nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒11‒26
seventeen papers chosen by
Thomas Andrén

  1. Use It or Lose It: Efficiency Gains from Wealth Taxation By Sergio Ocampo; Gueorgui Kambourov; Daphne Chen; Burhanettin Kuruscu; Fatih Guvenen
  2. Evolution of Tax Progressivity in the U.S.: New Estimates and Welfare Implications By Gaston Navarro; Axelle Ferriere; Daniel Feenberg
  3. Capital taxation : principles, properties and optimal taxation issues. By Céline Antonin; Vincent Touzé
  4. Wealth Transfers and Tax Planning: Evidence for the German Bequest Tax By Sommer, Eric
  5. Dodged a Bullet? “Rothification” Likely to Reduce Retirement Saving By Alicia H. Munnell; Gal Wettstein
  6. A note on time discretion and the welfare cost of lump-sum taxation By Cristian F. Sepulveda
  7. Income Inequality and Asset Prices By Agnieszka Markiewicz
  8. Taxation, social protection, and governance decentralization By Epstein, Gil S.; Gang, Ira N.
  9. Until Taxes Do Us Part: Tax Penalties or Bonuses and the Marriage Decision By Barigozzi, Francesca; Cremer, Helmuth; Roeder, Kerstin
  10. The Fiscal Effectiveness of the Provision of Investment Incentives By Václav Vybíhal
  11. Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs By Lukas Mayr; Dominik Sachs; Fabian Kindermann
  12. Transfer taxes and household mobility: distortion on the housing or labor market? By Hilber, Christian A. L.; Lyytikainen, Teemu
  13. An Interdisciplinary View on Tax Revenue Estimates and Forecasts and its Impacts on a Multilevel Public Budget System By André W. Heinemann; Hanna Kotina; Maryna Stepura
  14. Is consumption tax regressive? A libertarian perspective By Jim Fischer
  15. Subjective Well-Being and Public Policy By Odermatt, Reto; Stutzer, Alois
  16. Taxation of Temporary Jobs: Good Intentions With Bad Outcomes ? By Franck Malherbet; Helene Benghalem
  17. Property Tax Deferral: A Proposal to Help Massachusetts Seniors By Alicia H. Munnell; Anek Belbase; Wenliang Hou; Abigail Walters

  1. By: Sergio Ocampo (University of Minnesota); Gueorgui Kambourov (University of Toronto); Daphne Chen (Florida State University); Burhanettin Kuruscu (University of Toronto); Fatih Guvenen (University of Minnesota)
    Abstract: This paper studies the quantitative implications of wealth taxation (as opposed to capital income taxation) in an incomplete markets model with return rate heterogeneity across individuals. The rate of return heterogeneity arises from the fact that some individuals have better entrepreneurial skills than others, allowing them to obtain a higher return on their wealth. With such heterogeneity, capital income and wealth taxes have different efficiency and distributional implications. Under capital income taxation, entrepreneurs who are more productive and, as a result, generate more income pay higher taxes. Under wealth taxation, on the other hand, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity. Thus, in this environment, the tax burden shifts from productive entrepreneurs to unproductive ones if the capital income tax were replaced with a wealth tax. This reallocation increases aggregate productivity. Second, and at the same time, it increases wealth inequality in the population. To provide a quantitative assessment of these different effects, we build and simulate an overlapping generations model with individual-specific returns on capital income and with idiosyncratic shocks to labor income. Our results indicate that switching from a capital income tax to a wealth tax increases welfare by almost 8% through better allocation of capital. We also study optimal taxation in this environment and find that, relative to the benchmark, the optimal wealth tax increases welfare by 9.6% while the optimal capital income tax increases it by 6.3%.
    Date: 2017
  2. By: Gaston Navarro (Federal Reserve Board); Axelle Ferriere (European University Institute); Daniel Feenberg (NBER)
    Abstract: We provide a statistical description of the evolution of tax progressivity and income inequality in the U.S. for the period 1960-2008, using tax revenue data. We document a large and steady increase of tax progressivity over our sample, with brief exceptions during the early 1980’s and early 2000’s. We provide flexible – parametric and non-parametric – yearly estimates of the tax distribution. We then use a canonical heterogeneous households model (Aiyagari, 1994) to compare the optimal tax progressivity to the current U.S. tax system. Our findings are threefold. First, under the joint assumptions of a linear capital capital tax and an intensive labor supply choice, the optimal progressivity is very close to the one measured in the data. However, if the labor supply choice is on the extensive margin only, optimal tax progressivity is much larger than in the data. Third, preliminary results suggest that the optimal tax system should allow for a non-zero cross-term between capital and labor income taxes: there are welfare gains in allowing the marginal capital tax rate to be increasing in labor income.
    Date: 2017
  3. By: Céline Antonin (OFCE-SCIENCES PO); Vincent Touzé (OFCE Sciences Po)
    Abstract: This article addresses the issue of capital taxation relying on three levels of analysis. The first level deals with the multiple ways to tax capital (income or value, proportional or progressive taxation, and the temporality of the taxation) and presents some of France's particular features within a heterogeneous European context. The second area of investigation focuses on the main dynamic properties generated by capital taxation: the principle of equivalence with a tax on consumption; the issue of double taxation if it targets taxation of nominal income; neutrality of the uniform tax on the capital value; lastly, the risk of confiscatory taxation if there is a disjunction between taxation of the value and the income. The final level of analysis consists in assessing the debate on the optimal level of capital taxation drawing on the lessons in the literature. These discussions are organized into eight themes: (1) double taxation, (2) optimal growth, (3) property, (4) tax competition, (5) supervisory arguments, (6) measuring capital gains, (7) complexity and (8) fiscal stability
    Keywords: Taxation, savings, accumulation of capital
    JEL: D90 E21 H20
    Date: 2017–03–14
  4. By: Sommer, Eric (IZA)
    Abstract: The rising importance of bequests as a source of personal income lead to renewed interest in the taxation of wealth transfers. Empirical evidence on distortionary effects of bequest taxation is relatively scarce. On the basis of administrative data for Germany, this paper assesses the extent to which taxable bequests are targeted to the tax code. I investigate bunching at discrete jumps in the marginal tax rate. While there is evidence for tax planning in case of inter-vivo gifts, inheritances do not exhibit bunching. Further heterogeneity analyses demonstrate that tax planning is highest for gifts between close relatives. While the overall tax base responsiveness is rather low, the findings suggest that bequest tax planning almost exclusively occurs for donors rather than recipients of wealth transfers. Beyond, tax planning is more prevalent for close relatives and large estates.
    Keywords: bequest tax, tax planning, bunching, administrative data
    JEL: D91 H26 H31
    Date: 2017–10
  5. By: Alicia H. Munnell; Gal Wettstein
    Abstract: As part of its tax reform effort, the Congress was considering a proposal to require that employee contributions to 401(k)s above $2,400 go to a Roth – rather than a traditional – account. While this change is not currently in either the House or Senate bill, the debate over the tax plan is continuing. And opposition to other provisions – such as curtailing deductions for state and local taxes – could lead lawmakers to reconsider the 401(k) changes in order to help offset the overall cost of the tax-cut package. “Rothification” would help finance proposed tax cuts because it would increase government revenues over the next 10 years – the budget window for evaluating the impact of tax reform – and reduce revenues by a comparable amount thereafter. The increase occurs in the short term because money going to Roths is taxed up front, while taxation of money contributed to traditional plans does not occur until retirement. This effect on the budget is the sole reason that Rothification has been under consideration. The question is whether a shift to Roth accounts should be viewed as merely a budget gimmick or as a change that could affect how much people save for retirement. That subject is the focus of this brief. The discussion proceeds as follows. The first section describes the differences between Roth and traditional accounts. The second section discusses how switching to Roth accounts would affect the federal budget. The third section explores how the change may affect saving by different types of individuals. The final section concludes that Rothification is likely to lead to less saving by low- and moderate-earners who cannot afford to pay the taxes up-front. Among higher earners, savings may well remain unchanged, or even increase. Importantly, this budget-driven exercise is a diversion from real reform that would enhance retirement saving, such as mandatory auto-enrollment in 401(k)s, mandatory auto-escalation in the default contribution rate, automatic draw-down provisions, and an expansion of coverage to the half of private sector workers without a workplace retirement plan.
    Date: 2017–11
  6. By: Cristian F. Sepulveda (Farmingdale State College, SUNY)
    Abstract: The lump-sum tax is broadly regarded by standard optimal tax theory as the only non-distortionary tax instrument; any other tax instrument distorts relative prices and thus creates a deadweight loss. This paper discusses an unintended effect of lump-sum taxation that can be considered a distortion of the time endowment. Whenever this tax exceeds the amount of non-labor income, it reduces the taxpayer’s ability to freely allocate her time endowment. As long as the taxpayer assigns a positive value to time discretion, then the lump-sum tax creates a welfare cost that has not been identified in the literature. The welfare cost of the lump-sum tax could plausibly be greater than the traditional measure of deadweight loss of an equal yield labor income tax, which does not affect time discretion. Since the lump-sum tax does not unambiguously lead to a greater welfare level, we can conclude that it is not a proper efficiency standard at low levels of non-labor income. The same argument can be used to call for caution in the use of taxes based on the value of assets that are not the source of income flows, like owner-occupied property taxes and some types of wealth taxes. At low levels of non-labor income, these tax instruments will also have a negative effect on time discretion.
    Date: 2017–11
  7. By: Agnieszka Markiewicz (Erasmus University Rotterdam)
    Abstract: We study the relationship between income inequality and stock market returns. We develop a quantitative general equilibrium model that includes two groups of agents: top 10% income group (capital owners) and workers who consume their after-tax labor income. Inequality in the model arises from two sources: capital and labor, and its increase is modeled as growth in the capital owners' capital and labor shares of income. The model and the data predict positive relationship between capital income inequality and real equity returns and negative relationship between labor income inequality and real equity returns. We find that real cumulative return on ex-dividend S&P 500 index would have been lower by 40% if there was no rise in capital income inequality. If the labor share of top decile would not grow, the same S&P 500 index would have experienced cumulative growth higher by 32%. The effects of capital and labor incomes' changes partially offset each other, and S&P 500 index displays a cumulative increase of 290% between 1970 and 2014 and 275% if there was no increase in income inequality.
    Date: 2017
  8. By: Epstein, Gil S.; Gang, Ira N.
    Abstract: Governments do not have perfect information regarding constituent priorities and needs. This lack of knowledge opens the door for groups to lobby in order to affect the government’s taxation levels. We examine the political economy of decentralized revenue-raising authority in light of social protection expenditures by constructing a theoretical model of hierarchical contests and comparing the implications of centralized with decentralized governance. Increasing information available to the government may generate additional expenditures by interest groups trying to affect government taxation decisions. We show the potential existence of a poverty trap as a result of decentralization in taxation decisions.
    Keywords: governance,decentralization,economic-models-of-political-processes,contests,rentseeking,intergovernmental-relations
    JEL: H77 D72 H73
    Date: 2017
  9. By: Barigozzi, Francesca (University of Bologna); Cremer, Helmuth (Toulouse School of Economics); Roeder, Kerstin (University of Augsburg)
    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. Specifically, 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 effectively make the marriage decision more efficient; it may increase the number of efficient marriages that otherwise may not be concluded.
    Keywords: marriage penalty, marriage bonus, proposal game, signaling
    JEL: J12 D82 H31
    Date: 2017–10
  10. By: Václav Vybíhal (University of Ss Cyril and Methodius in Trnava, Faculty of Social Sciences, Department of Public Administration)
    Abstract: Foreign direct investments undoubtedly have a significant impact on the national economy. They contribute to economic growth, to reducing the unemployment rate and they also positively affect other macroeconomic indicators. Foreign companies bring with them not only foreign capital that they invest in the host country, but also new technology, modern and more effective production and management methods, classic standards of business conduct, new jobs as well as opportunities for domestic suppliers.Host countries then attempt to attract foreign investors via active policies through investment incentives and various preferential conditions for investing. Investment incentives for foreign investors are thus among the important public spending programs. Basic investment incentives in countries with transitive economies within the European Union include income tax credits, respectively tax holidays, the transfer of land for a subsidized price, one-time financial support for the creation of new jobs and financial support for retraining employees. The provision of investment incentives means not only an increase on the expenditure side of the public budget or a decrease of the income side of the public budget (due to tax credits), but it usually leads ? as our research demonstrated ? to a start of the influx of revenue sources for public budgets, already in the short or medium term horizon. The aim of the research was to develop a methodology for measuring the fiscal effectiveness of provided investment incentives in the process of their implementation, to determine what the effects are on the income side of the national budget, and for this purpose construct an indicator of fiscal effectiveness whose functional and explanatory power would need to be tested in practice among the recipients of investment incentives.The fiscal effectiveness of investment incentives was constructed as the share of outputs (in the form of revenues from taxes, social and health insurance, fees, savings on the expenditure side of the budget) on a unit of inputs (income tax credit, financial support for a created job, subsidy to cover the costs of employee retraining, administrative costs of collecting taxes, subsidies on the technical equipment of an area on which production is to be located, subsidy on the price of land). With regard for business plans, fiscal effectiveness was assessed for a period of 5 years from the approval and receipt of the investment incentive in a set of industrial enterprises in the Czech Republic. The research also covered results that were attained in Slovakia.
    Keywords: Foreign direct investment, investment incentives, fiscal effectiveness, industrial enterprises
    JEL: L38 G39 H20
    Date: 2017–10
  11. By: Lukas Mayr (European University Institute); Dominik Sachs (European University Institute); Fabian Kindermann (University of Bonn)
    Abstract: Taxing bequests not only generates direct tax revenue, but can have a positive impact on the labor supply of heirs through wealth effects. This leads to an increase in future labor income tax revenue. How large is this effect? We use a state of the art life-cycle model that we calibrate to the German economy to answer this question. Our model successfully matches quasi-experimental evidence regarding the size of wealth effects on labor supply. Using this evidence directly for a back of the envelope calculation fails because (i) heirs anticipate the reduction in bequests through taxation and adjust their labor supply already prior to the actual act of bequeathing, and (ii) when bequest receipt is stochastic, even those who ex post end up not inheriting anything respond ex ante to a change in the expected size of bequests. We find that for each Euro of bequest tax revenue the government mechanically generates, it obtains an additional 9 Cents of labor income tax revenue (in net present value) through a higher labor supply of (non-)heirs.
    Date: 2017
  12. By: Hilber, Christian A. L.; Lyytikainen, Teemu
    Abstract: We estimate the effect of the UK Stamp Duty Land Tax (SDLT) – a transfer tax on the purchase price of property or land – on different types of household mobility using micro data. Exploiting a discontinuity in the tax schedule, we isolate the impact of the tax from other determinants of mobility. We compare homeowners with self-assessed house values on either sides of a cut-off value where the tax rate jumps from 1 to 3 percent. We find that a higher SDLT has a strong negative impact on housing-related and short distance moves but does not adversely affect job-induced or long distance mobility. Overall, our results suggest that transfer taxes may mainly distort housing rather than labor markets.
    Keywords: transfer taxes; stamp duty; transaction costs; homeownership; household mobility
    JEL: F3 G3
    Date: 2017–06
  13. By: André W. Heinemann (University of Bremen); Hanna Kotina (Kyiv National Economic University); Maryna Stepura (Kyiv National Economic University)
    Abstract: While tax revenue forecasts are required for the public budget planning and execution process, the frameworks and accuracy of tax revenue forecasts are crucial for economic analysis of public budgets in multilevel systems. Insufficient and defective tax revenue forecasts can lead to budget problems as well as budget interdependencies in multilevel systems. The determination of budget revenues amount, which can actually be carried out, needs to estimate the forecast of tax revenues reasonably and accurately. Adequacy and feasibility of relevant indicators depend on the assessment of the state, trends and forecasting of economic and social development, stability and progressiveness of the current legislation, the forms and methods of tax mobilization, the level of fiscal culture and other factors. The role of tax revenue forecasting is enhanced significantly. Fiscal equalization schemes, grant systems and bailout rules have to take into account in the case of problems with the accuracy of tax revenue forecasts. If tax revenues forecasts in the medium-term are upward biased, the institutional setting can be an explanation for forecasts errors (Breuer 2014). However, over-optimistic as well as under-optimistic forecasts influence budgeting and budget targets.The present paper deals with the conditions and institutional frameworks for accuracy of tax revenue forecasts, especially in a medium-income and a high-income country. First, we present a literature review on tax revenue forecast and the importance of institutional performance for accurate tax revenue forecasts. Thereby, empirical studies to explain forecasts errors will be analyzed. In a comparison of two countries, the second session describes the institutional setting for tax revenue forecasts and the procedures in the Ukraine and Germany and shows the methods, actors and institutional mechanisms in these different multilevel systems. The analysis focusses on the degree of decentralization in both countries and legal equalization schemes. We show some determinants of tax revenue forecast errors and discuss the impacts and consequences for budgetary planning and budget managing in multilevel systems. Our findings point out the importance of fiscal governance in multilevel systems if tax revenue forecasts are influenced by many determinants in specific ways that makes revenue forecast difficult. Multilevel fiscal governance is required to solve problems in tax revenue forecasts and budgeting in decentralized systems. Additionally, the knowledge on taxpayer´s behavior (households, employees, consumer, firms) under conditions of globalization of taxation is underestimated at the present, but is needed for the improvement of public budget managing processes.
    Keywords: Tax estimates, Tax forecasts, Budget planning, Multilevel governance
    JEL: H11 H70 H77
    Date: 2017–10
  14. By: Jim Fischer (Mount Royal University)
    Abstract: Libertarians see a minimalist role for the state at best. That role should be limited to protecting liberty, or the ability of individuals to pursue economic opportunity. In doing so, the state provides the means for individuals to resolve contract disputes that inevitably result when one individual?s claim or pursuits conflict with another. To fulfill this role of administering justice, the state needs a revenue source. Traditionally, liberal democracies have allowed income tax to evolve as the prime source of revenue. This is difficult for libertarians, who see income tax as the theft of individual property by the state. Consumption tax is another option for financing the state, but it has been criticized as being regressive, and therefore unfair in its application. This paper challenges that assumption and makes the case that consumption tax, when applied as a retail sales tax at the point of sale, has inherent characteristics that make it progressive. As such, it overcomes the criticisms that libertarians find with income tax and make it a more acceptable alternative revenue source for financing the limited role of the state.
    Keywords: consumption tax, income tax, libertarian, progressive tax, regressive tax
    JEL: E21 H21
    Date: 2017–10
  15. By: Odermatt, Reto (University of Basel); Stutzer, Alois (University of Basel)
    Abstract: Measures of subjective well-being have gained substantial attention in economics as quantitative approximations of individual welfare. They allow researchers to study relevant determinants of welfare on an individual as well as on a societal level. These determinants might not to be easily detectable in observable behavior. By referring to the recent well-being literature, we provide a selection of determinants of well-being that are important for public policy and show how the analysis of subjective well-being is applied as a complementary analytical tool for policy evaluation. We highlight the use of these measures for guiding public policy in areas that might involve suboptimal behavior. We also discuss some challenges for future research that are associated with the choice of evaluation metrics, the role of aspiration and adaption in evaluations, and utility misprediction.
    Keywords: subjective well-being, determinants of welfare, policy evaluation, bounded rationality
    JEL: D61 D91 H4 I31
    Date: 2017–10
  16. By: Franck Malherbet (CREST and Ecole Polytechnique); Helene Benghalem (CREST)
    Abstract: This paper analyzes the consequences of the taxation of temporary jobs recently introduced in several European countries to induce fi rms to create more open-ended contracts and to increase the duration of jobs. The estimation of a job search and matching model on French data shows that the taxation of temporary jobs does not reach its objectives: it reduces the mean duration of jobs and decreases job creation, employment and welfare of unemployed workers. We find that a reform introducing an open-ended contract without layoff costs for separations occurring at short tenure would have opposite effects.
    Date: 2017
  17. By: Alicia H. Munnell; Anek Belbase; Wenliang Hou; Abigail Walters
    Abstract: Massachusetts citizens, like those in other states, face the prospect of inadequate retirement income. Social Security will provide less relative to pre-retirement earnings; 401(k) balances are generally meager; and half the private sector workforce does not have an employer-sponsored retirement plan. At the same time, the number of years spent in retirement has increased dramatically; health care costs are high and rapidly rising; and interest rates are at historic lows. In addition to these nationwide challenges, Massachusetts’ older residents face extraordinarily high housing costs and, as a result, rank among the most disadvantaged in terms of the gap between their required and actual resources. The three big levers to improve the retirement income situation are: 1) encourage people to work longer; 2) provide coverage for employees who do not have a retirement savings plan at work; and 3) enable older households to tap their home equity. States can assist on all three fronts to help individuals use their own resources to support themselves in retirement. They can publicize the advantage to individuals of staying in the labor force and to companies of hiring and retaining older workers. They can institute programs that require employers without a retirement plan to automatically enroll their workers in an Individual Retirement Account. And they can offer a program of property tax deferral that will enable homeowners to use some of their home equity to augment inadequate retirement income. This brief focuses on the third option, exploring one possible approach to property tax deferral that uses Massachusetts as an example. The discussion proceeds as follows. The first section describes the nation’s retirement income challenge and the particular problem created by Massachusetts’ high housing costs. The second section describes the major existing programs for homeowners’ relief in Massachusetts: two that cost the taxpayer and one that allows low-income homeowners to help themselves through limited property tax deferral. The third section describes a proposal for a new statewide program of property tax deferral that would be open to all homeowners. The fourth section addresses likely utilization and startup costs before the program becomes self-financing. The final section concludes that a comprehensive property tax deferral program offers enough promise to at least be tried as a pilot.
    Date: 2017–11

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