nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒10‒22
fifteen papers chosen by
Thomas Andrén

  1. Optimal taxation under different concepts of justness By Jessen, Robin; Metzing, Maria; Rostam-Afschar, Davud
  2. How Taxing Is Tax Filing? Using Revealed Preferences to Estimate Compliance Costs. By Youssef Benzarti
  3. Do Americans Want to Tax Capital? Evidence from Online Surveys By Raymond Fisman; Keith Gladstone; Ilyana Kuziemko; Suresh Naidu
  4. Tax-benefit microsimulation and income redistribution in Ecuador By H. Xavier Jara; Marcelo Varela
  5. Balancing the Equity-efficiency Trade-off in Personal Income Taxation: An Evolutionary Approach By Simone Pellegrino; Guido Perboli; Giovanni Squillero
  6. How Do Entrepreneurial Portfolios Respond to Taxation? By Frank Fossen; Ray Rees; Davud Rostam-Afschar; Viktor Steiner
  7. Procyclical endogenous taxation and aggregate instability By Mauro Bambi; Siritas Kettanurak
  8. The Ghost of Institutions Past: Tax Evasion and Asymmetric Path Dependence By Koch, Christian; Nikiforakis, Nikos; Kamm, Aaron
  9. Does Fiscal Equalization Lead to Higher Tax Rates? Empirical Evidence from Germany By Krause, Manuela; Büttner, Thiess
  10. Measurement of earnings: Comparing South African tax and survey data By Martin Wittenberg
  11. The Taxman calls. How does Facebook answer? Global Effects of Taxation on Online Advertising By Angel Cuevas; Ruben Cuevas; Andrea Lassmann; Federica Liberini; Antonio Russo
  12. Fiscal Rules and Discretion under Self-Enforcement By Marina Halac; Pierre Yared
  13. Public employment services under decentralization: Evidence from a natural experiment By Weber, Michael
  14. The Role of Corporate Taxes in the Decline of the Startup Rate By Neira, Julian; Singhania, Rish
  15. Do Corporate Taxes Hinder Innovation? By Abhiroop Mukherjee; Alminas Zaldokas

  1. By: Jessen, Robin; Metzing, Maria; Rostam-Afschar, Davud
    Abstract: A common assumption in the optimal taxation literature is that the social planner maximizes a welfarist social welfare function with weights decreasing with income. However, high transfer withdrawal rates in many countries imply very low weights for the working poor in practice. We reconcile this puzzle by generalizing the optimal taxation framework by Saez (2002) to allow for alternatives to welfarism. We calculate weights of a social planner's function as implied by the German tax and transfer system based on the concepts of welfarism, minimum absolute and relative sacrifice, as well as subjective justness. For the latter we use a novel question from the German Socio-Economic Panel. We find that the minimum absolute sacrifice principle is in line with social weights that decline with net income. Absolute subjective justness is roughly in line with decreasing social weights, which is reflected by preferences of men, West Germans, and supporters of the grand coalition parties.
    Keywords: Justness,Optimal Taxation,Income Redistribution,Equal Sacrifice,Inequality,Subjective Preferences
    JEL: D63 D60 H21 H23 I38
    Date: 2017
  2. By: Youssef Benzarti
    Abstract: This paper uses a quasi-experimental design and a novel identification strategy to estimate the cost of filing income taxes. First, using US income tax returns, I observe how taxpayers choose between itemizing deductions and claiming the standard deduction. Taxpayers forgo tax savings to avoid compliance costs, which provides a revealed preference estimate of the compliance cost of itemizing. I find that this cost increases with income, consistent with a higher opportunity cost of time for richer house- holds. Second, using my estimates and estimates of the time required to file other schedules, I estimate the cost of filing federal income taxes. I find that this cost has been increasing since the 1980’s and has reached 1.2% of GDP in the most recent years.
    JEL: H24 H31 H83
    Date: 2017–10
  3. By: Raymond Fisman; Keith Gladstone; Ilyana Kuziemko; Suresh Naidu
    Abstract: A vast theoretical literature in public finance has studied the question of the desirability of capital taxation. Distinct from questions of the optimality of taxing wealth is whether it is politically feasible. We provide, to our knowledge, the first investigation of individuals' preferences over jointly taxing income and wealth, via a survey on Amazon's Mechanical Turk. We provide subjects with a set of hypothetical individuals' incomes and wealth and elicit subjects' preferred (absolute) tax bill for these individuals. Our method allows us to unobtrusively map both income earned and accumulated wealth into desired tax levels. Our regression results yield roughly linear desired tax rates on income of about 14 percent. Respondents' suggested tax rates indicate positive desired wealth taxation. When we distinguish between sources of wealth we find that, in line with recent theoretical arguments, subjects' implied tax rate on wealth is three percent when the source of wealth is inheritance, far higher than the 0.8 percent rate when wealth is from savings. We show these tax rates are consistent with reasonable parameterizations of recent theoretical optimal wealth tax formulae.
    JEL: D6 D7 E22 H21
    Date: 2017–10
  4. By: H. Xavier Jara; Marcelo Varela
    Abstract: The aim of this paper is to explore the redistributive effects of taxes and benefits in Ecuador using two different approaches: direct use of reported taxes and benefits in household survey data, and use of simulated taxes and benefits obtained from ECUAMOD, the tax-benefit microsimulation model for Ecuador. Our results show that simulated taxes and social insurance contributions capture better the number of taxpayers and aggregate revenue amounts from official statistics than information taken directly from the data. Moreover, using reported data on taxes and social insurance contributions underestimates their redistributive effect in comparison with simulated policies. We discuss factors behind the differences between the two approaches and conclude with a discussion of the advantages offered by microsimulation for policy analysis.
    Date: 2017
  5. By: Simone Pellegrino (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy); Guido Perboli (Department of Control and Computer Engineering, Politecnico di Torino, Italy); Giovanni Squillero (Department of Control and Computer Engineering, Politecnico di Torino, Italy)
    Abstract: In this paper we propose a multi-objective evolutionary algorithm for supporting the definition of a personal income tax reform. As a case study, we apply this methodology to the Italian income tax, and consider a recently implemented tax cut. Our optimization algorithm is able to determine a set of tax structures that maximize the redistributive effect of the tax while minimizing its inefficiency - considering for the former the Reynolds-Smolensky index and for the latter the weighted average of taxpayers' effective marginal tax rates. The approach also takes into account two additional factors: the tax has to guarantee a specific revenue and to minimize the share of losing taxpayers with respect to the pre-reform situation. Experimental results clearly demonstrate that the methodology we employ can support the policy-maker's decisions in complex, real- world situations.
    Keywords: Personal Income Tax, Evolutionary Algorithms, Multi-Objective Optimization
    JEL: H23 H24
    Date: 2017–10
  6. By: Frank 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
  7. By: Mauro Bambi; Siritas Kettanurak
    Abstract: The existing contributions on endogenous taxation, and balanced budget rules, suggest that countercyclical taxes should be avoided, because they may lead to aggregate instability (i.e. sunspot equilibria); on the other hand, procyclical taxes have always been praised for their stabilizing role. In this paper, we re-examine this issue in an endogenous growth model with productive government investment, and we prove that an economy with procyclical taxes, and a sufficiently large income effect, can still be characterized by i) global indeterminacy because two balanced growth paths may exist; ii) aggregate instability around the balanced growth path with the lowest growth rate. Finally, we show that this dynamics may emerge for reasonable choices of the parameters.
    Keywords: Endogenous growth, time-varying consumption tax, local and global indeterminacy.
    JEL: C62 E32 H20 O41
    Date: 2017–10
  8. By: Koch, Christian; Nikiforakis, Nikos; Kamm, Aaron
    Abstract: In this study, we present evidence from a novel tax experiment featuring multiple equilbria. In the field, countries such as Greece seem to be stuck in a bad equilibrium with persistent high tax evasion while countries such as Germany seem to be in good equilibrium with persistent high compliance. Relatedly, our setting enables us to study our lab societies’ initial equilibrium selection and to what extent their compliance level is path dependent, i.e. depends on historical experience.
    JEL: C92 H26
    Date: 2017
  9. By: Krause, Manuela; Büttner, Thiess
    Abstract: This paper explores the role of fiscal equalization as a driver of states’ tax policy in Germany. We argue that fiscal redistribution of tax revenues provides an incentive for states to increase their tax rates. The analysis exploits differences in the degree of fiscal redistribution among the states over time. The results show a significant effect on tax policy: with full equalization of revenues from the real estate transfer tax the tax rate is about one percentage point higher than without.
    JEL: H20 H26 R38
    Date: 2017
  10. By: Martin Wittenberg (Southern Africa Labour and Development Research Unit, School of Economics, DataFirst, University of Cape Town)
    Abstract: Comparing earnings in the tax assessment data to those in the QLFS, it appears that earnings of employees in the QLFS are underreported by perhaps 40%, with bigger gaps near the top of the distribution. Benefits and annual bonuses contribute substantially to the gap. In the case of self-employment incomes it is also the case that high earnings are missing or underreported in the QLFS, but the tax data seems to miss many mid- and low-income self-employed earners. These differences make sense when one considers the incentives for reporting accurately to SARS versus to Statistics South Africa. These errors mean that earnings inequality as measured by the Gini coefficient is probably underestimated in the surveys by three percentage points.
    Date: 2017
  11. By: Angel Cuevas (Universidad Carlos III Madrid); Ruben Cuevas (Universidad Carlos III Madrid); Andrea Lassmann (KOF, ETH Zurich); Federica Liberini (KOF, ETH Zurich); Antonio Russo (KOF, ETH Zurich)
    Abstract: We study the effects of the taxation of digital platforms on the online advertising market. We exploit novel data on daily unit prices of Facebook ads targeted to country-specific audiences, collected around a major change in the firm's accounting practices following the introduction of the UK Diverted Profit Tax. We show that a substantial increase in ads prices followed such change, although with heterogeneous intensity across countries. These results are in line with a model of a platform operating in the global advertising market. We show that taxation of profits generated in one country makes the price charged to advertisers from that country (resp. other countries) increase (decrease). Accordingly, we demonstrate that aggregate advertising prices in OECD countries increased more, after the policy change, the larger is the market share of UK-based advertisers.
    Keywords: tax incidence; digital economy; online advertising
    JEL: H22 H25 F16
    Date: 2017–09
  12. By: Marina Halac; Pierre Yared
    Abstract: We study a fiscal policy model in which the government is present-biased towards public spending. Society chooses a fiscal rule to trade off the benefit of committing the government to not overspend against the benefit of granting it flexibility to react to privately observed shocks to the value of spending. Unlike prior work, we characterize rules that are self-enforcing: the government must prefer to comply with the rule rather than face the punishment that follows a breach, where any such punishment must also be self-enforcing. We show that the optimal rule is a maximally enforced deficit limit, which, if violated, leads to the worst punishment for the government. We provide a necessary and sufficient condition for the government to violate the deficit limit following sufficiently high shocks. Punishment takes the form of a maximally enforced surplus limit that incentivizes overspending; fiscal discipline is restored when the government respects it.
    JEL: C73 D02 D82 E6 H1 P16
    Date: 2017–10
  13. By: Weber, Michael
    Abstract: We study whether decentralizing public employment services impacts job finding positively, as is suggested by the classic decentralization theorem, or negatively, as is suggested by political economy considerations. Our difference-in-difference estimates for a German reform in 2012 point to negative effects: Decentralization decreased job finding by 10% and increased the use of inefficient job creation programs that likely reduce local but increase federal public expenditures.
    JEL: H11 H75 I38 J48
    Date: 2017
  14. By: Neira, Julian; Singhania, Rish
    Abstract: The business startup rate in the United States has exhibited a large secular decline in recent decades. The reasons behind the decline are not well understood. This paper hypothesizes that the startup rate declined in large part because corporate taxes raised the opportunity cost of entrepreneurship. We formalize this thesis using a model of occupational choice that features firm entry and exit. Quantitatively, the model accounts for much of the decline in the startup rate. Taxes alone account for one-fifth of the decline. Cross-sectoral patterns in US data support our results.
    Keywords: Firm Entry, Startups, Corporate Taxes, Declining Business Dynamism, Occupational Choice
    JEL: D2 E2 E6 H2
    Date: 2017–09–26
  15. By: Abhiroop Mukherjee (Associate Professor, Department of Finance, Hong Kong University of Science and Technology; Institute for Emerging Market Studies, Hong Kong University of Science and Technology); Alminas Zaldokas (Assistant Professor, Department of Economics, Hong Kong University of Science and Technology; Institute for Emerging Market Studies, Hong Kong University of Science and Technology)
    Abstract: Abhiroop Mukherjee and Alminas Zaldokas, HKUST IEMS Faculty Associates, examined how tax changes influence patenting activity in corporations, and found that tax increases would likely lead to lower innovation, but it would not be easy to reverse these losses quickly by cutting taxes back later.
    Keywords: corporate governance, development, emerging market and developing economies, emerging markets, innovation, patents, R&D, research and development
    Date: 2017–07

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