nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒09‒17
twenty papers chosen by
Thomas Andrén

  1. Disability benefits, consumption insurance, and household labor supply By David Autor; Andreas Ravndal Kostøl; Magne Mogstad; Bradley Setzler
  2. The Laffer curve for high incomes By Jacob Lundberg
  3. On the Marginal Excess Burden of Taxation in an Overlapping Generations Model By Chung Tran; Sebastian Wende
  4. The elasticity of taxable income: A meta-regression analysis By Neisser, Carina
  5. Tax Evasion and Inequality By Annette Alstadsæter; Niels Johannesen; Gabriel Zucman
  6. The Impact of a Rise in the Real Estate Transfer Taxes on the French Housing Market By Guillaume Bérard; Alain Trannoy
  7. Who Owns the Wealth in Tax Havens? Macro Evidence and Implications for Global Inequality By Annette Alstadsæter; Niels Johannesen; Gabriel Zucman
  8. Fiscal consolidation in an open economy with sovereign premia and without monetary policy independence By Philippopoulos, Apostolis; Varthalitis, Petros; Vassilatos, Vanghelis
  9. The Credibility of Commitment and Optimal Nonlinear Savings Taxation By Jang-Ting Guo; Alan Krause
  10. Towards a European R&D Incentive? An assessment of R&D Provisions under a Common Corporate Tax Base By Diego d'Andria; Dimitrios Pontikakis; Agnieszka Skonieczna
  11. Banks in Tax Havens: First Evidence based on Country-by-Country Reporting By Vincent Bouvatier; Gunther Capelle-Blancard; Anne-Laure Delatte
  12. The Marginal welfare cost of personal income taxation in New Zealand By Creedy, John; Mok, Penny
  13. BIMic: the Bank of Italy microsimulation model for the Italian tax and benefit system By Nicola Curci; Marco Savegnago; Marika Cioffi
  14. Personal Income Tax Reforms: A Genetic Algorithm Approach By Matteo Morini; Pellegrino Simone
  15. Tax Evasion, Firm Dynamics and Growth By Emmanuele Bobbio
  16. Household spending out of a tax rebate: Italian “€80 tax bonus” By Neri, Andrea; Rondinelli, Concetta; Scoccianti, Filippo
  17. Taxes and Market Hours -- the Role of Gender and Skill By Rachel Ngai; Lei Fang; Robert Duval Hernandez
  18. Effectiveness of tax incentives for venture capital and business angels to foster the investment of SMEs and start-ups By Institute for Advanced Studies (IHS)
  19. Dynamics of the British Multinational Enterprises and International Tax Regulation, 1914?1945 By Ryo Izawa
  20. Incentives to local public service provision: an evaluation of Italy’s Obiettivi di Servizio By Guglielmo Barone; Guido de Blasio; Alessio D'Ignazio; Andrea Salvati

  1. By: David Autor (MIT Department of Economics and NBER); Andreas Ravndal Kostøl (Norges Bank (Central Bank of Norway)); Magne Mogstad (University of Chicago and Statistics Norway and NBER); Bradley Setzler (University of Chicago)
    Abstract: While a mature literature finds that Disability Insurance (DI) receipt discourages work, the welfare implications of these findings depend on two rarely studied economic quantities: the full cost of DI allowances to taxpayers, summing over DI transfer payments, benefit substitution to or from other transfer programs, and induced changes in tax receipts; and the value that individuals and families place on receiving benefits in the event of disability. We comprehensively assess these missing margins in the context of Norway's DI system, drawing on two strengths of the Norwegian environment. First, Norwegian register data allow us to characterize the household impacts and fiscal costs of disability receipt by linking employment, taxation, benefits receipt, and assets at the person and household level. Second, random assignment of DI applicants to Norwegian judges who differ systematically in their leniency allows us to recover the causal effects of DI allowance on individuals at the margin of program entry. Accounting for the total effect of DI allowances on both household labor supply and net payments across all public transfer programs substantially alters our picture of the consumption benefits and fiscal costs of disability receipt. While DI denial causes a significant drop in household income and consumption on average, it has little impact on income or consumption of married applicants; spousal earnings and benefit substitution entirely offset the loss in DI benefit payments. To develop the welfare implications of these findings, we estimate a dynamic model of household behavior that translates employment, reapplication and savings decisions into revealed preferences for leisure and consumption. We find that household valuation of receipt of DI benefits is considerably greater for single and unmarried individuals than for married couples because spousal labor supply substantially buffers household income and consumption in the event of DI denial.
    Keywords: disability insurance, consumption insurance, household labor supply, added worker
    JEL: I38 J62 H53
    Date: 2017–09–06
  2. By: Jacob Lundberg
    Abstract: An expression for the Laffer curve for high incomes is derived, assuming a constant Pareto parameter and elasticity of taxable income. The peak of this Laffer curve is given by the well-known Saez (2001) expression. Microsimulations using Swedish population data show that the simulated curve matches the theoretically derived Laffer curve well, suggesting that the analytical expression is not too much of a simplification. Policy conclusions do not change much when income effects are taken into account. A country-level dataset of top effective marginal tax rates and Pareto parameters is assembled. This is used to draw Laffer curves for 27 OECD countries. Revenue-maximizing tax rates and degrees of self-financing for a small tax cut are also computed. The results indicate that degrees of self-financing range between 28 and 195 percent. Five countries have higher tax rates than the peak of the Laffer curve.
    Date: 2017–08
  3. By: Chung Tran; Sebastian Wende
    Abstract: We quantify marginal excess burden, defined as the change in deadweight loss for an additional dollar of tax revenue, for different taxes. We use a dynamic general equilibrium, overlapping generations model featured with heterogeneous agents and a realistic structure of corporate finance and taxes. Our main results, based on an economy calibrated to Australian data, indicate that company taxes are more distorting than personal income and consumption taxes. Specifically, the marginal excess burden for the company income tax is 83 cents per dollar of tax revenue raised, compared to 34 cents and 24 cents for the personal income and consumption taxes, respectively. A broader analysis of more tax instruments confrim that the relatively larger excess burden of company taxes ultimately falls on households. Importantly, the marginal excess burden is distributed unevenly across skill types, generations and ages. This highlights political challenges when obtaining popular support for raising taxes. Hence, our analysis demonstrates that marginal excess burden can be an useful tool for evaluating both eciency and distributional implications of a tax increase at the margin.
    Keywords: Taxation, scal distortion, overlapping generations, skill hetero-geneity, corporate nance, deadweight loss, dynamic general equilibrium, welfare
    JEL: E62 H21 H22 H24 H25
    Date: 2017–09
  4. By: Neisser, Carina
    Abstract: The elasticities of taxable (ETI) and broad income (EBI) are key parameters in optimal tax and welfare analysis. To examine the large variation in estimates found in the literature, I conduct a comprehensive meta-regression analysis of elasticities that measure behavioral responses to income taxation using information from 51 different studies containing 1,420 estimates. I find that heterogeneity in reported estimates is driven by regression techniques, sample restrictions and variations across countries and time. Moreover, I provide descriptive evidence of the correlation between contextual factors and the magnitude of an elasticity estimate. Overall, the study confirms the fact that the ETI itself is endogenous to the underlying tax system. I also document that selective reporting bias is prevalent in the literature. The direction of reporting bias depends on whether or not deductions are included in the tax base.
    Keywords: elasticity of taxable income,income tax,behavioral response,meta-regression analysis
    JEL: C81 H24 H26
    Date: 2017
  5. By: Annette Alstadsæter; Niels Johannesen; Gabriel Zucman
    Abstract: This paper attempts to estimate the size and distribution of tax evasion in rich countries. We combine random audits—the key source used to study tax evasion so far—with new micro-data leaked from large offshore financial institutions—HSBC Switzerland (“Swiss leaks”) and Mossack Fonseca (“Panama Papers”)—matched to population-wide wealth records in Norway, Sweden, and Denmark. We find that tax evasion rises sharply with wealth, a phenomenon random audits fail to capture. On average about 3% of personal taxes are evaded in Scandinavia, but this figure rises to close to 30% in the top 0.01% of the wealth distribution, a group that includes households with more than $45 million in net wealth. A simple model of the supply of tax evasion services can explain why evasion rises steeply with wealth. Taking tax evasion into account increases the rise in inequality seen in tax data since the 1970s markedly, highlighting the need to move beyond tax data to capture income and wealth at the top, even in countries where tax compliance is generally high. We also find that after reducing tax evasion—by using tax amnesties—tax evaders do not legally avoid taxes more. This result suggests that fighting tax evasion can be an effective way to collect more tax revenue from the very wealthy.
    JEL: E21 H26
    Date: 2017–09
  6. By: Guillaume Bérard (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); Alain Trannoy (EHESS - Ecole des Hautes Etudes en Sciences Sociales, 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 estimates the effects of an increase in the real estate transfer taxes (RETT) rate from 3.80% to 4.50%, following an optional reform implemented in March 2014 by French départements. Not all the départements implemented the RETT increase, which is the starting point for a natural experiment: using a difference-in-differences design, we estimate two main effects. (1) An anticipation effect a month before the implementation of the reform in order to avoid the RETT increase (timing response). The total tax base increased by 28% just the month before. (2) The classic depressing effect of a tax on the equilibrium quantity (extensive margin response) is estimated to be 7% on average from March 2014 to October 2015. All in all, the average net effect corresponds to a drop of the transactions of 4.6% over a period of ten months following the implementation date. Furthermore, we estimate that the elasticity of the tax revenue to the tax increase is about 0.65, meaning that départements’ tax revenues are still on the increasing side of the Laffer curve.
    Keywords: local government,real estate market,transfer taxes,natural experiment,anticipation
    Date: 2017–09
  7. By: Annette Alstadsæter; Niels Johannesen; Gabriel Zucman
    Abstract: Drawing on newly published macroeconomic statistics, this paper estimates the amount of household wealth owned by each country in offshore tax havens. The equivalent of 10% of world GDP is held in tax havens globally, but this average masks a great deal of heterogeneity—from a few percent of GDP in Scandinavia, to about 15% in Continental Europe, and 60% in Gulf countries and some Latin American economies. We use these estimates to construct revised series of top wealth shares in ten countries, which account for close to half of world GDP. Because offshore wealth is very concentrated at the top, accounting for it increases the top 0.01% wealth share substantially in Europe, even in countries that do not use tax havens extensively. It has considerable effects in Russia, where the vast majority of wealth at the top is held offshore. These results highlight the importance of looking beyond tax and survey data to study wealth accumulation among the very rich in a globalized world.
    JEL: E21 H26 H87
    Date: 2017–09
  8. By: Philippopoulos, Apostolis; Varthalitis, Petros; Vassilatos, Vanghelis
    Abstract: We welfare rank various tax-spending-debt policies in a New Keynesian model of a small open economy featuring sovereign interest-rate premia and loss of monetary policy independence. When we compute optimized state-contingent policy rules, our results are: (a) Debt consolidation comes at a short-term pain but the medium- and long-term gains can be substantial. (b) In the early phase of pain, the best fiscal policy mix is to cut public consumption spending to address the debt problem, and, at the same time, to cut income tax rates to mitigate the recessionary effects of debt consolidation. (c) In the long run, the best way of using the fiscal space created is to reduce capital taxes.
    Keywords: Feedback policy, New Keynesian, Sovereign premia, Debt consolidation
    JEL: E6 F3 H6
    Date: 2016
  9. By: Jang-Ting Guo; Alan Krause
    Abstract: 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-dimendional screening
    JEL: E69 H21 H24
    Date: 2017–09
  10. By: Diego d'Andria (European Commission - JRC); Dimitrios Pontikakis (European Commission - JRC); Agnieszka Skonieczna (European Commission - TAXUD)
    Abstract: EU businesses underinvest in R&D which is a driver of economic growth and productivity. While the world is becoming more R&D-intensive, the relative weight of the EU is decreasing, mainly due to the rapid rise of China. Taxation has been increasingly used to stimulate investment in R&D. A recent proposal for a Common Consolidated Corporate Tax Base (CCCTB) across the European Union (EU) includes an R&D incentive. This paper presents the rationale for the inclusion of R&D provisions, quantifies the subsidy implied by alternative options using the user's cost approach and approximates aggregate impacts by means of simple extrapolations from elasticities found in literature. We find that the CCCTB without an R&D incentive would significantly deteriorate incentives to invest in R&D. We present alternative options and argue that the level of support should be ambitious to address the pressing need in the EU to invest more, stay globally competitive and reach the EU's target of investing 3% of its GDP in R&D. Importantly, to take full advantage of the opportunities offered by this tax reform, EU member states will have to coherently mobilise a range of policies and engage in complementary non-tax interventions in their national innovation systems. We conclude with a broad consideration of what these may be for the varied and variably developed business innovation capabilities found across the EU.
    Keywords: R&D, B-index, CCCTB, Corporate taxation, innovation
    JEL: F21 H25 H73 O31
    Date: 2017–07
  11. By: Vincent Bouvatier; Gunther Capelle-Blancard; Anne-Laure Delatte
    Abstract: Since the Great Financial Crisis, several scandals have exposed a pervasive light on banks' presence in tax havens. Taking advantage of a new database, this paper provides a quantitative assessment of the importance of tax havens in international banking activity. Using comprehensive individual country-by-country reporting from the largest banks in the European Union, we provide several new insights: 1) Tax havens attract large extra banking activity beyond the regular gravity factors (+168% according to our estimates); 2) For EU banks, the main tax havens are located within Europe: Luxembourg, Isle of Man and Guernsey rank at the top of the foreign affiliates; 3) Attractive low tax rates are not sufficient to drive extra activity; 4) High quality of governance is not a driver, but banks avoid countries with weakest governance; 5) Banks also avoid the most opaque countries; 6) The tax savings for EU banks is estimated between €1 billion and €3.6 billion, i.e. 5 and 20% of fiscal revenues.
    Keywords: Tax evasion;International banking;Tax havens;Country-by-country reporting
    JEL: F23 G21 H22 H32
    Date: 2017–09
  12. By: Creedy, John; Mok, Penny
    Abstract: This 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: Income taxation, Social welfare, New Zealand,
    Date: 2017
  13. By: Nicola Curci (Bank of Italy); Marco Savegnago (Bank of Italy); Marika Cioffi (Bank of Italy)
    Abstract: The paper presents BIMic, a static and non-behavioural microsimulation model developed at the Bank of Italy. BIMic reproduces the main features of the Italian tax and benefit system, such as social security contributions, personal income tax, property taxes, family allowances and some other social benefits. It aims to evaluate the budgetary impact and distributive effects of tax-benefit programmes. Such programmes may be actually operating at a given point in time or may be a counterfactual set. To illustrate a potential use of BIMic, this paper discusses the distributive impact of a recently approved legislative innovation regarding the additional transfer to pensioners (known as the quattordicesima ai pensionati).
    Keywords: fiscal policy, tax-benefit, microsimulation model, redistribution, progressivity
    JEL: H22 H23 H31 C15 C63
    Date: 2017–09
  14. By: Matteo Morini (ENS Lyon - École normale supérieure - Lyon, DANTE - Dynamic Networks : Temporal and Structural Capture Approach - Inria Grenoble - Rhône-Alpes - Inria - Institut National de Recherche en Informatique et en Automatique - LIP - Laboratoire de l'Informatique du Parallélisme - ENS Lyon - École normale supérieure - Lyon - UCBL - Université Claude Bernard Lyon 1 - Inria - Institut National de Recherche en Informatique et en Automatique - Université de Lyon - CNRS - Centre National de la Recherche Scientifique - IXXI - Institut Rhône-Alpin des systèmes complexes - ENS Lyon - École normale supérieure - Lyon - UJF - Université Joseph Fourier - Grenoble 1 - UCBL - Université Claude Bernard Lyon 1 - INSA Lyon - Institut National des Sciences Appliquées Lyon - Inria - Institut National de Recherche en Informatique et en Automatique - Université de Lyon - CNRS - Centre National de la Recherche Scientifique, ESOMAS - Department of Economics and Statistics - UNITO - Università degli studi di Torino, IXXI - Institut Rhône-Alpin des systèmes complexes - ENS Lyon - École normale supérieure - Lyon - UJF - Université Joseph Fourier - Grenoble 1 - UCBL - Université Claude Bernard Lyon 1 - INSA Lyon - Institut National des Sciences Appliquées Lyon - Inria - Institut National de Recherche en Informatique et en Automatique - Université de Lyon - CNRS - Centre National de la Recherche Scientifique, LIP - Laboratoire de l'Informatique du Parallélisme - ENS Lyon - École normale supérieure - Lyon - UCBL - Université Claude Bernard Lyon 1 - Inria - Institut National de Recherche en Informatique et en Automatique - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Pellegrino Simone (ESOMAS - Department of Economics and Statistics - UNITO - Università degli studi di Torino)
    Abstract: Given a settled reduction in the present level of tax revenue, and by exploring a very large combinatorial space of tax structures, in this paper we employ a genetic algorithm in order to determine the 'best' structure of a real world personal income tax that allows for the maximisation of the redistributive effect of the tax, while preventing all taxpayers being worse off than with the present tax structure. We take Italy as a case study.
    Keywords: Tax reforms,Reynolds–Smolensky index,Micro-simulation models,Personal income taxation,Genetic algorithms
    Date: 2016–08–09
  15. By: Emmanuele Bobbio (Bank of Italy)
    Abstract: Italy's growth performance has been lacklustre in the last two decades. The economy has low R&D intensity; firms are smaller and less likely to grow or exit than firms in other advanced countries; the shadow economy is large. I show how these features arise simultaneously in a Schumpeterian growth model with heterogeneous firms where the tax auditing probability increases with firm size. Tax evasion confers a cost advantage over competitors. In equilibrium, small firms invest less in innovation because growing entails a (shadow) cost of fiscal regularization. Unfair competition forces other firms to lower the mark-up they charge for their new products, reducing the incentive to innovate. Market selection is hampered, further lowering the aggregate growth rate along the extensive margin. I calibrate the model on Italian firm-level data for the period 1995-2006 and find that enforcing taxes would have increased the long-run growth rate from 0.9% to 1.1%. The market share of high type firms would have been 8 percentage points higher and average firm size 25% higher. Also, I find that lowering the tax burden can have a significant impact on growth when the shadow economy is large, while the effect is negligible when taxes are enforced.
    Date: 2017
  16. By: Neri, Andrea; Rondinelli, Concetta; Scoccianti, Filippo
    Abstract: We estimate the consumption response of Italian households to the “€80 tax bonus” introduced in 2014, using the panel component on the Survey of Household Income and Wealth. We find that households that received the tax rebate increased their monthly consumption of food and means of transportation by about €20 and €30, respectively, about 50-60 per cent of the total bonus. There was a larger increase for households with low liquid wealth or low income. Our estimates are quite robust to different model specifications and are broadly in line with the evidence available from similar tax rebates in other countries but, due to the small sample size, are not always statistically significant. To understand the mechanism behind our results we then simulate an overlapping generations model of household consumption: the marginal propensity to consume generated by the structural model is in line with our empirical estimates. JEL Classification: D12, E21
    Keywords: consumer behavior, expenditure, fiscal stimulus
    Date: 2017–09
  17. By: Rachel Ngai (london school of economics); Lei Fang (Federal Reserve Bank of Atlanta); Robert Duval Hernandez (Unversity of Cyprus)
    Abstract: This paper documents that cross-country difference in aggregate market hours is mainly due to women's market hours, especially low-skilled women. Using a multi- sector model that allows for both gender and skill dimensions, it shows that taxes and social subsidies on family care account for a substantial fraction of the observed cross- country pattern in market hours. Both substitution margins across work and leisure and across market and home are important. Effects of taxes operate through both margins while social subsidies operate mainly through the second margin. The first margin affects all population groups while the second margin affects mostly women especially low-skilled.
    Date: 2017
  18. By: Institute for Advanced Studies (IHS)
    Abstract: The Capital Markets Union project (CMU) aims to strengthen the single market by deepening the integration of investment across the European Union. Improved access to finance is a key component of this project, in particular for start-ups, SMEs, and young companies with innovative growth plans. Historically, European SMEs have been primarily dependent on bank finance. In the wake of the financial crisis, this source of funding has been restricted by refinancing capacity, risk appetite and capital adequacy of the banking sector. This has forced young, growing and innovative businesses to seek finance from different sources, such as venture capital (VC) and business angels (BA).This study investigates the part that tax incentives for can play in fostering VC and BA investment, with the intention of promoting best practice across Member States.
    Keywords: SME, tax incentives, venture capital, business angels
    JEL: G24 H21 G32
    Date: 2017–07
  19. By: Ryo Izawa (Faculty of Economics, Shiga University)
    Abstract: This study explores dynamics between formation of a tax system and its adaptation by enterprises over a period of time. In particular, the study examines the formation process of the British international tax system, focusing on business interest groups f political activities and British multinational enterprises f behaviour from 1914 to 1945. It is clarified that some business interest groups highly influenced the British international tax system. Political activities contributed to legislating Dominion Income Tax Relief in 1920 and concluding the UK?US tax treaty in 1945. However, the British government did not always welcome business interest groups f political activities. Inland Revenue and the Treasury were particularly reluctant to reduce tax revenue. Additionally, the governmental body always endeavoured to minimise tax relief fs scope. In such a tax environment, British multinational enterprises changed corporate structures, locations, and/or domiciles in some cases. Furthermore, the British overseas engaged in tax planning, identical to contemporary multinationals f tax planning.
    Keywords: Taxation history, International taxation, Business interest group, International business, Corporate political activity
    Date: 2017–08
  20. By: Guglielmo Barone (Bank of Italy); Guido de Blasio (Bank of Italy); Alessio D'Ignazio (Bank of Italy); Andrea Salvati (Rice University, Houston, Texas)
    Abstract: Set up by the Italian central government and implemented in the areas of the country that are lagging behind, Obiettivi di Servizio is an innovative scheme designed to encourage local authorities to reach given targets for public service provision in the areas of education, childcare and elderly care, waste management, and water supply. The paper makes an econometric evaluation of the scheme’s effectiveness. Our findings suggest that the program was only partially successful, with considerable differences across regions and targets. An important driver of effectiveness was local institutional quality, while some features of the scheme – such as the common targets and the distribution of the pledges – might have impacted negatively on local performance. We also find signs of displacement effects: local authorities involved in the program might have concentrated on the targets to the detriment of other local public services.
    Keywords: public service provision, incentives
    JEL: C21 H75 H76
    Date: 2017–09

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