nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒02‒19
twenty-two papers chosen by
Thomas Andrén

  1. The effect of income distribution and fiscal policy on growth, investment, and budget balance: the case of Europe By Obst, Thomas; Onaran, Özlem; Nikolaidi, Maria
  2. Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly By Takanori Adachi; Michal Fabinger
  3. Constrained Tax Competition – Empirical Effects of the Minimum Tax Rate on the Tax Rate Distribution By von Schwerin, Axel; Buettner, Thiess
  4. Time-Poor, Working, Super-Rich By Corneo, Giacomo
  5. Effectiveness of Early Retirement Disincentives: Individual Welfare, Distributional and Fiscal Implications By Timm Bönke; Daniel Kemptner; Holger Lüthen
  6. The Intergenerational Causal Effect of Tax Evasion: Evidence from the Commuter Tax Allowance in Austria By Frimmel, Wolfgang; Halla, Martin; Paetzold, Jörg
  7. Universal versus Targeted Preschools: An Optimal Tax Approach By Sachs, Dominik; Abbott, Brant
  8. Fiscal Policy, Income Redistribution and Poverty Reduction in Low and Middle Income Countries By Nora Lustig
  9. Differences in welfare take-up between immigrants and natives By Bruckmeier, Kerstin; Wiemers, Jürgen
  10. The Distribution of Household Income and Federal Taxes, 2013 By Congressional Budget Office
  11. The Effects of Increasing the Early Retirement Age on Employment of Older Workers By Weber, Andrea; Manoli, Dayanand
  12. Design of optimal corrective taxes in the alcohol market By Griffith, Rachel; O'Connell, Martin; Smith, Kate
  13. International tax planning and fixed investment By Stéphane Sorbe; Åsa Johansson
  14. Tax planning by multinational firms: Firm-level evidence from a cross-country database By Åsa Johansson; Øystein Bieltvedt Skeie; Stéphane Sorbe; Carlo Menon
  15. International differences in corporate taxation, foreign direct investment and tax revenue By Øystein Bieltvedt Skeie
  16. The effect of statutory sick-pay on workers' labor supply and subsequent health By Martin Halla; Susanne Pech; Martina Zweimüller
  17. Social Security Disability Insurance: Participation and Spending By Congressional Budget Office
  18. Country-by-country reporting: Tension between transparency and tax planning By Evers, Maria Theresia; Meier, Ina; Spengel, Christoph
  19. Public Insurance and Wealth Inequality - A Euro Area Analysis By Pham-Dao, Lien
  20. Debt and tax planning by multinationals By Stéphane Sorbe; Åsa Johansson; Øystein Bieltvedt Skeie
  21. Who Becomes a Politician? By Ernesto Dal Bó; Frederico Finan; Olle Folke; Torsten Persson; Johanna Rickne
  22. Transfer pricing as tax avoidance under different legislative schemes By Holzmann, Carolin Maria

  1. By: Obst, Thomas; Onaran, Özlem; Nikolaidi, Maria
    Abstract: This paper develops a multi-country Post-Kaleckian model augmented by a government sector with public spending and taxes on consumption, labour and capital and estimates it for the EU15 countries. We estimate country specific equations to find the effect of income distribution, public spending and taxes on growth, on each component of private aggregate demand (i.e., consumption, investment, and net exports) and on budget balance for the EU15 countries. Next, we calculate a Europe-wide multiplier based on the responses of each country to changes not only in domestic income distribution, taxation and government expenditure but also to changes in the other European countries’ wage share, taxes and public spending. One novelty of this paper is that it goes beyond an isolated country-by-country analysis and integrates cross-country effects of a simultaneous change in the wage share on demand in Europe in a government augmented Post-Kaleckian model.Extending the model by taxes on labour and capital increases the likelihood of a wage-led economic regime. The fiscal multiplier effects are much stronger when policies are implemented simultaneously, and wage, tax and public spending policies are integrated into the policy mix. The impact of egalitarian wage policies are positive but small; the overall stimulus becomes much stronger when mixed with fiscal expansion. Expansionary fiscal policy is sustainable when wage, public spending and progressive tax policies are combined. The analysis of the paper can guide the development of a fiscal and wage policy mix conducive to equitable development.
    Keywords: Wage share; growth; European multiplier; demand regime; government sector; public spending; tax policy;
    JEL: E12 E22 E25 E62
    Date: 2017–01–01
  2. By: Takanori Adachi; Michal Fabinger
    Abstract: This paper studies welfare consequences of unit and ad valorem taxes in oligopoly with general demand, non-constant marginal costs, and a generalized type of competition. We present formulas providing connections between marginal cost of public funds, tax incidence, unit tax pass-through, ad valorem tax pass-through, and other economic quantities of interest. We show that there exists a simple, empirically relevant set of sufficient statistics for the marginal cost of public funds, namely the pass-through and the industry demand elasticity. Specializing to the case of price or quantity competition, we show how marginal cost of public funds and pass-through may be expressed using elasticities and curvatures of demand and inverse demand. These results apply also to symmetric oligopoly with multi-product firms. Finally, we present a generalization with the tax revenue function specified as a general function parametrized by a vector of tax parameters. We define multi-dimensional generalizations of pass-through and show that they are crucial for evaluating welfare changes in response to changes in taxation.
    Date: 2017–02
  3. By: von Schwerin, Axel; Buettner, Thiess
    Abstract: The paper explores the effect of a minimum tax rate on the tax policy of jurisdictions competing for investment and business location. The testing ground is the universe of local municipalities in the German federation which enjoy the autonomy to set the tax-rate of the local business tax. After experiencing problems with profit-shifting between jurisdictions, in 2004 a federal reform forced municipalities to charge a minimum tax rate on local business profits. As a consequence, low-tax municipalities, i.e. municipalities with tax rates below the minimum, had to adjust their tax policy. In the light of the theoretical literature on minimum tax rates in tax competition, we explore whether the reform has altered the tax-rate distribution beyond the effect on low-tax jurisdictions. More specifically, we test whether municipalities with tax rates above the minimum rate have reviewed their tax policy and decided to set higher tax rates. The empirical results point to significant effects in this regard. We show that the distribution has become more compressed in the bottom part after the reform. Moreover, our results provide quasi-experimental evidence on tax-competition effects in the sense that jurisdictions competing with low-tax jurisdictions have responded with setting higher tax-rates.
    JEL: H71 H23 H25
    Date: 2016
  4. By: Corneo, Giacomo (Free University of Berlin)
    Abstract: This paper revisits the standard model of labor supply under two additional assumptions: consumption requires time and some limited amount of work is enjoyable. Whereas introducing each assumption without the other one does not produce novel insights, combining them together does if the wage rate is sufficiently high. For top earners, work has a positive marginal utility at the optimum and above a critical wage level it converts into a pure consumption good. Their labor-supply curve is first backward bending and then vertical. This can justify an optimal marginal tax rate on top incomes equal to 100 percent. Top earners in the vertical half-line of the labor-supply curve optimally refrain from spending their entire income. At the macroeconomic level, this can generate a lack of effective demand. With some qualifications, these findings carry over to models that include savings and philanthropy.
    Keywords: super-rich, labor supply, time allocation, effective demand, optimal taxation of top labor incomes
    JEL: J22 H21 H24
    Date: 2017–01
  5. By: Timm Bönke; Daniel Kemptner; Holger Lüthen
    Abstract: In aging societies, information on how to reform pension systems is essential to policy makers. This study scrutinizes effects of early retirement disincentives on retirement behavior, individual welfare, pensions and public budget. We employ administrative pension data and a detailed model of the German tax and social security system to estimate a structural dynamic retirement model. We find that retirement behavior is strongly influenced by the level of disincentives. Further, disincentives come at the cost of increasing inequality and individual welfare losses. Still, net public returns are about three times as high as monetarized individual welfare losses. Our estimates also suggest that similar levels of net public returns, if achieved by indiscriminating pension cuts, are associated with individual welfare losses that are more than twice as high.
    Keywords: dynamic discrete choice, retirement, tax and pension system, pension reform
    JEL: C61 H55 J26
    Date: 2017
  6. By: Frimmel, Wolfgang (University of Linz); Halla, Martin (University of Innsbruck); Paetzold, Jörg (University of Salzburg)
    Abstract: Does tax evasion run in the family? To answer this question, we study the case of the commuter tax allowance in Austria. This allowance is designed as a step function of the distance between the residence and the workplace, creating sharp discontinuities at each bracket threshold. The distance to these brackets is a strong determinant of compliance since it corresponds to the probability of detection. The match of different administrative data sources allows us to observe actual compliance behavior at the individual level across two generations. To identify the intergenerational causal effect in tax evasion behavior, we use the paternal distance-to-bracket as an instrumental variable for paternal compliance. We find that paternal noncompliance increases children's non-compliance by about 20 percent.
    Keywords: tax evasion, tax morale, intergenerational correlation, intergenerational causal effect
    JEL: H26 A13 H24 J62 D14
    Date: 2017–01
  7. By: Sachs, Dominik; Abbott, Brant
    Abstract: Many governments set up large public preschool programs in order to expand ac- cess to early education (crowd-in). Public preschools, however, tend to crowd-out private preschool enrollment. This makes such programs less cost-effective because public finances are used to pay for preschool for children that would have been in (private) preschool oth- erwise. Making fees for public preschools increase with family income is a way to address this trade-off. Yet this creates adverse incentives for parental labor supply. Using methods of optimal nonlinear taxation, we derive a theory of income-contingent public preschool fees that optimally trade-off crowd-in, crowd-out and parental labor supply. The optimal shape of such a fee schedule depends on labor supply elasticities, crowd-in and crowd-out elasticities as well as on the progressivity of the pre-existing income tax schedule. The more progressive the income tax schedule is, the stronger are the adverse effects of a steep preschool fee schedule on labor supply. We calibrate our model to the U.S. and use in- formation on existing public preschool programs, enrollment rates and quasi-experimental evidence. We find that the government could increase overall preschool enrolment by 11 percentage points (19 percent) solely by targeting current subsidies more efficiently and without spending one single more dollar.
    JEL: H21 I20 J13
    Date: 2016
  8. By: Nora Lustig (Stone Center for Latin American Studies, Department of Economics, Tulane University, Commitment to Equity Institute (CEQI).)
    Abstract: Current policy discussion focuses primarily on the power of fiscal policy to reduce inequality. Yet, comparable fiscal incidence analysis for twenty-eight low and middle income countries reveals that, although fiscal systems are always equalizing, that is not always true for poverty. In Ethiopia, Tanzania, Ghana, Nicaragua, and Guatemala the extreme poverty headcount ratio is higher after taxes and transfers (excluding in-kind transfers) than before. In addition, to varying degrees, in all countries a portion of the poor are net payers into the fiscal system and are thus impoverished by the fiscal system. Consumption taxes are the main culprits of fiscally-induced impoverishment. Net direct taxes are always equalizing and indirect taxes net of subsidies are equalizing in nineteen countries of the twenty-eight. While spending on pre-school and primary school is pro-poor (i.e., the per capita transfer declines with income) in almost all countries, pro-poor secondary school spending is less prevalent, and tertiary education spending tends to be progressive only in relative terms (i.e., equalizing but not pro-poor). Health spending is always equalizing but not always propoor. More unequal countries devote more resources to redistributive spending and appear to redistribute more. The latter, however, is not a robust result across specifications.
    Keywords: Fiscal incidence, social spending, inequality, poverty, developing countries
    JEL: H22 H5 D31 I3
    Date: 2017–01
  9. By: Bruckmeier, Kerstin; Wiemers, Jürgen
    Abstract: Research on welfare participation often shows significant differences between immigrants and natives that are often attributed to immigrants’ higher risk of welfare dependence. We study whether immigrants in Germany also differ from their German counterparts in their take-up behavior conditional on being eligible for welfare benefits. The empirical approach intends (i) to determine eligibility for welfare benefits for a representative sample of the whole population of Germany using a microsimulation model (IAB-STSM) based on data from the German Socio-Economic Panel (GSOEP) and then (ii) to estimate probit models of observed welfare benefit take-up for the sample of eligible households. Our simulation results show that non take-up rates do not differ significantly between several groups of immigrants and natives. Additionally, the probit estimations do not reveal a significant effect of being a migrant on the probability to take up entitlements. Hence, our findings suggest that after controlling for observed and unobserved household characteristics immigrants are not more prone to take up welfare benefits.
    JEL: I38 H31 C15
    Date: 2016
  10. By: Congressional Budget Office
    Abstract: In 2013, households in the top, middle, and bottom income quintiles received 53, 14, and 5 percent, respectively, of the nation's before-tax income (which includes market income and government transfers) and paid 69, 9, and 1 percent, respectively, of federal taxes. The average federal tax rate in 2013 was 20 percent. The average tax rates for the top, middle, and bottom quintiles were 26, 13, and 3 percent, respectively. Among households in the top 1 percent of the income distribution, the rate was 34 percent, CBO estimates.
    JEL: H20 H24 H50 J30
    Date: 2016–06–08
  11. By: Weber, Andrea; Manoli, Dayanand
    Abstract: This paper studies the effects of a series of reforms of the public pension system in Austria in 2000 and 2004. An important element of the reforms was the increase in the early retirement age (ERA), which was phased in linearly over several cohorts. The empirical analysis, based on detailed administrative data, distinguishes between pension entries, which are mechanically affected by the ERA, and job exits, which reflect individual labor supply decisions. The paper presents four main findings. (1) The cohort-wise increase in the early retirement age led to pronounced shifts in the spike of pension entries at the cohort specific early retirement ages. (2) Job exits shifted in an almost parallel fashion, which leaves little room for additional substitution with other social insurance programs. (3) An important mechanism leading to increased employment is that individuals keep their pre-retirement jobs longer. (4) To quantify the effects of the reform on average retirement ages, we use a regression kink design that exploits the increasing slope in the ERA by birth cohorts and relates it to a corresponding linear increase in the labor force exit and pension claiming ages. We estimate that a one year increase in the ERA leads to a 0.4 year increase in the exit age and a 0.5 year increase in the claiming age.
    JEL: H55 J21 J26
    Date: 2016
  12. By: Griffith, Rachel; O'Connell, Martin; Smith, Kate
    Abstract: Alcohol consumption is associated with costs to society due to its impact on crime and health. Tax can lead consumers to internalise these externalities. We study optimal corrective taxation in the alcohol market. We allow for the fact that the externality generating commodity (ethanol) is available in many differentiated products, over which consumers might have heterogeneous preferences, and that there may also be heterogeneity in marginal externalities across consumers. We show that, if there is correlation in preferences and marginal externalities, setting different tax rates across products can improve welfare relative to a single tax rate on ethanol. We estimate a model of demand in the UK alcohol market and numerically solve for the optimal tax rates. Moving to an optimal system that taxes alcohol types at different rates would close half of the welfare gap between the current UK system and the first best.
    Keywords: Alcohol; corrective taxes; externality
    JEL: D12 D62 H21 H23
    Date: 2017–02
  13. By: Stéphane Sorbe; Åsa Johansson
    Abstract: This paper assesses how international tax planning affects real business investment by multinationals. Earlier studies have shown that corporate taxes reduce business investment. This paper shows that tax planning multinationals are less sensitive to corporate taxes than other firms in their investment decisions. This is presumably because tax planning multinationals do not face the full tax burden associated with their investments, since they shift part of the resulting profits to lower-tax rate countries. On average across industries, a 5 percentage point corporate tax rate increase is found to reduce investment by 5% in the long term. In industries with a strong presence of multinationals with profit-shifting opportunities, this effect is halved. These results obtained with industry-level data are confirmed by a firm-level analysis. Consistently with these results, the investment of tax planning multinationals is found to be more sensitive to taxes when strong rules against tax planning are in place. Planification fiscale internationale et investissement des entreprises Cet article évalue comment la planification fiscale internationale affecte l'investissement réel des entreprises multinationales. Des études antérieures ont montré que l’impôt sur les sociétés réduit l’investissement des entreprises. Cet article montre que les multinationales engagées dans la planification fiscale sont moins sensibles à l’impôt sur les sociétés que les autres entreprises dans leurs décisions d'investissement. C’est sans doute parce que les multinationales engagés dans la planification fiscale ne sont pas confrontées à la charge fiscale totale associée à leurs investissements, car elles transfèrent une partie des bénéfices qui en résultent dans des pays à taux d'imposition plus faible. En moyenne dans les différents secteurs, une augmentation du taux d'imposition des sociétés de 5 points de pourcentage réduirait l'investissement de 5% sur le long terme. Dans les secteurs avec une forte présence des multinationales avec des opportunités de transferts de bénéfices, cet effet est réduit de moitié. Ces résultats obtenus avec des données au niveau sectoriel sont confirmés par une analyse au niveau de l'entreprise. En cohérence avec ces résultats, l'investissement des multinationales engagées dans la planification fiscale serait plus sensible aux taxes lorsque des règles strictes contre la planification fiscale sont en place.
    Keywords: anti-avoidance rules, corporate tax, investment, multinational tax planning
    JEL: E22 F23 H26
    Date: 2017–02–16
  14. By: Åsa Johansson; Øystein Bieltvedt Skeie (OECD); Stéphane Sorbe; Carlo Menon
    Abstract: This paper exploits firm-level data from the ORBIS database to assess international tax planning by multinational enterprises (MNEs). Profit shifting to lower-tax rate countries is measured by comparing the profitability of MNE entities having different links to countries with different tax rates and thus different profit shifting opportunities. The paper also considers other aspects of tax planning that have been less documented in the empirical literature, such as the exploitation of mismatches between tax systems and preferential tax regimes, by comparing how profits reported by MNE entities are taxed relative to non-multinational entities with similar characteristics. The analysis builds on available unconsolidated financial account data, which, despite its limitations, is considered as the best existing cross-country firm-level data. Results are based on a very large sample of firms (1.2 million observations of MNE accounts) in 46 OECD and G20 countries and a sophisticated procedure to identify MNE groups. They provide robust evidence that MNEs shift profits to lower-tax rate countries and that large MNEs also exploit mismatches between tax systems and preferential tax treatment to reduce their tax burden. Overall, the estimated net tax revenue loss ranges from 4% to 10% of global corporate tax revenues. The empirical analysis also shows that strong “anti-avoidance” rules against tax planning are associated with reduced profit shifting, but also higher compliance costs for firms. Planification fiscale des entreprises multinationales : Des preuves basées sur des données internationales d'entreprises Ce document exploite les données d’entreprises de la base de données ORBIS pour évaluer la planification fiscale internationale des entreprises multinationales. Les transferts de bénéfices vers les pays à taux d'imposition inférieur sont mesurés en comparant la rentabilité des entités multinationales ayant des liens différents avec des pays ayant des taux d'imposition différents et donc différentes possibilités de transferts de bénéfices. Le document examine également d'autres aspects de la planification fiscale qui ont été moins documentés dans la littérature empirique, comme l'exploitation des disparités entre les systèmes fiscaux et les régimes fiscaux préférentiels, en comparant la façon dont les bénéfices déclarés par les entités multinationales sont imposés par rapport à des entités non-multinationales avec des caractéristiques similaires. L'analyse se fonde sur des données financières non consolidées, qui, malgré leurs limites, sont considérées comme le meilleur échantillon international de données d’entreprises existant. Les résultats sont basés sur un très grand échantillon d'entreprises (1,2 millions d'observations de comptes de multinationales) dans 46 pays de l'OCDE et du G20 et une procédure sophistiquée pour identifier les groupes multinationaux. Ils fournissent des preuves solides que les multinationales transfèrent leurs bénéfices vers les pays à taux d’imposition inférieur et que les grandes multinationales exploitent également les disparités entre les systèmes fiscaux et les traitements fiscaux préférentiels pour réduire leur fardeau fiscal. Au total, la perte de recettes fiscales nette estimée varie de 4% à 10% des recettes mondiales d’impôt sur les sociétés. L'analyse empirique montre également que des règles strictes « anti-évitement » contre la planification fiscale sont associés à des transferts de bénéfices réduits, mais aussi à des coûts de conformité plus élevés pour les entreprises.
    Keywords: base erosion, corporate income tax, firm-level data, multinational tax planning, profit shifting
    JEL: F23 H25 H26 H32
    Date: 2017–02–16
  15. By: Øystein Bieltvedt Skeie
    Abstract: This paper assesses the redistribution of foreign direct investments (FDI) and tax revenues among countries due to multinationals’ response to international differences in corporate tax systems. The paper briefly reviews the literature on the tax sensitivity of FDI and uses a consensus estimate of this sensitivity in combination with bilateral FDI data to compute hypothetical bilateral FDI positions in the absence of tax rate differences. In a second step, tax revenue effects are estimated by assuming a conventional rate of return on investment. For most OECD countries, the effects of tax rate differentials on FDI positions range between -15% and 15% of current FDI positions. The calculated effects of taxes on FDI reflect real investments as well as tax planning behaviours and the methodology cannot distinguish between these two channels. The methodology only captures part of the tax planning activities of multinationals, since some of these activities are not reflected in the size of the FDI positions. Différences internationales de fiscalité des entreprises, investissements directs à l'étranger et recettes fiscales Ce document évalue la redistribution des investissements directs étrangers (IDE) et des recettes fiscales entre les pays en raison de la réponse des multinationales aux différences internationales entre les systèmes d'imposition des sociétés. Le document examine brièvement la littérature sur la sensibilité des IDE à la fiscalité et utilise une estimation du consensus de cette sensibilité en combinaison avec des données d'IDE bilatéraux pour calculer les positions d'IDE bilatéraux hypothétiques en l'absence de différences de taux d'imposition. Dans un deuxième temps, les effets sur les recettes fiscales sont estimés en supposant un taux conventionnel de retour sur investissement. Pour la plupart des pays de l'OCDE, les effets des écarts de taux d'imposition sur les stocks d'IDE se situent entre -15% et 15% des stocks d'IDE effectifs. Les effets calculés de la fiscalité sur les IDE reflètent des investissements réels ainsi que les comportements de planification fiscale et la méthodologie ne permet pas de distinguer entre ces deux canaux. La méthodologie ne capte qu'une partie des activités de planification fiscale des multinationales, puisque certaines de ces activités ne sont pas reflétées dans la taille des stocks d'IDE.
    Keywords: corporate tax, foreign direct investment, multinational tax planning
    JEL: F21 F23 H25 H26
    Date: 2017–02–16
  16. By: Martin Halla; Susanne Pech; Martina Zweimüller
    Abstract: Social insurance programs typically comprise sick-leave insurance. An important policy parameter is how the costs of lost productivity due to sick leave are shared between workers, firms, and the social security system. We show that this sharing rule affects not only absence behavior but also workers' subsequent health. To inform our empirical analysis, we propose a model in which workers' absence decisions are conditional on the sharing rule, health, and a dismissal probability. Our empirical analysis is based on high-quality administrative data sources from Austria. Identification is based on idiosyncratic variation in the sharing rule caused by different policy reforms and sharp discontinuities at certain job tenure levels and firm sizes. An increase in either the workers' or the firms' cost share, both at public expense, decreases the number of sick-leave days. Policy-induced variation in sick leave has a significant effect on subsequent healthcare costs. The average worker in our sample is in the domain of presenteeism, that is, an increase in sick leave due to reductions in workers' or firms' cost share would reduce healthcare costs and the incidence of workplace accidents.
    Keywords: statutory sick-pay, sick leave, presenteeism, absenteeism, moral hazard, healthcare cost
    JEL: I18 J22 J38
    Date: 2017–02
  17. By: Congressional Budget Office
    Abstract: The Social Security Disability Insurance (DI) program paid $143 billion in 2015 to a total of 11 million beneficiaries. After 2018, spending for that program is projected to exceed its income and, under current law, the DI trust fund would be exhausted in 2022, CBO projects. In this report, CBO analyzes how DI enrollment and spending have changed over time and examines approaches policymakers could take to improve the financial sustainability of the program.
    JEL: H55 H60 J26
    Date: 2016–06–15
  18. By: Evers, Maria Theresia; Meier, Ina; Spengel, Christoph
    Abstract: Aggressive tax planning efforts of highly profitable multinational companies (Base Erosion and Profit Shifting (BEPS)) have become the subject of intense public debate in recent years. As a response, several international initiatives and parties have called for more transparency in financial reporting, especially by means of a Country-by-Country Reporting (CbCR). In line with that, the OECD and the European Commission have recently presented proposals for a comprehensive disclosure of country-specific tax-related information for companies in all industry sectors. In our paper, we demonstrate that neither consolidated or individual financial statements nor other existing data sources seem to be an appropriate basis for providing such country-specific information. Instead, it would be necessary to define detailed and harmonized definitions and regulations to ensure comparability. The discussion on benefits and costs of a CbCR reveals that benefits (at least partially) lack a theoretical foundation and, overall, do not seem to outweigh associated costs. This holds true, in particular, since current tax planning activities are mainly based on the legal exploitation of gaps and loopholes in national and international tax law. Instead, we argue that tax legislators should limit profit shifting by enforcing tax rules and by closing gaps in tax law. In particular, we call for more tightened and standardized transfer pricing regulations and thin-cap rules to be adopted at an international level.
    Keywords: tax avoidance,profit shifting,multinational firms,tax reform,tax reporting,country-by-country reporting,international transfer pricing
    JEL: H20 H26 F23 K34 M41
    Date: 2017
  19. By: Pham-Dao, Lien
    Abstract: Since the release of the first wave of the Household Finance and Consumption Survey, the causes of the large euro area differences in private net wealth inequality have been at the forefront of the political debate. This paper assesses the quantitative importance of cross-country differences in labor market risks and social security institutions for euro area differences in private net wealth inequality. I document the empirical puzzle that euro area countries with the largest reduction in the income Gini coefficient through public transfers and with most generous welfare states, robustly show a higher inequality in private net wealth. Going back to the argument by Hubbard et al. (1995) that public insurance crowds out private savings especially of the poor, I construct a life cycle model with heterogeneous households and incomplete markets that features exogenous labor market risks, social transfers and public and occupational pensions. Calibrating the model to the actual euro area differences in the gross earnings process, unemployment dynamics and social security systems, it can account for 61.2% of the cross-country differences in the net wealth Gini coefficients for the bottom 95% of the wealth distribution. The model results suggest that welfare policies contribute with 47.3% to the wealth inequality differences across the euro area, while gross earnings inequality and unemployment can rationalize 13.9%.
    JEL: D31 D91 E21
    Date: 2016
  20. By: Stéphane Sorbe; Åsa Johansson; Øystein Bieltvedt Skeie
    Abstract: Multinational enterprises (MNEs) manipulate the location of their debts to reduce their corporate tax burden. Indeed, by locating debts in higher-tax rate countries, MNEs can deduct interest payments against a higher tax rate. This paper provides evidence of such manipulation of debt location. The analysis is based on a large sample of firm-level data from the ORBIS database. By comparing the indebtedness of MNE entities with similar characteristics but different debt shifting opportunities, the analysis suggests that a 1 percentage point higher tax rate is associated with 1.3% higher third-party debt. This is a lower bound estimate of debt manipulation, since it excludes the manipulation of internal debt. The analysis also shows that strict rules limiting interest deductibility (e.g. thin capitalisation or interest-to-earnings rules) can reduce debt manipulation. The possibility to locate debts in higher-tax rate countries reduces the effective cost of debt for MNE groups. The empirical analysis suggests that this can lead MNE groups to increase their overall external indebtedness, compounding the “debt bias” existing in most tax systems. Dette et planification fiscale des multinationales Les entreprises multinationales manipulent l'emplacement de leurs dettes pour réduire le montant de leur impôt sur les sociétés. En effet, en plaçant des dettes dans les pays à taux élevé d'impôt, les entreprises multinationales peuvent déduire les paiements d'intérêts contre un taux d'imposition plus élevé. Ce document fournit la preuve d'une telle manipulation de l'emplacement de la dette. L'analyse est basée sur un large échantillon de données d’entreprises de la base de données ORBIS. En comparant l'endettement des entités multinationales ayant des caractéristiques similaires mais différentes possibilités de manipuler l’emplacement leur dette, l'analyse suggère qu’un taux d'imposition de 1 point de pourcentage plus élevé est associé à une dette externe accrue de 1,3%. Ceci est une estimation de la limite inférieure de l’ampleur de la manipulation de la dette, car elle exclut la manipulation de la dette interne. L'analyse montre également que les règles strictes limitant la déductibilité des intérêts (par exemple des règles relatives à la sous-capitalisation ou de règles sur les ratios intérêts-bénéfices) peuvent réduire la manipulation de la dette. La possibilité de localiser les dettes dans les pays à taux d'imposition élevé réduit le coût effectif de la dette pour les groupes multinationaux. L'analyse empirique suggère que cela peut entraîner des groupes multinationaux à augmenter leur endettement global externe, ce qui aggrave le biais en faveur du financement par la dette existant dans la plupart des systèmes fiscaux.
    Keywords: capital structure, debt bias, interest-to-earnings, multinational tax planning, thin capitalisation rules
    JEL: G32 H25 H26
    Date: 2017–02–16
  21. By: Ernesto Dal Bó; Frederico Finan; Olle Folke; Torsten Persson; Johanna Rickne
    Abstract: Can a democracy attract competent leaders, while attaining broad representation? Economic models suggest that free-riding incentives and lower opportunity costs give the less competent a comparative advantage at entering political life. Moreover, if elites have more human capital, selecting on competence may lead to uneven representation. This paper examines patterns of political selection among the universe of municipal politicians and national legislators in Sweden, using extraordinarily rich data on competence traits and social background for the entire population. We document four new facts that together characterize an “inclusive meritocracy.” First, politicians are on average significantly smarter and better leaders than the population they represent. Second, this positive selection is present even when conditioning on family (and hence social) background, suggesting that individual competence is key for selection. Third, the representation of social background, whether measured by parental earnings or occupational social class, is remarkably even. Fourth, there is at best a weak tradeoff in selection between competence and social representation, mainly due to strong positive selection of politicians of low (parental) socioeconomic status. A broad implication of these facts is that it is possible for democracy to generate competent and socially-representative leadership.
    JEL: H10 H70 J45 P16
    Date: 2017–02
  22. By: Holzmann, Carolin Maria
    Abstract: This paper investigates transfer pricing as tax avoidance before and after reforms of anti-avoidance legislation. The reforms introduced and tightened obligatory documentation requirements for transfer prices to enforce that multinational enterprises (MNEs) set internal transfer prices at an arm’s-length. Linking data from the Microdatabase Statistics on International Trade in Services that comprehends prices of MNEs’ international service transactions to the Microdatabase Direct Investment, I create a unique, novel data set to obtain information on whether MNEs’ transaction partners are affiliated companies or not. The results provide empirical evidence for tax-motivated transfer pricing during the entire first decade of the 2000s. Interestingly, MNEs target different types of service transactions for profit shifting via transfer pricing depending on the at the time applicable anti-shifting legislation. The findings show transfer pricing legislation to be effective in case of service transactions with observable market values. In contrast, the results clearly reveal the short-comings of transfer pricing legislation in case of intellectual property (IP) where an effective enforcement of the arm’s-length principle is very limited as market values are unobservable. Here, the findings suggest the need for a change in tax policy in order to effectively prevent base erosion in case of IP-related transfer pricing.
    JEL: F23 H25 H32
    Date: 2016

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