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on Public Economics |
| By: | Gilbert Mbara (Group for Research in Applied Economics (GRAPE)); Ryszard Kokoszczynski (University of Warsaw; Narodowy Bank Polski); Joanna Tyrowicz (Group for Research in Applied Economics (GRAPE); University of Warsaw) |
| Abstract: | We develop a dynamic general equilibrium model in which firms may evade the employer contribution component of social security taxes by offering some workers "secondary contracts". When calibrated, the model yields estimates of secondary labor market participation consistent with empirical evidence for the EU14 countries and the US. We investigate the optimal mix of the avoidable and unavoidable components of labor taxes and analyze the fiscal and macroeconomic effects of bringing the composition to the welfare optimum. We find that partial labor tax evasion makes tax revenues more elastic, but full tax compliance need not be a welfare enhancing policy mix. |
| Keywords: | Laffer curve, tax evasion, labor market duality |
| JEL: | H2 H26 H3 E13 E26 J81 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:fme:wpaper:16&r=pbe |
| By: | Şen, Hüseyin; Kaya, Ayşe |
| Abstract: | Using the augmented version of the Blanchard - Perotti’s SVAR technique, this paper seeks to empirically estimate the size of fiscal multipliers in Turkey over the period 2002:q3-2016:q2. In contrast to many previous papers that concentrate on fiscal policy instruments -taxes and government spending- at the aggregate level, in the paper we consider these instruments at the sub-component level. We examine output responses to discretionary changes in five fiscal variables (value-added tax, special consumption tax, personal income tax, real government spending, and transfer payments), and then we estimate the size of fiscal multipliers for taxes and government spending. Overall, our empirical findings indicate that the size of multipliers for taxes is different from that of government spending. Depending on the sub-components, the size of the multiplier ranges from -0.83 to -0.27 for taxes, and from 0.02 to 0.98 for government spending respectively. Overall, these findings corroborate the idea that a shock to government spending creates a (weak) Keynesian effect on GDP in the short run, while a shock to taxes brings about a non-Keynesian effect. |
| Keywords: | Fiscal Multipliers,Fiscal Policy,SVAR,Turkey |
| JEL: | E6 E62 H2 H30 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:162763&r=pbe |
| By: | Hauk, Esther (IAE Barcelona (CSIC)); Oviedo, Mónica (Universitat Autònoma de Barcelona); Ramos, Xavier (Universitat Autònoma de Barcelona) |
| Abstract: | This paper studies the relationship between people's beliefs about the quality of their institutions, as measured by corruption perceptions, and preferences for redistribution in Latin America. Our empirical study is guided by a theoretical model which introduces taxes into Foellmi and Oechslin's (2007) general equilibrium model of non-collusive corruption. In this model perceived corruption influences people's preferences for redistribution through two channels. On the one hand it undermines trust in government, which reduces people's support for redistribution. On the other hand, more corruption decreases own wealth relative to average wealth of below-average-wealth individuals leading to a higher demand for redistribution. Thus, the effect of perceived corruption on redistribution cannot be signed a priori. Our novel empirical findings for Latin America suggest that perceiving corruption in the public sector increases people's support for redistribution. Although the positive channel dominates in the data, we also and evidence for the negative channel from corruption to demand for redistribution via reduced trust. |
| Keywords: | preference for redistribution, perception of corruption, political trust, bribery, Latin America |
| JEL: | D31 D63 H1 H2 P16 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10854&r=pbe |
| By: | Frank M. Fossen; Ray Rees; Davud Rostam-Afschar; Viktor Steiner |
| Abstract: | We investigate how personal income taxes affect the portfolio share of personal wealth that entrepreneurs invest in their own business. In a reformulation of the standard portfolio choice model that allows for underreporting of private business income to tax authorities, we show that a fall in the tax rate may increase investment in risky entrepreneurial business equity at the intensive margin, but decrease entrepreneurial investment at the extensive margin. To test these hypotheses, we use household survey panel data for Germany eliciting the personal wealth composition in detail in 2002, 2007, and 2012. We analyze the effects of personal income taxes on the portfolio shares of six asset classes of private households, including private business equity. In a system of simultaneous demand equations in first differences, we identify the tax effects by an instrumental variables approach exploiting tax reforms during our observation period. To account for selectioninto entrepreneurship, we use changes in entry regulation into skilled trades. Estimation results are consistent with the predictions of our theoretical model. An important policy insight is that lower taxes drive out businesses that are viable only due to tax avoidance or evasion, but increase investment in private businesses that are also worthwhile in the absence of taxes. |
| Keywords: | Taxation, entrepreneurship, portfolio choice, investment |
| JEL: | H24 H25 H26 L26 G11 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1673&r=pbe |
| By: | Takanori Adachi (School of Economics, Nagoya University,); Michal Fabinger (Faculty of Economics, The University of Tokyo) |
| Abstract: | This paper studies welfare consequences of unit and ad valorem taxes in oligopoly with general demand, non-constant marginal costs, and a generalized type of competition. We present formulas providing connections between marginal cost of public funds, tax incidence, unit tax pass-through, ad valorem tax pass-through, and other economic quantities of interest. First, in the case of symmetric firms, we show that there exists a simple, empirically relevant set of sufficient statistics for the marginal cost of public funds, namely the pass-through and the industry demand elasticity. Specializing to the case of price or quantity competition, we show how marginal cost of public funds and pass-through are expressed using elasticities and curvatures of demand and inverse demand. These results also apply to symmetric oligopoly with multi-product firms. Second, we present a generalization with the tax revenue function specified as a general function parameterized by a vector of tax parameters. We analyze multi-dimensional pass-through, generalizing the results of Weyl and Fabinger (2013), and show that it is crucial for evaluating welfare changes in response to changes in taxation. Finally, we generalize our results to the case of heterogeneous firms, as well as to the case of changes in both production costs and taxes. |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2017cf1043&r=pbe |
| By: | Fossen, Frank M.; Rees, Ray; Rostam-Afschar, Davud; Steiner, Viktor |
| Abstract: | We investigate how personal income taxes affect the portfolio share of personal wealth that entrepreneurs invest in their own business. In a reformulation of the standard portfolio choice model that allows for underreporting of private business income to tax authorities, we show that a fall in the tax rate may increase investment in risky entrepreneurial business equity at the intensive margin, but decrease entrepreneurial investment at the extensive margin. To test these hypotheses, we use household survey panel data for Germany eliciting the personal wealth composition in detail in 2002, 2007, and 2012. We analyze the effects of personal income taxes on the portfolio shares of six asset classes of private households, including private business equity. In a system of simultaneous demand equations in first differences, we identify the tax effects by an instrumental variables approach exploiting tax reforms during our observation period. To account for selection into entrepreneurship, we use changes in entry regulation into skilled trades. Estimation results are consistent with the predictions of our theoretical model. An important policy insight is that lower taxes drive out businesses that are viable only due to tax avoidance or evasion, but increase investment in private businesses that are also worthwhile in the absence of taxes. |
| Keywords: | taxation,entrepreneurship,portfolio choice,investment |
| JEL: | H24 H25 H26 L26 G11 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:201719&r=pbe |
| By: | Candon Johnson (West Virginia University, Department of Economics); Joshua Hall (West Virginia University, Department of Economics) |
| Abstract: | This paper investigates the impact of taxes on the salaries received by National Basketball Association free agents from 2010-2014. High state income tax rates affect the after-tax income received by players from their team as well as on any ancillary income. Using data on 576 free agents, we find statistically significant evidence that free agents signing in high tax states receive higher salaries, ceteris paribus. Our results suggest that a one-unit increase in the average tax rate experienced by a free agent in a state leads to free agent salaries being over $60,000 higher. |
| Keywords: | Tiebout, taxation, National Basketball Association |
| JEL: | H20 H24 H71 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:wvu:wpaper:17-11&r=pbe |
| By: | Fatica, Serena; Prammer, Doris |
| Abstract: | This paper presents new evidence on the impact of the preferential treatment of owner-occupied housing in Europe. We find that tax benefits to homeowners reduce the user cost of housing capital by almost 40 percent compared to the efficient level under neutral taxation. On average, the tax subsidy translates into an excess consumption of housing services equivalent to 7.8 percent of the value of owner-occupied housing, or about 30 percent of financial asset holdings in household portfolios. The bulk of the subsidies stems from under-taxation of the return to home equity, while the average contribution of the tax rebate for mortgage interest payments is driven down by relatively low loan-to-value ratios in the data. However, at the margin, the tax–induced incentive to use mortgage debt to finance the purchase of the main residence is sizable. JEL Classification: H24, H31, D14 |
| Keywords: | owner-occupied housing, taxation, user cost |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172087&r=pbe |
| By: | Yoichi Gokan (Faculty of Economics, Ritsumeikan University) |
| Abstract: | This paper puts the apperantly di¤erent distortions of consumption externalities and endogenous consumption taxes to work in the one-sector Ramsey model without any distortions. We will prove that the two distortions can have similar or possibly exact same dynamic impacts on the aggregate economy, only if we use very familiar preferences in macro-dynamic literature. These two distortions ana- lytically have a very close similarity as the obstacle distorting a market equilibrium path and consumption externalities seem the invisible tax rates (transefer rates) on consumption for positive (negative) external e¤ects. |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2017cf1041&r=pbe |
| By: | John Creedy; Penny Mok (The Treasury) |
| Abstract: | The present paper reports estimates of welfare changes and the marginal welfare cost of income taxation for a wide range of income and demographic groups in New Zealand, in the context of a uniform increase in all marginal income tax rates. The results are obtained using enhancements to the NZ Treasury’s behavioural microsimulation model, Taxwell-B, which uses discrete hours modelling to examine the labour supply responses of all individuals to an income tax change. Considerable variation is found in the marginal welfare costs for different groups, with an overall value of 12 cents per extra dollar raised. The paper also demonstrates the use of a money metric utility measure in a social welfare function evaluation. A smaller reduction in ‘social welfare’ is obtained compared with the use of net incomes. |
| Keywords: | Direct taxation; excess burden; marginal welfare cost; welfare measurement |
| JEL: | H20 H31 I30 D63 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:nzt:nztwps:17/01&r=pbe |
| By: | Stephane Auray (CREST-Ensai and ULCO); Aurelien Eyquem (CREST-Ensai and Universite de Lyon); Paul Gomme (Concordia University and CIREQ) |
| Abstract: | We solve for the Ramsey-optimal path for government debt, labor income taxes and capital income taxes for a small open economy with an endogenously-determined real exchange rate. Due to the endogenous exchange rate, the model must be solved using the `primal problem': maximize the lifetime utility of the representative household subject to equilibrium conditions and the government budget constraint. The open economy constrains the government's setting of the capital income tax rate since physical capital cannot be dominated in rate of return by foreign assets. However, the endogenous real exchange rate loosens this constraint relative to a one good open economy model in which the real exchange rate is necessarily fixed. |
| Keywords: | Optimal fiscal policy, Tax reforms, Welfare |
| JEL: | E32 E52 F41 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:crd:wpaper:17002&r=pbe |
| By: | Peter Haan; Victoria Prowse |
| Abstract: | We analyze empirically the optimal mix and optimal generosity of social insurance and assistance programs. For this purpose, we specify a structural life-cycle model of the labor supply and savings decisions of singles and married couples. Partial insurance against wage and employment shocks is provided by social programs, savings, and the labor supplies of all adult household members. We show that the optimal policy mix focuses mainly on social assistance, which guarantees a permanent universal minimum household income, with a minor role for temporary earnings-related unemployment insurance. Optimal social assistance is moderately generous. Re ecting that married couples obtain intra-household insurance by making labor supply choices for both spouses, we also show that the optimal generosity of social assistance is decreasing in the proportion of married individuals in the population. |
| Keywords: | Unemployment insurance; Social assistance; Design of bene t programs; Life-cycle labor supply; Family labor supply; Intra-household insurance; Household savings; Employment risk; Added worker e ect. |
| JEL: | J18 J68 H21 I38 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1294&r=pbe |
| By: | Cheng, Chu-Chuan; Chu, Hsun |
| Abstract: | In this paper we examine the optimal policies for sin goods and health care in a two-period economy. Individuals are myopic in the sense that they undervalue the utilities of future consumption and health quality. When investing in health care in the second period, individuals who have previously made myopic decisions may persist in their shortsighted consumption plans (persistent error) or recognize their mistakes (dual self). We show that, for persistent-error myopes, the first-best policy mix requires a subsidy on savings and a tax on sin goods. The health care should be taxed (subsidized) if the degree of myopia concerning future consumption is larger (smaller) than that concerning health quality. For dual-self myopes, the optimal policy for sin goods can be either a tax or a subsidy, depending on the relative degrees of myopia and the property of the health quality function. |
| Keywords: | sin goods; health care; myopic behaviors |
| JEL: | H21 I18 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:80183&r=pbe |
| By: | Krzysztof Makarski (Group for Research in Applied Economics (GRAPE); Warsaw School of Economics; Narodowy Bank Polski); Joanna Tyrowicz (Group for Research in Applied Economics (GRAPE); University of Warsaw) |
| Abstract: | We analyze the political stability social security reforms which introduce a funded pillar (a.k.a. privatizations). We consider an economy populated by overlapping generations, which introduces a funded pillar. This reform is efficient in Kaldor-Hicks sense and has political support. Subsequently, agents vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces welfare in the long run, the distribution of benefits across cohorts along the transition path implies that “unprivatizing” social security is always politically favored. This suggests that property rights definition over retirement savings may be of crucial importance for determining the stability of retirement systems with a funded pillar. |
| Keywords: | majority voting, pension system reform, welfare |
| JEL: | H55 D72 C68 E17 E27 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:fme:wpaper:14&r=pbe |
| By: | B. Castelletti-Font; P. Clerc; M. Lemoine |
| Abstract: | The large imbalances within euro area have led to renew interest in tax policies that could reduce labour costs and thus improve competitiveness and growth. In this paper, we consider whether it would be more growth-enhancing for euro area countries to, instead, use capital income tax cuts.To address this issue, we focus on the open-economy dimension and make the simplifying assumption of complete insurance markets. Using a DSGE model calibrated for France within the euro area, we show that the increase in output resulting from tax cuts on capital income would indeed be higher than the increase in output resulting from tax cuts on labour, both in the short and long run. Importantly, the strong response of output to capital income tax cuts appears to be partly explained by the particularly high level of capital income taxes in France. Moreover, such tax cuts would be less efficient if they were expected to be only temporary. Finally, we illustrate our main points through a recent fiscal package implemented in France, which combines labour and capital income tax cuts. After briefly assessing this package, we find that investment and real output would have been more strongly boosted in the medium run if this package had been focused to a larger extent on reductions in capital income taxes. |
| Keywords: | Fiscal reforms, taxes, government spending, DSGE model. |
| JEL: | E62 E63 F42 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:634&r=pbe |
| By: | Gerdie Everaert (Ghent University, Department of Social Economics) |
| Abstract: | This paper investigates whether fiscal fatigue is a robust characteristic of the fiscal reaction function in a panel of OECD countries over the period 1970-2014 or merely an artifact of ignoring important aspects of the panel dimension of the data. More specifically, we test whether the quadratic and cubic debt-to-GDP terms remain significant once dynamics, heterogeneous slopes and an asymmetric reaction to the business cycle are allowed for. The results show a significant heterogeneous reaction of the primary balance to lagged debt with fiscal fatigue not being a general characteristic of the fiscal reaction function shared by all countries in our panel. In line with the literature, we further find that fiscal balances tend to deteriorate in contractions without correspondingly improving during expansions. Explorative stochastic debt simulations show that debt forecasts crucially depend on the specification of the fiscal reaction function. |
| Keywords: | Fiscal reaction function, dynamics, non-linearities, fiscal fatigue, debt sustainability analysis |
| JEL: | E62 H62 H63 H68 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201705-320&r=pbe |
| By: | Konstantinos Theodoridis; Haroon Mumtaz |
| Abstract: | This paper uses a range of structural VARs to show that the response of US stock prices to fiscal shocks changed in 1980. Over the period 1955-1980 an expansionary spending or revenue shock was associated with modestly higher stock prices. After 1980, along with a decline in the fiscal multiplier, the response of stock prices to the same shock became negative and larger in magnitude. We use an estimated DSGE model to show that this change is consistent with a switch from an economy characterised by active fiscal policy and passive monetary policy to one where fiscal policy was passive and the central bank acted aggressively in response to inflationary shocks. |
| Keywords: | Fiscal policy shocks, Stock prices, VAR, DSGE |
| JEL: | C5 E1 E6 E5 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:178117307&r=pbe |
| By: | Sharma, Rishi (Department of Economics, Colgate University) |
| Abstract: | In principle, a VAT should be neutral with regards to both the level and composition of exports. In practice, this may not be the case because exporters in many countries receive incomplete VAT refunds. When VAT refunds are incomplete, the exports of industries that rely heavily on intermediate goods are especially likely to be negatively affected by a VAT. Motivated by these considerations, this paper uses trade data for over 100 countries spanning 1962-2015 to evaluate the differential effect of the VAT across industries. I find that an industry with a 10% point higher intermediate goods share of output sees a decline in exports of over 8% relative to an industry with a lower share. This effect is particularly pronounced for low-income countries and essentially absent for high-income countries. |
| Keywords: | value-added tax; exports; export composition |
| JEL: | H87 H25 F10 F13 F14 |
| Date: | 2017–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:cgt:wpaper:2017-4&r=pbe |
| By: | Ronald Davies; Julien Martin; Mathieu Parenti; Farid Toubal |
| Abstract: | This paper analyzes the transfer pricing of multinational firms. Intra-firm prices may systematically deviate from arm's length prices for two motives: pricing to market and tax avoidance. Using French firm-level data on arm's length and intra-firm export prices, we find that the sensitivity of intra-firm prices to foreign taxes is reinforced once we control for pricing-to-market determinants. Most importantly, we find no evidence of tax avoidance if we disregard tax haven destinations. Tax avoidance through transfer pricing is economically sizable. The bulk of this loss is driven by the exports of 450 firms to ten tax havens. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ulb:ulbeco:2013/254377&r=pbe |
| By: | Conesa, Juan Carlos (Stony Brook University); Kehoe, Timothy J. (Federal Reserve Bank of Minneapolis) |
| Abstract: | In the early 1970s, hours worked per working-age person in Spain were higher than in the United States. Starting in 1975, however, hours worked in Spain fell by 40 percent. We find that 80 percent of the decline in hours worked can be accounted for by the evolution of taxes in an otherwise standard neoclassical growth model. Although taxes play a crucial role, we cannot argue that taxes drive all of the movements in hours worked. In particular, the model underpredicts the large decrease in hours in 1975–1986 and the large increase in hours in 1994–2007. The lack of productivity growth in Spain during 1994–2015 has little impact on the model’s prediction for hours worked. |
| Keywords: | Dynamic general equilibrium; Hours worked; Distortionary taxes; Total factor productivity |
| JEL: | C68 E13 E24 H31 |
| Date: | 2017–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:550&r=pbe |