nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒06‒04
ten papers chosen by
Thomas Andrén

  1. Optimal income taxation with labor supply responses at two margins: When is an Earned Income Tax Credit optimal? By Emanuel Hansen
  2. What are the Costs and Benefits of Social Security Investing in Equities? By Gary Burtless; Anqi Chen; Wenliang Hou; Alicia H. Munnell
  3. Modelling corporate tax reform in the EU: New calibration and simulations with the CORTAX model By Joint Research Center of the European Commission - IPTS
  4. Taxing and Subsidizing Foreign Investors By Sharma, Rishi
  5. The output effects of tax changes: narrative evidence from Spain By Paula Gil; Francisco Martí; Richard Morris; Javier J. Pérez; Roberto Ramos
  6. Property tax autonomy and tax mimicking in major metropolitan areas in Poland By Agnieszka Malkowska; Agnieszka Telega; Michal Gluszak; Bartlomiej Marona
  7. The effect of investing abroad on investment at home: On the role of technology, tax savings, and internal capital markets By Goldbach, Stefan; Nagengast, Arne J.; Steinmüller, Elias; Wamser, Georg
  8. Happiness and Public Expenditure: Evidence from a panel analysis By KASMAOUI, Kamal; BOURHABA, Othmane
  9. Tax Uncertainty: Evidence and Policy Responses By Ernesto Zangari; Antonella Caiumi; Thomas Hemmelgarn
  10. Social Security and Total Replacement Rates in Disability and Retirement By Mashfiqur R. Khan; Matthew S. Rutledge; Geoffrey T. Sanzenbacher

  1. By: Emanuel Hansen (University of Cologne)
    Abstract: This paper studies optimal non-linear income taxation in an empirically plausible model with labor supply responses at the intensive (hours, effort) and the extensive (participation) margin. In this model, redistributive taxation gives rise to a previously neglected trade-off between two aspects of effciency: To reduce the deadweight loss from distortions at the extensive margin, the social planner has to increase distortions at the intensive margin and vice versa. Due to this trade-off, minimizing the overall deadweight loss requires to distort labor supply by low-skill workers upwards at both margins. Building on these insights, the paper is the first to provide conditions under which social welfare is maximized by an Earned Income Tax Credit with negative marginal taxes and negative participation taxes at low income levels.
    Keywords: Optimal income taxation, Extensive margin, Intensive margin
    JEL: H21 H23 D82
    Date: 2017–05
  2. By: Gary Burtless; Anqi Chen; Wenliang Hou; Alicia H. Munnell
    Abstract: Policymakers have long known that the retirement of the baby boom generation would produce significant deficits for the Social Security program. Restoring balance will require raising taxes, reducing benefits, or both. Some observers argue that shifting a portion of the Social Security trust fund from bonds to stocks, as part of a comprehensive reform package, could reduce the size of the required tax increases or benefit cuts. Other countries, such as Canada and Japan, invest a portion of their social security assets in equities, so precedents exist. Equity investments, however, would expose the program to greater financial risk and, potentially, greater political risk. This brief, based on a recent paper, assesses the costs and benefits of investing in equities. The discussion proceeds as follows. The first section provides background on the debate over investing trust fund reserves in equities. The second section investigates how investing in equities would have affected the finances of Social Security if the policy had been adopted in the past and if the policy were adopted today as part of a package to restore solvency over the next 75 years. It also includes a welfare analysis to address the contention that people will not value lower taxes in good times as much as they will dislike tax hikes in bad times. The third section addresses the non-financial issues associated with equity investing, such as the impact on capital markets and corporate governance and how to account for the possibility of higher expected returns without giving the impression that the government could solve all its problems simply by selling bonds and buying stocks. The final section concludes that both retrospective and prospective analyses suggest that investing a portion of the Social Security trust fund in equities would improve its finances; little evidence exists that trust fund equity investments would disrupt the stock market; equity investments could be structured to avoid government interference with capital markets or corporate decision making; and accounting for returns on a risk-adjusted basis would avoid the appearance of a free lunch.
    Date: 2017–05
  3. By: Joint Research Center of the European Commission - IPTS
    Abstract: This report investigates the economic impact of the European Commission proposal for a common corporate tax base (CCTB) and a common consolidated corporate tax base with formula apportionment (CCCTB) within the EU. Furthermore, on top of the common base, it considers proposals to reduce the debt bias in corporate taxation. To do so, we employ an applied general equilibrium model (CORTAX) covering all EU Member States, featuring different firm types and modelling many key features of corporate tax regimes, including multinational profit shifting, investment decisions, loss compensation and the debt-equity choice of firms.
    Keywords: corporate taxation, CGEM, debt-bias, European Union
    JEL: H25 H26 H68 H87 C68
    Date: 2016–10
  4. By: Sharma, Rishi (Department of Economics, Colgate University)
    Abstract: Many countries impose taxes on foreign investors while also having in place targeted subsidies and tax incentives that are designed to attract them. This paper shows that such a policy can be optimal from the standpoint of a host country. The government has an incentive to tax inframarginal firms because they are relatively immobile. It also has an incentive to subsidize marginal firms because the economic activity generated by such a subsidy can increase domestic wages in excess of the fiscal cost of the subsidy. These tax and subsidy policies improve host country welfare at the expense of foreigners. This analysis is thus able to provide an explanation for why tax coordination efforts can simultaneously entail reduced taxes and subsidies on foreign firms.
    Keywords: international taxation, foreign direct investment, firm heterogeneity, tax competition
    JEL: H87 H25 F23
    Date: 2016–01–01
  5. By: Paula Gil (Universidad Complutense de Madrid); Francisco Martí (Banco de España); Richard Morris (European Central Bank); Javier J. Pérez (Banco de España); Roberto Ramos (Banco de España)
    Abstract: This paper estimates the GDP impact of legislated tax changes in Spain using a newly constructed narrative record for the period 1986-2015. Our baseline estimates suggest that a 1% of GDP increase in exogenous taxes depresses output by around 1.3% after one year, this negative effect fading away at more distant horizons. We also find that the effect of changes in indirect taxes are larger and that, following a tax increase, investment reacts more than consumption. Overall, our set of estimates is consistent with negative output effects triggered by tax increases, yet the quantitative effects are subject to non-negligible uncertainty that is refected in wide confidence bands, in line with the extant literature for other countries.
    Keywords: tax shocks, narrative record, fiscal policy, GDP growth
    JEL: E32 E62 H20
    Date: 2017–05
  6. By: Agnieszka Malkowska (Cracow University of Economics, Poland); Agnieszka Telega (Cracow University of Economics, Poland); Michal Gluszak (Cracow University of Economics, Poland); Bartlomiej Marona (Cracow University of Economics, Poland)
    Abstract: Research background: Real estate and urban economics literature is abundant in studies discussing various types of property taxes and their characteristics. Growing area of research focused on tax equity, tax competition, and tax mimicking. Recently, due to substantial developments in spatial and regional economics more attention was drawn to spatial effects. Empirical results are focused on spatial interaction and diffusion effects, hierarchies of place and spatial spillovers. Property tax system in Poland differs from those utilized in the majority of developed countries. As a consequence, property tax policy at local government level (including tax competition and tax mimicking effects) in Poland can differ substantially from those found in previous research in US and other European countries. There are few studies addressing the problem of tax competition and tax mimicking in Poland from empirical perspective. Purpose of the article: In the article we explore spatial dependences in property taxation. We identify clustering or dispersion of high and low values of the tax rates within major metropolitan areas in Poland. The effects can indicate presence of tax mimicking among municipalities in given metropolitan areas. Methodology/methods: We analyze the panel data from 304 municipalities in 10 metropolitan areas in Poland from year 2007 to 2016. The data covers four property tax rates: (1) on residential buildings (2) on buildings used for business purpose (3) on land used for business purpose (4) on land for other uses. To explore spatial distribution of rates we used global and local spatial autocorrelation indicators (Moran’s I statistic and LISA). Findings: The results suggest the presence of spatial correlation within metropolitan areas. We also found significant differences between metropolitan areas. The results of the study fill the gap in empirical research concerning property tax mimicking in Poland.
    Keywords: tax autonomy; property taxation; tax mimicking; spatial interdependence; Poland
    JEL: H2 H71 R5
    Date: 2017–05
  7. By: Goldbach, Stefan; Nagengast, Arne J.; Steinmüller, Elias; Wamser, Georg
    Abstract: This paper examines the relationship between foreign and domestic investment activity of multinational enterprises. The empirical analysis is based on micro data of German firms and their operations at home and abroad, including information on investment in fixed assets. The empirical approach, which rests upon extensive and intensive margin variation, is shown to produce very robust results. These suggest a positive relationship between foreign and home investment in real capital. This positive effect seems to be mainly related to additional opportunities for tax planning and better access to financing capital. In contrast, we do not find evidence that improved production processes and technology upgrading cause the positive effect on investment at home. Our empirical approach allows us to distinguish between an extensive and intensive margin effect: setting up a new foreign affiliate leads to an immediate positive effect of about EUR 450,000 additional investment; the investment elasticity at the intensive margin is estimated to be approximately 0.13.
    Keywords: Outward FDI,Multinational Firms,Domestic Investment,Corporate Taxes,Internal Capital Markets,Technology
    JEL: F23 F61 H25 L23
    Date: 2017
  8. By: KASMAOUI, Kamal; BOURHABA, Othmane
    Abstract: The present study examines empirically the relationship between Happiness and public spending. We use a panel data from 2006 to 2015 for about 132 countries. We first estimated a Pooled, fixed effect and finally a GMM model to deal with the endogeneity problem. Our main findings suggest, first, that high levels of public expenditure are associated with greater Happiness around the world. Second, as expected, social support, Healthy life expectancy, Freedom to make life choices and confidence in national government contribute significantly to Happiness.
    Keywords: Happiness, Public choice, Government spending, GMM
    JEL: H11 H40 H50 I31
    Date: 2017–05–23
  9. By: Ernesto Zangari (Banca d'Italia); Antonella Caiumi (European Commission); Thomas Hemmelgarn (European Commission)
    Abstract: Tax uncertainty typically derives from institutional flaws of the tax policy process and unclear tax rules at the domestic level. At the international level tax uncertainty has its roots in the lack of tax coordination and cooperation between countries, as well as in the increased globalization and the emergence of new business models. Uncertainty may have negative effects on investment, trade and compliance. In this paper, we discuss the main sources of tax uncertainty, review the economic and empirical literature on the effects of tax uncertainty, and examine the policy measures to tackle the issue at the domestic level and the recent policy initiatives at the international level, with a focus on the EU. This survey concludes that to improve tax certainty policy makers should focus their attention on planning tax reforms and tax changes properly, clearly communicating their content and timing, and more generally establishing a structured approach in managing the tax policy process. At the international level, the best policy answers are boosting the cooperation on tax matters, developing common approaches to fighting aggressive tax planning, as well as agreeing on a clear and sustainable distribution of tax revenues for cross-border investment and more generally on a transparent and non-harmful tax competition.
    Keywords: taxation, European Union, corporate taxation, uncertainty, investment, tax avoidance
    JEL: H20 H25 H26
    Date: 2017–03
  10. By: Mashfiqur R. Khan; Matthew S. Rutledge; Geoffrey T. Sanzenbacher
    Abstract: Social Security provides higher replacement rates to disability insurance beneficiaries than retired beneficiaries. This fact reflects two factors: 1) Disability Insurance (SSDI) beneficiaries have lower career earnings, and Social Security benefits are progressive; and 2) SSDI benefits are not reduced for claiming early. This project uses the 1992-2010 waves of the Health and Retirement Study (HRS) linked to Social Security Administration earnings records to decompose the differences between the Social Security replacement rates for retired worker and SSDI beneficiaries into these two factors. The project also examines how the total replacement rate – which accounts for other sources of income in addition to Social Security – differs between retirees and SSDI beneficiaries to capture the difference in overall retirement security between the two groups. The results indicate that about half of the 10-percentage-point advantage in Social Security replacement rates for SSDI beneficiaries is due to the actuarial adjustment applied to retirement benefits, implying that career earnings are not that different between retired workers and SSDI beneficiaries. But total replacement rates are substantially lower for SSDI beneficiaries, which indicates that, despite Social Security’s vital role in providing a reliable income source, SSDI beneficiaries have much lower post-career well-being than retired workers.
    Date: 2017–05

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