nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒10‒02
sixteen papers chosen by
Thomas Andrén

  1. Globalization, Inequality and Welfare By Pol Antràs; Alonso de Gortari; Oleg Itskhoki
  2. Taxation and Corporate Risk-Taking By Langenmayr, Dominika; Lester, Rebecca
  3. Corporate tax asymmetries and R&D: Evidence from a tax reform for business groups in Japan By Masanori Orihara
  4. Banks as Tax Planning Intermediaries By Gipper,Brandon
  5. Signals from the government: policy disagreement and the transmission of fiscal shocks By Callegari, Giovanni; Cimadomo, Jacopo; Ricco, Giovanni
  6. A Simpler Theory of Optimal Capital Taxation By Emmanuel Saez; Stefanie Stantcheva
  7. Taxes, stock ownership, and payout policy: Evidence from a 2011 tax reform in Japan By Kazuki Onji; Masanori Orihara
  8. Made in the U.S.A.? A Study of Firm Responses to Domestic Production Incentives By Lester, Rebecca
  9. Do savings increase in response to salient information about retirement and expected pensions? By Dolls, Mathias; Doerrenberg, Philipp; Peichl, Andreas; Stichnoth, Holger
  10. Job Qualities, Search Unemployment, and Public Policy By Jian Xin Heng; Benoit Julien; John Kennes; Ian King
  11. Does Fiscal Decentralisation Foster Regional Convergence? By Hansjörg Blöchliger; David Bartolini; Sibylle Stossberg
  12. How Reliably Do Financial Statement Proxies Identify Tax Avoidance? By De Simone, Lisa; Nickerson, Jordan; Seidman, Jeri K.; Stomebrg, Bridget
  13. Taxing and Subsidizing Foreign Investors By Sharma, Rishi
  14. Measuring tax treaty negotiation outcomes: the Actionaid tax treaties dataset By Martin Hearson
  15. Incentives to Tax Foreign Investors By Sharma, Rishi
  16. Public debt sustainability: Methodologies and debates in European institutions By João Amador; Cláudia Braz; Maria Manuel Campos; Sharmin Sazedj; Lara Wemans

  1. By: Pol Antràs; Alonso de Gortari; Oleg Itskhoki
    Abstract: This paper studies the welfare implications of trade opening in a world in which trade raises aggregate income but also increases income inequality, and in which redistribution needs to occur via a distortionary income tax-transfer system. We provide tools to characterize and quantify the effects of trade opening on the distribution of disposable income (after redistribution). We propose two adjustments to standard measures of the welfare gains from trade: a ‘welfarist’ correction inspired by the Atkinson (1970) index of inequality, and a ‘costly-redistribution’ correction capturing the efficiency costs associated with the behavioral responses of agents to trade-induced shifts across marginal tax rates. We calibrate our model to the United States over the period 1979-2007 using data on the distribution of adjusted gross income in public samples of IRS tax returns, as well as CBO information on the tax liabilities and transfers received by agents at different percentiles of the U.S. income distribution. Our quantitative results suggest that both corrections are nonnegligible: trade-induced increases in inequality of disposable income erode about 20% of the gains from trade, while the gains from trade would be about 15% larger if redistribution was carried out via non-distortionary means.
    JEL: D3 D6 F1 F6 H2
    Date: 2016–09
  2. By: Langenmayr, Dominika (Catholic University of Eichstatt-Ingolstadt and CESifo, Munich); Lester, Rebecca (Stanford University)
    Abstract: We study whether the corporate tax system provides incentives for risky firm investment. We analytically and empirically show two main findings: first, risktaking is positively related to the length of tax loss periods because the loss rules shift some risk to the government; and second, the tax rate has a positive effect on risk-taking for firms that expect to use losses, and a negative effect for those that cannot. Thus, the sign of the tax effect on risky investment hinges on firm-specific expectations of future loss recovery.
    JEL: G32 H25 H32
    Date: 2016–08
  3. By: Masanori Orihara (Policy Research Institute, Ministry of Finance,Japan)
    Abstract: Economic theory dating back to Domar and Musgrave (1944, Quarterly Journal of Economics 58, 388-422) suggests that the tax treatment of gains and losses can affect incentives for firms to undertake high-risk investments. We take advantage of a 2002 tax reform in Japan as a natural experiment to test the theory. This tax reform introduced a consolidated taxation system (CTS). The CTS allows business groups to offset gains with losses across firms in their group. Thus, the CTS can mitigate disincentives to high-risk investments. Using information on R&D as the investment risk measures, we estimate dynamic investment models with unique panel data of Japanese firms between 1994 and 2012. For identification, we take an instrumental variable approach in a difference-in-differences framework or in a triple-differences framework. We provide evidence that the CTS increases R&D, in agreement with Domar and Musgrave (1944). We also find evidence that the CTS enhances risk-sharing across group members and across asset types. These findings suggest that mitigating tax asymmetries is an effective policy to help encourage both risk-taking and risk-sharing.
    Keywords: tax asymmetries, R&D, business group, risk-taking, risk-sharing, natural experiment
    JEL: G31 G38 H25 H32
  4. By: Gipper,Brandon (Stanford University)
    Abstract: We provide the first large-sample evidence of banks playing an important role in facilitating tax planning by client firms. Capturing bank-client relationships using lending contracts and measuring borrower tax avoidance with the three-year cash effective tax rate and the unrecognized tax benefit balance, we document the extent to which banks are associated with tax avoidance by corporate borrowers. In multivariate analyses, we find that the average tax avoidance of a bank's other borrowers is an economically important determinant of a client firm's own tax avoidance. In additional tests, we find evidence consistent with this result being driven in part by banks acting as tax planning intermediaries. Finally, we find that clients experience meaningful increases in tax avoidance when they begin a new relationship with a bank whose existing borrowers are substantial tax avoiders. Overall, our results suggest that banks, in addition to being financial intermediaries, also act as tax planning intermediaries in facilitating corporate tax planning.
    Date: 2016–06
  5. By: Callegari, Giovanni; Cimadomo, Jacopo; Ricco, Giovanni
    Abstract: We investigate the effects of fiscal policy communication on the propagation of government spending shocks. To this aim, we propose a new index measuring the coordination effects of policy communication on private agents' expectations. This index is based on the disagreement amongst US professional forecasters about future government spending. The underlying intuition is that a clear fiscal policy communication can coalesce expectations, reducing disagreement. Results indicate that, in times of low disagreement, the output response to fiscal spending innovations is positive and large, mainly due to private investment response. Conversely, periods of elevated disagreement are characterised by muted output response. JEL Classification: E60, D80
    Keywords: disagreement, fiscal transmission mechanism, government spending shock
    Date: 2016–09
  6. By: Emmanuel Saez; Stefanie Stantcheva
    Abstract: This paper develops a theory of optimal capital taxation that expresses optimal tax formulas in sufficient statistics following the methodology of optimal labor income taxation. We first consider a simple model with utility functions linear in consumption and featuring heterogeneous utility for wealth. In this case, there are no transitional dynamics, the steady-state is reached immediately and has finite elasticities of capital with respect to the net-of-tax rate. This allows for a simple and transparent optimal tax analysis with formulas expressed in terms of empirical elasticities and social preferences (as in the optimal labor income tax theory). These formulas have the advantage of being easily taken to the data to simulate optimal taxes, which we do using U.S. tax return data on labor and capital incomes. Second, we show how these results can be extended to a much broader class of utility functions and models. The same types of formulas carry over.
    JEL: H20 H21
    Date: 2016–09
  7. By: Kazuki Onji (Graduate School of Economics, Osaka University,Japan); Masanori Orihara (Policy Research Institute, Ministry of Finance,Japan)
    Abstract: The 2011 tax reform in Japan changed the definition of the large individual shareholders in the Japanese tax law. As a result of this tax reform, the top marginal tax rate on dividend income for individual investors whose ownership ratios were between 3 and 5% rose from 10 to 43.6%. This tax reform created an incentive for these investors to restrict their ownership stakes to below 3%. We find clear evidence of such ownership adjustments: 51.9% of 3-to-5%-stake investors sold their stocks before the tax hike. The percentage of sellers was 86.1% for those whose ownership ratios were between 3 and 3.1%. We exploit this tax reform to examine whether investors f tax preferences affected firms f payout policy. Individual investors who retained stakes of at or more than 3% after the tax reform had an incentive to encourage firms to pay fewer dividends because dividends were less valuable to them. We predict that firms with such investors would have reduced dividend payout, and find statistical evidence supporting this prediction. Our study provides new quasi-experimental evidence supporting the dividend clientele hypothesis.
    Keywords: large shareholder, payout policy, stock selling, natural experiment
    JEL: G32 G35 G38 H24 H25 H26
  8. By: Lester, Rebecca (Stanford University)
    Abstract: How do U.S. companies respond to incentives intended to encourage domestic production and manufacturing? I study this question in the context of the Domestic Production Activities Deduction (DPAD), which was enacted in the American Jobs Creation Act of 2004 and is currently the second largest U.S. corporate tax expenditure. Specifically, I examine 1) whether and to what extent firms shift income to maximize the domestic manufacturing benefit, and 2) the extent that firms actually increase domestic investment and employment, measured using confidential data from the U.S. Bureau of Economic Analysis. While I find a positive effect of DPAD on domestic investment, I also find that DPAD firms shift income across time and across borders to maximize the tax benefit. These results show that changes in firm reporting are an important and economically significant response that has not been studied previously in this context. Additionally, these findings inform the ongoing policy debate on the possible extension or repeal of this tax incentive.
    JEL: F23 G38 H25 M40
    Date: 2016–08
  9. By: Dolls, Mathias; Doerrenberg, Philipp; Peichl, Andreas; Stichnoth, Holger
    Abstract: How can retirement savings be increased? We explore a unique policy change in the context of the German pension system to study this question. As of 2004, the German pension authority started to send out annual letters providing detailed and comprehensible information about the pension system and individual expected pension payments. This reform did not change the level of pensions, but only manipulated the knowledge about and salience of expected pension payments. Using German tax return data, we exploit two discontinuities in the age cutoffs of receiving such a letter to study their effects on private retirement savings. Our results show that the letters increase private retirement savings. The effects are fairly sizable and persistent over several years. We further show that the letter increases labor earnings, and that the increase in savings partly crowds out charitable donations. Moreover, we present evidence suggesting that both information and salience drive the savings effect. Our paper adds to a recent literature showing that policies that go beyond the traditional neoclassical reasoning can be powerful to increase savings rates.
    Keywords: pensions,savings,salience,information
    JEL: H55 H24 J26 D14
    Date: 2016
  10. By: Jian Xin Heng (Yale University); Benoit Julien (UNSW Australia); John Kennes (Aarhus University); Ian King (School of Economics, University of Queensland)
    Abstract: We analyse the impact of public policy on unemployment and the qualities of jobs created in an economy with directed search frictions. Policy variables include unemployment benefits, job creation subsidies, and a graduated income tax structure with a government budget constraint. Firms choose to create either high or low quality jobs and bid for labor. We find, among other things, that neither the upper tax threshold nor the upper tax rate affect the mix of job qualities or unemployment, and that, while subsidies to high quality jobs affect the mix of job types, they have no effect on unemployment. We also identify a policy configuration that allows for the simultaneous existence of constrained efficiency, ex post equity, and a balanced government budget.
    Keywords: Directed search, job heterogeneity, public policy
    JEL: J64 H21
    Date: 2016–07–25
  11. By: Hansjörg Blöchliger; David Bartolini; Sibylle Stossberg
    Abstract: Across the OECD, GDP per capita is converging. In contrast, regional disparities – or differences in GDP per capita across jurisdictions – are rising, mainly as a result of widening productivity differences. Fiscal decentralisation could help reduce them again. According to new OECD research, assigning more ownsource revenue to sub-national governments dampens regional GDP disparities and underpins regional convergence. In more decentralised settings, catching-up regions appear to adopt policy innovations more rapidly and their policy innovations have a stronger impact. Conversely, intergovernmental grants tend to fuel disparities, probably because they discourage lagging regions to develop their economic and fiscal base. However, when replacing intergovernmental transfers by own-source revenue, lower disparities in regional output may come at the cost of larger disparities in regional income and more unequal public service standards. Reforms to intergovernmental fiscal frameworks should therefore be two-pronged: a rise in sub-national own-source revenue should be paired with a re-design of intergovernmental transfers and fiscal equalisation, in order to make all jurisdictions enjoy the benefits of more sub-central fiscal power. La décentralisation budgétaire encourage-t-elle la convergence régionale du PIB ? Si l’on observe une convergence des PIB par habitant au sein de la zone OCDE, en revanche, les disparités régionales, c’est-à-dire, les écarts de PIB par habitant entre régions d’un même pays, se creusent, essentiellement du fait de l’augmentation des écarts de productivité. La décentralisation budgétaire pourrait contribuer à ce que ces disparités se réduisent de nouveau. Une nouvelle étude de l’OCDE montre que les disparités régionales de PIB sont atténuées et la convergence entre les régions stimulée lorsque les administrations infranationales disposent de recettes propres plus importantes. Il semble que, dans un environnement plus décentralisé, les régions en phase de rattrapage adoptent plus rapidement les innovations de politique publique et que celles-ci aient un impact plus fort. À l’inverse, les transferts interadministrations tendent à alimenter les disparités, probablement parce qu’ils n’incitent pas les régions en retard à élargir leur assise économique et budgétaire. Toutefois, en remplaçant les transferts interadministrations par des recettes propres, on risque de voir la réduction des différences régionales au niveau de la production s’opérer au prix d’un creusement des disparités au niveau des revenus et d’un accroissement des inégalités en matière de normes de service public. Les réformes des cadres budgétaires interadministrations devraient donc être déployées en deux volets : l’augmentation des recettes infranationales propres devrait être couplée à une redéfinition des transferts interadministrations et de la péréquation budgétaire, de façon que toutes les juridictions profitent des avantages du renforcement du pouvoir budgétaire des administrations infranationales.
    Keywords: fiscal decentralisation, fiscal equalisation, intergovernmental transfers, regional disparities, intergovernmental relations, fiscal autonomy, autonomie budgétaire, décentralisation budgétaire
    JEL: D63 H10 H70 H71 H75 H77 I38
    Date: 2016–09–22
  12. By: De Simone, Lisa (Stanford University); Nickerson, Jordan (Boston College); Seidman, Jeri K. (University of VA); Stomebrg, Bridget (University of GA)
    Abstract: Can financial statement proxies reliably identify tax avoidance? This is an important question because our understanding of the determinants of tax avoidance largely depends on results generated using such proxies. We seed Compustat data with three tax avoidance strategies and test how reliably effective tax rates and book-tax differences identify the seeded tax avoidance. We find permanent tax avoidance is more easily detected than deferral strategies, and that financial reporting choices can reduce statistical power. We also conclude that no single proxy most powerfully detects all types of tax avoidance. These findings are robust to changes in assumptions about the magnitude and pervasiveness of tax avoidance in the sample and are validated using a sample of tax shelters. We also offer evidence on how research design choices, firm performance and accounting for tax risk affect power. We contribute to the literature by using a controlled environment to examine the effectiveness of financial statement proxies for tax avoidance.
    Date: 2016–07
  13. By: Sharma, Rishi (Department of Economics, Colgate University)
    Abstract: Many countries impose taxes on foreign investors while also having in place targeted subsidies and tax incentives that are designed to attract them. This paper shows that such a policy can be optimal from the standpoint of a host country. The government has an incentive to tax inframarginal firms because they are relatively immobile. It also has an incentive to subsidize marginal firms because the economic activity generated by such a subsidy can increase domestic wages in excess of the fiscal cost of the subsidy. These tax and subsidy policies improve host country welfare at the expense of foreigners. This analysis is thus able to provide an explanation for why tax coordination efforts can simultaneously entail reduced taxes and subsidies on foreign firms.
    Keywords: international taxation, foreign direct investment, firm heterogeneity, tax competition
    JEL: H87 H25 F23
    Date: 2016–01–01
  14. By: Martin Hearson
    Abstract: This paper introduces a new dataset that codes the content of 519 tax treaties signed by low- and lower-middle-income countries in Africa and Asia. Often called Double Taxation Agreements, bilateral tax treaties divide up the right to tax cross-border economic activity between their two signatories. When one of the signatories is a developing country that is predominantly a recipient of foreign investment, the effect of the tax treaty is to impose constraints on its ability to tax inward investors, ostensibly to encourage more investment. The merits of tax treaties for developing countries have been challenged in critical legal literature for decades, and studies of whether or not they attract new investment into developing countries give contradictory and inconclusive results. These studies have rarely disaggregated the elements of tax treaties to determine which may be most pertinent to any investment-promoting effect. Meanwhile, as developing countries continue to negotiate, renegotiate, review and terminate tax treaties, comparative data on negotiating histories and outcomes is not easily obtained. The new dataset fills both these gaps. Using it, this paper demonstrates how tax treaties are changing over time. The restrictions they impose on the rate of withholding tax developing countries can levy on cross-border payments have intensified since 1970. In contrast, the permanent establishment threshold, which specifies when a foreign company’s profits become taxable in a developing country, has been falling, giving developing countries more opportunity to tax foreign investors. The picture with respect to capital gains tax and other provisions is mixed. As a group, OECD countries appear to be moving towards treaties with developing countries that impose more restrictions on the latter’s taxing rights, while non-OECD countries appear to be allowing developing countries to retain more taxing rights than in the past. These overall trends, however, mask some surprising differences between the positions of individual industrialised and emerging economies. These findings pose more questions than they answer, and it is hoped that this paper and the dataset it accompanies will stimulate new research on tax treaties.
    Keywords: capital gains tax; corporation tax; double taxation agreement; foreign direct investment; international taxation; sub-Saharan Africa; Asia; tax treaty; withholding tax
    JEL: F53 H25 K33 K34 N47 O23
    Date: 2016–02–21
  15. By: Sharma, Rishi (Department of Economics, Colgate University)
    Abstract: This paper shows that a small country can have incentives to tax inbound FDI even in a setting with perfect competition and free entry. While firms make no aggregate profits worldwide due to free entry, they make taxable profits in foreign production locations because their costs are partly incurred in their home countries. These profits are not perfectly mobile because firm productivity varies across locations. Consequently, the host country does not bear the entire burden of a tax on foreign firms, giving rise to an incentive to impose taxes. The standard zero optimal tax result can be recovered in this model under an apportionment system that ensures zero economic profits in each location.
    Keywords: international taxation, foreign direct investment, firm heterogeneity, tax competition
    JEL: H87 H25 F23
    Date: 2016–01–01
  16. By: João Amador; Cláudia Braz; Maria Manuel Campos; Sharmin Sazedj; Lara Wemans
    Abstract: Following the recent economic and financial crisis, public debt ratios increased considerably in most European Union countries, reaching historically high levels. Against this background, issues regarding the outlook for the debt ratio and the analysis of the sustainability of public finances in Member States became central in the economic policy analysis of European authorities. This Occasional Paper aims to address, in an integrated manner, the various aspects of the discussion on public debt sustainability, with a particular focus on the Portuguese case and on the constraints associated with the institutional and economic environment in the euro area. In this respect, the text approaches the concepts and methodologies used to assess sustainability, lists the existing assessment rules for euro area countries, presents its results for Portugal and refers to the main ongoing discussions on high debt levels.
    JEL: H60 H63
    Date: 2016

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