nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒09‒03
twenty-one papers chosen by
Thomas Andrén

  1. The Elasticity of Taxable Income: The case of South Africa By Johannes Hermanus Kemp
  2. Optimal Progressivity with Age-Dependent Taxation By Heathcote, Jonathan; Storesletten, Kjetil; Violante, Giovanni L.
  3. Optimal Ramsey Capital Income Taxation —A Reappraisal By Chien, YiLi; Wen, Yi
  4. Improving tax policy and administration in South-East Asia By Daniel Jeongdae Lee from the Macroeconomic Policy and Financing for Development Division.
  5. Should the Rich Be Taxed More? The Fiscal Inequality Coefficient By Hatgioannides, John; Karanassou, Marika; Sala, Hector
  6. An equilibrium-conserving taxation scheme for income from capital By Jacques Tempere
  7. On the effects of repeated tax amnesties By Sanchez Villalba, Miguel A.
  8. Tax Decentralisation, Labour productivity and Employment By Bartolini, David; Ninka, Eniel; Santolini, Raffaella
  9. The Credibility of Commitment and Optimal Nonlinear Savings Taxation By Jang-Ting Guo; Alan Krause
  10. Whose Child Is This? Shifting of Dependents Among EITC Claimants Within the Same Household By David Splinter; Jeff Larrimore; Jacob Mortenson
  11. Tax Competition with Heterogeneous Capital Mobility By Steeve Mongrain; John D. Wilson
  12. Taxing for shared prosperity By Daniel Jeongdae Lee and Zheng Jian from the Macroeconomic Policy and Financing for Development Division.
  13. Measuring the Effectiveness of Taxes and Transfers in Fighting Inequality and Poverty By Ali Enami
  14. Should Robots Be Taxed? By Guerreiro, Joao; Rebelo, Sérgio; Teles, Pedro
  15. Welfare Reform and the Intergenerational Transmission of Dependence By Hartley, Robert Paul; Lamarche, Carlos; Ziliak, James P.
  16. Optimal Taxation to Correct Job Mismatching By Guillaume Wilemme
  17. Social Security Claiming Decisions: Survey Evidence By John B. Shoven; Sita Nataraj Slavov; David A. Wise
  18. Women in Top Incomes: Evidence from Sweden 1974–2013 By Boschini, Anne; Gunnarsson, Kristin; Roine, Jesper
  19. Do ‘Catch-up Limits’ Raise Retirement Saving? Evidence from a Regression Discontinuity Design By Adam M. Lavecchia
  20. "Unemployment: The Silent Epidemic" By Pavlina R. Tcherneva
  21. Optimal Taxation and Economic Growth in Tunisia: Short and Long Run Cointegration Analysis By Chokri Terzi; Anis El Ammari; Ali Bouchrika; Khalil Mhadhbi

  1. By: Johannes Hermanus Kemp
    Abstract: A central tax policy parameter that has received much attention internationally, but about which there is substantial uncertainty, is the overall elasticity of taxable income. The size of this elasticity is of critical importance in the formulation of tax and transfer policy, as well as for the study of the welfare implications of tax decisions. This paper uses a panel of individual tax returns for the period 2009 - 2013 and the phenomenon of ’bracket creep’ as source of tax rate variation to construct instrumental variable estimates of the sensitivity of income to changes in tax rates. We find that the overall elasticity of taxable income is approximately 0.3, while that of broad income is significantly lower. This overall elasticity is primarily due to the elastic response of taxable income for taxpayers who have incomes above R380 000, who have an elasticity of closer to 0.4. The estimates suggest an optimal marginal tax rate for the top 10% of income earners that is generally in line with the current income tax schedule. However, results also suggest that there is little scope for raising marginal rates on high-income earners without inducing a negative revenue response.
    Keywords: fiscal policy, Elasticity, taxable income, optimal tax
    JEL: H21 H31 J22
    Date: 2017–08
  2. By: Heathcote, Jonathan (Federal Reserve Bank of Minneapolis); Storesletten, Kjetil (University of Oslo); Violante, Giovanni L. (Princeton University)
    Abstract: This paper studies optimal taxation of labor earnings when the degree of tax progressivity is allowed to vary with age. We analyze this question in a tractable equilibrium overlapping-generations model that incorporates a number of salient trade-offs in tax design. Tax progressivity provides insurance against ex-ante heterogeneity and earnings uncertainty that missing markets fail to deliver. However, taxes distort labor supply and human capital investments. Uninsurable risk cumulates over the life cycle, and thus the welfare gains from income compression via progressive taxation increase with age. On the other hand, average labor productivity rises with age, and thus the welfare losses from progressive taxation's distortionary impact on labor supply also increase with age. The optimal age-varying system balances these distortions. In a calibrated version of the economy, we quantify the welfare gains of moving from the optimal age-invariant to the optimal age-dependent system and find that they are negligible.
    Keywords: Tax progressivity; Tagging; Income distribution; Skill investment; Labor supply; Partial insurance; Government expenditures; Welfare
    JEL: D30 E20 H20 H40 J22 J24
    Date: 2017–08–04
  3. By: Chien, YiLi (Federal Reserve Bank of St. Louis); Wen, Yi (Federal Reserve Bank of St. Louis)
    Abstract: This paper addresses a long-standing problem in the optimal Ramsey capital taxation literature. The tractability of our model enables us to solve the Ramsey problem analytically along the entire transitional path. We show that the conventional wisdom on Ramsey tax policy and its underlying intuition and rationales do not hold in our model and may thus be misrepresented in the literature. We uncover a critical trade off for the Ramsey planner between aggregate allocative efficiency in terms of the modified golden rule and individual allocative efficiency in terms of self-insurance. Facing the trade off, the Ramsey planner prefers issuing debt rather than taxing capital if possible. In particular, the planner always intends to supply enough bonds to relax individuals' borrowing constraints and through which to achieve the modified golden rule by crowding out capital. Capital tax is not the vital tool to achieve aggregate allocative efficiency despite possible over-accumulation of capital. Thus the optimal capital tax can be zero, positive, or even negative, depending on the Ramsey planner's ability to issue debt. The modified golden rule can fail to hold whenever the government encounters a debt limit. Finally, the desire to relax individuals' borrowing constraints by the planner may lead to unlimited debt accumulation, resulting in a dynamic path featuring no steady state.
    Keywords: Optimal Capital Taxation; Ramsey Problem; Incomplete Market
    JEL: E13 E62 H21 H30
    Date: 2017–08–18
  4. By: Daniel Jeongdae Lee from the Macroeconomic Policy and Financing for Development Division. (United Nations Economic and Social Commission for Asia and the Pacific)
    Abstract: An important function of the government is to collect taxes for the provision of public goods. While a number of South-East Asian economies, such as Indonesia and the Philippines, have relatively low tax revenues as a share of GDP, there is renewed public interest in strengthening tax revenues for better education, healthcare and infrastructure, especially in the context of the recently adopted 2030 Agenda for Sustainable Development. This policy brief discusses how improvements in tax policy and administration could help raise adequate revenues and provides illustrative estimates of ‘potential’ tax revenues.
  5. By: Hatgioannides, John (City University London); Karanassou, Marika (Queen Mary, University of London); Sala, Hector (Universitat Autònoma de Barcelona)
    Abstract: This paper holistically addresses the effective (relative) income tax contribution of a given in-come (or, wealth) group. The widely acclaimed standard in public policy is the absolute benefaction of a given income group in filling up the fiscal coffers. Instead, we focus on the ratio of the average income tax rate of an income group divided by the percentage of national income (or wealth) appropriated by the same income group. In turn, we develop the Fiscal Inequality Coefficient which compares the effective percentage income tax payments of pairs of income (or wealth) groups. Using data for the US, we concentrate on pairs such as the Bottom 90% versus Top 10%, Bottom 99% versus Top 1%, and Bottom 99.9% versus Top 0.1%. We conclude that policy makers with a strong social conscience should re-evaluate the progressivity of the income tax system and make the richest echelons of the income and wealth distributions pay a fairer and higher tax.
    Keywords: fiscal policy, progressive income taxation, inequality, effective income tax rate, fiscal inequality coefficient
    JEL: H23 H30 E64
    Date: 2017–08
  6. By: Jacques Tempere
    Abstract: Under conditions of market equilibrium, the distribution of capital income follows a Pareto power law, with an exponent that characterizes the given equilibrium. Here, a simple taxation scheme is proposed such that the post-tax capital income distribution remains an equilibrium distribution, albeit with a different exponent. This taxation scheme is shown to be progressive, and its parameters can be simply derived from (i) the total amount of tax that will be levied, (ii) the threshold selected above which capital income will be taxed and (iii) the total amount of capital income. The latter can be obtained either by using Piketty's estimates of the capital/labor income ratio or by fitting the initial Pareto exponent. Both ways moreover provide a check on the amount of declared income from capital.
    Date: 2017–08
  7. By: Sanchez Villalba, Miguel A.
    Abstract: We examine empirically the effect of tax amnesties on long term tax collection when such amnesties are used by a government as a regular source of revenue. We use data from the Tucuman province (Argentina) to test the main hypothesis of the model, namely, that amnesties lower the government’s revenue, as they reduce the penalties and make evasion more profitable. We find, however, that amnesties do not affect the long-term revenue. The other main result is in line with the theoretical predictions: the increase in short-run revenue is temporary and only accelerates the collection of the taxes but does not increase the amount collected. Thus, we conclude that amnesties were used only to obtain a short-run surge in revenue and to avoid more fundamental tax reforms.
    Keywords: tax amnesties; tax evasion
    JEL: C22 H26 H27
    Date: 2017
  8. By: Bartolini, David; Ninka, Eniel; Santolini, Raffaella
    Abstract: Tax decentralisation should improve the efficiency of local governments and ultimately boost output growth. The empirical evidence is however mixed. The current work looks at two channels through which tax decentralisation may affect economic growth: labour productivity and employment rate. The empirical analysis conducted on 20 OECD countries over the period 1980-2010 shows that the ultimate effect of fiscal decentralisation on growth depends on which channel prevails, thus rendering the direct estimation of tax decentralisation on growth ambiguous. Tax decentralisation make the employment rate grow faster, while it has either no effect of reduces labour productivity growth. When the analysis is conducted using an IV approach with instruments based on institutional similarities and geographic distance, the positive and significant effect on employment rate growth is offset by the reduction of labour productivity growth, resulting in the absence of any statistically significant effect on output growth.
    Keywords: economic growth; labour productivity; employment rate; tax decentralisation
    JEL: H70 H77 O40 O47
    Date: 2017–08–31
  9. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Alan Krause (University of York, UK)
    Abstract: We compare optimal nonlinear savings taxation under different assumptions with regard to the government's ability to commit to its future tax policy. In particular, we incorporate the possibility that individuals may differ in their beliefs regarding the probability of commitment. When these beliefs are homogeneous, we find that optimal marginal savings tax rates always fall between those under the polar cases of full-commitment (zero marginal savings taxation) and no-commitment (progressive marginal savings taxation). However, this result no longer holds when beliefs are postulated to be heterogeneous. The effects of beliefs changing in response to past commitment or no-commitment decisions by the government are also quantitatively explored.
    Keywords: Savings Taxation; Commitment; Multi-Dimensional Screening.
    JEL: E60 H21 H24
    Date: 2017–09
  10. By: David Splinter; Jeff Larrimore; Jacob Mortenson
    Abstract: Using a panel of household level tax data, we estimate the degree to which dependents are "reassigned" between tax units within households, and how these reassignments affect combined tax liabilities. Reassigning dependents reduces combined tax liabilities on average, suggesting some household level coordination. Additionally, when EITC benefits expanded in 2009, reassignments increasingly involved adding a third child to tax returns to claim these new benefits. However, the subgroup reassigning towards three child tax units actually increased total household tax liabilities, suggesting that some taxpayers may prioritize minimizing their own tax burden or focus on particularly salient aspects of tax policy.
    Keywords: Earned income tax credit ; Household level tax coordination ; Tax avoidance
    JEL: D10 H24 H26 H31 H53
    Date: 2017–08–22
  11. By: Steeve Mongrain (Simon Fraser University); John D. Wilson (Michigan State University)
    Abstract: An ongoing debate in the tax competition literature is whether a system of countries or regions should restrict the preferential tax treatment of different types of firms or capital. We further investigate this issue by departing from the bulk of the literature in three ways: (1) rather than maximize only tax revenue, governments also put positive weight on the income generated by resident-owned firms; (2) under preferential taxation, firms are distinguished by their country of origin; and (3) the competing regions are allowed to differ in size. Under the assumption of uniformly-distributed moving costs, identical regions always prefer the non-preferential regime. But when a small and large region compete, the small region prefers the preferential regime in some cases. We also identify non-uniform distributions of moving costs where the preferential regime is preferred by identical competing regions. This finding is related to differences in tax-base elasticities.
    Keywords: Tax Competition; Heterogeneity; Preferential Tax Treatment.
    JEL: H73 H77 H71
    Date: 2017–06–21
  12. By: Daniel Jeongdae Lee and Zheng Jian from the Macroeconomic Policy and Financing for Development Division. (United Nations Economic and Social Commission for Asia and the Pacific)
    Abstract: After decades of remarkable economic growth which lifted millions out of extreme poverty, Asia is now grappling with a widening gap between the haves and the have-nots. This policy brief examines ways in which tax policy can help narrow this gap. It finds that Asian countries could benefit from a more balanced tax mix, a more progressive income tax, and greater use of wealth-related taxes.
  13. By: Ali Enami (Department of Economics, Tulane University)
    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
    Date: 2017–08
  14. By: Guerreiro, Joao; Rebelo, Sérgio; Teles, Pedro
    Abstract: We use a model of automation to show that with the current U.S. tax system, a fall in automation costs could lead to a massive rise in income inequality. This inequality can be reduced by raising marginal income tax rates and taxing robots. But this solution yields mediocre outcomes both in terms of efficiency and inequality. A Mirrleesian optimal income tax achieves better outcomes, but is difficult to implement. A practical compromise is to amend the tax system to include a lump-sum rebate. With this rebate in place, it is optimal to tax robots only when there is partial automation.
    Keywords: automation; inequality; optimal taxation; robots.
    JEL: H21 O33
    Date: 2017–08
  15. By: Hartley, Robert Paul (Columbia University); Lamarche, Carlos (University of Kentucky); Ziliak, James P. (University of Kentucky)
    Abstract: We estimate the effect of welfare reform on the intergenerational transmission of welfare participation and related economic outcomes using a long panel of mother-daughter pairs over the survey period 1968–2013 in the Panel Study of Income Dynamics. Because states implemented welfare reform at different times starting in 1992, the cross-state variation over time permits us to quasi-experimentally separate out the effect of mothers' welfare participation during childhood on daughters' economic outcomes in adulthood in the pre-and post-welfare reform periods. We find that a mother's welfare participation increased her daughter's odds of participation as an adult by roughly 30 percentage points, but that welfare reform attenuated this transmission by at least 50 percent, or at least 30 percent over the baseline odds of participation. While we find comparable-sized transmission patterns in daughters' adult use of the broader safety net and other outcomes such as educational attainment and income, there is no diminution of transmission after welfare reform. These results are obtained by addressing nonrandom selection into welfare and are robust to other potential threats to identification from misclassification error, life-cycle age effects, and cross-state mobility.
    Keywords: welfare reform, welfare participation, intergenerational transmission, poverty
    JEL: I38 J62 H53
    Date: 2017–08
  16. By: Guillaume Wilemme (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - CNRS - Centre National de la Recherche Scientifique - ECM - Ecole Centrale de Marseille)
    Abstract: This paper presents a new efficiency argument for an accommodating taxation policy on high incomes. Job seekers, applying to different segments of a frictional labor market, do not internalize the consequences of mismatch on the entry decision of firms. Workers are not selective enough, resulting in a lower average job productivity and suboptimal job creation. The output-maximizing policy is anti-redistributive to improve the quality of the jobs prospected. As an income tax affects the sharing of the match surplus, a tax on production (or profits) is required to redress the slope of the wage curve. Neither a minimum wage nor unemployment benefits can fully decentralize optimal search behaviors.
    Keywords: anti-redistributive taxation,composition externality,job quality,mismatch,search strategy
    Date: 2017–06
  17. By: John B. Shoven; Sita Nataraj Slavov; David A. Wise
    Abstract: While research shows that there are large gains in lifetime wealth from delaying claiming Social Security, most people claim at or before full retirement age. We fielded an original, nationally representative survey to gain insight into people’s rationales for their Social Security claiming decisions, their satisfaction with their past claiming decisions, and how they financed any gap between retirement and claiming. Common rationales for claiming Social Security before full retirement age include stopping work, liquidity, poor health, and concerns about future benefit cuts due to policy changes. Claiming upon stopping work and claiming at full retirement age appear to be viewed as social norms. But while Social Security claiming is strongly associated with stopping work, the roughly quarter of the sample who have a gap of two or more years between retirement and claiming used employer-sponsored pensions and other saving to finance the delay. Individuals who claimed at full retirement age are more satisfied with their claiming decisions than individuals who claimed early or delayed. There is little evidence that claiming decisions and rationales for claiming are correlated with financial literacy or knowledge of Social Security rules.
    JEL: D14 H55 J26
    Date: 2017–08
  18. By: Boschini, Anne (SOFI, Stockholm University); Gunnarsson, Kristin (Uppsala University); Roine, Jesper (Stockholm Institute of Transition Economics)
    Abstract: Using a large, register-based panel data set we study gender differences in top incomes in Sweden over the period 1974–2013. We find that, while women are still a minority of the top decile group, and make up a smaller share the higher up in the distribution we move, their presence has steadily increased in all top groups over the past four decades. Top income women are wealthier and rely more on capital incomes, but the difference, relative to men, has decreased since the 1970s. Over this period capital incomes have in general become more important in the top, but the share of working-rich women has gone up, while the opposite is true for men. Realized capital gains are more important for top income women but turn out to be of a more transitory nature than for men. Mobility is generally higher for top income women compared to top income men but the trend since the 1990s is toward increased gender equality in this respect too. Finally, we find important differences between top income women and men in terms of marital status and family composition. Overall, our results suggest that many of the findings in the top income literature have a clear gender component and that understanding gender equality in the top of the distribution requires studying not only earnings and labour market outcomes but also incomes from other sources.
    Keywords: income inequality, income distribution, gender inequality, top incomes, capital incomes, realized capital gains
    JEL: D13 D31 H20 J16 J31
    Date: 2017–08
  19. By: Adam M. Lavecchia (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: This paper studies the effect of raising contribution limits on retirement saving by exploiting the ‘catch-up limit’ provision, a rule which allows those over the age of 50 to make higher IRA and 401(k) contributions than those under 50. Using an age-related regression discontinuity design, I find that eligibility for ‘catch-up limits’ leads to a large increase in total tax-deferred contributions for those without access to a 401(k) plan. This is driven by a 25 percent increase in average IRA contributions and a 21 percent increase in the likelihood of making an IRA contribution. I also find no significant effects on overall 401(k) contributions. The findings suggest that, contrary to the neoclassical life-cycle model, the response to eligibility for ‘catchup limits’ was not limited to constrained savers.
    Keywords: Retirement saving, Tax-preferred savings accounts, Contribution limits, Regression discontinuity design
    JEL: D14 H31 J26
    Date: 2017
  20. By: Pavlina R. Tcherneva
    Abstract: This paper examines two key aspects of unemployment--its propagation mechanism and socioeconomic costs. It identifies a key feature of this macroeconomic phenomenon: it behaves like a disease. A detailed assessment of the transmission mechanism and the existing pecuniary and nonpecuniary costs of unemployment suggests a fundamental shift in the policy responses to tackling joblessness. To stem the contagion effect and its outsized social and economic impact, fiscal policy can be designed around two criteria for successful disease intervention--preparedness and prevention. The paper examines how a job guarantee proposal uniquely meets those two requirements. It is a policy response whose merits include much more than its macroeconomic stabilization features, as discussed in the literature. It is, in a sense, a method of inoculation against the vile effects of unemployment. The paper discusses several preventative features of the program.
    Keywords: Unemployment; Epidemic; Mortality; Morbidity; Health; Scarring Effects; Crime; Family; Job Guarantee; Labor Market Dynamics; Involuntary Job Loss; Prevention
    JEL: E24 E62 H1 H4 I18 I3 J08 J6
    Date: 2017–08
  21. By: Chokri Terzi (IMM - Institut Marcel Mauss - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique); Anis El Ammari (IMM - Institut Marcel Mauss - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique); Ali Bouchrika (IMM - Institut Marcel Mauss - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique); Khalil Mhadhbi (IMM - Institut Marcel Mauss - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Tax policy is among the most common and relevant instruments in the toolkit of policy-makers when thinking about promoting growth, yet there is not compelling evidence regarding its effect in Tunisia. Using a variety of approaches, we measure firstly the optimal tax burden rate using Scully’s static model and the quadratic model. For Scully’s static model, gross domestic product is the dependent variable. For the quadratic model, growth rate is a dependent variable explained by tax rate in level and in square including dummy variables. Secondly and according to stationary and cointegration test results, we focus on the long-term effects on gross domestic product of the important taxes, namely tax revenue and private receipts including dummy variable. In this second study, we use a basic Scully model and we develop a vector error correction model technique. Our results show that optimal tax burden rate has to be situated between 12.8% and 19.6% of gross domestic product which is widely lower than the current rates. The long-term analysis estimates an optimal rate of 15.2% of gross domestic product which can participate to increase economic growth, to stabilize the tax evasion and to encourage investment especially after the Tunisian revolution.
    Keywords: cointegration,tax burden rate, growth, vector error correction model
    Date: 2017–06–22

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