nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒11‒06
fourteen papers chosen by
Thomas Andrén

  1. Business Income and Business Taxation in the United States Since the 1950s By Conor Clarke; Wojciech Kopczuk
  2. Can a concern for status reconcile diverse social welfare programs? By Stark, Oded; Jakubek, Marcin
  3. Optimal Fiscal Policy in a Model with Uninsurable Idiosyncratic Shocks By Marcelo Zouain Pedroni; Sebastian Dyrda
  4. Is Uncle Sam Inducing the Elderly to Retire? By Alan J. Auerbach; Laurence J. Kotlikoff; Darryl R. Koehler; Manni Yu
  5. Tax administration resources and Income inequality By Nguyen, Trang T.T.
  6. Welfare state generosity and student performance: Evidence from international student tests 1980 ? 2003 By Torberg Falch; Justina AV Fischer
  7. Tax Credits and the Debt Position of U.S. Households By McGranahan, Leslie
  8. Fiscal Equalization Schemes and Subcentral Government Borrowing By Barrios, Salvador; Martínez–López, Diego
  9. Fiscal Policy and Debt Management with Incomplete Markets By Thomas Sargent; Mikhail Golosov; David Evans; anmol bhandari
  10. Trends in Cumulative Marginal Tax Rates Facing Low-Income Families, 1997-2007 By Gizem Kosar; Robert A. Moffitt
  11. Optimal policy with heterogeneous agents and aggregate shocks : An application to optimal public debt dynamics By François Legrand; Xavier Ragot
  12. The Heterogeneous Effects of Government Spending: It's All About Taxes By Gaston Navarro; Axelle Ferriere
  13. Consumption and Leisure: The Welfare Impact of Migration on Family Left Behind By Murard, Elie
  14. Intra-Household Behavioral Responses to Cash Transfer Programs: Evidence from a Regression Discontinuity Design By Bergolo, Marcelo; Galvan, Estefania

  1. By: Conor Clarke; Wojciech Kopczuk
    Abstract: In theory, the U.S. tax system aims to attribute and tax all business income to individuals. But the tax treatment of this income varies. Pass-through income is taxed when earned; capital-gains income is taxed when realized; dividends when distributed; other forms of business income may escape taxation entirely. Business owners often have control over the timing and character of their income: They can often choose, for example, between reporting business income or deducting it as wages or fringe benefits. And laws change, changing the incentive and ability to shift income between the individual and corporate sectors. We integrate a wide variety of tax data to document the large long-run changes in the structure of business income and business taxation in the United States. These changes include the degree to which business incomes are taxed on a realization versus an accrual basis, the extent to which taxation is deferred, and the share of business income that is ultimately subject to taxation. We highlight the evolving relevance of retained earnings in the changing corporate sector and their relationship to equity values and unrealized capital gains. We also document the evolution of individual income components — profits of pass-through entities, dividends, and capital gains (both taxable gains and those escaping taxation through step-up). As a result of these changes, business incomes are increasingly taxed through personal income taxes instead of a combination of corporate and personal taxes. In particular, this implies that the observability of business incomes on personal income tax returns has improved over time, a fact that has implications for measuring and understanding the income distribution.
    JEL: D31 H25
    Date: 2016–10
  2. By: Stark, Oded; Jakubek, Marcin
    Abstract: Let there be two individuals: "rich," and "poor." Due to inefficiency of the income redistribution policy, if a social planner were to tax the rich in order to transfer to the poor, only a fraction of the taxed income would be given to the poor. Under such inefficiency and a standard utility specification, a Rawlsian social planner who seeks to maximize the utility of the worst-off individual will select a different allocation of incomes than a utilitarian social planner who seeks to maximize the sum of the individuals' utilities. However, when individuals prefer not only to have more income but also not to have low status conceptualized as low relative income, and when this distaste is incorporated in the individuals' utility functions with a weight that is greater than a specified critical level, then a utilitarian social planner will select the very same income distribution as a Rawlsian social planner.
    Keywords: Maximization of social welfare,Rawlsian social welfare function,Utilitarian social welfare function,Inefficient policy of income redistribution,Distaste for low status
    JEL: D31 D60 H21 I38
    Date: 2016
  3. By: Marcelo Zouain Pedroni (University of Amsterdam); Sebastian Dyrda (University of Toronto)
    Abstract: This paper studies optimal taxation in the standard incomplete markets model. We formulate a Ramsey problem and solve numerically for the optimal (time varying) paths of proportional capital and labor income taxes, (possibly negative) lump-sum transfers, and government debt. The solution maximizes welfare along the transition between an initial steady state, calibrated to replicate key features of the US economy, and an endogenously determined final steady state. We find that in the optimal (utilitarian) policy: (i) capital income taxes are front-loaded hitting the imposed upper bound of 100 percent for 33 years before decreasing to 45 percent in the long-run; (ii) labor income taxes are reduced to less than half of their initial level, from 28 percent to about 13 percent in the long-run; and (iii) the government accumulates assets over time reducing the debt-to-output ratio from 63 percent to ô€€€17 percent in the long-run. This leads to an average welfare gain equivalent to a permanent 4.9 percent increase in consumption. Though distortive, taxes reduce the variance both cross-sectionally and over time of after-tax income, increasing welfare for both a redistributive and an insurance motive which we quantify.
    Date: 2016
  4. By: Alan J. Auerbach; Laurence J. Kotlikoff; Darryl R. Koehler; Manni Yu
    Abstract: Many, if not most, Baby Boomers appear at risk of suffering a major decline in their living standard in retirement. With federal and state government finances far too encumbered to significantly raise Social Security, Medicare, and Medicaid benefits, Boomers must look to their own devices to rescue their retirements, namely working harder and longer. However, the incentive of Boomers to earn more is significantly limited by a plethora of explicit federal and state taxes and implicit taxes arising from the loss of federal and state benefits as one earns more. Of particular concern is Medicaid and Social Security’s complex Earnings Test and clawback of disability benefits. This study measures the work disincentives confronting those age 50 to 79 from the entire array of explicit and implicit fiscal work disincentives. Specifically, the paper runs older respondents in the Federal Reserve’s 2013 Survey of Consumer Finances through The Fiscal Analyzer -- a software tool designed, in part, to calculate remaining lifetime marginal net tax rates. We find that working longer, say an extra five years, can raise older workers’ sustainable living standards. But the impact is far smaller than suggested in the literature in large part because of high net taxation of labor earnings. We also find that many Baby Boomers now face or will face high and, in very many cases, extremely high work disincentives arising from the hodgepodge design of our fiscal system. A third finding is that the marginal net tax rate associated with a significant increase in earnings, say $20,000 per year, arising from taking a full-time or part-time job (which could a second job), can, for many elderly, be dramatically higher than that associated with earning a relatively small, say $1,000 per year, extra amount of money. This is due to the various income thresholds in our fiscal system. We also examine the elimination of all transfer program asset and income testing. This dramatically lowers marginal net tax rates facing the poor. Another key finding is the enormous dispersion in effective marginal remaining lifetime net tax rates facing seeming identical households, i.e., households with the same age and resource level. Finally, we find that traditional, current-year (i.e., static) marginal tax calculations relating this year’s extra taxes to this year’s extra income are woefully off target when it comes to properly measuring the elderly’s disincentives to work. Our findings suggest that Uncle Sam is, indeed, inducing the elderly to retire.
    JEL: H31 H55
    Date: 2016–10
  5. By: Nguyen, Trang T.T.
    Abstract: The paper contributes to the research field as the first quantitative study deploying OECD Tax administration database to provide empirical evidence with respect to the impact of Tax administration resources on income inequality. Methodologically speaking, we apply, for the unique data set of 46 countries extracted from OECD Tax administration 2015 database, the cross-sectional multiple regression employing the OLS estimator before justifying with other estimators i.e. truncated regression, quantile regression and weighted least squared (WLS). We finally obtain the robustly negative relationship between Tax administration resources (employees and non-salary expenditure) and income inequality as hypothesize. The paper ends with some policy recommendations following the limitations and directions for further research.
    Keywords: income inequality, Tax administration, OECD Tax administration database, Tax administration resources, Tax administration employees, non-salary expenditure
    JEL: D63 H00 H20 M21
    Date: 2016–10–30
  6. By: Torberg Falch (Department of Economics, Norwegian University of Science and Technology); Justina AV Fischer (SOEP at the DIW, Berlin)
    Abstract: Student achievement has been identified as an important contributor to economic growth. This paper investigates the relationship between redistributive government activities and investment in human capital measured by student performance in international comparative tests in Mathematics and Science during the period 1980 to 2003. In fixed effects panel models, government consumption, government social expenditures, and the progressivity of the income tax system have negative effects on student achievement. These results are robust to a variety of model specifications, such as conditioning on educational expenditures, and alternative measures of student performance from the World Bank. Our estimates indicate that increased government size by 10 percent reduces student achievement by 0.1 standard deviations.
    Keywords: Student achievement,welfare state,government size,tax system,panel data,international tests,PISA
    JEL: H2 H5 I2 C33
    Date: 2016–10–31
  7. By: McGranahan, Leslie (Federal Reserve Bank of Chicago)
    Abstract: This paper investigates the effect of tax credit receipt on the outstanding indebtedness of households. In particular, we use data on zip code level indebtedness to explore whether debt levels and past due amounts change more dramatically during tax refund season in those zip codes where households receive greater Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) refunds. We see a substantial decline in debt past due in high tax credit zip codes during tax refund season indicating that some recipient households use tax refunds to repair their balance sheets. At the same time, we see increases in both auto and credit card debt during tax refund season showing a link between tax refunds and asset accumulation and consumption.
    Keywords: Debt; household; Earned Income Tax Credit (EITC); tax policy
    JEL: D1 H20 H60
    Date: 2016–10–26
  8. By: Barrios, Salvador (Asian Development Bank Institute); Martínez–López, Diego (Asian Development Bank Institute)
    Abstract: Examining the cases of Canada, Germany, and Spain, the role played by fiscal equalization schemes in determining subnational borrowing was analyzed, and the link between regional governments’ primary fiscal balances and gross domestic product per capita was tested econometrically. The study results show that either poor or rich regions can display higher regional public borrowing on average, and these results can be linked to the institutional design of regional equalization systems in place. Particular elements, such as tax efforts and fiscal capacities, also play relevant roles in this regard. Reforms of these schemes can therefore prove instrumental in reducing regional heterogeneity in public borrowing.
    Keywords: Fiscal equalization schemes; government borrowing; public borrowing; subnational borrowing; fiscal capacity; Canada; Germany; Spain; 公共借入金; 政府借入金; 財政能力
    JEL: H70 R50
    Date: 2016–10–27
  9. By: Thomas Sargent (New York University); Mikhail Golosov (Princeton University); David Evans (University of Oregon); anmol bhandari (university of minnesota)
    Abstract: A Ramsey planner chooses a distorting tax on labor and manages a portfolio of securities in an environment with incomplete markets. We develop a method that uses second order approximations of the policy functions to the planner’s Bellman equation to obtain expressions for the unconditional and conditional moments of debt and taxes in closed form such as the mean and variance of the invariant distribution as well as the speed of mean reversion. Using this, we establish that asymptotically the planner’s portfolio minimizes an appropriately defined measure of fiscal risk. Our analytic expressions that approximate moments of the invariant distribution can be readily applied to data recording the primary government deficit, aggregate consumption, and returns on traded securities. Applying our theory to U.S. data, we find that an optimal target debt level is negative but close to zero, that the invariant distribution of debt is very dispersed, and that mean reversion is slow.
    Date: 2016
  10. By: Gizem Kosar; Robert A. Moffitt
    Abstract: We present new calculations of cumulative marginal tax rates (MTRs) facing low income families participating in multiple welfare programs over the period 1997-2007, the period after 1996 welfare reform but before the program expansions of the Great Recession. Our calculations are for nondisabled, nonelderly families who pay federal and state income taxes and the payroll tax but receive benefits from up to four different transfer programs—Medicaid, Food Stamps, subsidized housing, and Temporary Assistance for Needy Families. The results show enormous variation in MTRs across families who participate in different combinations of welfare programs, who have different family structures, and who have earnings in different ranges. For families who participate in either no or fewer than two welfare programs, which constitutes the large majority of low income families, MTRs are either negative or positive but modest in magnitude. But families participating in two or more programs, while still facing negative or modest positive rates at low earnings, usually face considerably higher MTRs at higher earnings ranges, often up to 80 percent and even occasionally over 100 percent. While the fraction of families in this category is not large, they constitute about one-fifth of single parent families.
    JEL: I38
    Date: 2016–10
  11. By: François Legrand (EM Lyon); Xavier Ragot (Paris School of Economics)
    Abstract: Abstract We show that allocations in incomplete insurance-market economies can be represented as the solution of the program of a constrained planner. This representation allows for solving Ramsey programs in incomplete-market economies with aggregate shocks, and thus determining optimal policies in such setups. We apply this framework to derive optimal public debt and fiscal policy after a technology, a government spending or an uncertainty shock. We find that, for any adverse shock, public debt decreases whereas capital taxes increases on impact. This policy limits the fall in capital after such shocks. Simulations of the optimal solutions can be obtained by simple perturbation methods.
    Date: 2016
  12. By: Gaston Navarro (Federal Reserve Board); Axelle Ferriere (European University Institute)
    Abstract: Empirical work suggests that government spending generates large expansions of output and consumption. Most representative-agent models predict a moderate expansion of output, and a crowding-out of consumption. We reconcile these findings by taking into account the distribution of taxes. Using US data from 1913 to 2012, we provide evidence that government spending induces larger expansions in output and consumption when financed with more progressive taxes. We then develop a model with heterogeneous households and idiosyncratic risk, to show that a rise in government spending can be expansionary, both for output and consumption, only if financed with more progressive labor taxes. Key to our results is the model endogenous heterogeneity in households’ marginal propensities to consume and labor supply elasticities. In this respect, the distributional impact of fiscal policy is central to its aggregate effects.
    Date: 2016
  13. By: Murard, Elie (IZA)
    Abstract: This paper examines the effect of international migration on the welfare of family members left behind at the origin. Previous literature has produced inconclusive evidence, with some studies suggesting that migration reduces income poverty while others show that non-migrants bear a larger work burden to compensate for the loss of migrants' earnings. This paper provides a new unified framework that generates testable predictions of whether migration increases non-migrants' welfare in terms of both consumption and leisure time. Drawing on household panel data in rural Mexico, I find that migration increases non-migrants' consumption, but that this consumption gain cannot be explained by labor supply adjustments. Migration improves left-behinds' welfare through two different channels: (i) migrants' remittances exceed their forgone income contribution to the origin household; and (ii) the out-migration of a farmer increases the marginal productivity of agricultural labor for those left behind in the farm.
    Keywords: migration, remittances, welfare, labor supply, consumption, Mexico
    JEL: J22 F22
    Date: 2016–10
  14. By: Bergolo, Marcelo (IECON, Universidad de la República); Galvan, Estefania (Aix-Marseille University)
    Abstract: This paper investigates the behavioral responses of coupled men and women to a cash transfer program in Uruguay – Asignaciones Familiares-Plan de Equidad (AFAM-PE) –, by analyzing its effect on labor market responses, marital dissolution, and the decision-making process regarding the use of money. The identification strategy exploits both the fact that the monetary transfer is targeted to women and a local random assignment into the AFAM-PE which exogenously changed the intra-household distribution of resources across applicant households. Based on a regression discontinuity design and on a follow-up survey matched with administrative records of applicant households to the program, the insights of this study may be summarized in four broad results. First, while no significant effects are found for men, the program has significant negative effects on the formality choice of women at the eligibility cut-off, but no robust effect on the margin of employment. Secondly, these responses seem to be associated with a decline in women's movement into formal labor from unregistered jobs. These responses do not depend on their partner's labor supply. Third, contrary to findings for various welfare programs in developed countries, no effect on marital dissolution is found. Fourth, we find suggestive evidence that the AFAM-PE results in women taking greater (perceived) responsibility for decisions in specific spheres of household expenditures. In conclusion, considering the overall effects, these results suggest that conditional cash transfer programs (CCTs) do not necessary imply an increase in women's control over household resources, offering suggestive considerations for the ongoing debate in developing countries and suggesting the need to discuss new designs for social assistance.
    Keywords: conditional cash transfer program, intra-household allocations, labor market behavior, women´s decision-making
    JEL: H31 O15 D13 J22
    Date: 2016–10

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