nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒11‒12
nineteen papers chosen by
Thomas Andrén

  1. Taxing high-income earners: Tax avoidance and mobility By Alejandro Esteller-Moré; Amedeo Piolatto; Matthew D. Rablen
  2. Distributional Effects of the Wealth Tax under a Lifetime-Dynastic Income Concept By Elin Halvorsen; Thor Olav Thoresen
  3. The Consequences of the Value-Added Tax on Inequality By Kaisa Alavuotunki; Mika Haapanen; Jukka Pirttilä
  4. Revisiting the growth effects of fiscal policy: A Bayesian model averaging approach By K. Peren Arin; Elias Braunfels; Gernot Doppelhofer
  5. Trump's tax reform plan: a short overview By Luigi Bernardi
  6. More Giving or More Givers? The Effects of Tax Incentives on Charitable Donations in the UK By Miguel Almunia; Benjamin Lockwood; Kimberley Ann Scharf
  7. The Optimal Taxation of Risky Capital Income: The Rate of Return Allowance By Kevin Spiritus; Robin Boadway
  8. United States Is Outlier in Tax Trends in Advanced and Large Emerging Economies By Simeon Djankov
  9. Welfare Benefit Reforms and Employment By Marta Aloi; Teresa Lloyd-Braga; Manuel Leite-Monteiro
  10. The Effects of Presumptive Methods of Taxation on Revenue Mobilization in the Value Added Tax By Gohar S. Sedrakyan
  11. Politically Feasible Reforms of Non-Linear Tax Systems By Felix Bierbrauer; Pierre C. Boyer
  12. Corporate Tax Competition in the Presence of Unemployment By MORITA Tadashi; OGAWA Yoshitomo; ONO Yoshiyasu
  13. Fiscal policy transmission in a non-Ricardian model of a monetary union By Christoph Bierbrauer
  14. Estimating the Tax and Credit-Event Risk Components of Credit Spreads By Benzoni, Luca; Goldstein, Robert S.
  15. International taxation and M&A prices By von Hagen, Dominik; Pönnighaus, Fabian Nicolas
  16. A Complementary Tool to Monitor Fiscal Stress in European Economies By Stéphanie Pamies Sumner; Katia Berti
  17. Heterogeneity and the Public Sector Wage Policy By Gomes, Pedro Maia
  18. Majority Rule and Selfishly Optimal Nonlinear Income Tax Schedules with Discrete Skill Levels By Craig Brett; John A Weymark
  19. Tax Pass-through in the European Beer Market By Aria Ardalan; Sebastian G. Kessing

  1. By: Alejandro Esteller-Moré (IEB, Universitat de Barcelona); Amedeo Piolatto (IEB, Universitat de Barcelona); Matthew D. Rablen (University of Sheffield)
    Abstract: The taxation of high-income earners is of importance to every country and is the subject of a considerable amount of recent academic research. Such high-income earners contribute substantial amounts of tax and generate significant positive spillovers, but are also highly mobile: a 1% increase in the top marginal income tax rate increases outmigrations by around 1.5 to 3%. We review research into taxation of high-income earners to provide a synthesis of existing theoretical and empirical understanding. We offer various avenues for potential future theoretical and empirical research.
    Keywords: High-income earners, mobility, tax avoidance
    JEL: H26 H31 K34 K42
    Date: 2017–11
  2. By: Elin Halvorsen; Thor Olav Thoresen
    Abstract: Recent books by Thomas Piketty (Piketty, 2014) and Anthony Atkinson (Atkinson, 2015) have brought the annual wealth tax back on the policy agenda. Both authors suggest using the annual wealth tax to supplement the redistributional effects of the income tax, assigning it a role as a redistributional backstop mechanism. However, when measured against annual income, the wealth tax is often not delivering the expected effects – a large share of the tax burden falls on people with low income. We argue that instead of using yearly income, one should measure wealth tax burdens with respect to individual lifetime income in family dynasties. Using rich Norwegian administrative data, we describe how a lifetime-dynastic income concept can be established. Under our preferred income concept, the wealth tax shows advantageous distributional effects – it represents a clear redistributional supplement to the income tax and is overall progressive in income.
    Keywords: wealth tax, redistribution, life-cycle income, dynastic income
    JEL: D31 H24
    Date: 2017
  3. By: Kaisa Alavuotunki; Mika Haapanen; Jukka Pirttilä
    Abstract: This paper examines the impact of the introduction of the value-added tax on inequality and government revenues using newly released macro data. We present both conventional county fixed effect regressions and instrumental variable analyses, where VAT adoption is instrumented using the previous values of neighbouring countries VAT systems as an instrument. The results reveal – in contrast to earlier work – that the revenue consequences of the VAT have not been positive. The results indicate that income-based inequality has increased due to the VAT adoption, whereas consumption inequality has remained unaffected.
    Keywords: tax policy, value-added tax, inequality, developing countries
    JEL: H23 O23
    Date: 2017
  4. By: K. Peren Arin; Elias Braunfels; Gernot Doppelhofer
    Abstract: Motivated by the mixed evidence in previous literature, we reexamine the effects of various types of government spending and taxes, as well as overall budget surplus/deficit, on economic growth. To address the model uncertainty issue that may have plagued earlier studies we employ a Bayesian Model Averaging (BMA) approach. We use a panel data set for OECD countries for the 1990-2013 period, control for country and time specific effects, and allow for a wide range of other potential growth determinants. The results suggest a robust link between only some fiscal variables and economic growth. On the spending side, productive public spending has a robust positive effect on growth. On the revenue side, we document a robust negative effect for the top corporate tax rate, but, maybe surprisingly, not for any income tax variable. Finally, our results suggest that a budget surplus has a robust positive effect on economic performance. We also analyze the timing of effects and conclude that most effects occur with a lag of two years.
    Keywords: Fiscal Policy, Public Spending, Taxes, Economic Growth.
    JEL: E62 H20 O40
    Date: 2017–11
  5. By: Luigi Bernardi (Università di Pavia)
    Abstract: Since the 2016 electoral campaign, the President elect of the USA, Donald Trump, has presented a broad Plan for reducing taxes. This Plan centres on a reduction in Federal income tax rates for both individuals and businesses. The main underlying argument (in keeping with Republican tradition) in support of the Plan, is that taxes are harmful to economic growth. This short paper firstly presents a summary of the changes in tax structure suggested by the Plan. This is followed by a discussion of the three main critical and arguable points of the Plan (budget neutrality, distributional consequences and macroeconomic effects), also through a review of the most recent studies regarding this topic. The prevailing view is that the Plan might boost economic growth, but only at the price of a huge budget deficit, while it may well favour only the wealthiest taxpayers in the USA.
    Keywords: Taxation, Donald Trump’s tax plan
    JEL: H2 H20 H24 H25 H26
    Date: 2017–10
  6. By: Miguel Almunia; Benjamin Lockwood; Kimberley Ann Scharf
    Abstract: This paper estimates the tax-price elasticity of giving using UK administrative tax return data, exploiting variation from a large tax reform. We estimate both the intensive and extensive-margin elasticity, using a novel instrumental variables strategy. Then, we derive new conditions to evaluate the welfare consequences of changes in the generosity of the subsidy to donations. We find a small intensive-margin elasticity of -0.2 and a substantial extensive-margin elasticity of -0.8, yielding a total elasticity of about -1. These estimates mask considerable heterogeneity: high-income individuals respond more on the intensive margin, while the extensive-margin response is stronger among low-income taxpayers.
    Keywords: tax policy, charitable giving
    JEL: H24 H31 D64
    Date: 2017
  7. By: Kevin Spiritus; Robin Boadway
    Abstract: We study the optimality of taxing capital income according to a Rate-of-Return Allowance proposed by the Mirrlees Review. In a mean-variance framework the optimal tax on risk-free returns is zero with constant returns to scale in private investment, but positive with decreasing returns to scale, and vice versa. The optimal tax rate on excess returns to risky assets is positive if the stochastic tax revenue is returned to the household by variable public good provision. If it is returned as a stochastic lump sum, the optimal tax on excess returns is irrelevant with only aggregate risk, and approaches 100 % if there is also idiosyncratic risk.
    Keywords: optimal capital taxation, rate of return allowance
    JEL: H21 H23 H24
    Date: 2017
  8. By: Simeon Djankov (Peterson Institute for International Economics)
    Abstract: In this comparative analysis of tax systems in advanced and large emerging economies, the United States stands out as an anomaly. Over the past 30 years the average corporate income tax rate in the 46 countries studied has fallen to about 20 to 25 percent, nearly every country has introduced carbon taxes, and personal income taxes have stabilized around 35 to 45 percent. By contrast, the US tax system relies primarily on high direct personal and corporate taxes and has no value-added tax (VAT) or carbon tax. The US Congress should cut the corporate tax rate by 10 to 15 percentage points, to reach the OECD average and boost US competitiveness. Lawmakers can further consider a shift to indirect taxes like the VAT, to make up for revenues that would be lost under a reduced corporate tax rate.
    Date: 2017–11
  9. By: Marta Aloi; Teresa Lloyd-Braga; Manuel Leite-Monteiro
    Abstract: We consider an economy characterised by involuntary unemployment among low skilled workers, and investigate the implications for employment and income of welfare schemes often advocated as less distortionary. We show that reducing unemployment benefits in favour of income subsidies (social benefits) reduces employment in general equilibrium and also the income of low skilled workers, for not too high distortions in the labour market. Furthermore, it leads to a higher tax burden and a welfare deterioration. To support employment, we suggest that systems grounded in contribution-based unemployment insurance schemes are to be preferred and strengthened.
    Keywords: unemployment benefits, social benefits, taxes, unions, employment
    JEL: H20 I38 J65
    Date: 2017
  10. By: Gohar S. Sedrakyan (International Center of Public Policy, Andrew Young School of Policy Studies, Georgia State University)
    Abstract: Recent economic studies of presumptive taxation in the ECA region suggest negative effects of these tax modes on tax revenues mobilization. This study uses a three-stage methodology to estimate the effect of presumptive taxation on revenue mobilization for the VAT. First, we develop a new approach to estimate the true VAT potential tax base in an economy that includes presumptive taxation. Next, the paper assesses potential tax collections reflecting true taxable capacity and a tax effort index, suggesting the presence of inefficiencies in the tax system and sizable tax avoidance. Second, we use regression analysis to test for the scale of impact of presumptive taxation on VAT collections. Third, we use vector autoregression analysis (VAR) to analyze the bidirectional effect of VAT actual and potential collection and presumptive taxation modes in short and long-term perspective. For contrasting the variance of impact of presumptive taxation on VAT mobilization we use two different presumptive tax modes, simplified tax and presumptive payments, with different tax structures. We use data for Armenia for the numerical application of the analysis. Our findings reveal that, indeed, Armenia’s simplified tax has a significant distorting and diminishing effect on VAT collections. Meanwhile, presumptive payments have a positive impact on VAT mobilization.
    Date: 2017–10
  11. By: Felix Bierbrauer; Pierre C. Boyer
    Abstract: We present a conceptual framework for the analysis of politically feasible tax reforms. First, we prove a median voter theorem for monotonic reforms of non-linear tax systems. This yields a characterization of reforms that are preferred by a majority of individuals over the status quo and hence politically feasible. Second, we show that every Pareto-efficient tax systems is such that moving towards lower tax rates for below-median incomes and towards higher rates for above median incomes is politically feasible. Third, we develop a method for diagnosing whether a given tax system admits reforms that are welfare-improving and/ or politically feasible.
    Keywords: non-linear income taxation, tax reforms, political economy, welfare analysis
    JEL: C72 D72 D82 H21
    Date: 2017
  12. By: MORITA Tadashi; OGAWA Yoshitomo; ONO Yoshiyasu
    Abstract: We analyze the corporate tax competition between two countries in a two-sector model in which one sector is an oligopoly and oligopolists can choose their location between the two countries. Importantly, our model considers imperfect labor markets, where the wage rates in both countries are fixed, causing unemployment to appear. Under such framework, we show that a unique and stable Nash equilibrium of corporate taxes exists and discuss the properties of the equilibrium tax rates. We also examine the relation between the wage rates and equilibrium tax rates as well as that between the share of equities for oligopoly profits and equilibrium tax rates.
    Date: 2017–11
  13. By: Christoph Bierbrauer (Hochschule Darmstadt)
    Abstract: We present an analytically tractable two-country New Open Economy Macroeconomics model of a currency union featuring an overlapping generations structure of the Blanchard (1985)-Yaari (1965) type. It enables us to study the transmission and spillover effects of a wider range of fiscal shocks in comparison to the standard model. We show that, depending on the financing decision of the government, fiscal policy measures can have very different effects on key macroeconomic variables such as consumption and output. Moreover, the spillovers of national fiscal policy depend on the composition of government spending, the type of the fiscal measure and the cross-country substitutability between goods.
    Keywords: Overlapping generations; New open economy macroeconomics; Public Debt; Decentralized fiscal policy; Monetary union
    JEL: E62 F33 F41 H31 H50 H63
    Date: 2017–10–29
  14. By: Benzoni, Luca (Federal Reserve Bank of Chicago); Goldstein, Robert S. (University of Minnesota)
    Abstract: This paper argues that tax liabilities explain a large fraction of observed short-maturity investment-grade (IG) spreads, but credit-event premia do not. First, we extend Duffie and Lando (2001) by permitting management to issue both debt and equity. Rather than defaulting, managers of IG firms who receive bad private signals conceal this information and service existing debt via new debt issuance. Consistent with empirical observation, this strategy implies that IG firms have virtually zero credit-event risk (at least until they become “fallen angels"). Second, we provide empirical evidence that short maturity IG spreads are mostly due to taxes. By properly accounting for the tax treatment of capital gains and interest income associated with bond investments, we reconcile this finding with the previous literature which argues against a significant tax component to spreads.
    Keywords: Credit risk; investment grade (IG); tax liability; liquidity risk
    JEL: H20 H23 H25 H81
    Date: 2015–11–18
  15. By: von Hagen, Dominik; Pönnighaus, Fabian Nicolas
    Abstract: We show that corporate taxation systems regarding foreign dividends and capital gains across 49 countries differ in many aspects, contradicting the requirements for capital ownership neutrality and indicating that ownership patterns are distorted. Consequently, a national tax policy maker may ask which taxation system improves the position of its multinational entreprises in bidding for foreign targets. To address this question, we develop a theoretical model on the impact of foreign dividends and capital gains taxation on cross-border M&A prices from the acquirer's perspective and theoretically compare different taxation systems. In a next step, we empirically validate our model in a regression analysis on a large cross-border M&A data set. Based on this analysis, we find that foreign dividends taxation rather than capital gains taxation impacts M&A prices. Finally, we provide tax policy suggestions.
    Keywords: International taxation,Repatriation taxes,Capital gains taxes,Lock-in effect,Multinational entities,Cross-border M&As
    JEL: F23 G34 H25 H26 H32 H73
    Date: 2017
  16. By: Stéphanie Pamies Sumner; Katia Berti
    Abstract: This paper presents an indicator of fiscal distress for European economies based on a multivariate regression analysis (logit modelling, the L1 indicator) and on a recently updated dataset of fiscal stress episodes. This indicator presents some interesting features: relying on a parsimonious set of variables that have been tested for their conditional statistical significance, it exhibits an overall satisfactory insample performance. In line with Berti et al. (2012), this indicator confirms the importance of monitoring macro-financial variables to assess countries' vulnerabilities to fiscal distress. It also provides some evidence that the change in the public debt ratio is an important predictor of fiscal distress events, while the level of public debt would particularly matter when combined with macrocompetitiveness imbalances. Our analysis suggests that the L1 indicator could be used as a complementary tool to the Commission S0 indicator to monitor prospective fiscal risks, building on the respective strengths of the two approaches, while compensating for their limitations.
    JEL: E62 E65 F34 H62 H63
    Date: 2017–06
  17. By: Gomes, Pedro Maia (Birkbeck, University of London)
    Abstract: A model with search and matching frictions and heterogeneous workers was established to evaluate a reform of the public sector wage policy in steady-state. The model was calibrated to the UK economy based on Labour Force Survey data. A review of the pay received by all public sector workers to align the distribution of wages with the private sector reduces steady-state unemployment by 1.4 percentage points.
    Keywords: public sector employment, public sector wages, public sector wage premium, unemployment, skilled workers, worker heterogeneity
    JEL: E24 E62 J45
    Date: 2017–10
  18. By: Craig Brett (Mt. Allison University); John A Weymark (Vanderbilt University)
    Abstract: Röell (unpublished, 2012) shows that Black's Median Voter Theorem for majority voting with single-peaked preferences applies to voting over nonlinear income tax schedules that satisfy the constraints of a finite type version of the Mirrlees optimal income tax problem when voting takes place over the tax schedules that are selfishly optimal for some individual and preferences are quasilinear. An alternative way of establishing Röell's median voter result is provided that offers a different perspective on her findings, drawing on insights obtained by Brett and Weymark (GEB, 2017) in their analysis of a version of this problem with a continuum of types. In order to characterize a selfishly optimal schedule, it is determined how to optimally bunch different types of individuals.
    Keywords: nonlinear income taxation, political economy of taxation, optimal bunching, redistributive taxation, voting over tax schedules
    JEL: H2 D7
    Date: 2017–11–05
  19. By: Aria Ardalan (University of Siegen); Sebastian G. Kessing (University of Siegen and CESifo)
    Abstract: We study the pass-through of indirect taxes on beer prices in the European Union (EU). Exploiting the variation of value added tax rates, beer excise tax rates, and beer prices in a panel of monthly data from 1996 to 2016 of all current 28 EU member states, we estimate the tax pass-through of specific beer excise taxes and ad valorem value added taxes, respectively. Ad valorem taxes are under-shifted at a rate of approximately 70%. Specific excise taxes are almost fully shifted to prices in the EU, but, in contrast to the empirical findings for the US, there is no evidence of over-shifting. Nevertheless, the difference between ad valorem and specific tax pass-through rates indicates that imperfect competition plays an important role in the European beer market.
    Keywords: Tax incidence, Pass-through, VAT, Excise Taxes, EU.
    JEL: H22 H23
    Date: 2017

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