that tax burden of population in Georgia, considering their income, is unequal, while according to tax code of Georgia, income of individuals is taxed by flat rate of 20%. Result of investigation, described in the article will be useful for executive and legislative authorities of Georgia to make decisions regarding tax system in Georgia, also for scientists and students who have research interest in the same field.
    Keywords: Decile inequality; Proportional tax system; Progressive tax system; Tax burden; Tax rate; Population
    JEL: H21 H24 G28
  13. By: Biruta Pule (BA School of Business and Finance); Gunta Innuse (BA School of Business and Finance)
    Abstract: The company sustainable development is closely linked with the control of expenses and the ways how to reduce its impact on company cash flow. In Baltic countries business environment is becoming less attractive as a result of tax burden. It encourages tax payers to seek alternative solutions for the reduction of tax burden, especially in relation to labour tax costs and its impact on company cash flow. The article focuses on the assumption that the impact of labour tax costs on business environment in Lithuania and Estonia is much more favourable than in Latvia. Having evaluated labour costs and taking into consideration that they occur under the same production conditions in each of the Baltic countries, we can draw the conclusion that such assumption is false. It cannot be applied in strategic decision making and internal action plan design. When developing tax planning strategy in companies by considering which taxes create the heaviest tax burden, as well as by looking at the ways how it affects investment and company expenses, the calculations have been carried out that lead to the conclusion that tax policy in all Baltic countries and its impact on business environment is similar. Therefore, strategic decision to move business from one territory of the country to another country could turn out to be inefficient. Such decision does not refer to internal action plan of controlling tax payment administration in the company. The analysis indicates significant differences in administration of national taxation.
    Keywords: tax burden, labour costs and taxes, management of tax payment
  14. By: Krueger, Dirk (University of Pennsylvania); Mitman, Kurt (Stockholm University); Perri, Fabrizio (Federal Reserve Bank of Minneapolis)
    Abstract: How big are the welfare losses from severe economic downturns, such as the U.S. Great Recession? How are those losses distributed across the population? In this paper we answer these questions using a canonical business cycle model featuring household income and wealth heterogeneity that matches micro data from the Panel Study of Income Dynamics (PSID). We document how these losses are distributed across households and how they are affected by social insurance policies. We find that the welfare cost of losing one’s job in a severe recession ranges from 2% of lifetime consumption for the wealthiest households to 5% for low-wealth households. The cost increases to approximately 8% for low-wealth households if unemployment insurance benefits are cut from 50% to 10%. The fact that welfare losses fall with wealth, and that in our model (as in the data) a large fraction of households has very low wealth, implies that the impact of a severe recession, once aggregated across all households, is very significant (2.2% of lifetime consumption). We finally show that a more generous unemployment insurance system unequivocally helps low-wealth job losers, but hurts households that keep their job, even in a version of the model in which output is partly demand determined, and therefore unemployment insurance stabilizes aggregate demand and output.
    Keywords: Great Recession; Wealth inequality; Social insurance; Welfare loss from recessions
    JEL: E21 E32 J65
    Date: 2016–07–18

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