nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒08‒20
nine papers chosen by
Thomas Andrén

  1. On the Dynamics of Community Development By Levon Barseghyan; Stephen Coate
  2. How Do Entrepreneurial Portfolios Respond to Income Taxation? By Frank M. Fossen; Ray Rees; Davud Rostam-Afschar; Viktor Steiner
  3. Measuring the Effectiveness of Taxes and Transfers in Fighting Inequality and Poverty. By Ali Enami
  4. Shopping for Lower Sales Tax Rates By Scott R. Baker; Stephanie Johnson; Lorenz Kueng
  5. Does social capital matter in corporate decisions? Evidence from corporate tax avoidance By Hasan, Iftekhar; Hoi, Chun-Keung (Stan); Wu, Qiang; Zhang, Hao
  6. Embedding Cooperation in General-equilibrium Models By John E. Roemer
  7. Simulating Business Cash Flow Taxation: An Illustration Based on the “Better Way” Corporate Tax Reform By Seth G Benzell; Laurence J Kotlikoff; Guillermo LaGarda
  8. Taxing Childcare: Effects on Childcare Choices, Family Labor Supply and Children By Christina Gathmann; Björn Sass
  9. The Government Dependence on Financial Sources of Outside It's Influence By Mariana Paja

  1. By: Levon Barseghyan; Stephen Coate
    Abstract: This paper presents a dynamic political economy model of community development. In each period, a community invests in a local public good. The community can grow, with new housing supplied by competitive developers. To finance investment, the community can tax residents and issue debt. In each period, fiscal decisions are made by current residents. The community's initial wealth (the value of its stock of public good less its debt) determines how it develops. High initial wealth leads to rapid development. Low initial wealth leads to gradual development that is fueled by community wealth accumulation. Wealth accumulation arises from the desire to attract more households to share the costs of the public good. The long run size of the community can be too large or too small and development may proceed too slowly. Nonetheless, some development occurs and, at all times, public good provision is efficient.
    JEL: H41 H7 H72 H74
    Date: 2017–08
  2. 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 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
  3. By: Ali Enami (Stone Center for Latin American Studies, Department of Economics, Tulane University. Commitment to Equity Institute (CEQI).)
    Abstract: This chapter introduces new indicators that measure the effectiveness of the elements of a fiscal system in reducing inequality and poverty. The new indices are generally divided into two families of Impact Effectiveness (IE) and Spending Effectiveness (SE) indicators and are applicable in any context (i.e. inequality and poverty). Moreover, a variation of the former, known as the Fiscal Impoverishment and Gains Effectiveness indicator (FI/FGP), is separately introduced that is only applicable in the context of poverty. IE and SE indicators are similar in the sense that they both compare the performance of a tax or transfer in reducing inequality or poverty with respect to its theoretically maximum potential. For IE indicators, we keep the amount of money raised (or spent) constant and compare the actual and potential performance of a tax (or transfer) to each other. For SE indicators, we keep the impact of a tax (or transfer) on inequality or poverty constant and compare the actual size of a tax (or transfer) with the theoretically minimum amount of tax (or transfer) that would create the same impact.
    Keywords: inequality, poverty, fiscal incidence, marginal contribution, effectiveness indicator
    JEL: D31 H22 I38
  4. By: Scott R. Baker; Stephanie Johnson; Lorenz Kueng
    Abstract: Using comprehensive high-frequency state and local sales tax data, we show that household spending responds strongly to changes in sales tax rates. Even though sales taxes are not observed in posted prices and have a wide range of rates and exemptions, households adjust in many dimensions, stocking up on storable goods before taxes rise and increasing online and cross-border shopping. Interestingly, households adjust spending similarly for both taxable and tax-exempt goods. We embed an inventory problem into a continuous-time consumption-savings model and demonstrate that this seemingly irrational behavior is optimal in the presence of shopping trip fixed costs. The model successfully matches estimated short-run and long-run tax elasticities with a reasonable implied reservation wage of $7-10. We provide additional empirical evidence in favor of this new shopping-complementarity mechanism. While our results reject non-salience of sales tax changes, on average, we also show that upcoming tax changes that are more salient prompt larger responses.
    JEL: D12 E21 H31
    Date: 2017–08
  5. By: Hasan, Iftekhar; Hoi, Chun-Keung (Stan); Wu, Qiang; Zhang, Hao
    Abstract: We investigate whether the levels of social capital in US counties, as captured by strength of civic norms and density of social networks in the counties, are systematically related to tax avoidance activities of corporations with headquarters located in the counties. We find strong negative associations between social capital and corporate tax avoidance, as captured by effective tax rates and book-tax differences. These results are incremental to the effects of local religiosity and firm culture toward socially-irresponsible activities. They are robust to using organ donation as an alternative social capital proxy and fixed effect regressions. They extend to aggressive tax avoidance practices. Additionally, we provide corroborating evidence using firms with headquarter relocation that changes the exposure to social capital. We conclude that social capital surrounding corporate headquarters provides environmental influences constraining corporate tax avoidance.
    JEL: A13 H26 M40 M41 Z13
    Date: 2017–08–10
  6. By: John E. Roemer (Dept. of Political Science & Cowles Foundation, Yale University)
    Abstract: Humans cooperate a great deal in economic activity, but our two major models of equilibrium – Walrasian competitive in markets and Nash in games – portray us as only non-cooperative. In earlier work, I have proposed a model of cooperative decision making (Kantian optimization); here, I embed Kantian optimization in general equilibrium models and show that ‘Walras-Kant’ equilibria exist and often resolve inefficiencies associated with income taxation, public goods and bads, and non-traditional firm ownership, which typically plague models where agents are Nash optimizers. In four examples, introducing Kantian optimization in one market – often the labor market – suffices to internalize externalities, generating Pareto efficient equilibria in their presence. The scope for efficient decentralization via markets appears to be significantly broadened with cooperative behavior.
    Keywords: Kantian optimization, Cooperation, General equilibrium, Market socialism, Global emissions control, Worker-owned firms, Externalities, Public goods
    JEL: D50 D60 D62 D70 D91 E19 H21 H23 H41
    Date: 2017–08
  7. By: Seth G Benzell; Laurence J Kotlikoff; Guillermo LaGarda
    Abstract: The U.S., according to some measures, has one of the highest marginal effective corporate tax rates (METRs) of any developed country. Yet the tax collects less than 2 percent of GDP. This paper studies the impact of replacing the U.S. corporate tax with a Business Cash Flow Tax (BCFT). Our paper studies BCFT reform with reference to a particular, but reasonably generic, proposal, namely the House Republican “Better Way” tax plan. We use the Global Gaidar Model – a 17-region, global, overlapping-generations model, calibrated to U.N. demographic and IMF fiscal data – to simulate the dynamic, general equilibrium impact of this reform. In the short run, the U.S. capital stock, pre-tax wage rates, and GDP rise by roughly 25 percent, 8 percent, and 9 percent, respectively. Over time, the capital stock and wage rates remain significantly above their baseline values. There is a smaller long-run increase in GDP as workers spend some of their higher wages on additional leisure. The tax reform produces enough additional revenues to permit a reduction in personal income tax rates while maintaining the economy's initial debt-to-GDP ratio. The beneficiaries of the House plan are today's and tomorrow's workers. We also simulate a matching METR cut by the rest of the world, which raises the world interest rate. The short-run increases in the capital stock, pre-tax wage rates, and GDP are smaller. However, along the transition path, all U.S. agents experience slightly higher welfare than under the House plan. This reflects the combination of a higher post-corporate tax world interest rate and Americans' disproportionately large holdings of global assets
    JEL: E02 F43 H2 H6
    Date: 2017–08
  8. By: Christina Gathmann; Björn Sass
    Abstract: Previous studies report a range of estimates for the response of female labor supply and childcare attendance to childcare prices. We shed new light on these questions using a policy reform that raises the price of public daycare. After the reform, children are 8 percentage points less likely to attend public daycare which implies a compensated price elasticity of -0.6. There is little labor supply response in the full sample, though declines for vulnerable subgroups. Spillover effects on older siblings and fertility decisions show that the policy affects the whole household, not just targeted family members.
    Date: 2017
  9. By: Mariana Paja (Ecological University of Bucharest - Faculty of Economics)
    Abstract: The Brexit will reduce the amounts that the European Union will be able to redirect for Structural and Cohesion Funds to reduce gaps in favor of less developed countries. If we have any external support, we will be able to achieve the revenue enumerated in the state budget law. The main sources of growth, which would increase revenues, are strictly the funds that would come from the European Union (five times more this year than last year). By providing this year's budget, for the good budget execution as it was initiated, it would be ideal to get these absolutely necessary funds.
    Keywords: absorption, EU budget, European funds, financial flow
    JEL: H62 H63 H68
    Date: 2017–04

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