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on Public Economics |
| By: | Dominik Sachs; Aleh Tsyvinski; Nicolas Werquin |
| Abstract: | We study the incidence and the optimal design of nonlinear income taxes in a Mirrleesian economy with a continuum of endogenous wages. We characterize analytically the incidence of any tax reform by showing that one can mathematically formalize this problem as an integral equation. For a CES production function, we show theoretically and numerically that the general equilibrium forces raise the revenue gains from increasing the progressivity of the U.S. tax schedule. This result is reinforced in the case of a Translog technology where closer skill types are stronger substitutes. We then characterize the optimum tax schedule, and derive a simple closed-form expression for the top tax rate. The U-shape of optimal marginal tax rates is more pronounced than in partial equilibrium. The joint analysis of tax incidence and optimal taxation reveals that the economic insights obtained for the optimum may be reversed when considering reforms of a suboptimal tax code. |
| JEL: | E62 H21 H22 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22646&r=pbe |
| By: | Sachs, Dominik; Tsyvinski, Aleh; Werquin, Nicolas |
| Abstract: | We study the incidence and the optimal design of nonlinear income taxes in a Mirrleesian economy with a continuum of endogenous wages. We characterize analytically the incidence of any tax reform by showing that one can mathematically formalize this problem as an integral equation. For a CES production function, we show theoretically and numerically that the general equilibrium forces raise the revenue gains from increasing the progressivity of the U.S. tax schedule. This result is reinforced in the case of a Translog technology where closer skill types are stronger substitutes. We then characterize the optimum tax schedule, and derive a simple closed-form expression for the top tax rate. The U-shape of optimal marginal tax rates is more pronounced than in partial equilibrium. The joint analysis of tax incidence and optimal taxation reveals that the economic insights obtained for the optimum may be reversed when considering reforms of a suboptimal tax code. |
| Keywords: | General Equilibrium; optimal taxation; Tax Incidence; Tax Reforms |
| JEL: | H21 H22 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11497&r=pbe |
| By: | Dominik Sachs (European University Institute); Aleh Tsyvinski (Cowles Foundation, Yale University); Nicolas Werquin (Toulouse School of Economics) |
| Abstract: | We study the incidence and the optimal design of nonlinear income taxes in a Mirrleesian economy with a continuum of endogenous wages. We characterize analytically the incidence of any tax reform by showing that one can mathematically formalize this problem as an integral equation. For a CES production function, we show theoretically and numerically that the general equilibrium forces raise the revenue gains from increasing the progressivity of the U.S. tax schedule. This result is reinforced in the case of a Translog technology where closer skill types are stronger substitutes. We then characterize the optimum tax schedule, and derive a simple closed-form expression for the top tax rate. The U-shape of optimal marginal tax rates is more pronounced than in partial equilibrium. The joint analysis of tax incidence and optimal taxation reveals that the economic insights obtained for the optimum may be reversed when considering reforms of a suboptimal tax code. |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2051&r=pbe |
| By: | Matúš Senaj; Zuzana Siebertová; Norbert Švarda; Jana Valachyová |
| Abstract: | This paper provides a microeconometric analysis of labour force participation elasticities in Slovakia. Using a fully parametric framework, a probability model for participation in labour force is estimated. Our results show that low-skilled and females are the groups that are particularly responsive to changes in income taxes and transfers. We perform a microsimulation analysis of two counterfactual scenarios of abolition of the flat tax regime. We find out that recent departure from the flat-tax system in Slovakia reduces the average probability of being economically active by 0.1 percentage points. The same average effect is found in the hypothetical scenario simulating a departure from the flat-tax system by reintroducing five tax brackets. However, we show that the impact of the two scenarios on selected subgroups of population is different. |
| Date: | 2016–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:cel:dpaper:41&r=pbe |
| By: | Salvador Ortigueira (Department of Economics, University of Miami); Joana Pereira (Economics Department, New York University) |
| Abstract: | It is not uncommon that tax reform laws contain retroactive provisions. In this paper we are concerned with the fiscal and macroeconomic consequences of the constitutional ability of the government to retroactively revoke pre-announced income taxes. To this end, we study time-consistent optimal fiscal policy in a neoclassical economy where the government chooses the level of expenditure in a public good, debt issues and income taxation. When the government lacks commitment to these three fiscal variables, a complementarity between the decisions of the households and the government emerges, generating a multiplicity of expectations-driven equilibria. That is, fiscal policy is not uniquely pinned down by economic fundamentals, but it is determined by households' expectations about current and future policies. Accordingly, economies with identical fundamentals may display significantly different fiscal policies, consumption and investment. |
| Keywords: | Retroactive Taxation; Expectation traps; Equilibrium Multiplicity Publication Status: Under Review |
| JEL: | E21 H24 H31 J12 |
| Date: | 2016–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:mia:wpaper:2016-05&r=pbe |
| By: | McKeehan, Margaret K. (Rice University); Zodrow, George R. (Rice University and Centre for Business Taxation, Oxford University) |
| Abstract: | Alternative economic theories yield dramatically different prescriptions for optimal capital taxation in small open economies. On the one hand, foreign firms, including those with investments that yield firm-specific above-normal returns, have a large number of alternative investment opportunities; this suggests that the supply of foreign direct investment is highly elastic, which implies that small open economies should avoid imposing any source-based taxes on capital income. On the other hand, governments invariably want to tax any above-normal returns earned by location-specific capital, especially if the returns accrue to foreigners, and to take full advantage of the potential revenue increase from any "treasury transfer" effect that arises due to residence-based tax systems with foreign tax credits, such as that utilized by the United States. These factors suggest that investment is highly inelastic with respect to capital taxation, so that source-based capital income taxation is desirable; indeed, in one special case, the capital income tax rate for a small open economy should equal the relatively high US tax rate. Moreover, this difficult trade-off is in practice complicated by numerous additional factors: deferral of unrepatriated profits and cross-crediting of foreign tax credits for US multinationals, foreign direct investment from firms from countries that, unlike the United States, operate territorial systems, and the existence of opportunities for both international capital income shifting and labor income shifting. In this paper, we analyze optimal capital income taxation in a small open economy model that attempts to balance these conflicting factors. |
| JEL: | H21 H25 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:riceco:16-001&r=pbe |
| By: | CREMER, Helmuth; PESTIEAU, Pierre (Université catholique de Louvain, CORE, Belgium) |
| 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 |
| Date: | 2016–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2016006&r=pbe |
| By: | Juranek, Steffen (Dept. of Business and Management Science, Norwegian School of Economics); Schindler, Dirk (Dept. of Accounting, Auditing and Law, Norwegian School of Economics); Schjelderup, Guttorm (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | The digital economy is characterized by the use of intellectual property such as software, patents and trademarks. The pricing of such intangibles is widely used to shift profits to low-tax countries. We analyze the role of a source tax on royalty payments for abusive transfer pricing, and optimal tax policy. First, we show that mispricing of royalty payments does not affect investment behavior by multinationals. Second, it is in the vast majority of cases not optimal for a government to set the source tax equal to the corporate tax rate. The reason is that shutting down abusive transfer pricing activities needs to be traded off against mitigating the corporate tax distortion in capital investment. The latter can be achieved by some tax deductibility of royalty payments. If the true arm's length transfer price equals zero or for special corporate tax systems that treat debt and equity alike (i.e., for ACE and CBIT), it will be optimal to equate both tax rates. |
| Keywords: | Royalty taxation; intellectual property; multinationals; profit shifting |
| JEL: | F23 H21 H25 |
| Date: | 2016–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2016_016&r=pbe |
| By: | Moyen, Stéphane; Stähler, Nikolai; Winkler, Fabian |
| Abstract: | We discuss how cross-country unemployment insurance can be used to improve international risk sharing. We use a two-country business cycle model with incomplete financial markets and frictional labor markets where the unemployment insurance scheme operates across both countries. Cross-country insurance through the unemployment insurance system can be achieved without affecting unemployment outcomes. The Ramsey-optimal policy however prescribes a more countercyclical replacement rate when international risk sharing concerns enter the unemployment insurance trade-off. We calibrate our model to Eurozone data and find that optimal stabilizing transfers through the unemployment insurance system are sizable and mainly stabilize consumption in the periphery countries, while optimal replacement rates are countercylical overall. Moreover, we find that debt-financed national policies are a poor substitute for fiscal transfers. |
| Keywords: | Unemployment Insurance,International Business Cycles,Fiscal Union,International Risk Sharing |
| JEL: | E32 E62 H21 J64 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:332016&r=pbe |
| By: | Mary N. Gade (Oklahoma State University); Karen Maguire (Oklahoma State Univeristy); Francis Makamu (Oklahoma State University) |
| Abstract: | Oklahoma assesses a production tax of seven percent on the extraction of oil, natural gas, and other minerals. However, since July 2002, it has taxed production from horizontal wells at only one percent for the first 48 months of production. This is a significant tax incentive relative to its neighboring states, Texas and Kansas, particularly considering the limited evidence as to the effectiveness of severance tax incentives for increasing in-state development of immobile resources. This paper empirically examines whether the severance tax incentive has encouraged horizontal development in Oklahoma relative to Texas and Kansas. Our findings indicate that the Oklahoma tax exemption has not had a significant influence on horizontal drilling. |
| Keywords: | Severance Tax, Oil and Natural Gas, Hydraulic Fracturing |
| JEL: | H71 H73 Q32 Q35 Q48 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:okl:wpaper:1701&r=pbe |
| By: | Sebastian Devlin-Foltz; Alice M. Henriques; John Sabelhaus |
| Abstract: | The share of wealth owned by top wealth-holders in the U.S. has been rising over the past few decades, though there is some debate about exactly how concentrated wealth is, and how fast those top wealth shares are rising. |
| Date: | 2016–07–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2016-07-29-2&r=pbe |
| By: | Massimiliano Ferraresi (University of Ferrara); Umberto Galmarini (University of Insubria & IEB); Leonzio Rizzo (University of Ferrara & IEB); Alberto Zanardi (Italian Parliamentary Budget Office) |
| Keywords: | Political budget cycle, transfers, federal budget, property tax, fiscal reform, local elections. |
| JEL: | C3 H71 H72 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ieb:wpaper:doc2016-21&r=pbe |
| By: | Ohid Yaqub (cience Policy Research Unit, University of Sussex, UK) |
| Abstract: | Serendipity, the notion of researchers making unexpected and beneficial discoveries, has played an important role in debates about the feasibility and desirability of targeting public R&D investments. The purpose of this paper is to show that serendipity can come in different forms and come about in a variety of ways. The archives of Robert K Merton, who introduced the term to the social sciences, were used as a starting point for gathering literature and examples. We identify four types of serendipity (Walpolian, Mertonian, Browsing, Curiosity) together with four mechanisms of serendipity (Theory-led, Observer-led, Error-borne, and Network-emergent). We also discuss implications of the different types and mechanisms for theory and policy. |
| Keywords: | serendipity, uncertainty, research policy, science policy, technology policy, innovation management |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:sru:ssewps:2016-17&r=pbe |
| By: | Stefano Bosi (EPEE (University of Evry)); Ngoc-Sang Pham (LEM (University of Lille 3) and EPEE (University of Evry)) |
| Abstract: | We study the interplay between taxation, bubble formation and eco- nomic growth. A rational bubble may be beneficial when growth is fu- elled by public investment (or R&D externalities) and the government levies taxes on bubble returns to finance this investment. Our main result challenges the conventional view about the negative effect of bubbles in endogenous growth (Grossman and Yanagawa, 1993). |
| Keywords: | taxation on financial revenue, public R&D, endogenous growth |
| JEL: | E44 H23 O30 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:eve:wpaper:16-03&r=pbe |
| By: | Stamatopoulos, Ioannis; Hadjidema, Stamatina; Eleftheriou, Konstantinos |
| Abstract: | This paper examines the determinants of the variability in corporate effective tax rates before and after the beginning of the financial crisis in Greece. Analyzing firm-level data for the period between 2000 - 2014, we find strong evidence that specific firm characteristics including firm size, financial leverage, capital and inventory intensity influence the level of corporate effective tax rates. Our results also indicate that corporate effective tax rates and their association with the firm-specific characteristics were significantly influenced in the sub-period after the beginning of the financial crisis. Our findings may have important implications both for policy makers and firms. |
| Keywords: | corporate taxation; financial crisis; Greece; tax determinants |
| JEL: | H25 |
| Date: | 2016–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73787&r=pbe |
| By: | Kawagishi, Taketo; Nakamoto, Yasuhiro |
| Abstract: | Considering that people can invest in their health-related quality of life, we investigate the effects of public policies (the investment subsidy policy and the direct transfer of investment commodities) on the health-related quality of life in the small open economy. Our main findings are that a temporary increase in these public policies conducted by the domestic government does not have positive impacts on the health-related quality of life in the long run; and alternatively, the foreign aid in the form of direct transfer of investment commodities improves their health. |
| Keywords: | Health-related quality of life; Temporary effects of public policies; Foreign aid |
| JEL: | F41 H21 I12 I18 |
| Date: | 2016–07–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73859&r=pbe |
| By: | Baris Alpaslan; Abdilahi Ali |
| Abstract: | This paper extends a two-period Overlapping Generations model of endogenous growth where the interactions between public infrastructure, human capital with R&D activities, and growth are studied. The paper makes two important contributions. First, it accounts for the spillover effect of the stock of ideas on learning which in turn promotes the production of innovative technologies. In doing so, it brings to the fore a two-way interaction between human capital and innovation. The paper then applies various econometric methods which confirm the above theoretical thesis. Second, the solutions of the model emphasise the important role public spending on infrastructure, human capital and R&D can play in promoting economic growth. In order to study the transitional dynamics of the model and to illustrate the impact of public policy, the model is calibrated using the average data for low-income countries and a sensitivity analysis is reported under different parameter configurations. The findings of the numerical analysis show that trade-offs in the allocation of public spending may inevitably emerge. In particular, investment in public infrastructure at the expense of spending on R&D is less likely to succeed in promoting economic growth, whereas it may be more effective to foster growth through an offsetting cut in another productive component, namely, education. In light of these potential trade-offs, governments in low-income countries need to use their limited budgets as part of holistic measures in order to achieve efficient outcomes. |
| Keywords: | Infrastructure, Human Capital, Innovation, Government Policy |
| JEL: | H54 J24 O31 O38 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-59&r=pbe |