nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒11‒05
25 papers chosen by
Thomas Andrén

  1. Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach By Kory Kroft; Kavan Kucko; Etienne Lehmann; Johannes Friedrich Schmieder
  2. Inequality, imperfect competition, and fiscal policy By Balamatsias, Pavlos
  3. Taxation and Labor Supply of Married Couples across Countries: A Macroeconomic Analysis By Alexander Bick; Nicola Fuchs-Schündeln
  4. As Easy as ABC? Multidimensional Screening in Public Finance By Sander Renes; Floris Zoutman
  5. Price and Quantity Effects of the German Real Estate Transfer Tax By Kunka Petkova; Alfons J. Weichenrieder
  6. Pension reform disabled By Sigurd Mølster Galaasen
  7. Welfare Cost of the Real Estate Transfer Tax By Thiess Büttner
  8. Capital Taxation and Government Debt Policy with Public Discounting By Malte Rieth
  9. Child Care Subsidies, Quality, and Optimal Income Taxation By Spencer Bastani; Sören Blomquist; Luca Micheletto
  10. International Transfer Pricing and Tax Avoidance: Evidence from Linked Trade-Tax Statistics in the UK By Li Liu; Tim Schmidt-Eisenlohr; Dongxian Guo
  11. Commodity Taxation and Regulatory Competition By Simone Moriconi; Pierre M. Picard; Skerdilajda Zanaj
  12. Tax Revenue Losses through Cross-Border Loss Offset: An Insurmountable Hurdle for Formula Apportionment By Mohammed Mardan; Michael Stimmelmayr
  13. Tax Policy and Economic Growth: Does It Really Matter? By Donatella Baiardi; Paola Profeta; Riccardo Puglisi; Simona Scabrosetti
  14. The Real Estate Transfer Tax and Government Ideology: Evidence from the German States By Manuela Krause; Niklas Potrafke
  15. Income Shifting as Income Creation? The Intensive vs. the Extensive Shifting Margins By Håkan Selin; Laurent Simula
  16. Banks in Tax Havens: First Evidence based on Country-by-Country Reporting By Vincent Bouvatier; Gunther Capelle; Anne-Laure Delatte
  17. Wealth Taxation, Non-listed Firms, and the Risk of Entrepreneurial Investment By Dirk Schindler
  18. Learning to Tax - Interjurisdictional Tax Competition under Incomplete Information By Johannes Becker; Ronald B. Davies
  19. Replacing Income Taxation with Consumption Taxation in Japan By Selahattin Imrohoroglu
  20. How Do Entrepreneurial Portfolios Respond to Income Taxation? By Steiner, Viktor; Fossen, Frank; Rees, Ray; Rostam-Afschar, Davud
  21. Until taxes do us part: tax penalties or bonuses and the marriage decision By F. Barigozzi; H. Cremer; K. Roeder
  22. Heterogeneity in Needs and Negative Marginal Tax Rates By Spencer Bastani; Sören Blomquist; Luca Micheletto
  23. Reforming Australia's Superannuation Tax System and the Age Pension to Improve Work and Savings Incentives By David Ingles and Miranda Stewart
  24. Indirect Taxation of Financial Services By Vidar Christiansen
  25. The true art of the tax deal: Evidence of aid flows and bilateral double tax agreements By Braun, Julia; Zagler, Martin

  1. By: Kory Kroft; Kavan Kucko; Etienne Lehmann; Johannes Friedrich Schmieder
    Abstract: We derive a sufficient statistics optimal income tax formula in a general model that incorporates unemployment and endogenous wages, to study the shape of the tax and transfer system at the bottom of the income distribution. The sufficient statistics are the macro employment response to taxation and the micro and macro participation responses. We estimate these statistics using policy variation from the U.S. tax and transfer system. Our results suggest that the optimal tax more closely resembles a Negative Income Tax than an Earned Income Tax Credit relative to the case where unemployment and wage responses are not taken into account.
    Date: 2017
  2. By: Balamatsias, Pavlos
    Abstract: This paper analyses a simple model of an economy with imperfect competition in the goods markets and heterogeneous individuals due to different skill endowments. We then examine how the combination of income inequality, and imperfect competition, affect taxing and spending policies. Results indicate that firms’ market power and income inequality positively affect the size of fiscal multipliers, meaning that spending and taxing multipliers are bigger the more unequal an economy is. We also use the balanced budget multiplier to examine how income inequality and imperfect competition affect the net increase in output and expenditure caused by fiscal policies. The model shows that in highly unequal societies the maximum net increase in output and expenditure comes when increased government spending is funded by taxing the minority of high-income workers, as the adverse effects on the economy will be smaller compared to a tax imposed on the majority. However, this result changes as the economy becomes more equal and for high enough percentages of the population belonging in the high-income group the maximum net increase in output and expenditure comes when the government increases government spending and taxes low-income people instead. Finally, we examine the welfare effects of government policies. We see that while taxes reduce taxpayers’ welfare, if the net increase in output and expenditure is big enough, fiscal policy can be Pareto improving, as both income groups benefit from it; or at least the income group not paying taxes benefits while the income group paying taxes is not worse off. Income inequality is once again crucial in our analysis as it affects the size of welfare losses the taxpaying segments of the population have and whether government policies can be Pareto improving.
    Keywords: Income inequality, Fiscal multiplier, Public Expenditure, Taxation
    JEL: D63 E12 E62
    Date: 2017–10–24
  3. By: Alexander Bick; Nicola Fuchs-Schündeln
    Abstract: We document contemporaneous differences in the aggregate labor supply of married couples across 17 European countries and the US. Based on a model of joint household decision making, we quantify the contribution of international differences in non-linear labor income taxes and consumption taxes to the international differences in hours worked in the data. Through the lens of the model, taxes, together with wages and the educational composition, account for a significant part of the small differences in married men’s and the large differences in married women’s hours worked in the data. Taking the full non-linearities of labor income tax codes, including the tax treatment of married couples, into account is crucial for generating the low cross-country correlation between married men’s and women’s hours worked in the data, and for explaining the variation of married women’s hours worked across European countries.
    Keywords: taxation, two-earner households, hours worked
    JEL: E60 H20 H31 J12 J22
    Date: 2017
  4. By: Sander Renes; Floris Zoutman
    Abstract: We characterize the second-best allocation in a Mirrleesian optimal tax model where agents differ in multiple dimensions and the planner can tax multiple goods non-linearly. We develop a new method that allows us to solve the partial differential equations that describe the optimum regardless of the dimensionality of the problem. We derive four theoretical properties of the optimum. First, the optimal tax system is described by a multidimensional version of Diamond’s (1998) and Saez’ (2001) ABC-formula. Second, the Atkinson-Stiglitz theorem does not generalize to settings where the planner screens in multiple dimensions. Third, the optimal marginal tax rate on each good depends on the consumption level of multiple goods. Fourth, a no-distortion at the top/bottom result continues to hold. A calibrated simulation on taxation of couples shows a strong positive relationship between an individual’s optimal marginal tax rate and the income earned by his spouse.
    Keywords: optimal non-linear taxation, redistribution, tax system, multi-dimensional screening
    JEL: C63 D82 H21 H24
    Date: 2017
  5. By: Kunka Petkova; Alfons J. Weichenrieder
    Abstract: This paper analyzes the tax effects of the German real estate transfer tax (RETT). While the vast majority of single-family houses in Germany are owner-occupied, apartments are usually held by private and incorporated investors. For this reason, we conducted a regression analysis to determine the effects of increasing RETT on the number and the prices of transactions separately for these two market segments. Our findings suggest that increasing the RETT by 1% is associated with a decline in transactions by 0.23% for single-family houses, but with no significant effect on the prices of traded houses. Conversely, for apartments, we find no significantly negative effects on the transactions, but the price effect of the RETT tends to be negative. Finally, for vacant lots, we find even larger quantity effects than for single-family houses suggesting roughly an elasticity of -1. The results for this specific market segment indicate that the government operates near the top of a Laffer curve.
    Keywords: real estate transaction tax, stamp duty, housing market, taxation, financial transaction tax
    JEL: H24 R21
    Date: 2017
  6. By: Sigurd Mølster Galaasen (Norges Bank (Central Bank of Norway))
    Abstract: Old-age pension reform is on the agenda across the OECD, and a key target is to delay retirement. Most of these countries also have a disability insurance (DI) program accounting for a large share of labor force exits. This paper builds a quantitative life-cycle model with endogenous retirement to study how DI and old-age pension (OA-pension) systems interact with health and wages to determine retirement age, with particular focus on the macroeconomic effects of OA-pension reforms. Individuals face uncertain future health status and wages, and if in bad health they are eligible for DI if they choose to retire before reaching the statutory retirement age. I calibrate the model to the Norwegian economy and explore the effects of raising the statutory retirement age and cutting OA-pension on labor supply and public finances. The main contribution of the paper is that I, in contrast to standard macro pension models, include DI as another endogenous margin of retirement. I show that failure to account for this margin might severely bias the analysis of OA-pension reforms.
    Keywords: Retirement, disability insurance, life-cycle, pension reform
    JEL: E2 E6 H31 H55 J26
    Date: 2017–10–23
  7. By: Thiess Büttner
    Abstract: This paper considers the welfare implications of a tax on real estate transfers. A theoretical analysis shows how the discouragement of mutually beneficial transactions as well as tax-sheltering activities give rise to a welfare loss that can be estimated comprehensively from the empirical elasticity of the tax base. In the absence of tax planning, the elasticity of the tax base is determined by the hazard rate to deter transactions at the margin. With tax planning, the elasticity of the tax base is also driven by the “technology†of tax sheltering. Empirical evidence on the deadweight loss is obtained from the analysis of real estate transfer taxes in Germany. After a constitutional reform has granted the German states the right to set the local rate of the real estate transfer tax, over the last ten years many states have made use of this discretion and have increased the tax rate - some of them repeatedly. Based on the empirical estimate of the revenue effect of these tax increases, the paper shows that the German experience points to a substantial welfare cost of real estate transfer taxation. The preferred estimate suggests that each additional Euro of revenues raised is associated with an increase of the deadweight loss of about 67 cents.
    Keywords: real estate transfer tax, marginal cost of funds, tax rate elasticity of the tax base, tax avoidance
    JEL: H20 H26 R38
    Date: 2017
  8. By: Malte Rieth
    Abstract: This paper characterizes capital taxation and public debt policy in a quantitative macroeconomic model with an impatient government and uncertainty. The government has access to linear taxes on capital and labor, and to non-state-contingent bonds. Government impatience generates positive and empirically realistic longrun levels of both capital taxes and public debt. Prior predictive analysis shows that the simulated model matches the distribution of both variables in a sample of 42 countries, alongside other statistics. The paper then presents econometric evidence that countries with higher political instability, used as an approximation of unobservable public discount rates, have both higher capital taxes and debt.
    Keywords: Fiscal policy, prior predictive analysis, political instability, macro panel, Ramsey optimal policy
    JEL: E62 H21 H63 C23
    Date: 2017
  9. By: Spencer Bastani; Sören Blomquist; Luca Micheletto
    Abstract: In this paper we examine the desirability of subsidizing child care expenditures in a model where parents can choose both the quantity and the quality of child care services they purchase in the market. Our vehicle of analysis is a Mirrleesian optimal tax framework where child care services not only enable parents to work, but also contribute to children’s formation of human capital. In addition, there are externalities related to the parents’ choice of child care arrangements for their offspring. Using a quantitative simulation model calibrated to the US economy, we evaluate the relative merits of some the most common forms of child care subsidies (tax deductions, tax credits, and opting-out public provision schemes) in terms of their effectiveness in alleviating the distortions associated with income taxation and increasing the quality of child care chosen by parents.
    Keywords: optimal income taxation, child care subsidies, tax deductibility, tax credit, public provision of private goods
    JEL: H21 H41
    Date: 2017
  10. 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
  11. By: Simone Moriconi; Pierre M. Picard; Skerdilajda Zanaj
    Abstract: This paper studies theoretically and empirically competition in commodity taxation and product market regulation between trading partner countries. We present a two-country general equilibrium model in which destination-based commodity taxes finance public goods, and product market regulation affects both the number of firms in the market and product diversity. We provide empirical evidence based on data for 21 OECD countries over the 1990-2008 period. Our results suggest that commodity taxation and product market regulation are interdependent policies. We find absence of strategic interaction in commodity taxation between governments. Furthermore, we show that domestic regulation has a negative effect on domestic commodity taxation. Finally, we demonstrate that product market regulation is a strategic complementary policy.
    Keywords: regulation, commodity tax, strategic interactions
    JEL: F00 H10 H70 H87 L50
    Date: 2017
  12. By: Mohammed Mardan; Michael Stimmelmayr
    Abstract: This paper analyzes the relevance of firm losses for tax revenues and welfare when switching from separate accounting to a system of tax base consolidation with formula apportionment. We find that a system change unambiguously decreases tax revenues in the short run, in which neither firms nor governments can adjust their behavior, due to the cross-border loss offset inherent to formula apportionment. In the medium run, in which only firms can adjust their strategies, tax revenues are still lower under formula apportionment if the probability of incurring losses or the costs of profit shifting are sufficiently small. However, in the long run, where both firms and governments are able to adjust their behavior after the system change, a switch from separate accounting to formula apportionment is beneficial under the aforementioned conditions. Furthermore, we show that a higher weight of input shares in the apportionment formula may mitigate tax competition because, contrary to output factors, input factors provide an insurance against tax revenue shortfalls due to loss-making affiliates.
    Keywords: separate accounting, formula apportionment, corporate losses, cross-border loss offset, CCCTB
    JEL: H73 H25 F23
    Date: 2017
  13. By: Donatella Baiardi; Paola Profeta; Riccardo Puglisi; Simona Scabrosetti
    Abstract: We challenge the “OECD view†(Arnold et al. 2011) according to which a shift from direct to indirect taxation is associated with higher long-run economic growth. We study the relationships between per capita GDP, overall tax revenue and tax composition (in particular direct vs. indirect taxation). We can replicate the findings in Arnold et al. when focusing on the same sample of countries and time period, but not when adopting more cautious estimates of the standard errors. The results are not robust to adding countries and/or extending the time period under consideration. They also differ in the short- and long-run.
    Keywords: economic growth, taxation, tax mix, OECD countries
    JEL: E62 H20 P50
    Date: 2017
  14. By: Manuela Krause; Niklas Potrafke
    Abstract: In 2006, the reform of the German fiscal constitution realigned legislative powers between the federal and the state governments. Since 2007, the German state governments have been allowed to design real estate transfer tax rates. We investigate whether government ideology predicts the levels and increases in the real estate transfer tax rates; and show that leftwing and center governments were more active in increasing the real estate transfer tax rates than rightwing governments. The result is important because many voters were disenchanted with the policies and platforms of the established German parties in the course of the euro and refugee crisis. Disenchantment notwithstanding, the established political parties are still prepared to offer polarized policies.
    Keywords: taxation, real estate transfer tax, reform, partisan politics, government ideology, German states
    JEL: D72 H20 H71 P16 R38
    Date: 2017
  15. By: Håkan Selin; Laurent Simula
    Abstract: The public finance literature has modeled income shifting as a decision along the intensive margin even though it involves significant fixed costs, giving rise to an important extensive margin. We show that accounting for this extensive margin has crucial policy implications: the classical distinction between income creation and income shifting breaks down. We make this point in a simple linear tax setting with a population of agents differing in terms of productivities, labor supply elasticities, and costs of income shifting. In the most empirically plausible scenario when people who shift easily are also more elastic in labor supply, giving them a lower tax rate is a good thing. This mechanism may be compared to third degree price discrimination in industrial organization. Numerical simulations suggest that fixed shifting costs have a large impact on optimal taxes. We further demonstrate that the conclusions derived for linear taxes carry over to non-linear tax schedules.
    Keywords: income shifting, optimal taxation, labor income tax
    JEL: H21 H24
    Date: 2017
  16. By: Vincent Bouvatier; Gunther Capelle; 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 standard factors based on gravity equations; 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 EUR 1 billion and EUR 3.6 billion.
    JEL: F3 G3 G21 H22 H3 L8
    Date: 2017–07
  17. By: Dirk Schindler
    Abstract: How to incorporate hard-to-measure assets into the wealth tax? We analyze the effect of an optimal wealth tax on risk-taking behavior and welfare when investors do not only have the standard portfolio choice with a well-diversified market portfolio, but can alternatively choose to invest all their wealth into a non-diversifiable, indivisible project. The latter is interpreted as entrepreneurial investment into a small, non-listed firm for which the actual value is hard to measure and non-verifiable. For such firms, real-world wealth tax systems base the wealth tax on deterministic book values. We show that this tax treatment does not distort the choice of projects if the tax is set optimally with an imputed interest rate on book values, actually larger than the risk-free market rate of return. The market equilibrium and a proportional tax on the market portfolio will ensure an efficient risk allocation between private and public consumption and across projects. Failing to apply an imputed inflation of book values, instead, gives rise to an implicit subsidy on entrepreneurial activity and distorts investment. Our findings also have implications for taxation of hard-to-measure assets under capital-gains and inheritance taxation.
    Keywords: wealth taxation, portfolio choice, non-listed firms, risk diversification, hard-to-measure assets
    JEL: H21 D14 G11
    Date: 2017
  18. By: Johannes Becker; Ronald B. Davies
    Abstract: How do countries compete for mobile tax base when they lack precise information on how tax rates affect the tax base? We present a multi-period version of a classic tax competition model in which countries set source-based taxes under incomplete information on the tax base elasticity. This information, however, improves as they observe both their own and their neighbours’ experiences. In contrast to the existing work on policy learning, we focus on learning in the presence of (fiscal) externalities. We show that, because learning can exacerbate this external-ity, the value of learning can be negative and, thus, learning may be too fast. Given that variance in tax policies enhances learning, this implies that, in the sequence of Markov perfect equilibria, tax rates can be too heterogeneous. Furthermore, we contribute to the empirical tax competition literature by showing that learning generates tax patterns that look as if countries react to each other even if there are no fiscal externalities. We conclude that the existing results typically taken as evidence of tax competition may be more nuanced than heretofore recognized.
    Keywords: social learning, policy diffusion, tax competition
    JEL: H25 H32 H87
    Date: 2017
  19. By: Selahattin Imrohoroglu
    Abstract: Over the past two decades, Japan has suffered from low economic growth and a large and growing debt to output ratio. Furthermore, Japan anticipates significant increases in future government expenditures due to an aging population. These problems have led Japan to introduce a consumption tax rate in an attempt to raise revenues, and, more recently, to reduce the statutory corporate income tax rate to raise investment and output growth. In this paper we study the growth and welfare consequences of a reduction in income taxation in Japan along with increases in consumption taxation to stabilize the debt to output ratio. In particular, we consider various unanticipated tax reforms using the model described in Hansen and Imrohoroglu (2016). We find that while output per working age population is projected to be roughly constant between 2015 and 2021 in the benchmark equilibrium representing the status quo, under alternative policies considered, output could be as much as 15% higher by 2021.
    Date: 2017–10
  20. By: Steiner, Viktor; Fossen, Frank; Rees, Ray; Rostam-Afschar, Davud
    Abstract: We investigate how comprehensive personal income taxes affect the portfolio share of personal wealth that entrepreneurs invest in their own business. Using detaild wealth information form waves 2002, 2007 and 2013 of the SOEP, 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.
    Date: 2017
  21. By: F. Barigozzi; H. Cremer; K. Roeder
    Abstract: The tax regimes applied to couples in many countries including the US, France, and Germany imply either a marriage penalty or a marriage bonus. We study how they affect the decision to get married by considering two potential spouses who play a marriage proposal game. At the end of the game they may get married, live together without formal marriage, or split up. In this signaling game, proposing (or getting married) is costly but can indicate strong love. The striking property we obtain is that a marriage bonus may actually reduce the probability that a couple gets married. If the bonus is sufficiently large, the signaling mechanism breaks down, and only a pooling equilibrium in which fewer couples get married remains. Similarly, a marriage penalty may increase the marriage probability. Speciffically, the penalty may lead to a separating equilibrium with efficiency enhancing information transmission, which was otherwise not possible. Our results also imply that marriage decisions in the laissez-faire are not necessarily privately optimal. In some cases a bonus or a penalty may effiectively make the marriage decision more efficient; it may increase the number of efficient marriages that otherwise may not be concluded.
    JEL: J12 D82 H31
    Date: 2017–10
  22. By: Spencer Bastani; Sören Blomquist; Luca Micheletto
    Abstract: This paper highlights the possibility that negative marginal tax rates arise in an intensive-margin optimal income tax model where wages are exogenous and preferences are homogeneous, but where agents differ both in skills (labor market productivity) and their needs for a work-related consumption good.
    Keywords: nonlinear income taxation, negative marginal tax rates, heterogeneity in needs, redistribution
    JEL: H21
    Date: 2017
  23. By: David Ingles and Miranda Stewart
    Abstract: Australia's retirement income system combines private and public provision for old age. Retirees rely on private (but highly regulated) superannuation saving that attracts large tax concessions; a public, means-tested age pension; home ownership; and other private savings. Despite recent changes intended to make the system fairer and more fiscally sustainable, Australia's retirement income system still lacks coherence, produces inequitable outcomes and creates high effective tax rates on work and saving. This article proposes a more coherent approach to address fairness, reduce the effective tax rates on work and saving and provide adequate earnings replacement rates with greater fiscal sustainability than is delivered in the recent reforms.
    Keywords: age pension, income tax, retirement saving, superannuation, work incentives
    Date: 2017–09–11
  24. By: Vidar Christiansen
    Abstract: An important question is whether VAT exemption of financial services is a desirable property or whether it is justified only due to practical and administrative necessity. This paper singles out a number of financial services for discussion of this issue in a context allowing for other taxes and other preexisting distortions. It discusses taxation of intermediation that facilitates savings and borrowing, payment services and currency exchange. It also elaborates on the distortionary effects of taxing intermediate goods due to VAT exemption with focus on exports and consumer prices.
    Keywords: financial services, indirect taxation, value added tax, VAT exemptions
    JEL: H20 H21 H22
    Date: 2017
  25. By: Braun, Julia; Zagler, Martin
    Abstract: Nash bargaining model shows that a deal is struck only if both countries mutually benefit. • The model predicts voluntary signature of asymmetric double tax agreements only if there is compensation for the capital importer. Empirical evidence indicates that foreign aid from the capital exporter to the capital importer increases on average by 6 million USD In the signature year of a double tax agreement
    JEL: H2
    Date: 2017

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