nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒04‒30
twelve papers chosen by
Thomas Andrén

  1. Taxing the Rich By Augustin Landin; Guillaume Plantin
  2. An Integrated Micro Data Base for Tax Analysis in Germany By Stefan Bach; Martin Beznoska; Viktor Steiner
  3. Fiscal policy, income redistribution and poverty reduction in low and middle income countries By Nora Lustig
  4. Optimal income taxation theory and principles of fairness By FLEURBAEY Marc; MANIQUET François
  5. Expenditure responses, policy interventions and heterogeneous welfare effects in Hungary during the 2000s By Zsombor Cseres-Gergely; Gyorgy Molnar; Tibor Szabo
  6. Jumping the welfare gap in designing public transfers By Simonovits Andras
  7. Politics, Not Economics, Ultimately Drives Inequality By Jon D. Wisman
  8. Public good provision and social loss under polarization By Ramón José Torregrosa Montaner
  9. The Capital Gains Tax: A Curse but Also a Blessing for Venture Capital Investment By Bock, Carolin; Watzinger, Martin
  10. The End of Cheap Talk About Poverty Reduction: The Cost of Closing the Poverty Gap While Maintaining Work Incentives By Diego Collado; Bea Cantillon; Karel Van den Bosch; Tim Goedemé; Dieter Vandelannoote
  11. Tax Potential and Tax Effort: An Empirical Estimation for Non-Resource Tax Revenue and VAT’s Revenue By MAIMOUNA DIAKITE; Jean-François BRUN
  12. The Impact of In-Work Benefits on Employment and Poverty By Dieter Vandelannoote; Gerlinde Verbist

  1. By: Augustin Landin (Toulouse School of Economics (TSE)); Guillaume Plantin (Département d'économie)
    Abstract: Affluent households can respond to taxation with means that are not economically viable for the rest of the population, such as sophisticated tax plans and international tax arbitrage. This article studies an economy in which an inequality-averse social planner faces agents who have access to a tax-avoidance technology with subadditive costs, and who can shape the risk profile of their income as they see fit. Subadditive avoidance costs imply that optimal taxation cannot be progressive at the top. This in turn may trigger excessive risk-taking. When the avoidance technology consists in costly migration between two countries that compete fiscally, we show that an endogenous increase in inequality due to risk-taking makes progressive taxation more fragile, which vindicates in turn risk-taking and can lead to equilibria with regressive tax rates at the top, and high migrations of wealth towards the smaller country.
    Keywords: Optimal taxation; Tax avoidance
    JEL: H21 H26
    Date: 2016–07
  2. By: Stefan Bach; Martin Beznoska; Viktor Steiner
    Abstract: This paper documents methodology underlying the construction of the integrated data base for our study on “Wer trägt die Steuerlast in Deutschland? - Verteilungswirkungen des deutschen Steuer- und Transfersystems” (Who bears the tax burden in Germany? – Distributional Analyses of the German tax and transfer system). Financial support from the Hans Böckler Stiftung for the project is gratefully acknowledged. The paper greatly benefited from comments by the members of the scientific advisory council of the project.
    Date: 2017
  3. By: Nora Lustig (Tulane University)
    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 pro-poor. 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: 2017–02
  4. By: FLEURBAEY Marc (Princeton University); MANIQUET François (Université catholique de Louvain, CORE, Belgium)
    Abstract: The achievements and limitations of the classical theory of optimal labor-income taxation based on social welfare functions are now well known. Even though utili-tarianism still dominates public economics, recent interest has arisen for broadening the normative approach and making room for fairness principles such as desert or responsibility. Fairness principles sometimes provide immediate recommendations about the relative weights to assign to various income ranges, but in general require a careful choice of utility representations embodying the relevant interpersonal com-parisons. The main message of this paper is that the traditional tool of welfare economics, the social welfare function framework, is exible enough to incorporate many approaches, from egalitarianism to libertarianism.
    Keywords: Optimal taxation, fair social orderings
    JEL: H21 D63
    Date: 2017–03–29
  5. By: Zsombor Cseres-Gergely (European Commission, Joint Research Centre and research fellow at Institute of Economics, Centre for Economic and Regional Studies of the Hungarian Academy of Sciences); Gyorgy Molnar (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences); Tibor Szabo (Credit Risk Modeler at Raiffeisen Bank)
    Abstract: VAT rates have changed multiple times and to a relatively great extent in Hungary during the past years. We use the resulting price changes in estimating the price- and income-elasticity of households’ expenditures. As a novelty, we introduce an interaction term in estimating the demand system and show that the own price elasticity of food is increasing with increasing production for own consumption. Based on the estimation results, we compute the average welfare effect of the changes and describe also its heterogeneity within the population. We find that the VAT-reforms in 2006 and 2009 have both decreased the welfare of those in the first income quintile. We also look at the welfare effect of multiple hypothetic reforms such as the decrease of the VAT rate of food and a decrease of utility prices as well as a subsidy to production for own consumption. We find that the best targeted measure is an income-transfer to the low-income unemployed either directly or through participation in the public works scheme.
    Keywords: QUAIDS model, household expenditures, consumer behaviour, compensating variation, simulation, welfare effect, production for own consumption
    JEL: D12 H20 H31
    Date: 2017–01
  6. By: Simonovits Andras (Institute of Economics, Research Centre for Economic and Regional Studies, Hungarian Academy of Sciences, also Mathematical Institute of Budapest University of Technology)
    Abstract: We consider three transfer models with a representative individual who discounts the utility of the merit good with respect to the standard one's. In each model, a paternalistic government taxes the consumer and transfers him additional merit goods in return. The private purchase of the merit goods is cheaper than the transfer. Even if the optimal transfer system is welfare superior to the transfer-free system, a system with much lower transfer may be inferior, therefore this welfare gap should be jumped. Various pension modelers (e.g. Feldstein, 1985; van Groezen, Leers and Meijdam, 2003) overlooked this problem and drew wrong conclusions.
    Keywords: transfers, pensions, taxes, social welfare, paternalism
    JEL: D10 H55 J13 J14 J18 J26
    Date: 2017–03
  7. By: Jon D. Wisman
    Abstract: Over the past 40 years, inequality has exploded in the U.S. and significantly increased in virtually all nations. Why? The current debate typically identifies the causes as economic, due to some combination of technological change, globalization, inadequate education, demographics, and most recently, Piketty’s claim that it is the rate of return on capital exceeding the growth rate. But to the extent true, these are proximate causes. They all take place within a political framework in which they could in principle be neutralized or reversed. Indeed, this mistake is itself political. It masks the true cause of inequality and presents it as if natural, due to the forces of progress, just as in pre-modern times it was the will of gods. By examining three broad distributional changes in modern times, this article demonstrates the dynamics by which inequality is a political phenomenon through and through. It places special emphasis on the role played by ideology -- politics’ most powerful instrument -- in making inequality appear as necessary.
    Keywords: Political power; Distribution; Legitimation; Ideology
    JEL: D63 B00 Z18 N3
    Date: 2017
  8. By: Ramón José Torregrosa Montaner (Universidad de Salamanca)
    Abstract: This paper considers a population divided into two significantly-sized groups regarding the preferences its members have about a single public good. The public good equilibrium amount is that of the majority group in such a way that it is far from the Pareto-efficient one. This allows us to characterize a social loss function, which depends on the inter-group heterogeneity and the relative size of each group, parameters which also compound the degree of polarization. Our main conclusion is that, in general, higher levels of polarization do not imply higher social losses. This happens whenever the higher polarization is associated with higher inter-group heterogeneity, and the change in the amount of the public good in equilibrium implied is low enough.
    Keywords: Public good, majority voting equilibrium, polarization
    JEL: D79 H41
    Date: 2017–03
  9. By: Bock, Carolin (TU Darmstadt); Watzinger, Martin (University of Munich)
    Abstract: Our study analyzes the effect of the capital gains tax on the individual investment decisions of venture capitalists. By doing so, we are able to study the decisions for a sample of 76,852 funding rounds in 32 countries from 2000 to 2012. Our results support the predictions of the theoretical model that higher capital gains tax rates are associated with fewer start-ups financed and a lower probability of receiving follow-up funding. However, the results concerning the effect on the probability of success of start-ups show that a higher tax burden is associated with a higher probability of eventual start-up success.
    Keywords: Venture Capital; Capital Gains Tax; Selection Effect; Follow-up Funding; Innovation;
    JEL: G24 H25 H32
    Date: 2017–04–26
  10. By: Diego Collado; Bea Cantillon; Karel Van den Bosch; Tim Goedemé; Dieter Vandelannoote
    Abstract: How can poverty reduction be improved and at what cost? Available evidence suggests that social investment strategies and employment policies are important but not sufficient. In order to reduce the number of people below the relative at-risk-of-poverty threshold of the EU, countries must develop not only effective employment policies but also ensure adequate social protection. This implies increasing social transfers for working and non-working households, while protecting work incentives. In this paper we show that this is not a cheap option. We calculate the hypothetical cost of closing the poverty gap while maintaining the existing average labour market participation incentives at the bottom of the income distribution. We do it in three of the most developed welfares states of the EU, representing different welfare regimes, namely Belgium, Denmark and the United Kingdom. Results show that this would require around two times the budget needed to just lift all disposable household incomes to the poverty threshold. The cost would obviously be lower in countries with smaller poverty gaps and with weaker participation incentives. Furthermore, the results suggest that for anti-poverty strategies to be effective other factors should be considered more carefully, including the drivers of rising inequalities in market incomes, and especially the downward pressures on low wages, as well as the most appropriate magnitude of financial work incentives.
    Date: 2017–04
  11. By: MAIMOUNA DIAKITE; Jean-François BRUN
    Abstract: A better assessment of non-resource tax potential and VAT’s tax potential independently using a more appropriate model with knowledge of the shortcomings of the previous methods used. Generalized Least Squares Estimators and Stochastic frontier Models The results show that Low income countries have higher tax effort along the period compared to Lower-middle and Upper-middle income countries. They also suggest that inefficiency in taxation depends more on policy decisions than on tax administration performance.
    Keywords: A large sample of developing countries , Public finance, Tax policy
    Date: 2016–07–04
  12. By: Dieter Vandelannoote; Gerlinde Verbist
    Abstract: This article studies the impact of design characteristics of in-work benefits on employment and poverty in an international comparative setting, taking account of both first and second order effects. We use the microsimulation model EUROMOD, which has been enriched with a discrete labour supply model in order to take account of labour supply reactions. The analysis is performed for four EU-member states: Belgium, Italy, Poland and Sweden. The results show that design characteristics matter substantially, though the specific effects differ in magnitude across countries, indicating there is no one-size-fits-all solution. Throughout the analysis, numerous trade-offs are uncovered: not only between employment and poverty goals, but also within employment incentives itself (extensive vs. intensive margin). Taking account of behavioral reactions attenuates the impact on poverty outcomes, signaling the importance of bringing these effects into the empirical analysis.
    Date: 2017–02

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