nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒10‒23
nineteen papers chosen by
Thomas Andrén

  1. The Impact of Taxes on Income Mobility By Mario Alloza
  2. Optimal fiscal policy with utility-enhancing government spending, consumption taxation and a common income tax rate: the case of Bulgaria By Vasilev, Aleksandar
  3. Tax Potential and Tax Effort: An Empirical Estimation for Non-resource Tax Revenue and VAT’s Revenue By Jean-François Brun; Maïmouna Diakite
  4. Sub-metropolitan Tax Competition with Household and Capital Mobility By Tidiane Ly
  5. Turning Out for Redistribution: The Effect of Voter Turnout on Top Marginal Tax Rates By Sabet, Navid
  6. When fiscal consolidation meets private deleveraging By Javier Andrés; Óscar Arce; Carlos Thomas
  7. Optimal unemployment insurance for older workers By Jean-Olivier Hairault; François Langot; Sébastien Ménard; Thepthida Sopraseuth
  8. Choosing Between an Estate Tax and a Basis Carryover Regime: Evidence from 2010 By Robert Gordon; David Joulfaian; James M. Poterba
  9. Taxes and Technological Determinants of Wage Inequalities: France 1976-2010 By Antoine Bozio; Thomas Breda; Malka Guillot
  10. Pension Saving Responses to Anticipated Tax Changes: Evidence from Monthly Pension Contribution Records By Claus Thustrup Kreiner; Søren Leth-Petersen; Peer Ebbesen Skov
  11. Consumption taxes and taste heterogeneity By Stéphane Gauthier; Fanny Henriet
  12. Estimating the Elasticity of Taxable Income: Evidence from Top Japanese Taxpayers By Miyazaki, Takeshi; Ishida, Ryo
  13. Do Mortgage Subsidies Help or Hurt Borrowers? By David Rappoport
  14. Family Labor Supply and the Timing of Cash Transfers: Evidence from the Earned Income Tax Credit By Tzu-Ting Yang
  15. Responses of firms to tax, administrative and accounting rules: Evidence from Armenia By Asatryan, Zareh; Peichl, Andreas
  16. The political economy of interregional competition for firms By Daniel Hopp; Michael Kriebel
  17. Regulation, tax and capital structure: evidence from administrative data on Italian banks By Steve Bond; Kyung Yeon Ham; Giorgia Maffini; Andrea Nobili; Giacomo Ricotti
  18. Distributional Effects of Taxing Financial Transactions and the Low Interest Rate Environment By Dorothea Schäfer
  19. Fiscal policy and the youth labour market By Ebell, Monique.; O'Higgins, Niall.

  1. By: Mario Alloza (Bank of Spain; Centre for Macroeconomics (CFM))
    Abstract: This paper investigates how taxes affect relative mobility in the income distribution in the US. Household panel data drawn from the PSID between 1967 and 1996 is employed to analyse the relationship between marginal tax rates and the probability of staying in the same income decile. Exogenous variation in marginal tax rates is identified by using counterfactual rates based on legislated changes in the tax schedule. I find that higher marginal tax rates reduce income mobility. An increase in one percentage point in marginal tax rates causes a decline of around 0.8% in the probability of changing to a different income decile. Tax reforms that reduce marginal rates by 7 percentage points are estimated to account for around a tenth of the average movements in the income distribution in a year. Additional results suggest that the effect of taxes on income mobility differs according to the level of human capital and that it is particularly significant when considering mobility at the bottom of the distribution.
    Keywords: Income mobility, Inequality, Marginal tax rate
    JEL: E24 E62 D31 D63 H24 H31
    Date: 2016–10
  2. By: Vasilev, Aleksandar
    Abstract: This paper explores the effects of fiscal policy in an economy based on indirect taxes, and taxing all income at the same rate. The focus of the paper is on the relative importance of consumption vs. income taxation, as well as on the provision of valuable public services. To this end, a Real-Business-Cycle model, calibrated to Bulgarian data (1999-2014), was set up with a richer public finance side. Bulgarian economy was chosen as a case study due to its dependence on consumption taxation as a source of tax revenue. To illustrate the effects of fiscal policy, two regimes were compared and contrasted to one another - exogenous vs. optimal (Ramsey) policy case. The main findings from the computational experiments performed are: (i) The optimal steady-state (capital and labor income) tax rate is zero, as it is the most distortionary tax to use; (ii) The benevolent Ramsey planner provides the optimal amount of the utility-enhancing public services. (iii) The optimal steady-state consumption tax has to triple to finance the optimal level of government spending.
    Keywords: consumption tax,income tax,general equilibrium,fiscal policy
    JEL: D58
    Date: 2016
  3. By: Jean-François Brun (CERDI - Centre d'études et de recherches sur le developpement international - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique); Maïmouna Diakite (CERDI - Centre d'études et de recherches sur le developpement international - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Taxation is one of the main components of a country’s fiscal space. Its internal origin and the accountability it creates between rulers and populations make it a key element in financing public expenditure. Tax capacity differs between countries and depends on structural factors. A number of empirical studies attempted to determine countries’ overall tax potential and tax effort (Lotz and Morss, 1967; Stotsky and Wolde Mariam, 1997; Fenochietto and Pessino, 2013). However, the methodologies used tend to underestimate or overestimate countries’ tax potential and thereby their tax effort. The purpose of this study is to better assess countries’ non-resource tax potential and VAT’s tax potential independently using a more appropriate method. It is in line with the study of Brun et al. (2014) and rests on a large sample of developing countries over the period 1980/2014. We first employ the previous models and discuss about their shortcomings, after we use the stochastic frontier model of Kumbhakar, Lien and Hardaker (2014). This model allows to disentangle the overall tax effort into a persistent tax effort due to policy economy decisions and a time-varying tax effort relating to tax administration efficiency. The results are more realistic. Low income countries have higher tax effort along the period even if their tax effort decline at the end of period on the opposite of resource depending countries. In fact, the latter characterized by lower tax effort compared to non-resource countries improved consequently the efficiency of their system since 2010. The results also suggest that inefficiency in taxation depends more on policy decisions than on tax administration performance.
    Keywords: Tax potential,Tax effort,Value-added tax,Non-resource revenues,Stochastic frontier model,Inefficiency.
    Date: 2016–06–15
  4. By: Tidiane Ly (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - UCBL - Université Claude Bernard Lyon 1 - UL2 - Université Lumière - Lyon 2 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - ENS Lyon - École normale supérieure - Lyon)
    Abstract: This paper investigates the efficiency properties of tax competition between submetropolitan jurisdictions when capital, residents and workers are mobile, and both households and firms compete for local land markets. We analyze two decentralized equilibria: (1) with a local tax on residents and two separate local taxes on capital and land inputs, efficiency is achieved and the existence of a marginal fiscal cost due to residents' mobility is revealed; (2) combination of the taxes on capital and land inputs into a single business property tax leads local authorities to charge inefficiently high taxation on capital. We show that capital mobility induces a reduction in the business land taxation and local public inputs are used to offset the distorting effects of the property tax, accounting for the distorting impact of workers' mobility.
    Keywords: Tax competition, Mobility, Public goods, Public inputs
    Date: 2016
  5. By: Sabet, Navid
    Abstract: This paper documents the impact of voter turnout on top marginal tax rates in the 34 OECD countries for the period between 1974 and 2014. Across a number of specifications, I find that increases in voter turnout have a positive and statistically significant effect on top tax rates. This finding is broadly consistent with the median voter theorem that posits government redistribution to be a function of the income of the median voter. Because turnout has fallen drastically in the decades leading to 2014, and because the decrease is strongly correlated with income, the pivotal voter is no longer the one whose income lies near the median of the overall income distribution but instead the one whose income is at the median of a much richer subset of the distribution. Using ordinary least squares estimation as well as panel data methods, I find that increases in turnout are associated with higher rates of income tax for top earners. An instrumental variables approach confirms my hypothesis, though the estimates are less precisely estimated.
    Keywords: voter turnout; income tax; redistribution; government policy
    JEL: H24 I38 P16
    Date: 2016–09
  6. By: Javier Andrés (University of Valencia); Óscar Arce (Banco de España); Carlos Thomas (Banco de España)
    Abstract: We analyze the interaction between fiscal consolidation and private-sector deleveraging in an economy within a monetary union. Pre-existing long term collateralized private debt – a core ingredient of the deleveraging process – plays a critical role in shaping fiscal multipliers. By buffering the short-run fall in debtors’ spending capacity, long-run private debt reduces the short-run multipliers of aggressive (large and/or fast) consolidations. However, absent credibility concerns, aggressive consolidations raise the intensity and length of private deleveraging, causing higher output losses over the medium run. In terms of discounted output losses and welfare, this latter effect dominates, so that larger and faster consolidations are relatively costlier than smaller and more gradual ones. Also, in this environment, alternative budgetary instruments generate sizable differences in terms of their incidence on private deleveraging dynamics and, hence, on the overall output costs of fi scal consolidations.
    Keywords: fiscal consolidations, long term private debt, financial shock.
    JEL: E62 E44
    Date: 2016–10
  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 (PSE - 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: Robert Gordon; David Joulfaian; James M. Poterba
    Abstract: Executors of estates for decedents in 2010 could choose between an estate tax regime and a basis carry-over regime. For most executors, this created a tradeoff between a current estate tax payment and a future capital gains tax liability for beneficiaries who inherited assets with carryover-basis. Various features of a decedent’s estate, including the gross value of assets, outstanding debts, whether the decedent resided in a state with an estate tax, and the basis of assets held at the time of death, affected the relative tax burden under the two regimes. Some executors chose to file estate tax returns for decedents from 2010, but these estate tax filings resulted in very little estate tax revenue. Estate tax filers had more leverage, were more likely to be from a state with an estate tax or from married decedents, were less likely to have made lifetime gifts, and had larger charitable bequests – all factors that are associated with reduced estate tax liability. While it is not possible to tell definitively whether executors chose the most tax-efficient option when confronted with the two tax regimes, evidence from tax returns suggests that an increase of one percent of estate value in the difference between estate tax liability and prospective tax liability under the carryover basis regime reduced the likelihood of filing an estate tax return by between 0.3 and 1.5 percentage points.
    JEL: H24 H31
    Date: 2016–10
  9. By: Antoine Bozio (PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), PSE - Paris School of Economics); Thomas Breda (PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), PSE - Paris School of Economics); Malka Guillot (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique)
    Abstract: This paper makes two simple points. First, labour demand depends on product wage or labour cost. Hence, demand-side explanations for the rise in inequalities such as skill-biased technical change and job polarization should be tested using data on labour cost and not net wage or posted wage. Contrary to previous studies, we find evidence of skill-biased technical change in France when we measure wage inequality in terms of labour cost. In that respect, France is no exception. Second, the French case provides a clear evidence that changes in taxation can have very significant effect in converting market inequalities into consumption or net wages inequalities. In France, net wage inequalities have decreased by about 10%, while labour cost inequalities have increased by 15% over the 1976-2010 period. This fact provides support both for the supporters of the skill-biased technical change explanations of the secular increase in wage inequalities, as well to those who believe that institutions could have significant impact on inequalities in disposable incomes.
    Keywords: Wage inequality,Labour cost,Social Security contributions,Tax incidence
    Date: 2016–03–29
  10. By: Claus Thustrup Kreiner; Søren Leth-Petersen; Peer Ebbesen Skov (Department of Economics,Auckland University of Technology, NZ)
    Abstract: A Danish tax reform, decided in May 2009 and taking effect from the beginning of 2010, lowered the marginal tax rate on top bracket taxable income from 63% to 56%. Because contributions to pension accounts are tax deductible, the reform provided an incentive to increase pension contributions before the change in taxation. Using high frequency panel data, we document an increase in pension contributions in the second half of 2009 in response to the anticipated change in taxation, and that this led to an increase in total savings. Length: 36 pages
    Keywords: Pension savings, tax incentives, high frequency individual data.
    JEL: H3
    Date: 2016–06
  11. By: Stéphane Gauthier (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Fanny Henriet (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)
    Abstract: We study optimal commodity taxes in the presence of non-linear income taxes when agents differ in skills and tastes for consumption. We show that commodity taxes are partly determined by a many-person Ramsey rule when there is taste heterogeneity within income classes. The usual role of consumption taxes in relaxing incentive constraints explains the remaining part of these taxes when there is taste heterogeneity between income classes. We quantify the importance of these two components on Canadian microdata using a new method to identify empirically the binding incentive constraints. Incentives matter but tax exemptions are mostly justified by Ramsey considerations.
    Keywords: taste heterogeneity, commodity taxes, income taxation, empirical tests for asymmetric information, social weights
    Date: 2016–01–07
  12. By: Miyazaki, Takeshi; Ishida, Ryo
    Abstract: This study measures the elasticity of taxable income (ETI) using data on top Japanese taxpayers between 1986 and 1989. During these years, Japan decreased the income tax rates of the top-to-bottom income earners and number of income brackets drastically. We construct a panel dataset of top taxpayers in Japan in this period, using Japanese tax return data and estimate the ETI. We find that the ETI with regard to the net-of-tax rate is approximately 0.074–0.055, considerably lower than those for the United States and most European countries but nearly equal to that for Denmark.
    Keywords: Elasticity of taxable income; income tax; Japan; top taxpayers
    JEL: H21 H24
    Date: 2016–10
  13. By: David Rappoport
    Abstract: Mortgage subsidies affect homeownership costs by reducing effective mortgage rates and increasing house prices. I show analytically the role of mortgage subsidies in determining house price changes, economic incidence, and efficiency costs using a theoretical framework for applied welfare analysis. I derive simple expressions for these effects, as functions of reduced-form sufficient statistics, which I use to measure the effects from eliminating mortgage deductions. My main results characterize the distributional impact of mortgage subsidies among buyers and owners and how house price responses attenuate efficiency losses. My results provide broader methodological insights into the welfare analysis of credit policies.
    Keywords: Public economics ; Mortgage subsidies ; Incidence ; Optimal taxation ; House prices ; Mortgage interest deductions ; MID
    JEL: H22 R21 R28
    Date: 2016–10–05
  14. By: Tzu-Ting Yang (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: This paper exploits the unique disbursement timing and benefit rules of the Earned Income Tax Credit (EITC) to provide new evidence on how families adjust their labor supply in response to receiving anticipated cash transfers. I find that income seasonality caused by EITC receipt leads to changes in the intra-year labor supply patterns of married women. On average, receiving a $1,000 payment significantly reduces the proportion of married women who work, by 1.3 percentage points, in the month when the EITC is received. Additionally, this labor supply response is mainly driven by those who are secondary earners or liquidityconstrained.
    Date: 2016–10
  15. By: Asatryan, Zareh; Peichl, Andreas
    Abstract: Using panel data on the full population of corporate tax returns of Armenian firms, we study the behavioral response of firms to three size-dependent regulations. We find: i) a strong response to an accounting notch where International Financial Reporting Standards become mandatory; ii) a moderate response to an administrative notch below which the frequency of filing and paying taxes declines from monthly to quarterly; and iii) no response to a tax notch created by the registration threshold of the value added tax. Exploiting tax audits, we provide evidence suggesting that income under-reporting drives the bunching response of firms by between 60 and 100 percent. Additional evidence suggests that firms respond to tax audits by compensating every additional dollar of audit driven increase in reported income by a 0.7-0.8 dollar increase in reported deductions.
    Keywords: small and medium enterprises,size-dependent regulation,value added tax,tax administration,tax accounting,tax evasion
    JEL: H25 H26 O12
    Date: 2016
  16. By: Daniel Hopp; Michael Kriebel
    Abstract: This paper studies interregional competition for firms when the bidding is decided upon majority voting. We model the competition as an auction under full information between two asymmetric regions inhabited by low- and high-skilled individuals. We derive two results: First, the location decision is inefficient in most cases, especially when the median voter is high-skilled. Second, winning the auction is harmful for the region if the political process and a strong competition lead to subsidies which exceed the surplus created by a firm's location. This implies that restricting interregional competition for firms, e.g. regulating subsidies, may enhance welfare. Furthermore, our model shows that countries with high redistributive taxes and a low-skilled majority have an advantage to attract foreign firms.
    Keywords: median voter, political economy, subsidy competition, spillover
    JEL: H23 H25 H31 P16 R11
    Date: 2016–10
  17. By: Steve Bond (University of Oxford); Kyung Yeon Ham (University of Oxford); Giorgia Maffini (University of Oxford); Andrea Nobili (Associazione Bancaria Italiana); Giacomo Ricotti (Bank of Italy)
    Abstract: This paper explores the effect of taxation on the capital structure of banks. For identification, we exploit exogenous regional variations in the rate of the Italian tax on productive activities (IRAP) using administrative, confidential data on regional banks provided by the Bank of Italy (1998-2011). We find that IRAP rate changes do not always lead to a change in banks’ leverage: banks close to the regulatory constraints do not change their leverage when tax rates change. This holds true for both tax cuts and tax hikes. Among less constrained entities, the leverage of smaller banks is more responsive to changes in tax rates than that of larger banks. Overall, the tax system has little effect on the capital structure of banks, especially for larger and possibly more systemically important institutions; regulatory constraints instead seem to be a first-order determinant. Our findings cast doubt on the role of the tax system as a cause or tool for addressing the negative externalities of excessive leverage in the banking system.
    Keywords: capital structure, debt, regulation, corporate tax, banks
    JEL: G21 G32 G38 H25 H32
    Date: 2016–10
  18. By: Dorothea Schäfer
    Abstract: The study aims to assess the distributional effects of taxing financial transactions including a focus on gender. It specifically investigates the impact of the low interest rate environment on tax revenues and distribution. The first part of the study is explorative, aiming to develop a concept for the assessment. This is because the role of low or even negative interest rates is not yet specifically considered in the context of FTT. In the second part, the challenge is to find appropriate data for European countries in order to assess distributional effects. The study also highlights the existing data gaps that prevent a long-term evaluation of FTT with regard to tax revenues, impact, and distributional consequences.
    Keywords: European Union, financial transactions, tax burden, social sustainability
    JEL: G20 H21 H22 H23
    Date: 2016
  19. By: Ebell, Monique.; O'Higgins, Niall.
    Abstract: The analysis seeks to evaluate the potential that expansionary fiscal policy can have – and under which conditions – to ameliorate, and restrictive fiscal policy to worsen, conditions in youth labour markets. Through a panel econometric model applied to European countries, the analysis finds that a fully countercyclical fiscal policy is an instrument well-suited to ameliorating youth unemployment.
    Keywords: youth unemployment, fiscal policy, labour market analysis, EU countries, North America, chômage des jeunes, politique fiscale, analyse du marché du travail, pays de l'UE, Amérique du Nord, desempleo de jóvenes, política fiscal, análisis del mercado de mano de obra, países de la UE, América del Norte
    Date: 2015

This nep-pbe issue is ©2016 by Thomas Andrén. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.