nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒04‒09
seventeen papers chosen by
Thomas Andrén

  1. Trends and Gradients in Top Tax Elasticities: Cross-country Evidence, 1900–2014 By Rubolino, Enrico; Waldenström, Daniel
  2. Tax Progressivity and Top Incomes: Evidence from Tax Reforms By Rubolino, Enrico; Waldenström, Daniel
  3. Corporate Income Tax Reform in the EU By Jonathan Pycroft; María Teresa Álvarez-Martinez; Salvador Barrios; Maria Gesualdo; Dimitris Pontikakis
  4. Fiscal delegation in a monetary union: instrument assignment and stabilization properties By Henrique S. Basso; James Costain
  5. Enforce Tax Compliance, but Cautiously: The Role of Trust in Authorities and Power of Authorities By Tsikas, Stefanos A.
  6. Public Expenditures and Debt at the Subnational Level: Evidence of Fiscal Smoothing from Argentina By Martín Besfamille; N. Grosman; D. Jorrat; O. Manzano; P. Sanguinetti
  7. The Effect of the GST on Indian Growth By Eva Van Leemput; Ellen A. Wiencek
  8. The Effect of Sales-Tax Holidays on Consumer Spending By Aditya Aladangady; Shifrah Aron-Dine; Wendy E. Dunn; Laura Feiveson; Paul Lengermann; Claudia R. Sahm
  9. Taxation and housing markets with search frictions By Danilo Liberati; Michele Loberto
  10. Top-down vs.Bottom-up? Reconciling the effects of tax and transfer shocks on output By Sebastian Gechert; Christoph Paetz; Paloma Villanueva
  11. Procrastination and Property Tax Compliance: Evidence from a Field Experiment By Michael Chirico; Robert Inman; Charles Loeffler; John MacDonald; Holger Sieg
  12. Dynamic scoring of tax reforms in the European Union By Barrios Cobos, Salvador; Dolls, Mathias; Maftei, Anamaria; Peichl, Andreas; Riscado, Sara; Varga, Janos; Wittneben, Christian
  13. Comparing Welfare and Profit in Quantity and Price Competition within Stackelberg Mixed Duopolies By Hirose, Kosuke; Matsumura, Toshihiro
  14. To What Extent Can Long-Term Investment in Infrastructure Reduce Inequality? By E. Hooper; S. Peters; P. Pintus
  15. Endogenous Tax Audits and Taxpayer Assistance Services: Theory and Experiments By Christian A. Vossler; Scott M. Gilpatric
  16. Effects of Consumption Taxes on Real Exchange Rates and Trade Balances By Caroline Freund; Joseph E. Gagnon
  17. Market-preserving fiscal federalism in the European Monetary Union By van Riet, Ad

  1. By: Rubolino, Enrico (Uppsala University); Waldenström, Daniel (Research Institute of Industrial Economics (IFN))
    Abstract: We compile data spanning the period 1900–2014 and up to 30 countries to study long-run patterns in the tax elasticity of top incomes. Our results show that top tax elasticities vary tremendously over time; they were medium-to-low before 1950, virtually zero during the postwar era up to 1980 and have thereafter increased to unprecedented levels. We document a strong income gradient in tax response within the top, underlining the importance to study even small top groups separately. Several mechanisms are investigated. Tax-driven income shifting between wage and capital income is important in the very top. Wars, financial crises, and country-specific effects and trends have bearing on top elasticities whereas standard macroeconomic factors and indicators of “real responses” do not.
    Keywords: Economic history; Income inequality; Taxation
    JEL: D31 H21 H24 H26 N40
    Date: 2017–03–27
  2. By: Rubolino, Enrico (Uppsala University); Waldenström, Daniel (Research Institute of Industrial Economics (IFN))
    Abstract: We study the link between tax progressivity and top income shares. Using variation from large-scale Western tax reforms in the 1980s and 1990s and the novel synthetic control method, we find large and lasting boosting impacts on top income shares from the progressivity reductions. Effects are largest in the very top groups while earners in the bottom half of the top decile were almost unaffected by the reforms. Cuts in top marginal tax rates account for most of this outcome whereas reduced overall progressivity contributed less. Searching for mechanisms, real income responses as measured by growth in aggregate GDP per capita, registered patents and tax revenues were unaffected by the reforms. By contrast, tax avoidance behavior related to the management of capital incomes in the very income top appears to lie behind the observed effects.
    Keywords: Income inequality; Tax policy
    JEL: H21 H24 H26
    Date: 2017–03–27
  3. By: Jonathan Pycroft; María Teresa Álvarez-Martinez; Salvador Barrios; Maria Gesualdo; Dimitris Pontikakis
    Abstract: Corporate tax reforms in the EU are motivated by evidence that the current system is unfair and inefficient. Uncoordinated national tax regimes can feature tax loopholes and inconsistencies in the treatment of corporate profits across borders that give rise to strategic tax planning by multinational corporations. There is growing recognition of these issues and a renewed impetus to address them. Attempts to improve international coordination of national corporate tax policies are being undertaken through the OECD Base Erosion and Profit Shifting (BEPS) Project. In this paper, we evaluate the effects that changing the corporate income tax (CIT) rate may have on EU countries using a Computable General Equilibrium (CGE) model. The model captures the key features of the corporate tax regimes including investment decisions, loss compensation, multinational profit shifting and the debt-equity choice of firms. This is a multi-regional model including all 28 EU member states, the USA and Japan. It encapsulates the behaviour of all economic agents, reflecting both the direct and indirect effects of policy changes on macroeconomic variables, such as GDP, investment and employment. We simulate the impact of removing differences in corporate tax rates across EU countries and their effect on tax competition considering both uncoordinated and coordinated changes. For each of the three simulations, revenue neutrality is maintained by adjusting labour taxes to compensate for any revenue increase or shortfall caused. In addition, sensitivity analysis is performed, ensuring budget neutrality through adjusting transfer to pensioners or government expenditure. We first consider simulations where one country raises or lowers its rate in isolation. We simulate an upward adjustment in a low CIT tax economy, namely Ireland, up to the level of a higher tax economy, namely Germany. These two countries represent to polar examples since Ireland has the lowest statutory CIT rate in the EU and in Germany, which is the largest country in the Union, the CIT rate is among the highest. Second, we simulate the reverse case, where Germany reduces its rate to the Irish level. In each case, we observe the impact on the country affected as well as the international spillover effects. The third simulation supposes that all EU member states choose to harmonise their CIT rates at the EU average level. The first two simulations reveal that a tax shift from labour tax to corporate tax (Ireland) has a negative impact on GDP, whilst a tax shift from corporate tax to labour tax (Germany) has a positive impact on GDP. On the other hand, the impact on (after-tax) wages moves in the opposite direction. As anticipated, the German CIT rate simulation causes larger spillover effects, with all other countries' GDP being negatively affected to some degree. Nevertheless, the benefits to Germany are sufficient to slightly raise EU GDP by 0.19 percent. The third simulation, where CIT rates are harmonised across the EU, tends to suggest that a tax shift from corporate tax to labour tax raises GDP, whilst the opposite tax shift lowers GDP; this holds true for 22 out of 28 EU countries. The aggregate impact is a small fall in EU GDP of 0.13 percent. This result broadly holds for the alternative budget-neutral closures. A benefit of CIT rate harmonisation is that it removes much of the incentive to engage in profit shifting. We conclude that reforming corporate taxes can generate substantial responses within the implementing country as well as beyond its own borders. Harmonisation of CIT rates would likely involve winners and losers, and as such, may be best pursued gradually and as part of a broader package of corporate tax reform.
    Keywords: European Union, Tax policy, General equilibrium modeling
    Date: 2016–07–04
  4. By: Henrique S. Basso (Banco de España); James Costain (Banco de España)
    Abstract: Motivated by the failure of fiscal rules to eliminate deficit bias in the euro area, this paper analyzes an alternative policy regime in which each Member State government delegates at least one fiscal instrument to an independent authority with a mandate to avoid excessive debt. Other fiscal decisions remain in the hands of member governments, including the allocation of spending across different public goods, and the composition of taxation. We study the short-and long-run properties of dynamic games representing different institutional configurations in a monetary union. Delegation of budget balance responsibilities to a national or union-wide fiscal authority implies large long-run welfare gains due to much lower steady-state debt. The presence of the fiscal authority also reduces the welfare cost of fluctuations in the demand for public spending, in spite of the fact that the authority imposes considerable “austerity” when it responds to fi scal shocks.
    Keywords: independent fiscal authority, delegation, decentralization, monetary union, sovereign debt
    JEL: E61 E62 F41 H63
    Date: 2017–03
  5. By: Tsikas, Stefanos A.
    Abstract: The "Slippery Slope Framework" hypothesizes that (an individual's) tax compliance is determined by both the tax authority's powerfulness and its trustworthiness, and that the two dimensions moderate each other. By employing a within-country fixed effects analysis for 25 European countries, this paper tests the conjecture that a slippery slope exists also on the aggregate level. Results show that both trust and power are positively correlated with higher tax compliance. Trust and power also moderate each other: the lower trust, the greater the compliance-increasing impact of power. However, the positive effect decreases with increasing coercion. Strong deterrence policies may eventually damage tax compliance.
    Keywords: Tax compliance; Slippery Slope Framework; trust; power; institutions
    JEL: E62 H26 H30
    Date: 2017–03
  6. By: Martín Besfamille; N. Grosman; D. Jorrat; O. Manzano; P. Sanguinetti
    Abstract: This paper uses the particular features of the tax-sharing regime Coparticipación Federal de Impuestos and the fact that some provinces earn hydrocarbon royalties to investigate public expenditures and debt at the subnational level in Argentina. We obtain that facing a one peso increase in intergovernmental transfers, provinces spend on average 36 cents in public expenditures with no changes in public debt. On the other hand, when royalties increase one peso, 59 cents are used to pay back public debt while public expenditures are not affected. These results, which are robust to many different specifications of the basic regressions, suggest a non-negligeable expenditure/debt smoothing behavior of Argentine provinces.
    JEL: C3 E62 H72 H77
    Date: 2017
  7. By: Eva Van Leemput; Ellen A. Wiencek
    Abstract: This note first documents India's current tax system and describes the changes approved under the new GST legislation. Second, it analyzes the impact of the new GST on Indian GDP and welfare through the impact on domestic and international trade. Finally, this note examines the sensitivity of the growth and welfare outcomes under an alternative scenario of the GST bill.
    Date: 2017–03–24
  8. By: Aditya Aladangady; Shifrah Aron-Dine; Wendy E. Dunn; Laura Feiveson; Paul Lengermann; Claudia R. Sahm
    Abstract: Over the past decade, many U.S. states have enacted policies that temporarily exempt consumer purchases of certain goods from state sales taxes. In this note, we investigate whether the pre-announced sales-tax holidays noticeably alter the spending behavior of consumers. Specifically, we investigate whether there are shifts in the level and/or composition of consumer spending before, during, and after these sales-tax holidays.
    Date: 2017–03–24
  9. By: Danilo Liberati (Bank of Italy); Michele Loberto (Bank of Italy)
    Abstract: Housing taxation is an important policy instrument that shapes households’ choices about homeownership and renting as well as the evolution of the housing market. We study the effects of housing taxation in a model with search and matching frictions in the property market and a competitive rental market. We show a new transmission channel for a housing tax reform that works through a ‘shifting’ effect from landlords to tenants. We calibrate the model in order to estimate the long-run effects of the recent Italian housing market taxation reforms and the extent of property tax capitalization on house prices. We show that property taxation on owner-occupied dwellings has a negative effect on property and rental prices, whereas taxes on second homes have opposite qualitative effects. The simultaneous increase in both these instruments may mitigate the dynamics of prices and rents as well as the change in the ratio between the share of owners and renters, leading to a partial capitalization taxation on prices.
    Keywords: housing market, matching, property taxation
    JEL: R21 R31 E62
    Date: 2017–03
  10. By: Sebastian Gechert (Macroeconomic Policy Institute (IMK)); Christoph Paetz (Macroeconomic Policy Institute (IMK)); Paloma Villanueva (Banco de España)
    Abstract: Using the bottom-up approach of Romer and Romer (2010), we construct a narrative dataset of net-revenue shocks for Germany by extending the tax shock series of Hayo and Uhl (2014) and coding a shock series for social security contributions, benefits and transfers. We estimate the multiplier effects of shocks to net revenues, taxes, social security contributions, benefits and transfers in a proxy SVAR framework [Mertens and Ravn (2013)] and compare them with the top-down identification [Blanchard and Perotti (2002)]. We find multiplier effects of net-revenue components between 0 and 1 for both approaches. These estimates are comparably low and we investigate the differences.
    Keywords: fiscal shock identification, fiscal multipliers, revenue elasticities
    JEL: E62 H20 H30
    Date: 2017–03
  11. By: Michael Chirico; Robert Inman; Charles Loeffler; John MacDonald; Holger Sieg
    Abstract: Municipal governments commonly confront problems with property tax collection. We model tardy taxpayers as procrastinators that have a present bias. Late payments arise due to lack of salience, lack of deterrence or lack of tax morale. To test the importance of the different theoretical explanations, we developed and implemented a randomized controlled experiment conducted with the City of Philadelphia. The structure of the experiment allows us to identify the relative importance of the three key sets of parameters of our model. We find that lack of salience and lack of deterrence are key components of non-compliance behavior.
    JEL: H2 H3 H7
    Date: 2017–03
  12. By: Barrios Cobos, Salvador; Dolls, Mathias; Maftei, Anamaria; Peichl, Andreas; Riscado, Sara; Varga, Janos; Wittneben, Christian
    Abstract: In this paper, we present the first dynamic scoring exercise linking a multi-country microsimulation and DSGE models for all countries of the European Union. We illustrate our novel methodology analysing a hypothetical tax reform for Belgium. We then evaluate real tax reforms in Italy and Poland. Our approach takes into account the feedback effects resulting from adjustments in the labor market and the economy-wide reaction to the tax policy changes. Our results suggest that accounting for the behavioral reaction and macroeconomic feedback to tax policy changes enriches the tax reforms' analysis, by increasing the accuracy of the direct fiscal and distributional impact assessment provided by the microsimulation model for the tax reforms considered. Our results are in line with previous dynamic scoring exercises, showing that most tax reforms entail relatively smaller feedback effects in terms of the labor tax revenues for tax cuts benefiting workers, compared with the ones granted to firms.
    Date: 2017
  13. By: Hirose, Kosuke; Matsumura, Toshihiro
    Abstract: We compare welfare and profits under price and quantity competition in mixed duopolies, wherein a state-owned public firm competes against a private firm. It has been shown that price competition yields larger profit for the private firm and greater welfare if the two firms move simultaneously, regardless of whether the private firm is domestic or foreign. We investigate welfare and profit rankings under Stackelberg competition. Under public leadership, the profit and welfare rankings have common features with the simultaneous-move game, regardless of the nationality of private firms. By contrast, under private leadership, the result depends on the nationality of the private firm. When the private firm is domestic, welfare is greater under quantity competition, while the result is reversed when the private firm is foreign. However, regardless of nationality, private firms earn more under price competition. Introducing the nonnegative profit constraint in the public firm improves welfare and increases the private firm's profit, and price competition yields a higher profit for private firms regardless of nationality and which firm is the leader. However, this constraint affects the welfare ranking. Under private leadership, quantity competition yields greater welfare regardless of the nationality of the private firm. These results indicate that profit ranking is fairly robust to the time structure in mixed Stackelberg duopolies, but welfare ranking is not.
    Keywords: public leadership; private leadership; mixed markets; Cournot-Bertrand comparison
    JEL: H42 H44 L13 L32
    Date: 2017–03–20
  14. By: E. Hooper; S. Peters; P. Pintus
    Abstract: By reviewing US state-level panel data on infrastructure spending and on per capita income inequality from 1950 to 2010, this paper sets out to test whether there is an empirical link between infrastructure and inequality. Our main result, obtained from panel regressions with both state and time fixed effects, shows that highways and higher education spending growth in a given decade correlates negatively with Gini indices at the end of the decade. Such a finding suggests a causal effect from growth in infrastructure spending to a reduction in inequality, through better access to job and education opportunities. More significantly, this relationship is stronger with inequality at the bottom 40 per cent of the income distribution. In addition, infrastructure expenditures on highways are shown to be more effective at reducing inequality. A counterfactual experiment reveals which US states ended up with a significantly higher bottom Gini coefficient in 2010 that is attributed to underinvestment in infrastructure over the first decade of the 21st century. From a policy making perspective, this paper aims to present innovations in finance for infrastructure investments, for the US, other industrially advanced countries and also for developing economies.
    Keywords: Public Infrastructure, Education, Highways, Income Inequality, US State Panel Data, Fixed Effects Models.
    JEL: C23 D31 H72 I24 O51
    Date: 2017
  15. By: Christian A. Vossler (Department of Economics, University of Tennessee); Scott M. Gilpatric (Department of Economics, University of Tennessee)
    Abstract: In recent years there has been a sharp rise in the information available to individual income taxpayers, such as through tax preparation software provided by third parties and support available by tax agencies, although the effects of this information on tax reporting is not well understood. Within a setting characterized by an endogenous audit process and taxpayer uncertainty, this study uses theory and laboratory experiments to investigate the effects of taxpayer assistance services that better inform taxpayers about their tax liability and the audit process. The endogenous audit rule we study is simple, yet relative to existing work is more likely to characterize the actual incentives facing taxpayers. Among our findings, and in contrast to the case of purely random audits, in theory the effect of information services on tax underreporting is ambiguous, and we find support empirically for increased tax underreporting even in a setting where theory predicts the opposite. When services provide better information on both liability and the audit process, audit information is more salient to participants, negating the strong effects observed when only liability information is provided.
    Keywords: individual income tax; taxpayer assistance services; endogenous audits; tax reporting and enforcement; experimental methods
    JEL: C91 D8 H24 H26 H83
    Date: 2017–03
  16. By: Caroline Freund (Peterson Institute for International Economics); Joseph E. Gagnon (Peterson Institute for International Economics)
    Abstract: This paper examines the effects of border-adjusted consumption taxes (mainly value added taxes or VATs) in a sample of 34 advanced economies from 1970 through 2015. We find that the real exchange rate tends to rise by the full amount of any consumption tax increase, with little effect on the current account balance and modest offsetting effects on the trade and income balances. Case studies suggest that adjustment comes initially through prices. We note that the border-adjusted cash flow tax of the House Republicans differs in important ways from consumption taxes used in our study, which raises the possibility of a slower adjustment process with temporarily larger trade effects.
    Keywords: VAT, border tax adjustment, exchange rate adjustment, current account adjustment
    JEL: F31 F32 H20
    Date: 2017–04
  17. By: van Riet, Ad
    Abstract: Responding to the euro crisis, European leaders have put in place an enhanced economic and financial governance framework for the euro area, including the main pillars of a banking union, while they have initiated work on a capital markets union. This should more effectively secure sound national macroeconomic and fiscal policies, a healthy financial sector and the stability of the euro. This paper poses the question whether the status quo of half-way political integration is sufficient to safeguard the cohesion and integrity of the euro area. National governments still have considerable leeway to circumvent the “hard” budget constraint and the strong market competition implied by the euro area’s “holy trinity” (one market, one currency and one monetary policy). For example, they might target captive sovereign debt markets or take protectionist measures. This economic nationalism would entrench the crisis-related fragmentation of the single market and frustrate the efficient functioning of the monetary union. A higher level of market-preserving fiscal federalism could prevent member countries from encroaching on markets and foster sustainable economic convergence towards an optimal currency area.
    Keywords: European Monetary Union, monetary policy trilemma, protectionism, market fragmentation, fiscal federalism
    JEL: E6 F33 F4 H7
    Date: 2015–10–30

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