nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒10‒15
23 papers chosen by
Thomas Andrén

  1. Tax competition among U.S. States: racing to the bottom or riding on a seesaw? By Robert S. Chirinko; Daniel J. Wilson
  2. Redistributive Innovation Policy, Inequality and Efficiency By Parantap Basu; Yoseph Getachew
  3. Pareto Efficient Taxation and Expenditures: Pre- and Re-distribution By Joseph E. Stiglitz
  4. Do local governments tax homeowner communities differently? By Füss, Roland; Lerbs, Oliver
  5. Fiscal Space under Demographic Shift By Christine Ma; Chung Tran
  6. Transfer Pricing Regulation and Taxation of Royalty Payments By Juranek, Steffen; Schindler, Dirk; Schjelderup, Guttorm
  7. International Transfer Pricing and Tax Avoidance : Evidence from Linked Trade-Tax Statistics in the UK By Li Liu; Tim Schmidt-Eisenlohr; Dongxian Guo
  8. Consumption Insurance, Welfare, and Optimal Progressive Taxation By Rostam-Afschar, Davud; Yao, Jiaxiong
  9. Effects of Institutional History and Leniency on Collusive Corruption and Tax Evasion By Johannes Buckenmaier; Eugen Dimant; Luigi Mittone
  10. National Tax Regulation, International Standards and the GATS: Argentina—Financial Services By Panagiotis Delimatsis; Bernard Hoekman
  11. Optimal Redistributive Income Taxation and Efficiency Wages By Aronsson, Thomas; Micheletto, Luca
  12. Do Local Governments Tax Homeowner Communities Differently? By Lerbs, Oliver; Füss, Roland
  13. An adverse social welfare consequence of a rich-to-poor income transfer: A relative deprivation approach By Stark, Oded; Kosiorowski, Grzegorz; Jakubek, Marcin
  14. Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany By Clemens Fuest; Andreas Peichl; Sebastian Siegloch
  15. Protected tax havens: Cornering the market through international reform? By Ivar Kolstad
  16. Measuring the Efficiency of VAT reforms: Evidence from Slovakia By Andrej Cupák; Peter Tóth
  17. The Interaction of Pension System and Unemployment Insurance - Evidence from two Reforms By Endler, Johannes; Geyer, Johannes
  18. The Intergenerational Causal Effect of Tax Evasion: Evidence from the Commuter Tax Allowance in Austria By Frimmel, Wolfgang; Halla, Martin; Paetzold, Jörg
  19. Debt Sustainability of States in India: An Assessment By Kaur, Balbir; Mukherjee, Atri; Ekka, Anand Prakash
  20. Optimal income taxation with composition effects By Laurence Jacquet; Etienne Lehmann
  21. How Much Does Motherhood Cost Women in Social Security Benefits? By Matthew S. Rutledge; Alice Zulkarnain; Sara Ellen King
  22. Microsimulation tools for the evaluation of fiscal policy reforms at the Banco de España By Olympia Bover; José María Casado; Esteban García-Miralles; Roberto Ramos; José María Labeaga
  23. Selection in Health Insurance Markets and Its Policy Remedies By Michael Geruso; Timothy Layton

  1. By: Robert S. Chirinko; Daniel J. Wilson
    Abstract: Dramatic declines in capital tax rates among U.S. states and European countries have been linked by many commentators to tax competition, an inevitable “race to the bottom,” and underprovision of local public goods. This paper analyzes the reaction of capital tax policy in a given U.S. state to changes in capital tax policy by other states. Our study is undertaken with a novel panel data set covering the 48 contiguous U.S. states for the period 1965 to 2006 and is guided by the theory of strategic tax competition. The latter suggests that capital tax policy is a function of “foreign” (out-of-state) tax policy, preferences for government services, home state and foreign state economic and demographic conditions. The slope of the reaction function – the equilibrium response of home state to foreign state tax policy – is negative, contrary to casual evidence and many prior empirical studies of fiscal reaction functions. This result, which stands in contrast to most published findings, is due to two critical elements – allowing for delayed responses to foreign tax changes and for heterogeneous responses to aggregate shocks. Omitting either of these elements leads to a misspecified model and a positively sloped reaction function. Our results suggest that the secular decline in capital tax rates, at least among U.S. states, reflects synchronous responses among states to common shocks rather than competitive responses to foreign state tax policy. While striking given prior empirical findings, these results are fully consistent with the qualitative and quantitative implications of the theoretical model developed in this paper and presented elsewhere in the literature. Rather than “racing to the bottom,” our findings suggest that states are “riding on a seesaw.” Consequently, tax competition may lead to an increase in the provision of local public goods, and policies aimed at restricting tax competition to stem the tide of declining capital taxation are likely to be ineffective.
    Keywords: Tax Competition, State Taxation, Reaction Functions, Capital Taxation
    JEL: H71 H77 H25 H32
    Date: 2017–08
  2. By: Parantap Basu (Durham University Business School, Durham University, Durham, UK); Yoseph Getachew (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: Using a heterogenous-agent growth model with in-house R&D and incomplete capital markets, we examine the efficiency and distributional effects of alternative public R&D policies that target high-tech and low-tech sectors. We find that such policies have important implication for efficiency, inequality and social mobility. A regressive public R&D investment financed by income tax could boost growth and welfare via a positive effect on individual savings and effort. However, it could also discourage them via its effect on the efficiency-inequality trade off. The relationship between public R&D spending and welfare is therefore hump shaped admitting an optimal degree of regressivity in public R&D spending. A case for optimal progressive public R&D investment, however, can be made with a properly designed R&D policy that combines consumption tax and investment subsidy policies.
    Keywords: Public R&D investment, inequality dynamics, social mobility, growth, welfare
    JEL: D31 E13 H4 O41
    Date: 2017–10
  3. By: Joseph E. Stiglitz
    Abstract: This paper shows that there is a presumption that Pareto efficient taxation entails a positive tax on capital. When tax and expenditure policies can affect the market distribution of income, those effects need to be taken into account, reducing the burden imposed on distortionary redistribution. The paper extends the 1976 Atkinson-Stiglitz results to a dynamic, overlapping generations model, correcting a misreading of the result on the desirability of a zero capital tax. That result required separability of consumption from labor and that the only unobservable differences among individuals was in (fixed) labor productivities. In a general equilibrium model, one needs to take into account the effects of policy changes on binding self-selection constraints; and with non-separability, capital taxation depends on the complementarity/substitutability of leisure during work with retirement consumption. The final section considers taxation when there are constraints on the imposition of intergenerational transfers (either political constraints or those derived from unobservability.) It constructs a simple two class model, capitalists who maximize dynastic welfare and workers who save for retirement, whose productivity can be enhanced by (publicly provided) education. It derives a simple expression for the optimal capital tax, which is positive, so long as the social welfare function is sufficiently equalitarian and the productivity of educational expenditures are sufficiently high.
    JEL: E2 H2 H41 H52 I24
    Date: 2017–09
  4. By: Füss, Roland; Lerbs, Oliver
    Abstract: This paper investigates whether and how strongly the share of homeowners in a community affects residential property taxation by local governments. Different from renters, homeowners bear the full property tax burden irrespective of local market conditions, and the tax is more salient to them. "Homeowner communities" may hence oppose high property taxes in order to protect their housing wealth. Using granular spatial data from a complete housing inventory in the 2011 German Census and historical war damages as a source of exogenous variation in local homeownership, we provide empirical evidence that otherwise identical jurisdictions charge significantly lower property taxes when the share of homeowners in their population is higher. This result is invariant to local market conditions, which suggests tax salience as the key mechanism behind this effect. We find positive spatial dependence in tax multipliers, indicative of property tax mimicking by local governments.
    Keywords: homeownership,public financing,residential property tax,spatial tax mimicking,yardstick competition
    JEL: D72 H20 H31 H71 R31
    Date: 2017
  5. By: Christine Ma (Deloitte Access Economics); Chung Tran (The Australian National University (E-mail:
    Abstract: To what extent does population ageing limit fiscal capacity and affect fiscal sustainability? We answer this question through the lens of a fiscal space defined by the budgetary room between the current tax revenue and the peak of a Laffer curve. We use a dynamic general equilibrium, overlapping generations model calibrated to data from Japan and the US. Our findings show that the evolution of underlying demographic structures plays an important role in shaping a country fs fiscal capacity. There will be significant contractions in the fiscal space of Japan and the US when the two countries enter the late stage of demographic transition in 2040. In particular, the results from the model calibrated to Japan indicate that an increase in the old-age dependency ratio to over 70 percent can reduce Japan fs fiscal space by 36 percent. The existing design of Japan fs tax-transfer system is not fiscally sustainable by 2040 when factoring in the growing fiscal cost of the social security program.
    Keywords: Population Ageing, Laffer Curve, Fiscal Limit, Sustainability, Heterogeneity, Dynamic General Equilibrium
    JEL: E62 H20 H60 J11
    Date: 2017–09
  6. By: Juranek, Steffen; Schindler, Dirk; Schjelderup, Guttorm
    Abstract: We analyze the implications of OECD methods to regulate transfer pricing and the role of a royalty tax for abusive transfer pricing. We show: (i) Under traditional methods, mispricing of royalty payments does not affect investment, but the Transactional Profit Split Method triggers higher investment to facilitate profit shifting. (ii) Royalty taxation reduces both profit shifting and investment. (iii) A royalty tax rate below the corporate tax rate leads to overinvestment in an ACE tax system.
    JEL: H25 H32 F23
    Date: 2017
  7. By: Li Liu; Tim Schmidt-Eisenlohr; Dongxian Guo
    Abstract: This paper employs unique data on export transactions and corporate tax returns of UK multinational firms and finds that firms manipulate their transfer prices to shift profits to lower-taxed destinations. It uncovers three new findings on tax-motivated transfer mispricing in real goods. First, transfer mispricing increases substantially when taxation of foreign profits changes from a worldwide to a territorial approach in the UK, with multinationals shifting more profits into low-tax jurisdictions. Second, transfer mispricing increases with a firm's R&D intensity. Third, tax-motivated transfer mispricing is concentrated in countries that are not tax havens and have low-to-medium-level corporate tax rates.
    Keywords: Transfer pricing ; Corporate taxation avoidance ; Multinational firms
    JEL: F23 H25 H32
    Date: 2017–10–04
  8. By: Rostam-Afschar, Davud; Yao, Jiaxiong
    Abstract: Partial insurance of consumption against wage shocks is achieved through progressive taxation, labor supply adjustment, and precautionary wealth accumulation. The optimal degree of progressivity depends on preference and initial wealth conditions. More patient, more willing to work, and less wealthy households prefer more progressivity. The optimal progressivity is similar in Germany in comparison to the United States, though wealth has a greater impact on consumption insurance in Germany.
    JEL: D31 E21 H21 J22
    Date: 2017
  9. By: Johannes Buckenmaier (University of Cologne); Eugen Dimant (University of Pennsylvania); Luigi Mittone (University of Trento, Department of Economics and Management)
    Abstract: We investigate the effects of an institutional mechanism that incentivizes tax payers to blow the whistle on collusive corruption and tax compliance. We do this through a leniency program. In our experiment we nest collusive corruption within a tax evasion framework. We not only study the effect of the presence of such a mechanism on behavior, but also the dynamic effect caused by the introduction and the removal of leniency. We find that in the presence of a leniency mechanism, subjects collude and accept bribes less, while paying more taxes. We find no evidence that it encourages bribe offers. Our results show that the introduction of the opportunity to blow the whistle decreases collusion and bribe acceptance rate, and it increases the collected tax yield. It also does not encourage bribe offers. In contrast, the removal of the institutional mechanism does not induce negative effects, suggesting a positive spillover effect of leniency that persists even after the mechanism has been removed.
    Keywords: collective action; cooperation; voluntary participation; experiment
    Date: 2017
  10. By: Panagiotis Delimatsis; Bernard Hoekman
    Abstract: Can a WTO Member discriminate against foreign suppliers of services located in jurisdictions that refuse to share information with a government to permit it to determine if its nationals engage in tax evasion? Does it matter if the Member uses standards developed by an international body as the criterion for deciding whether to impose measures? In Argentina—Financial Services the WTO Appellate Body held that services from jurisdictions that share financial tax information may be different from services provided by jurisdictions that do not cooperate in supplying such information. It overruled a Panel finding that measures to increase taxes on financial transactions with non-cooperative jurisdictions were discriminatory. We argue that the AB reached the right conclusion but that an important opportunity was missed to clarify what WTO Members are permitted to do to enforce their domestic regulatory regimes, and how international standards could have a bearing on this question. By giving consideration to arguments that the likeness of services and service suppliers may be a function of prevailing domestic regulatory regimes, the AB increased the scope for confusion and future litigation.
    Keywords: tax evasion, tax havens, international regulatory cooperation, information exchange, transparency
    JEL: F51 G28 H26 H87
    Date: 2017–09
  11. By: Aronsson, Thomas (Department of Economics, Umeå University); Micheletto, Luca (Department of Law, University of Milan, Italy, Dondena Centre, Bocconi University, and CESifo Germany)
    Abstract: This paper integrates efficiency wage setting in the theory of optimal redistributive income taxation. In doing so, we use a model with two skill-types, where efficiency wage setting characterizes the labor market faced by the low-skilled, whereas the high-skilled face a conventional, competitive labor market. There are two types of jobs in this economy; a low-demanding job which can be carried out by everybody, and a high-demanding job which can only be carried out by the high-skilled, meaning that a potential mimicker may either adopt a conventional income-replication strategy or a job-replication strategy. In this framework, we show that the marginal income tax implemented for the high-skilled is negative under plausible assumptions. The marginal income tax facing the low-skilled can be either positive or negative in general, even if employment-related motives for policy intervention typically contribute to an increase in this marginal tax. An increase in the unemployment benefit contributes to relax the binding self-selection constraint (irrespective of the strategy adopted by a potential mimicker), which makes this instrument particularly useful from the perspective of redistribution.
    Keywords: Nonlinear income taxation; unemployment benefits; efficiency wages; redistribution
    JEL: H21 H42
    Date: 2017–10–03
  12. By: Lerbs, Oliver; Füss, Roland
    Abstract: Using data from a complete housing inventory in the 2011 German Census and historical war damages as a source of exogenous variation in local homeownership, we provide evidence that otherwise identical jurisdictions charge lower property taxes when the share of homeowners in their population is higher. The result is independent of local market conditions, suggesting tax salience as key mechanism. We find positive spatial dependence in tax multipliers, indicative of property tax mimicking.
    JEL: D72 H20 H71 H72 H77
    Date: 2017
  13. By: Stark, Oded; Kosiorowski, Grzegorz; Jakubek, Marcin
    Abstract: A transfer from a richer individual to a poorer one seems to be the most intuitive and straightforward way of reducing income inequality in a society. However, can such a transfer reduce the welfare of the society? We show that a rich-to-poor transfer can induce a response in the individuals' behaviors which actually exacerbates, rather than reduces, income inequality as measured by the Gini index. We use this result as an input in assessing the social welfare consequence of the transfer. Measuring social welfare by Sen's social welfare function, we show that the transfer reduces social welfare. These two results are possible even for individuals whose utility functions are relatively simple (namely, at most quadratic in all terms) and incorporate a distaste for low relative income. We first present the two results for a population of two individuals. We subsequently provide several generalizations. We show that our argument holds for a population of any size, and that the choice of utility functions which trigger this response is not singular - the results obtain for an open set of the space of admissible utility functions. In addition, we show that a rich-to-poor transfer can exacerbate inequality when we employ Lorenz-domination, and that it can decrease social welfare when we draw on any increasing, Schur-concave welfare function.
    Keywords: A rich-to-poor transfer,Relative income,Sen's social welfare function
    JEL: D30 D31 D60 D63 H21 I38
    Date: 2017
  14. By: Clemens Fuest; Andreas Peichl; Sebastian Siegloch
    Abstract: This paper estimates the incidence of corporate taxes on wages using a 20-year panel of German municipalities exploiting 6,800 tax changes for identication. Using event study designs and differences-in-differences models, we find that workers bear about half of the total tax burden. Administrative linked employer-employee data allow us to estimate heterogeneous firm and worker effects. Our findings highlight the importace of labor market institutions and profit-shifting opportunities for the incidence of corporate taxes on wages. Moreover, we show that low-skilled, young and female employees bear a larger share of the tax burden. This has important distributive implications.
    Keywords: business taxation, incidence, administrative data, local taxation
    JEL: H20 H70 J30
    Date: 2017
  15. By: Ivar Kolstad
    Abstract: Since the year 2000, an international reform process has been underway to reduce the negative impacts of tax havens. This paper analyzes whether the reform period has favoured protected tax havens, i.e. havens with strong connections to the UK, the EU, the United States and China, relative to tax havens without such connections. Using a difference in difference approach, we show that portfolio investment in protected havens increased significantly more than in unprotected havens in the period 1997 to 2015. In other words, through their associated territories, some of the most powerful countries in the world seem to have cornered the market for tax haven services during the reform period. This may make further reform more difficult.
    Keywords: tax tax havens
    Date: 2017
  16. By: Andrej Cupák (National Bank of Slovakia); Peter Tóth (National Bank of Slovakia)
    Abstract: We estimate a demand system to simulate the welfare and fiscal impacts of the recent value added tax (VAT) cut on selected foods in Slovakia. We evaluate the efficiency of the tax cut vis-a-vis its hypothetical alternatives using the ratio of the welfare and fiscal impacts. Based on our findings, tax cuts tend to be more efficient if demand for a good is price-elastic or if the good has several complements. The results also indicate that cherry-picking from food sub-categories could have improved the efficiency of the recent tax change. Further, we found potential revenue-neutral welfare-improving tax schemes, namely, a reduced rate on foods financed by an increased rate on non-foods improves welfare in case of most food types. The paper contributes to the literature by demonstrating that standard approximate efficiency indicators of VAT reforms are biased compared with simulation-based results for any plausible degree of a tax change.
    Keywords: Consumer behavior; Demand system; QUAIDS; Value added tax; Tax reform; Efficiency; Optimal taxation; Slovakia
    JEL: D12 E21 H21 I31
    Date: 2017–09
  17. By: Endler, Johannes; Geyer, Johannes
    Abstract: Unemployment benefits are one important option to bridge time between employment exit and claiming retirement benefits for older workers. We develop an option value model that explicitly accounts for the pension system and unemployment insurance in Germany. We use administrative panel data and implement the model for female birth cohorts of 1940 to 1949, exploiting exogenous variation in social security wealth by the pension reform 1992 and the reform of unemployment benefits in 2004.
    JEL: H55 J14 J22 J26 J65
    Date: 2017
  18. By: Frimmel, Wolfgang; Halla, Martin; Paetzold, Jörg
    Abstract: Does tax evasion run in the family? We study the case of the commuter tax allowance in Austria, which is designed as a step function of the commuting distance, creating sharp discontinuities at each bracket threshold. The data sources allow us to observe actual compliance behavior at the individual level. To identify a causal effect, we use the paternal distance-to-bracket as an IV for paternal compliance. We find that paternal noncompliance increases children's non-compliance by about 24%.
    JEL: H26 A13 H24
    Date: 2017
  19. By: Kaur, Balbir; Mukherjee, Atri; Ekka, Anand Prakash
    Abstract: The debt position of the state governments in India, which deteriorated sharply between 1997-98 and 2003-04, has witnessed significant improvement since 2004-05. Debt sustainability analysis based on empirical estimation of inter-temporal budget constraint and fiscal policy response function in a panel data framework, covering 20 Indian states for the period 1980-81 to 2015-16, indicates that the debt position at the state level is sustainable in the long run. The increase in contingent liabilities of states and take-over of large chunk of these liabilities through debt restructuring of State Power Distribution Companies, however, would adversely affect the debt position of states.
    Keywords: gross fiscal deficit, public debt, state governments
    JEL: H7 H74
    Date: 2017–10–13
  20. By: Laurence Jacquet; Etienne Lehmann
    Date: 2017
  21. By: Matthew S. Rutledge; Alice Zulkarnain; Sara Ellen King
    Abstract: The increase in female labor force participation coupled with a higher number of women reaching retirement unmarried has increased the share of women claiming Social Security benefits earned through their own job histories. But they still bear the lion’s share of caregiving responsibilities, and the previous literature has provided clear evidence that motherhood reduces earnings during the childbearing and child-rearing years. What remains understudied is the extent to which mothers face lower lifetime earnings and, consequently, lower Social Security income. This paper uses the Health and Retirement Study (HRS) linked to administrative earnings records to answer three questions. First, how much less do mothers earn over their careers compared to childless women, and how much less do they earn for each additional child? Second, how do Social Security benefits differ between mothers and non-mothers? Third, how does each of the existing elements of the Social Security system that indirectly help mothers – namely, spousal benefits and the progressivity of the benefit formula – contribute to reducing the motherhood penalty?
    Date: 2017–10
  22. By: Olympia Bover (Banco de España); José María Casado (Banco de España); Esteban García-Miralles (Banco de España); Roberto Ramos (Banco de España); José María Labeaga (UNED)
    Abstract: This paper presents the microsimulation models developed at the Banco de España for the study of fiscal reforms, describing the tool used to evaluate changes in the Spanish personal income tax and also the one for the value added tax and excise duties. In both cases the structure, data and output of the model are detailed and its capabilities are illustrated using simple examples of hypothetical tax reforms, presented only to illustrate the use of these simulation tools.
    Keywords: microsimulation, Spain, personal income tax, value added tax, excise duties
    JEL: C81 D12 H20
    Date: 2017–10
  23. By: Michael Geruso; Timothy Layton
    Abstract: In this essay, we review the theory and evidence concerning selection in competitive health insurance markets and discuss the common policy tools used to address the problems it creates. We begin by outlining some important but often misunderstood differences between two types of conceptual frameworks related to selection. The first, which we call the fixed contracts approach, takes insurance contract provisions as given and views selection as influencing only insurance prices in equilibrium. The second, the endogenous contracts approach, treats selection as also influencing the design of the contract itself, including the overall level of coverage and coverage for services that are differentially demanded by sicker consumers. After outlining the selection problems, we discuss four commonly employed policy instruments that affect the extent and impact of selection: 1) premium rating regulation, including community rating; 2) consumer subsidies or penalties to influence the take-up of insurance; 3) risk adjustment; and 4) contract regulation. We discuss these policies with reference to two markets that seem especially likely to be targets of reform in the short and medium term: Medicare Advantage and the individual insurance markets reformed by the Affordable Care Act of 2010.
    JEL: H22 H4 I1 I13 I18
    Date: 2017–09

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