nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒04‒02
seventeen papers chosen by
Thomas Andrén

  1. Fiscal Policy, Growth and Income Distribution in the UK and the US By Keshab Raj Bhattarai; Jonathan Haughton; David Tuerck
  2. Optimal Progressive Income Taxation in a Bewley-Grossman Framework By Juergen Jung; Chung Tran
  3. Fiscal sustainability under physical and human capital accumulation in an overlapping generations model By Takumi Motoyama
  4. Decomposing the Marginal Excess Burden of Australia’s Goods and Services Tax By Verikios, George; Patron, Jodie; Gharibnavaz, Reza
  5. The effects of tax on bank liability structure By Gambacorta, Leonardo; Ricotti, Giacomo; Sundaresan, Suresh M; Wang, Zhenyu
  6. The Composition Effects of Tax-Based Consolidations on Income Inequality By Ciminelli, Gabriele; Ernst, Ekkehard; Giuliodori, Massimo; Merola, Rossana
  7. Labour Force Participation and Tax-Benefit Systems: A Cross-Country Comparative Perspective By Gábor Kátay; Kamil Galuščák
  8. How many educated workers do you wish for your economy? European targets, optimal public spending, and labor market impact By Therese REBIERE; Isabelle LEBON
  9. Estimating Labor Supply Disincentives of a Negative Income Tax: Some Results and Lessons from the Experiments By Robert Moffitt; Kenneth Kehrer
  10. Closing Routes to Retirement: How Do People Respond? By Johannes Geyer; Clara Welteke
  11. "Trump's Bait and Switch: Job Creation in the Midst of Welfare State Sabotage" By Pavlina R. Tcherneva
  12. Fiscal Policy and Growth By Saima Nawaz; Idrees Khawaja
  13. A Negative Income Tax Experiment By David Kershaw
  14. Taxing multinational enterprises as unitary firms By Picciotto, Sol
  15. Revisiting personal income tax in Latin America: Evolution and impact By Alberto Barreix; Juan Carlos Benítez; Miguel Pecho
  16. When do managers highlight their effective tax rate? By Flagmeier, Vanessa; Müller, Jens; Sureth-Sloane, Caren
  17. Inequality, redistribution and cultural integration in the Welfare State By Bisin, Alberto; Verdier, Thierry

  1. By: Keshab Raj Bhattarai; Jonathan Haughton; David Tuerck
    Abstract: Income and income inequality increased substantially in the UK during the industrial revolution. Income inequality was the worst around 1880. This triggered enactments of more egalitarian tax and transfer system and halved the income inequality by the 1960s. Inequality has risen again with fiscal system reforms in the last five decades. As the taxes and transfers affect different categories of households and firms differently a multi-household multisectoral DCGE model of the UK and the US are appropriate modelling frameworks for such analyses. Providing such analysis for fairer system of taxes, apparently missing from the existing literature, is the main contribution of this paper.By analysing solutions of a dynamic computable general equilibrium (DCGE) model it is shown how policies could be designed for the optimal equitable paths of UK economy in the 21st century. We also found replacing the existing taxes by fair taxes to be favourable for growth and distribution in the US. Whether the growth enhancing and inequality reducing objectives could be achieved in the long run depends on the type of labour-leisure and consumption saving choices of low as well as the high income households and changes in the pattern of use of capital or labour input by firms in response to the public policies that often aim on achieving higher rate of growth with greater equality of income and utility for all types of UK households. It is also clear from the model that tax-reforms designed to tackle short-run problem have very detrimental effects on long run growth and may not be helpful in reducing the inequality in the distribution of income. Thus there is a clear trade-off between growth and equality. The greater equality in income alone does not automatically guarantee greater welfare for everyone no matter what the configuration of the social welfare function is. The bottom line is that the levels of consumption and utility cannot grow when the economy is not growing.
    Keywords: UK and USA, General equilibrium modeling, Public finance
    Date: 2015–07–01
  2. By: Juergen Jung (Department of Economics, Towson University); Chung Tran (Research School of Economics, The Australian National University)
    Abstract: We study the optimal progressivity of income taxation in a Bewley-Grossman model of health capital accumulation where individuals are exposed to earnings and health risks over the lifecycle. We impose the U.S. tax and transfer system and calibrate the model to match U.S. data. We then optimize the progressivity of the income tax code. The optimal income tax system is more progressive than current U.S. income taxes with zero taxes at the lower end of the income distribution and a marginal tax rate of over 50 percent for income earners above US$ 200,000. The Suits index—a Gini coefficient for the income tax contribution by income—is around 0.53 and much higher than 0.17 in the U.S. benchmark tax system. Welfare gains from switching to the optimal tax system amount to over 5 percent of compensating consumption. Moreover, we find that the structure of the health insurance system affects the degree of optimal progressivity of the income tax system. The introduction of Affordable Care Act in 2010—a program that redistributes wealth from high income and healthy types, to low income and sicker types—reduces the optimal progressivity level of the income tax system. Finally, we demonstrate that the optimal tax system is sensitive to the parametric specification of the income tax function and the transfer policy.
    Keywords: Health risk, inequality, tax progressivity, Suits index, social insurance, optimal tax, general equilibrium.
    JEL: E62 H24 I13 D52
    Date: 2017–03
  3. By: Takumi Motoyama (Graduate School of Economics, Osaka University)
    Abstract: We consider fiscal sustainability by using an overlapping generations model with human capital accumulation (private and public education) and public debt. Based on this model, we explicitly show (i) the parameter region in which the economy cannot be fiscally sustainable for any initial endowment, and (ii) the threshold of initial endowment over (under) which the economy diverges (converges) to the steady state. Importantly, the threshold is neutral to the level of initial human capital. Further, we show the existence and uniqueness of the growth-maximizing level of each policy variable (i.e., the tax rate and public education/production ratio).
    Keywords: Human capital accumulation, Public education, Public debt, Fiscal sustainability
    JEL: E62 H52 H63 I28
    Date: 2017–03
  4. By: Verikios, George; Patron, Jodie; Gharibnavaz, Reza
    Abstract: We estimate the marginal excess burden of the GST and its components. Our results show that the GST is highly distortionary in its treatment of intermediate inputs and investment, but is efficient as applied to household consumption. We also estimate the general equilibrium effects of changes to the GST base and rate, and its removal from investment. The general equilibrium estimates support the marginal excess burden estimates. Our results suggest that the efficiency of the GST could be improved by broadening the consumption base or removing it from investment. Simply increasing the GST rate would be welfare decreasing.
    Keywords: computable general equilibrium, differential incidence, goods and services tax, marginal excess burden, tax reform, value-added tax.
    JEL: C68 D58 D61 H21 H22
    Date: 2017–03–01
  5. By: Gambacorta, Leonardo; Ricotti, Giacomo; Sundaresan, Suresh M; Wang, Zhenyu
    Abstract: This paper examines the effects of taxation on the liability structure of banks. We derive testable predictions from a dynamic model of optimal bank liability structure that incorporates bank runs, regulatory closure and endogenous default. Using the supervisory data provided by the Bank of Italy, we empirically test these predictions by exploiting exogenous variations of the Italian tax rates on productive activities (IRAP) across regions and over time (especially since the global financial crisis). We show that banks endogenously respond to a reduction in tax rates by reducing nondeposit liabilities more than deposits in addition to lowering leverage. The response on the asset side depends on the financial strength of the bank: well-capitalized banks respond to a reduction in tax rates by increasing their assets, but poorly-capitalized banks respond by cleaning up their balance sheet.
    Keywords: bank liability structure; corporate tax; leverage
    JEL: G21 G32 G38 H25
    Date: 2017–03
  6. By: Ciminelli, Gabriele; Ernst, Ekkehard; Giuliodori, Massimo; Merola, Rossana
    Abstract: We analyse the effects of tax-based consolidations on income inequality, output and labour market conditions for a sample of 16 OECD countries over the period 1978-2012 employing a panel vector autoregressive methodology. We find that tax-based consolidations reduce income inequality, but at the cost of weaker economic activity. However, tax composition does matter. We show that indirect taxes reduce income inequality by more than direct taxes, possibly due to the operation of a positive labour supply channel. Among indirect taxes, value added and sale taxes are the most successful tool for policy-makers to balance efficiency and equity. Finally, we show that tax-based consolidations reduce disposable income inequality via a decrease in market income disparities and an increase in government redistribution respectively in countries with a weaker and a stronger preference for redistribution.
    Keywords: Income distribution,Tax-based consolidation,Fiscal consolidation,Labour force participation,Tax composition
    JEL: E2 H2 O1
    Date: 2017
  7. By: Gábor Kátay; Kamil Galuščák
    Abstract: This paper investigates the extent to which cross-country differences in aggregate participation rates can be explained by divergence in tax-benefit systems. We take the example of two countries, the Czech Republic and Hungary, which – despite a lot of similarities – differ markedly in labour force participation rates. We use, for both countries, a very detailed, complex microsimulation model and perfectly comparable micro estimates of labour supply at the extensive margin (i.e. the participation decision) to quantify the portion of the divergence in the two countries’ participation rates explained by differences in their taxation and welfare benefit systems.we first replicate for Czech individual level data the labour supply estimation for Hungary presented in Benczúr et al. (2014). The two entirely comparable estimated equations for the Czech Republic and Hungary are then used to simulate how the aggregate participation rate would change in one country if it adopted the other country’s tax and social welfare system.Our results show that the estimated labour supply elasticities for the Czech Republic are very close to the results for Hungary, suggesting that, at least in this dimension, individual preferences are similar in the two countries. This holds true even for sub-populations depending on the level of education, gender and marital status: in both countries, lower educated people, the elderly and married women (of childbearing age) are the most responsive to tax and transfer changes. Second, the simulation results suggest that about one-half of the total difference in the participation rates of the 15–74 years old population can be explained by differences in the tax-benefit systems. The results are quasi-symmetric, meaning that if the Czech system was adopted, the Hungarian participation rate would increase by about the same number of percentage points that the Czech participation would decrease by if the Hungarian system were implemented. The highest responses are obtained for married women and women of childbearing age. This is related to the more generous maternity benefit system in place in Hungary as compared to the Czech Republic.
    Keywords: Czech Republic and Hungary, Labor market issues, Microsimulation models
    Date: 2015–07–01
  8. By: Therese REBIERE; Isabelle LEBON
    Abstract: This paper studies optimal taxation schemes of education in a search-matching model where the labor market is divided between a high-skill and a low-skill sector. Two public policy targets - maximizing the global employment level and optimizing the social surplus - are studied according to three different public taxation strategies. Using GAMS, we calibrate our model using evidences for fourteen European countries, and compare our results with the target from the Europe 2020 Agenda for higher education achievement. We show that, with the current labor market characteristics, the target decided by the governments seems compatible with the social surplus maximization objective in some countries while it is too high for other countries. Maximizing employment would imply, for all countries, higher educational spending than that required for the social surplus to reach its maximum.
    Keywords: 14 European Countries, Labor market issues, Tax policy
    Date: 2015–07–01
  9. By: Robert Moffitt; Kenneth Kehrer
    Abstract: Reviews the basic findings of the negative income tax experiments and discusses the modeling differences encountered in estimating the labor supply response to tax rates.
    Keywords: Negative Income Tax, National basic income, Graduated work incentive, Graduated tax.
    JEL: J I
  10. By: Johannes Geyer; Clara Welteke
    Abstract: We present quasi-experimental evidence on the employment effects of an unprecedented large increase in the early retirement age (ERA). Raising the ERA has the potential to extend contribution periods and to reduce the number of pension beneficiaries at the same time, if employment exits are successfully delayed. However, workers may not be able to work longer or may choose other social support programs as exit routes from employment. We study the effects of the ERA increase on employment and potential program substitution in a regression-discontinuity framework. Germany abolished an important early retirement program for women born after 1951, effectively raising the ERA for women by three years. We analyze the effects of this huge increase on employment, unemployment, disability pensions, and inactivity rates. Our results suggest that the reform increased both employment and unemployment rates of women age 60 and over. However, we do not find evidence for active program substitution from employment into alternative social support programs. Instead employed women remained employed and unemployed women remained unemployed. The results suggest an increase in inequality within the affected cohorts.
    Keywords: Retirement age, early retirement, regression discontinuity, pension reform, unemployment, labor supply, disability pension
    JEL: J14 J18 J22 J26
    Date: 2017
  11. By: Pavlina R. Tcherneva
    Abstract: President Trump's faux populism may deliver some immediate short-term benefits to the economy, masking the devastating long-term effects from his overall policy strategy. The latter can be termed "welfare state sabotage" and is a wholesale assault on essential public sector institutions and macroeconomic stabilization features that were built during the New Deal era and ushered in the "golden age" of the American economy. Starting in the late '70s, many of these institutions were significantly eroded by Republicans and Democrats alike, paving the way for the rise of Trump but paling in comparison with what is to come.
    Keywords: Manufacturing; Service Sector; Infrastructure; Full Employment; Inequality; Social Wages; Welfare State; Trickle-down Economics
    JEL: H J21 J38 L8 N12 N60 Z18
    Date: 2017–03
  12. By: Saima Nawaz; Idrees Khawaja
    Abstract: This study seeks to examine the impact of fiscal policy on growth while accounting the level of development and controlling for the state of institutions. A theoretical framework is developed to examine the impact of fiscal policy on economic growth while controlling for institutionsWe extend the augmented Solow growth model by assuming that technological advancement depends not only upon constant rate of technological progress (as envisaged in the neoclassical model) but also upon fiscal policy and the quality of institutions. This provides a framework to analyze the impact of both the fiscal policy and institutions on economic growth. The empirical investigation uses panel data of 56 countries over 1981-2010. We use fixed effects model and a dynamic panel based on the System Generalized Method of Moments (SYS-GMM).In sum, the disaggregated results suggest that effectiveness of fiscal policy in generating growth is function of the level of development of an economy. Typically, in developed countries more resources are allocated to the sectors considered productive while in developing economies resources are not only misallocated but are also characterized by rent seeking and leakages. This difference in resource allocation is responsible for the different impact that government expenditures cast on growth. The resource allocation in a country, among other things, would depend upon the quality of institutions.
    Keywords: 56 countries: Developed and Developing, Growth, Public finance
    Date: 2015–07–01
  13. By: David Kershaw
    Abstract: Would payments to those who earned less than a certain amount reduce their incentive to work? Initial results of an unusual test indicate no such effect.
    Keywords: Negative Income Tax, National basic income, Graduated work incentive, Graduated tax
    JEL: J I
  14. By: Picciotto, Sol
    Abstract: The international tax system needs a paradigm shift. The rules devised over 80 years ago treat the different parts of a multinational enterprise as if they were independent entities, although they also give national tax authorities powers to adjust the accounts of these entities. This creates a perverse incentive for multinationals to create ever more complex groups in order to minimise taxes, exploiting the various definitions of the residence of legal persons and the source of income. While states may attempt to combat these strategies, they also compete to offer tax incentives, many of which facilitate such techniques to undermine other countries’ taxes. Several alternative approaches have been identified, which start from the economic reality that multinationals operate as unitary firms. These include residence-based worldwide taxation, under which the ultimate home country of a multinational taxes its worldwide profits but with a credit for equivalent foreign taxes paid; a destination-based cash flow tax, which attributes the tax base to the country of ultimate sales to third parties; and unitary taxation with formulary apportionment, which apportions the firm’s consolidated profits according to factors reflecting its real presence in each country. This volume outlines the nature of the problem and discusses attempts to resolve it, including the recent G20/OECD project on base erosion and profit shifting (BEPS). It then explores unitary taxation with formulary apportionment. The contributions discuss how to move towards such a system starting from the current rules; the role of accounting in defining the consolidated tax base; lessons from the experience of existing formulary systems, especially in the USA; evidence from quantitative studies of tax base misalignment under current rules and the possible effects of different apportionment formulas; specific issues in the finance and extractive industries sectors; and the prospects for regional adoption.
    Keywords: Development Policy, Economic Development, Finance, Governance,
    Date: 2017
  15. By: Alberto Barreix (Inter-American Development Bank); Juan Carlos Benítez (OECD Development Centre); Miguel Pecho (Inter-American Center of Tax Administrations)
    Abstract: This study documents the process through which standard tax reliefs and tax allowances reduce the taxable base of the Personal Income Tax (PIT) in Latin American countries by using the models developed in Taxing Wages in Latin America and the Caribbean 2016. The theoretical estimations on the personal income tax are complemented with data from the tax administrations. The study finds that the PIT is progressive, but only paid by a small proportion of formal high-wage earning individuals. On average, more than 80% of the PIT is paid by the richest ten per cent of the population but at average effective rates below the region’s average statutory minimum tax schedule rate. The combination of these factors results in the PIT having a scant revenue-raising capacity and a meagre impact on income redistribution.
    Keywords: Personal income tax, tax deductions, tax exemptions, tax system, wage distribution
    JEL: D31 H24
    Date: 2017–03–30
  16. By: Flagmeier, Vanessa; Müller, Jens; Sureth-Sloane, Caren
    Abstract: We examine the disclosure of GAAP effective tax rate (ETR) information in firms' financial statements. Applying the theoretical underpinnings of Wagenhofer (1990) to a tax setting, we argue that firms face a tradeoff in their GAAP ETR disclosure decision. On the one hand, firms have incentives to increase GAAP ETR disclosure if the ratio has a condition that is favorable from an investor's perspective, expecting positive capital market reactions. On the other hand, the disclosure might draw tax auditors' and public attention to the GAAP ETR and result in proprietary costs in terms of additional tax payments or reputational damages. We empirically test the disclosure behavior by examining the relation between disclosure intensity and five different measures of favorable GAAP ETR conditions. First, we provide evidence that the annual report section in which most of the firms disclose GAAP ETR information is the management report, indicating that firms assign considerable relevance to the ratio. Second, we find a higher disclosure intensity if the GAAP ETR has a favorable condition, i.e. is decreasing or near the average ratio of firms in the same industry or size group. We do not find a significant relation to the disclosure level for smooth GAAP ETRs. Our findings indicate that firms assess the benefits of providing the favorable GAAP ETR information to be higher than the related costs. Documenting firms' GAAP ETR reporting behavior, we contribute to the tax disclosure literature by providing insights into possible disclosure incentives. Further, our results could increase awareness among investors to have a second look at the GAAP ETR if the disclosure intensity with respect to the ratio is low.
    Keywords: Effective Tax Rate,Disclosure,Proprietary Costs
    Date: 2017
  17. By: Bisin, Alberto; Verdier, Thierry
    Abstract: This paper constructs a simple theoretical political economy model to analyze the dynamic interactions between redistribution, public good provision and cultural integration of minority groups. Cultural differentiation erodes the support for general public good provision and vertical redistribution, reducing in turn the attractiveness of adoption of the mainstream culture by the minority groups. Our model shows the possibility for multiple politico-cultural steady state trajectories depending strongly on the initial degree of cultural differentiation in the society. An exogenous increase in income inequality is shown to increase the likelihood of multiple steady state trajectories. In a context with multiple minority groups, culltural fragmentation favors integration into the mainstream culture.
    Keywords: cultural integration; inequality; political economy; redistribution
    JEL: J13 J15 Z10
    Date: 2017–03

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