nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒05‒07
twenty-one papers chosen by
Thomas Andrén

  1. Productivity, Taxation and Evasion: An Analysis of the Determinants of the Informal Economy By Alessandro Di Nola; Georgi Kocharkov; Aleksandar Vasilev
  2. Tax Progressivity and Top Incomes: Evidence from Tax Reforms By Rubolino, Enrico; Waldenström, Daniel
  3. Mobility and the lifetime distributional impact of tax and transfer reforms By Peter Levell; Barra Roantree; Jonathan Shaw
  4. Trends and Gradients in Top Tax Elasticities: Cross-Country Evidence, 1900–2014 By Rubolino, Enrico; Waldenström, Daniel
  5. Corporate Tax Cuts: Examining the Record in Other Countries By Simeon Djankov
  6. How Do Unemployed Workers Behave Prior to Retirement? A Multi-State Multiple-Spell Approach By Gałecka-Burdziak, Ewa; Góra, Marek
  7. Skewness, Tax Progression, and Demand for Redistribution: Evidence from the UK By Pogorelskiy, Kirill; Traub, Stefan
  8. Towards neutral distribution taxes and vanishing tax effects in the European Union By Maier, Christoph; Schanz, Deborah
  9. Free childcare and parents’ labour supply: is more better? By Mike Brewer; Sarah Cattan; Claire Crawford; Birgitta Rabe
  10. Optimal Tax Routing : Network Analysis of FDI Diversion By van 't Riet, Maarten; Lejour, Arjen
  11. Closing Routes to Retirement: How Do People Respond? By Geyer, Johannes; Welteke, Clara
  12. Two decades of income inequality in Britain: the role of wages, household earnings and redistribution By Chris Belfield; Richard Blundell; Jonathan Cribb; Andrew Hood; Robert Joyce
  13. 35 Years of Reforms: A Panel Analysis of the Incidence of, and Employee and Employer Responses to, Social Security Contributions in the UK By Stuart Adam; David Phillips; Barra Roantree
  14. Do Rewards Work?: Evidence from the Randomization of Public Works By Paul Carrillo; Edgar Castro; Carlos Scartascini
  15. Design of optimal corrective taxes in the alcohol market By Rachel Griffith; Martin O'Connell; Kate Smith
  16. The Effect of Income on Subjective Well-Being: Evidence from the 2008 Economic Stimulus Tax Rebates By Marta Lachowska
  17. Capital Income Tax, Linear R&D Technology, and Economic Growth By Tenryu, Yohei
  18. Tax Policy for Great Society Programs: Tax Expenditure and the Failure of Comprehensive Tax Reform in the United States in 1969 By Seiichiro Mozumi
  19. Income Support Policies for the Working Poor By Marchal, Sarah; Marx, Ive; Verbist, Gerlinde
  20. Innovation dynamics and fiscal policy: Implications for growth, asset prices, and welfare By Donadelli, Michael; Grüning, Patrick
  21. The Policy Process of Environmental Taxation in Denmark By Shintaro Kurachi

  1. By: Alessandro Di Nola (University of Konstanz, Germany); Georgi Kocharkov (University of Konstanz, Germany); Aleksandar Vasilev (Department of Economics, American University in Bulgaria)
    Abstract: We evaluate the relative importance of labor productivity versus income taxes and social contributions for tax compliance in an economy with a large degree of informality. Empirical evidence points out that tax evasion in Europe happens through partially concealing wages and profits in formally registered enterprises. To this end, we build a model in which employeremployee pairs of heterogeneous productive capacities make joint decisions on the degree of tax evasion. The quantitative model takes as inputs the income tax structure and social contributions. The model is used to analyze the case of Bulgaria which has the largest informal economy in Europe. The estimation strategy relies on matching the empirical series for the size of the informal economy and other aggregate outcomes for 2000-2014. Our counterfactual experiments show that the most important factor for the changing size of the informal economy is labor productivity, which accounts for more than 75% of the change. The variation in corporate income tax accounts for the rest. Changes in personal income tax levels and progressivity are found not to be quantitatively relevant for tax evasion. We also characterize optimal taxation in 2014 with respect to minimizing tax evasion. The productive gains of imposing optimal taxes are small.
    Keywords: Informal economy, progressive taxation, tax evasion, flat tax reform
    JEL: H24 H25 H26 C63 E62 E65
    Date: 2017–04
  2. By: Rubolino, Enrico (Uppsala University); Waldenström, Daniel (Paris School of Economics)
    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: taxation, income inequality, tax policy
    JEL: D31 H21 H24 H26 H31 H76
    Date: 2017–03
  3. By: Peter Levell (Institute for Fiscal Studies and Institute for Fiscal Studies); Barra Roantree (Institute for Fiscal Studies and Institute for Fiscal Studies); Jonathan Shaw (Institute for Fiscal Studies and Institute for Fiscal Studies)
    Abstract: The distributional impact of proposed reforms plays a central role in public debates around tax and transfer policy. We show that accounting for realistic patterns of mobility in employment, earnings and household circumstances over the life-cycle greatly affects our assessment of the distributional effects of tax and transfer reforms. We focus on three reforms modelled in the UK context: (i) changes to out-of-work versus in-work benefits, (ii) adjustments to income tax rates, and (iii) reforms to indirect taxation. In all three cases, the long-run distributional impact differs to that implied by a standard crosssection analysis in important ways.
    Keywords: Mobility, tax, transfer reforms
    JEL: D31 H20 H24
    Date: 2016–09–09
  4. By: Rubolino, Enrico (Uppsala University); Waldenström, Daniel (Paris School of Economics)
    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: taxation, income inequality, economic history
    JEL: D31 H21 H24 H26 N40
    Date: 2017–03
  5. By: Simeon Djankov (Peterson Institute for International Economics)
    Abstract: At 35 percent, the United States has the highest statutory corporate income tax rate among advanced economies, and this high rate coexists with a number of large preferences and exceptions. Reform of the widely criticized corporate tax is among the top agenda items of the Trump administration and the Republican leadership of Congress, and even many Democrats say the time has come to revamp the tax to make US-based multinational corporations more competitive in the global economy. Djankov analyzes episodes of tax rate cuts in other advanced economies and finds that radical corporate tax cuts, of 15 or more percentage points, are rare, but modest cuts of about 10 percentage points are possible in normal economic conditions and practical to implement as they do not trigger large fiscal imbalances. He concludes that a US corporate income tax cut of 10 to 15 percentage points—from 35 percent to 20 to 25 percent at the federal level—would bring the US rate in line with the average rate (23 percent) among other advanced economies.
  6. By: Gałecka-Burdziak, Ewa (Warsaw School of Economics); Góra, Marek (Warsaw School of Economics)
    Abstract: We examine the behaviour of unemployed older workers up to five years prior to the point at which they can transition out of unemployment because they become eligible to receive pension benefits. We use a unique dataset covering the unemployment histories (longitudinal data) of individuals born between 1940 and 1965 who were registered with any of the public employment offices in Poland. Thus, we study a whole population of individuals who experienced this type of transition over the time period 1996-2015. We examine the transition from unemployment to retirement as a multi-year process. We analyse multiple unemployment spells, identify transition pathways, and look for patterns in these transitions. Moreover, we estimate a conditional risk set model (a stratified Cox model). Our research proves that being close to the point at which they are eligible to receive pension benefits leads individuals 'wait' to fulfil these eligibility criteria.
    Keywords: elder workers unemployment, retirement, transition pathways, multiple unemployment spells, recurrent event data, longitudinal analysis
    JEL: C14 C41 H55 J14 J22 J26 J64
    Date: 2017–03
  7. By: Pogorelskiy, Kirill (Department of Economics, University of Warwick); Traub, Stefan (Helmut-Schmidt-Universitat Hamburg, Germany)
    Abstract: We introduce a skewness-based approach to measure tax progression and demand for redistribution. Adapting a novel, quantile-based statistical measure of skewness to right-skewed income distributions, we uncover its political economy foundation, by simultaneously relating the same measure to the classical model of income redistribution due to Meltzer and Richard (1981), to the Prospect Of Upward Mobility (POUM) mechanism due to Benabou and Ok (2001), and to the progressivity of a tax schedule. In an empirical analysis of UK income distributions in 1979 - 2013, we find that skewness has increased over time, with the rich moving further away from the median. While the magnitude of the increase has remained small enough so that observed redistribution (or lack thereof ) could be consistent with POUM hypothesis, more recent periods show an increase in tax progression.
    Keywords: quantile skewness ; inequality ; voting over redistribution ; tax progression JEL classification numbers: D31 ; D63 ; H20 ; P16
    Date: 2017
  8. By: Maier, Christoph; Schanz, Deborah
    Abstract: The European Union (EU) has no explicit common income tax law. Nevertheless, Court of Justice decisions have driven EU member states to adopt more similar corporate tax systems, and thus, to align the tax treatment of corporate profit distributions - dividends and capital gains. This paper empirically analyzes the influence of the tax preferences of individual and corporate shareholders for the two corporate distribution types - dividends or capital gains - from 1990 to 2012. In the first years of the observation period, European tax systems have provided opposing tax advantages, where individual shareholders have preferred capital gains and corporate shareholders have preferred dividends. To account for these differences depending on the firm's shareholder structure, we derive firm-specific tax preferences for profit distributions. Our empirical analysis reveals that - in line with current literature - the firm-specific tax preferences indeed affect dividend payments. Moreover, we show that in contrast to our detailed study, a simplified approach to measure tax effects on distributions overestimates this influence. In subsequent years, as European Court of Justice decisions have indirectly aligned EU corporate tax systems, we find that tax preferences have converged to a great extent with the tendency to equal tax treatment of dividends and capital gains for both - individual and corporate - shareholder groups. In line with this development, we find that the association of tax preferences and distribution policies vanishes in the last years of the observation period. Our study implies that the EU common regulatory framework, even in the absence of explicit law, can affect corporate distribution decisions and foster neutral taxation of dividends and capital gains across EU member states.
    Keywords: tax preferences,dividends,capital gains,distributions,neutral taxation,corporate tax systems,European Union,European Court of Justice
    JEL: G30 G35 H24 H25
    Date: 2017
  9. By: Mike Brewer (Institute for Fiscal Studies and University of Essex); Sarah Cattan (Institute for Fiscal Studies and Institute for Fiscal Studies); Claire Crawford (Institute for Fiscal Studies); Birgitta Rabe (Institute for Fiscal Studies)
    Abstract: Despite the introduction of childcare subsidies in many countries, the cost of childcare is still thought to hinder parental employment. Many governments are considering increasing the generosity of their childcare subsidies, but the a priori effect of such a policy is ambiguous and little is known empirically about its likely impact. This paper compares the effects on parents’ labour supply of offering free part-time childcare and of expanding this offer to the whole school day in England using an empirical strategy which, unlike previous studies, exploits both date of birth discontinuities and panel data. We find that the provision of free part-time childcare has little, if any, causal impact on the labour market outcomes of mothers or fathers. Increasing the number of hours of free childcare to cover a full school day, however, leads to significant increases in the labour supply of mothers whose youngest child is eligible, with impacts emerging immediately and increasing over the months following entitlement.
    Keywords: Labour supply, childcare, school entry, difference-in-difference
    JEL: I21 J22
    Date: 2016–12–02
  10. By: van 't Riet, Maarten; Lejour, Arjen (Tilburg University, Center For Economic Research)
    Abstract: The international corporate tax system is considered as a network and, just like for transportation, ‘shortest’ paths are computed, minimizing tax payments for multinational enterprises when repatriating profits. We include corporate income tax rates, withholding taxes on dividends, double tax treaties and the double taxation relief methods. We find that treaty shopping leads to an average potential reduction of the tax burden on repatriated dividends of about 6 percentage points. Moreover, an indicator for centrality in the tax network identifies the United Kingdom, Luxembourg and the Netherlands, amongst others, as the most important conduit countries. Tax havens do not have a crucial role in treaty shopping. In the regression analysis we find that the centrality indicators are robustly significant explanatory variables for bilateral FDI stocks. This also holds for our treaty shopping indicator.
    Keywords: Corporate taxation; tax treaties; treaty shopping; tax havens; shortest path
    JEL: F23 H25 H26 H87
    Date: 2017
  11. By: Geyer, Johannes (DIW Berlin); Welteke, Clara (DIW Berlin)
    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: 2017–03
  12. By: Chris Belfield (Institute for Fiscal Studies and Institute for Fiscal Studies); Richard Blundell (Institute for Fiscal Studies and IFS and UCL); Jonathan Cribb (Institute for Fiscal Studies and Institute for Fiscal Studies); Andrew Hood (Institute for Fiscal Studies and Institute for Fiscal Studies); Robert Joyce (Institute for Fiscal Studies and Institute for Fiscal Studies)
    Abstract: We study earnings and income inequality in Britain over the past two decades, including the period of relatively “inclusive” growth from 1997-2004 and the Great Recession. We focus on the middle 90%, where trends have contrasted strongly with the “new inequality” at the very top. Household earnings inequality has risen, driven by male earnings – although a ‘catch-up’ of female earnings did hold down individual earnings inequality and reduce within-household inequality. Nevertheless, net household income inequality fell due to deliberate increases in redistribution, the tax and transfer system’s insurance role during the Great Recession, falling household worklessness, and rising pensioner incomes.
    Keywords: Inequality, labour market, household earnings, social security
    JEL: D31 E24 J3
    Date: 2017–01–13
  13. By: Stuart Adam; David Phillips; Barra Roantree
    Abstract: We exploit variation in National Insurance contributions (NICs) – the UK’s system of social security contributions – and a large panel dataset to examine the effects of 35 years of employee and employer NICs reforms on labour cost (gross earnings plus employer NICs), hours of work and labour cost per hour, both immediately (0–6 months) after reforms are implemented and in the slightly longer term (12–18 months). We consider assumptions under which the estimated coefficients on net-of-marginal and net-of-average tax rates in a panel regression can be interpreted as behavioural elasticities or as reflecting incidence. We find a compensated elasticity of taxable earnings with respect to the marginal rate of employee NICs of about 0.2–0.3, operating largely through hours of work, while that with respect to the marginal rate of employer NICs is not statistically significantly different from zero. We also find that labour cost falls by a much larger amount when the average rate of employer NICs is reduced than when the average rate of employee NICs is reduced, which is consistent with the economic incidence of NICs being strongly affected by its formal legal incidence. Estimates from the hours and hourly labour cost regressions provide further support to this interpretation of the findings, and also suggest the presence of substantial income effects – though also, after 1999, a puzzling effect of average employer NICs rates on hours of work. Each of these results remains true after 12–18 months (if anything, coefficients on lagged changes in NICs rates strengthen these findings), implying that any shifting of employer NICs changes to the individual employees concerned (and vice versa for employee NICs) does not begin over this time horizon. These results are similar to those found by Lehmann et al. (2013) for France but represent an extension of that work by considering hours as well as labour cost responses and second-year as well as immediate effects.
    JEL: H2 J2 J3
    Date: 2017–04
  14. By: Paul Carrillo; Edgar Castro; Carlos Scartascini
    Abstract: This paper evaluates the effect of positive inducements on tax behavior by exploiting a natural experiment in which a municipality of Argentina randomly selected 400 individuals among more than 72,000 taxpayers who had complied with payment of their property tax. These individuals were publicly recognized and awarded the construction of a sidewalk. Results indicate that: i) being selected in the lottery and publicly recognized by the government has a positive but not persistent effect on future compliance; ii) receiving the sidewalk has a large positive and persistent effect; iii) high and persistent spillover effects exist: some neighbors of those who receive the reward comply more too, and these effects can be even larger than the direct effects; and iv) there is no financial motive effect; i.e., people do not pay their taxes just to participate in the lottery. Recognition serves only as a short-term incentive, but the provision of a durable and visible good has more persistent and broader effects. These findings provide evidence on features that make a positive inducement more successful, whether for tax compliance or other policy purposes.
    Keywords: Public Works, Tax compliance, Public Services, Tax Rate, Public Policy, Tax incentives, public works, sidewalk renovation, sidewalk construction, reciprocity
    JEL: D62 H23 H42 C93
    Date: 2017–04
  15. By: Rachel Griffith (Institute for Fiscal Studies and IFS and Manchester); Martin O'Connell (Institute for Fiscal Studies); Kate Smith (Institute for Fiscal Studies)
    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 di fferentiated 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 fi rst best.
    Keywords: externality, corrective taxes, alcohol
    JEL: D12 D62 H21 H23
    Date: 2017–01–31
  16. By: Marta Lachowska (W.E. Upjohn Institute for Employment Research)
    Keywords: Subjective well-being, affect, income effect, quasi-experimental, instrumental variable
    JEL: I31 H31 E62
  17. By: Tenryu, Yohei
    Abstract: This paper shows that, in a R&D-based growth model in which vertical and horizontal innovations occur simultaneously, increasing the capital income tax leads to faster growth. For this result to hold, the production function for both vertical and horizontal innovations must have constant returns to scale.
    Keywords: Endogenous growth, Capital income tax, Vertical innovation, Horizontal Innovation, Scale effect.
    JEL: H20 J22 O31 O40
    Date: 2017–04–22
  18. By: Seiichiro Mozumi (Faculty of Economics, Keio University)
    Abstract: On December 30, 1969, Richard Nixon signed the Tax Reform Act of 1969-originally crafted by the Treasury Department during the presidency of Lyndon B. Johnson-into law. Some scholars who discussed the tax reform have evaluated that it succeeded in making the federal tax system somewhat fairer, simpler, and more equitable, while the others have pointed out that its legislative process exemplified the quandary of comprehensive tax reform; this paper analyzes and demonstrates the conflict regarding with the tax reform between tax reform proponents, such as the Treasury Department and Democrats in Congress, and the Johnson administration. The unenthusiastic Johnson administration, and particularly the CEA's argument of temporary tax surcharge based on "domesticated Keynesianism," delayed the proposal and legislation of the tax reform until the Nixon presidency, and doomed the ideal tax reform that the Treasury crafted on the basis of the concept of "tax expenditures." With greater support of the Johnson administration, the Tax Reform Act of 1969 could have not only made the federal tax system so much fairer and more equitable, but also restored the taxation -expenditure nexus the Kennedy-Johnson tax cut of 1964 had broken.
    Keywords: Comprehensive tax reform, tax expenditures, domesticated Keynesianism
    JEL: H2 N42
    Date: 2017–03–28
  19. By: Marchal, Sarah (University of Antwerp); Marx, Ive (University of Antwerp); Verbist, Gerlinde (University of Antwerp)
    Abstract: This paper asks what governments in the EU Member States and some US states are doing to support workers on low wages. Using model family simulations, we assess the policy measures currently in place to guarantee an adequate disposable income to working families, taking into account minimum wages, social security contributions, taxes and cash benefits. We show that despite increased efforts over the past decade, disposable incomes of certain types of minimum wage workers still fall well below the EU at-risk-of-poverty thresholds in many countries. Single earners with dependent children are especially at risk of poverty. We discuss the options for making progress.
    Keywords: direct income support, minimum wages, in-work benefits, in-work poverty
    JEL: I38 J88 H75
    Date: 2017–03
  20. By: Donadelli, Michael; Grüning, Patrick
    Abstract: We study the general equilibrium implications of different fiscal policies on macroeconomic quantities, asset prices, and welfare by utilizing two endogenous growth models. The expanding variety model features only homogeneous innovations by entrants. The Schumpeterian growth model features heterogeneous innovations: "incremental" innovations by incumbents and "radical" innovations by entrants. The government levies taxes on labor income and corporate profits and supplies subsidies to consumption, capital investment, and investments in research and development by entrants and, if applicable, incumbents. With these models at hand, we provide new insights on the interplay of innovation dynamics and fiscal policy.
    Keywords: endogenous growth,asset pricing,government,fiscal policy,heterogeneous innovation
    JEL: E22 G12 H20 I30 O30
    Date: 2017
  21. By: Shintaro Kurachi (Faculty of Economics, Keio University)
    Abstract: This study examines why the Danish CO2 tax system has remained a substantial tax break on industry. Denmark was part of the "First Wave" of countries to introduce a CO2 tax, as were the other Nordic countries, in the 1990s. However, the Nordic CO2 tax structure remained a substantial tax break and low tax burden, and was distorted because of the large tax break of the CO2 tax burden on industry. The Danish government tried to increase the burden of the CO2 tax on industry, but this attempt failed owing to problems of international competitiveness and the country's relationship with the EU and the other Nordic countries. The structure of the CO2 tax burden was very regressive, which meant it was too heavy for the low-middle income groups. Therefore, the center-right government introduced a "Tax Freeze" (Skattestoppet) in 2002, to avoid increasing the tax burden on the low-income groups. Nevertheless, the "Tax Freeze" failed to secure the flexibility of the tax policy, and accelerated the real estate bubble precipitated by the Lehman shock in 2008. In order to cover for the reduction in income tax since the 1990s, an environmental taxation was introduced, and then subsequently increased. However, it has become more difficult to acquire additional CO2 tax revenue, needed because of the reduction in income tax. The low-middle income groups did not support the increase in CO2 taxation, because it was not implemented to improve the environment, but rather to generate additional tax revenue. Therefore, the Danish CO2 tax system has recently been reconsidered.
    Keywords: Environmental Taxation, Carbon Taxation, Denmark, Corporate Taxation, Tax Freeze
    JEL: H23 Q58
    Date: 2017–03–31

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