nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒07‒23
fifteen papers chosen by
Thomas Andrén

  1. Four levers of redistribution: The impact of tax and transfer systems on inequality reduction By Elvire Guillaud; Matthew Olckers; Michaël Zemmour
  2. Comparing redistributive efficiency of tax-benefit systems in Europe By Daniela Mantovani
  3. State and Federal Tax Policy toward Nonprofit Organizations By James Alm; Daniel Teles
  4. Perception of Corruption and Public Support for Redistribution in Latin America By Esther Hauk; Mónica Oviedo; Xavier Ramos
  5. How do entrepreneurial portfolios respond to income taxation? By Fossen, Frank M.; Rees, Ray; Rostam-Afschar, Davud; Steiner, Viktor
  6. The Right Kind of Help? Tax Incentives for Staying Small By Dora Benedek; Pragyan Deb; Borja Gracia; Sergejs Saksonovs; Anna Shabunina; Nina T Budina
  7. "Endogenizing Government's Objectives in Tax Competition with Capital Ownership" By Keisuke Kawachi; Hikaru Ogawa; Taiki Susa
  8. A Tax Plan for Endogenous Innovation By Steve Raymond; Lukas Schmid; Anastasios Karantounias; Mariano Croce
  9. Incorporating spatial price adjustments in U.S. public policy analysis By John A. Bishop; Jonathan M. Lee; Lester A. Zeager
  10. The stability of tax elasticities over the business cycle in European countries By Melisso Boschi; Stefano d'Addona
  11. Do Government Subsidies to Low-income Individuals Affect Interstate Migration? Evidence from the Massachusetts Health Care Reform By James Alm; Ali Enami
  12. Boosting taxes for boasting about houses: Status concerns in the housing market By Schünemann, Johannes; Trimborn, Timo
  13. A Welfarist Role for Nonwelfarist Rules: An example with envy By Matthew Weinzierl
  14. Is fiscal policy in the euro area Ricardian? By Nikki Panjer; Leo de Haan; Jan Jacobs
  15. Productivity, Taxes, and Hours Worked in Spain: 1970–2015 By Juan Carlos Conesa; Timothy J. Kehoe

  1. By: Elvire Guillaud; Matthew Olckers; Michaël Zemmour
    Abstract: Using observational micro data from the Luxembourg Income Study (LIS), we assess the redistributive impact of tax and transfer configurations across 22 OECD countries for the period 1999-2013. After recovering new tax data (employer social contributions), we measure the reduction of income inequality due to the four structural dimensions of tax and transfer systems: the average tax rate, tax progressivity, the average transfer rate, and transfer targeting. Among the most remarkable results, we notice (i) the diverse combinations of taxation and transfers that achieve the same reduction in inequality; (ii) the absence of configurations that match strongly progressive taxation with a high rate of taxation; and (iii) the decisive impact of the rate of transfers relative to targeting.
    Keywords: tax-benefi t system, inequality reduction, social protection, redistributive policies
    JEL: H23 H55 I38
    Date: 2017–04
  2. By: Daniela Mantovani
    Abstract: In empirical analysis, the Kakwani index is the most frequently used indicator for comparing progressivity across countries and over time. The Kakwani is often assumed to measure to what extent a policy design is targeted to the poor. It has, however, a major drawback: it is not defined for net tax incidence—that is, the whole system of taxes and benefits. Moreover, it is defined over different intervals for different pre-tax income distributions and different average tax rates. This paper proposes an index based on the concept of relative redistributive efficiency that is not affected by these drawbacks. The Redistributive Efficiency index was compared to the Kakwani index for taxes/benefits in EU countries by using Euromod baselines. In addition, the Redistributive Efficiency index was computed on the whole tax-benefit system; that is, taxes and benefits were evaluated together. Only Ireland and the UK combine high levels of redistributive efficiency with a relevant amount of tax revenues and social expenditures. They obviously obtain very high redistribution, above 15 points. Most of the countries considered show an intermediate level of redistribution (between 7 and 12 points), but with a different mix. A group of Central and Northern European countries plus Slovenia and Hungary combine medium levels of redistributive efficiency and medium size, while some Southern European countries (Spain and Portugal) and new members compensate a rather low amount of transfer and taxes with quite high levels of efficiency. The remaining new member states and Southern EU countries show a very low level of redistribution, below 7 points. Interestingly, they vary in the level of tax burden and of resources devoted to benefits but all of them show a poor Redistributive Efficiency. This suggests that low Redistributive Efficiency plays a key role in explaining why certain countries perform a limited amount of redistribution.
    Keywords: income Redistribution; Progressivity, Microsimulation; EUROMOD
    JEL: C00 D31 H20 I38
    Date: 2017–07
  3. By: James Alm (Department of Economics, Tulane University); Daniel Teles (Department of Economics, Tulane University)
    Abstract: State and federal tax policy in the United States generally favors nonprofit organizations, and particularly nonprofits classified as 501(c)3 nonprofit charities. This favorable tax treatment comes from two types of tax policies. First, nonprofits are exempt from paying a variety of state and federal taxes. Second, individuals are encouraged to donate to nonprofit charities through favorable policies in the federal income tax, state income taxes, and the inheritance tax. This paper presents some basic material on the tax treatment of nonprofit organizations, and then examines what we know and what we do not know about state and federal tax policy toward nonprofit organizations.
    Keywords: Nonprofit organizations; 501(c)3 organizations; tax deductions; charitable donations; unrelated business income tax; tax price elasticity
    JEL: L3 H24 H31
    Date: 2017–07
  4. By: Esther Hauk (Barcelona Graduate School of Economics); Mónica Oviedo (Dept. Economia Aplicada, Facultat dEconomia i Empresa, Campus UAB); Xavier Ramos (Dept. Economia Aplicada, Facultat dEconomia i Empresa, Campus UAB)
    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 find 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
  5. 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
  6. By: Dora Benedek; Pragyan Deb; Borja Gracia; Sergejs Saksonovs; Anna Shabunina; Nina T Budina
    Abstract: Some countries support smaller firms through tax incentives in an effort to stimulate job creation and startups, or alleviate specific distortions, such as financial constraints or high regulatory or tax compliance costs. In addition to fiscal costs, tax incentives that discriminate by firm size without specifically targeting R&D investment can create disincentives for firms to invest and grow, negatively affecting firm productivity and growth. This paper analyzes the relationship between size-related corporate income tax incentives and firm productivity and growth, controlling for other policy and firm-level factors, including product market regulation, financial constraints and innovation. Using firm level data from four European economies over 2001–13, we find evidence that size-related tax incentives that do not specifically target R&D investment can weigh on firm productivity and growth. These results suggest that when designing size-based tax incentives, it is important to address their potential disincentive effects, including by making them temporary and targeting young and innovative firms, and R&D investment explicitly.
    Keywords: Productivity;size-based taxation, growth, structural reforms
    Date: 2017–06–13
  7. By: Keisuke Kawachi (Faculty of Humanities, Law and Economics, Mie University); Hikaru Ogawa (Graduate School of Economics and Graduate School of Public Pol- icy, University of Tokyo); Taiki Susa (College of Business Administration and Information Science, Chubu University)
    Abstract: In this paper, we extend the standard approach of horizontal tax competition by endogenizing the policy objectives that governments pursue. Following the literature on strategic delegation games, we consider a preplay stage, where jurisdictions commit themselves to act as Leviathan or as benevolent agents. We show that the sub-game perfect equilibria (SPEs) correspond to the three cases of tax competition between (i) the Leviathan and the benevolent government, (ii) both Leviathans, and (iii) both benevolent governments, depending on the form of capital ownership. The results provide grounds for the assumption of government objective made in literature, and explain why some governments behave as Leviathans, while others as benevolent agents in international tax competition.
    Date: 2017–07
  8. By: Steve Raymond (UNC); Lukas Schmid (Duke University); Anastasios Karantounias (Federal Reserve Bank of Atlanta); Mariano Croce (University of North Carolina at Chapel H)
    Abstract: In times when elevated government debt raises concerns about dimmer global growth prospects, we ask: How can the government provide incentives for innovation in a fiscally sustainable way? We address this question by examining the Ramsey problem of finding optimal tax and subsidy schemes in a model in which growth is endogenously sustained by risky innovation. We characterize the shadow value of growth and entry in the innovation sector. We find that a profit tax is required to replicate the first-best in order to balance the positive spillovers of innovative activity. At the second-best, the profit tax is designed to optimally respond to growth shocks above and beyond what is prescribed by the standard tax-smoothing incentives in economies with exogenous growth. The interplay of risk and innovation opens a new margin for optimal taxation.
    Date: 2017
  9. By: John A. Bishop (Department of Economics East Carolina University, Greenville, NC 27858, USA); Jonathan M. Lee (Department of Economics East Carolina University, Greenville, NC 27858, USA); Lester A. Zeager (Department of Economics East Carolina University, Greenville, NC 27858, USA)
    Abstract: The U.S. Bureau of Economic Analysis has recently released regional price parities (RPPs) for the 325 Standard Metropolitan Statistical Areas and the 50 state nonmetropolitan areas. We consider the effects of RPP adjustments on four public policy issues: poverty rates, family income inequality, tax progressivity, and metropolitan-size premiums. We demonstrate that RPP adjustments strongly affect the spatial distribution of U.S. poverty, have an equalizing effect on income inequality (equivalent to a $1,500 cash transfer to each U.S. family), and also increase effective federal tax progressivity by more than 25 percent. Income premiums for the major metropolitan areas largely disappear after adjusting for spatial prices and controlling for the characteristics of family heads. Metro-size premiums also depend on whether we adjust incomes by the overall RPPs or a narrower housing-price index (as in earlier research). We conjecture that other public policy findings are sensitive to adjustments for spatial price differences.
    Keywords: regional price parities, poverty, inequality, tax progressivity, metro-size premiums.
    JEL: D31 H23 I32 R32
    Date: 2017–05
  10. By: Melisso Boschi; Stefano d'Addona
    Abstract: We estimate short- and long-run tax elasticities that capture the relationship between changes in national income and tax revenue. We show that the short-run tax elasticity changes according to the business cycle. We estimate a two state Markov-switching regression on a novel dataset of tax policy reforms in 15 European countries from 1980 to 2013, showing that the elasticities during booms and recessions are statistically (and often economically) different. The elasticities of (i) indirect taxes, (ii) social contributions, and (iii) corporate income taxes, tend to be larger during recessions. Tax elasticities for personal income tend to be more stable across the regimes. Estimates of long-run elasticities are in line with existing literature.
    Keywords: Tax elasticity, Tax policy discretionary change, Business cycle, European economy, Markov-switching regimes
    JEL: C24 C29 E32 E62 H20 H30
    Date: 2017–07
  11. By: James Alm (Department of Economics, Tulane University); Ali Enami (Department of Economics, Tulane University)
    Abstract: Following the passage of the Patient Protection and Affordable Care Act (ACA) of 2010, many – but not all – states decided to expand their Medicaid program in line with provisions of the new law. Will low-income individuals respond to the incentives of living in a state with better health subsidies by relocating to the state? This paper addresses this question by examining the population growth rate of low-income individuals in Massachusetts following the Massachusetts Health Care Reform (MHCR) of 2006. Like the ACA, the MHCR expanded the Medicaid program, and also provided subsidized health insurance for low-income individuals. Using difference-in-differences and triple-differences models and Internal Revenue Service tax return data, we show that the reform did not have a global effect on the movement of low-income individuals across all cities in Massachusetts. However, we also show that the reform did have a local (or border) effect on the movement into border cities of the state, an effect that is relatively large for cities very close to the border but disappears quickly once the distance to border goes beyond 15 miles.
    Keywords: Massachusetts health care reform, interstate migration, Medicaid expansion, subsidized health insurance, border analysis
    JEL: H24 I13 J11
    Date: 2017–07
  12. By: Schünemann, Johannes; Trimborn, Timo
    Abstract: There is empirical evidence that households use residential houses as status goods. Their visibility qualifies them as an excellent signaling device of the relative income and wealth position, in contrast to less visible financial assets. To this end we introduce a residential housing sector and status concerns for housing into a neoclassical framework. In the model, households derive utility from the absolute amount of housing and from comparing their stock of housing to a reference stock, which is composed of the current or past level of housing of their peers. We analyze how status concerns affect household behavior and find that they increase housing demand and labor supply. Furthermore, we find that status concerns exert a negative externality and elevate housing to inefficiently high levels. We derive a (state contingent) optimal tax that establishes the first-best allocation along the transition path and at the steady state. Calibrating the model to the US we quantify the optimal tax on residential housing to 1.8%. Introducing the optimal tax entails a considerable welfare gain of 0.29% measured in consumption equivalents.
    Keywords: Status Concerns,Residential Housing,Optimal Taxation
    JEL: E03 O10 D10 H21 R31
    Date: 2017
  13. By: Matthew Weinzierl
    Abstract: I propose and formalize an argument for why economists working in the welfarist normative tradition should include nonwelfarist principles in how they judge economic policy. The key idea behind this argument is that the world is too complex, and our ability to model it too limited, for us to fully trace a policy's effects on welfare. Nonwelfarist principles can be valuable to a welfarist facing this limitation if they act as informational proxies, carrying accumulated knowledge about the effects of policy that otherwise cannot be considered. This argument can be seen both as extending a familiar logic for rule utilitarianism beyond the realm of individual ethics and as a specific version of a broader argument made for centuries by theorists from Hume to Hayek. I also provide evidence of an example in which real-world policy judgments are consistent with this theoretical argument. Results from a novel U.S. opinion survey show that approximately half of respondents reject redistribution driven by envy even though it generates direct utilitarian gains. That share rises as the role of envy is made more salient, consistent with respondents using nonwelfarist principles to encode concerns about the unobservable consequences of policy.
    JEL: D61 H21
    Date: 2017–07
  14. By: Nikki Panjer; Leo de Haan; Jan Jacobs
    Abstract: According to the so-called 'fiscal theory of the price level' (FTPL), under a non-Ricardian regime the price level has to adjust to fulfil the government's budget constraint. In contrast, under a Ricardian regime, government balances adjust in order to preserve government solvency. We empirically determine whether a Ricardian or a non-Ricardian regime is more plausible for the euro area, following the research strategy of Canzoneri, Cumby, and Diba (2001). A Vector AutoRegressive (VAR) model for the primary government balance and the government debt is estimated for the period 1980q2-2013q4. Our model uses dummy interaction terms to account for the breaks due to the introduction of the Euro Convergence Criteria (ECC) and the start of the global financial crisis, respectively. No evidence is found in favour of either regime for the pre-ECC period. In the post-ECC period, a Ricardian regime is more plausible. Some evidence points in the direction of a non-Ricardian regime for the period after the start of the financial crisis.
    Keywords: Fiscal Policy; Euro area; Ricardian regime
    JEL: E63 H62 H63
    Date: 2017–07
  15. By: Juan Carlos Conesa; Timothy J. Kehoe
    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.
    JEL: C68 E13 E24 H31
    Date: 2017–07

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