nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒07‒30
fourteen papers chosen by
Thomas Andrén

  1. Optimal taxation and the tradeoff between efficiency and redistribution By George Economides; Anastasios Rizos
  2. The Impact of Taxes on Income Mobility By Mario Alloza
  3. International tax competition: A reappraisal By Hory, Marie-Pierre; Organització de Cooperació i Desenvolupament Econòmic, Països de l'
  4. Taxation, Redistribution and Frictional Labor Supply By Hakki Yazici; Christopher Sleet
  5. Quantifying the Welfare Gains from History Dependent Income Taxation By Marek Kapicka
  6. Do People Respond to the Mortage Interest Deduction? Quasi-Experimental Evidence from Denmark By Jonathan Gruber; Amalie Jensen; Henrik Kleven
  7. Happiness and Public Expenditure: Evidence from a Panel Analysis By Kamal KASMAOUI; Othmane BOURHABA
  8. Corporate Income Tax as a Genuine own Resource By Fabien CANDAU; Jacques LE CACHEUX
  9. Using Tax Deductions to Promote Lifelong Learning: Real and Shifting Responses By Van den Berge, Wiljan; Jongen, Egbert L. W.; van der Wiel, Karen
  10. Education and tax morale By Rodríguez Justicia, David
  11. The Unemployment Insurance Taxable Wage Base Mystery By Parsons, Donald O.
  12. The Role of Taxes in the Disconnect between Corporate Performance and Economic Growth By Urooj Khan; Suresh Nallareddy; Ethan Rouen
  13. The Effects of the Affordable Care Act on Health Insurance Coverage and Labor Market Outcomes By Mark Duggan; Gopi Shah Goda; Emilie Jackson
  14. Emission Taxes and Damage Thresholds in the Presence of Pre-existing Regulations By Ross McKitrick

  1. By: George Economides (Athens University of Economics and Business); Anastasios Rizos
    Abstract: This paper studies the aggregate and distributional implications of introducing consumption taxes into an otherwise deterministic version of the standard neoclassical growth model with income taxes only and heterogeneity across agents. In particular, the economic agents differ among each other with respect to whether they are allowed to save (in physical capital) or not. Policy is optimally chosen by a benevolent Ramsey government. The main theoretical finding comes to confirm the widespread belief that the introduction of consumption taxes into a model with income taxes only, creates substantial efficiency gains for the economy as whole, but at the cost of higher income inequality. In other words, consumption taxes reduce the progressivity of the tax system, and maybe, from a normative point of view, this result justifies the design of a set of subsidies policies which will aim to outweigh the regressive effects of the otherwise more efficient consumption taxes.
    Keywords: Ramsey taxation, heterogeneity, efficiency, inequality
    JEL: H21 H23 E62
    Date: 2017–06–30
  2. By: Mario Alloza (Banco de España and CFM)
    Abstract: This paper investigates how taxes affect relative mobility in the income distribution in the US. Household panel data drawn from the PSID between 1967 and 1996 is employed to analyse the relationship between marginal tax rates and the probability of staying in the same income decile. Exogenous variation in marginal tax rates is identified by using counterfactual rates based on legislated changes in the tax schedule. I find that higher marginal tax rates reduce income mobility. An increase in one percentage point in marginal tax rates causes a decline of around 0.8 percentage points in the probability of changing to a different income decile. Tax reforms that reduce marginal rates by 7 percentage points are estimated to account for around a tenth of the average movements in the income distribution in a year. Additional results suggest that the effect of taxes on income mobility differs according to the level of human capital and that it is particularly significant when considering mobility at the bottom of the distribution.
    Keywords: income mobility, inequality, marginal tax rate
    JEL: E24 E62 D31 D63 H24 H31
    Date: 2017–07
  3. By: Hory, Marie-Pierre; Organització de Cooperació i Desenvolupament Econòmic, Països de l'
    Abstract: This paper investigates the interactions between tax policies at the international level (OECD countries). Both contemporaneous and time-delayed tax interactions are considered using Spatial Dynamic Panel Data model from Yu et al. (2008). Moreover, we test if the interdependence between governments exists due to the geographic closeness but also due to the proximity in terms of public investment levels. The results show, on one hand, that there are positive contemporaneous but negative time-delayed interactions. It is compatible with the existence of tax competition in a contemporaneus way, but also with the free-riding phenomena in the time-delayed approach. On the other hand, we show that interactions between countries are higher when they have similar levels of public investment than for the geographical closeness. This last result confirms the theoretical assumption that countries with close infrastructure investment are more likely to achieve tax harmonization. However, the negative time-delayed interactions are not consistent with this hypothesis, proving both tax and infrastructure competition between the OECD countries still exists. JEL Classification: E62, H54, H87 Key Words: Tax Competition; Yardstick Competition; Public Infrastructure Investment; Strategic Interactions; Spatial Dynamic Panel Data model; OECD.
    Keywords: Organització de Cooperació i Desenvolupament Econòmic, Països de l', 339 - Comerç. Relacions econòmiques internacionals. Economia mundial. Màrqueting,
    Date: 2017
  4. By: Hakki Yazici (Sabanci University); Christopher Sleet (Carnegie Mellon University)
    Abstract: We analyze the implications of ex ante dispersion in worker talents and a frictional labor market for the design of tax and benefit systems. Our model features on and off the job search, job ladders and equilibrium income and profit dispersion within talent markets. In a baseline setting with no talent dispersion, the optimal system consists of an unemployment benefit financed out of a simple lump sum tax on workers. The benefit is high enough to suppress worker income and firm profit dispersion, deter worker poaching and collapse job ladders. With talent dispersion, high benefit levels drive less talented workers out of the market and are prohibitively costly. Active talent markets are frictional. Taxes impact the dispersion of worker incomes and firm profits within these markets. These effects shape and modify conventional optimal tax formulas.
    Date: 2017
  5. By: Marek Kapicka (UCSB)
    Abstract: I quantify the welfare gains from introducing history dependent income tax in an incomplete markets framework where individuals face uninsurable random walk idiosyncratic shocks. I assume that the income tax paid is a function of a geometrical weighted average of past incomes, and solve for the optimal weights. I find that the optimal weights on past incomes decline geometrically at a rate equal to the discount rate. The welfare gains from history dependence are large, about 1.77 percent of consumption. I decompose the total effect into an efficiency effect that increases labor supply, and an insurance effect that reduces volatility of consumption and find that, quantitatively, the insurance effect dominates the efficiency effect. The optimal tax increases consumption insurance by trading higher tax progressivity with repect to past incomes for a reduced tax progressivity with respect to the current income.
    Date: 2017
  6. By: Jonathan Gruber; Amalie Jensen; Henrik Kleven
    Abstract: Using linked housing and tax records from Denmark combined with a major reform of the mortgage interest deduction in the late 1980s, we carry out the first comprehensive long-term study of how tax subsidies affect housing decisions. The reform introduced a large and sharp reduction in the mortgage deduction for top-rate taxpayers, while reducing it much less or not at all for lower-rate taxpayers. We present three main findings. First, the mortgage deduction has a precisely estimated zero effect on homeownership. This holds even in the very long run. Second, the mortgage deduction has a sizeable impact on housing demand at the intensive margin, inducing homeowners to buy larger and more expensive houses. Third, the largest effect of the mortgage deduction is on household financial decisions, inducing them to increase indebtedness. These findings suggest that the mortgage interest deduction distorts the behavior of homeowners at the intensive margin, but is ineffective at promoting homeownership at the extensive margin and any externalities that may be associated with it.
    JEL: H24 H31
    Date: 2017–07
  7. By: Kamal KASMAOUI; Othmane BOURHABA
    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: 2017–04
  8. By: Fabien CANDAU; Jacques LE CACHEUX
    Abstract: This article proposes an original review of the literature on tax competition, providing new evidence on tax competition concerning different types of capital (intangibles, industrial building, etc). We also present fiscal optimization of Multi-National Firms (MNFs) and document some case studies regarding the foregone tax revenue due to evasion. Amounts saved by firms are comparable to the contributions to the EU budget by countries like the UK, Ireland, the Netherlands or Luxembourg. We estimate the revenue losses for the national governments of EU15 due to corporate tax avoidance through profit shifting under three scenarios considering different levels of `CIT efficiency' to raise revenue for the year 2015. The 'intermediate' scenario predicts that the revenue losses for the EU governments due to corporate tax avoidance amount to approximately 98 billion euros. After this description of the failure of the current system of taxation, the defense of corporate income tax at the European level as a genuine own resource for the EU budget, this article analyzes alternative schemes such as the Common Consolidated Corporate Tax Base (CCCTB).
    JEL: F23 H26 H61
    Date: 2017–03
  9. By: Van den Berge, Wiljan (CPB Netherlands Bureau for Economic Policy Analysis); Jongen, Egbert L. W. (CPB Netherlands Bureau for Economic Policy Analysis); van der Wiel, Karen (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: Policymakers are concerned about potential underinvestment in lifelong learning. In this paper we study to what extent a tax deduction helps to stimulate post-initial training. Specifically, we employ a regression kink and regression discontinuity design as jumps in tax bracket rates generate exogenous variation in the effective costs of lifelong learning. Using high quality data on tax returns of the universe of Dutch taxpayers, we find that the tax deduction has heterogeneous effects on lifelong learning. Low-income singles show no response. For high-income singles we find an effect of 10% on the probability to use the tax deduction. Furthermore, ignoring shifting of expenses between partners leads to spurious large estimates for primary earners and spurious negative estimates for secondary earners.
    Keywords: lifelong learning, tax deduction, RKD, RDD
    JEL: C21 H20 J24
    Date: 2017–07
  10. By: Rodríguez Justicia, David
    Abstract: While the determinants of tax morale have been widely studied in the literature, surprisingly, the fundamental influence of education on tax morale has yet to be investigated. Given the insights in the psychological and political science literature about the role of education in the formation of social values, in this paper, we analyze two channels through which education shapes tax morale. We find that while the tax morale of individuals that are net receivers of welfare state benefits increases with their educational level, it decreases with educational level among those who are net contributors. Furthermore, our results indicate that the more highly educated, who have been shown to be better able to assess information in the media on public affairs, exhibit higher levels of tax morale in countries that have better quality public services, a fairer tax system and more transparent institutions. JEL classification: H26; H52; I25 Key words: Tax morale; Tax compliance; Education; Welfare state benefits; Trust in public institutions
    Keywords: Frau fiscal, Educació moral, Educació i desenvolupament, 336 - Finances. Banca. Moneda. Borsa, 37 - Educació. Ensenyament. Formació. Temps lliure,
    Date: 2017
  11. By: Parsons, Donald O. (George Washington University)
    Abstract: Unemployment insurance experts lament the low Federal taxable wage base (TWB), last increased to $7000 per worker in 1982. The Federal TWB sets only a system minimum and by 2014 all but two states had TWBs that exceeded the minimum, opening up state TWB choice for study. States do align TWB with state payroll earnings. Indeed TWB/WAGE ratios within states have been remarkably stable for decades, though the ratio varies dramatically across states. Critics seem especially concerned about the tax regressivity of low TWBs, but the hypothesis that more progressive states choose less regressive (higher) TWBs is flatly rejected by the data. Earlier UI analysts focused on employer insurance equity, and the resistance of low cost, high-wage (stable) employers to subsidizing high cost, low-wage (unstable) employers. These analysts provided convincing evidence that (i) employers believed this to be the key issue, and (ii) the TWB did redistribute the insurance premium burden in the hypothesized direction. Across states – wage levels constant – economies characterized by greater income inequality and a preponderance of large (low turnover) firms are associated with lower TWBs. Apparently critics were right to imagine a link between wages and the TWB, but ignored the fact that this matching could be done better across location.
    Keywords: unemployment insurance, taxable wage base, experience rating
    JEL: J65 J41 J33
    Date: 2017–07
  12. By: Urooj Khan (Columbia University); Suresh Nallareddy (Duke University); Ethan Rouen (Harvard Business School, Accounting and Management Unit)
    Abstract: We investigate the relation between the growth in corporate profits and the overall U.S. economy, focusing on the impact of the U.S. corporate tax regime on this relation. We document that the growth of corporate profits, on average, has outpaced the growth of the economy and this disconnect increases as the difference between the corporate income tax rate of the U.S. and the other OECD countries increases. The underlying mechanism is fewer corporate profits being channeled into subsequent domestic investments when the U.S. tax rate is relatively higher, leading to lower economic growth. Our findings have implications for policy setters.
    Keywords: Taxes, economic growth, GDP, corporate profits, American Jobs Creation Act of 2004
    JEL: E20 H25 K34 O10 M40 M41
    Date: 2017–07
  13. By: Mark Duggan; Gopi Shah Goda; Emilie Jackson
    Abstract: The Affordable Care Act (ACA) includes several provisions designed to expand insurance coverage that also alter the tie between employment and health insurance. In this paper, we exploit variation across geographic areas in the potential impact of the ACA to estimate its effect on health insurance coverage and labor market outcomes in the first two years after the implementation of its main features. Our measures of potential ACA impact come from pre-existing population shares of uninsured individuals within income groups that were targeted by Medicaid expansions and federal subsidies for private health insurance, interacted with each state’s Medicaid expansion status. Our findings indicate that the majority of the increase in health insurance coverage since 2013 is due to the ACA and that areas in which the potential Medicaid and exchange enrollments were higher saw substantially larger increases in coverage. While labor market outcomes in the aggregate were not significantly affected, our results indicate that labor force participation reductions in areas with higher potential exchange enrollment were offset by increases in labor force participation in areas with higher potential Medicaid enrollment
    JEL: H31 H51 J18 J20 J38
    Date: 2017–07
  14. By: Ross McKitrick (Department of Economics, University of Guelph, Guelph ON Canada)
    Abstract: This paper makes two contributions to the economics of pollution policy. First, many studies have looked at the effects of emission taxes in the absence of regulations and vice versa, but the implications for optimal tax design when one is layered on top of the other have been ignored, even though the practice is commonly observed. I develop a model of multiple polluting sectors capable of providing a tractable characterization of this case. Second, numerical modeling has shown that tax interactions can yield a positive damage threshold below which any emission tax is welfare-reducing even if marginal damages are positive, but this has largely been ignored in both the theoretical and policy literatures. I show that a positive damage threshold occurs when the policy is not revenue-raising and/or the rest of the tax system is not optimized, but can also occur in a second-best context with optimal taxes and full revenue-recycling, a result not previously shown. Introducing a pollution tax when one firm is already subject to an emissions constraint yields a positive damage threshold that goes up, the more the regulation distorts the income tax base. Hence, under more general conditions than have previously been realized, pollution taxes are not guaranteed to raise welfare even when marginal damages are positive and revenues are fully recycled.
    Keywords: emissions taxes, tax interactions, second-best, carbon taxes
    JEL: H21 H23 Q54 Q58
    Date: 2017

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