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on Public Economics |
| By: | Sandra V Lizarazo Ruiz; Adrian Peralta-Alva; Damien Puy |
| Abstract: | This paper assesses the macroeconomic and distributional impact of personal income tax (PIT) reforms in the U.S. drawing on a multi-sector heterogenous agents model in which consumers have non-homothetic preferences and sectors differ in terms of their relative labor and skill intensity. The model is calibrated to key characteristics of the US economy. We find that (i) PIT cuts stimulate growth but the supply side effects are never large enough to offset the revenue loss from lower marginal tax rates; (ii) PIT cuts do “trickle-down” the income distribution: tax cuts stimulate demand for non-tradable services which raise the wages and employment prospects of low-skilled workers even if the tax cut is not directly incident on them; (iii) A revenue neutral tax plan that reduces PIT for middle-income groups, raises the consumption tax, and expands the Earned Income Tax Credit can have modestly positive effects on growth while reducing income polarization; (iv) The growth effects from lower income taxes are concentrated in non-tradable service sectors although the increased demand for tradable goods generate positive spillovers to other countries; (v) Tax cuts targeted to higher income groups have a stronger growth impact than tax cuts for middle income households but significantly worsen income polarization, even after taking into account trickle-down effects and an expansion of the Earned Income Tax Credit. |
| Date: | 2017–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/192&r=pbe |
| By: | Pedro Brinca; Miguel H. Ferreira; Francesco Franco; Hans A. Holter; Laurence Malafry |
| Abstract: | Following the Great Recession, many European countries implemented fiscal con- solidation policies aimed at reducing government debt. Using three independent data sources and three different empirical approaches, we document a strong positive re- lationship between higher income inequality and stronger recessive impacts of fiscal consolidation programs across time and place. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of European economies, in- cluding the distribution of wages and wealth, social security, taxes and debt, and study the effects of fiscal consolidation programs. We find that higher income risk induces precautionary savings behavior, which decreases the proportion of credit-constrained agents in the economy. Credit-constrained agents have less elastic labor supply re- sponses to fiscal consolidation achieved through either tax hikes or public spending cuts, and this explains the relationship between income inequality and the impact of fiscal consolidation programs. Our model produces a cross-country correlation between inequality and the fiscal consolidation multipliers, which is quite similar to that in the data. JEL codes: E21, E62, H31, H50 |
| Keywords: | fiscal consolidation, income inequality, fiscal multipliers, public debt, income risk |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:unl:unlfep:wp617&r=pbe |
| By: | Garriga, Carlos (Federal Reserve Bank of St. Louis) |
| Abstract: | In this paper, we explore the proposition that the optimal capital income tax is zero using an overlapping generations model. We prove that for a large class of preferences, the optimal capital income tax along the transition path and in steady state is non-zero. For a version of the model calibrated to the US economy, we find that the model could justify the observed rates of capital income taxation for an empirically reasonable intertemporal utility function and a robust demographic structure. |
| Keywords: | Optimal taxation; uniform commodity taxation |
| JEL: | E62 H21 |
| Date: | 2017–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-032&r=pbe |
| By: | Philipp Doerrenberg; Andreas Peichl |
| Abstract: | We present the first randomized survey experiment in the context of tax compliance to assess the role of social norms and reciprocity for intrinsic tax morale. We find that participants in a reciprocity treatment have significantly higher tax morale than those in a social-norm treatment. This suggests that a potential backfire effect of social norms is outweighed if the consequences of violating the social norm are made salient. We further document the anatomy of intrinsic motivations for tax compliance and present first evidence that previously found gender effects in tax morale are not driven by differences in risk preferences. |
| Keywords: | Tax compliance, tax evasion, instrinsic motivation, tax morale, social norms, reciprocity |
| JEL: | H20 H32 H50 C93 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ifowps:_242&r=pbe |
| By: | Johann K. Brunner; Susanne Pech |
| Abstract: | We study the optimal tax system in a dynamic model where di¤erences in wages induce di¤erences in inheritances, and the transition from parent ability to child ability is described by a Markov chain. In accordance with empirical evidence, we assume that in any generation more able individuals are likely to have a more able parent, which implies that in the steady state they also tend to receive larger inheritances than less able individuals. We show that the Atkinson-Stiglitz result on the redundancy of indirect taxes does not hold in this framework. In particular, given an optimal income tax, a bequest tax as well as a consumption tax are potential instruments for additional redistribution. For the bequest tax the sign of the overall welfare e¤ect depends on the reaction of bequests and on inequality aversion, while for the consumption tax the sign is always positive because the distorting e¤ect is outweighed by the induced increase in wealth accumulation. |
| Keywords: | Optimal taxation, estate tax, consumption tax, wealth transmission. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2017_17&r=pbe |
| By: | Satoshi Kasamatsu (Graduate School of Economics, The University of Tokyo); Hikaru Ogawa (Faculty of Economics, The University of Tokyo) |
| Abstract: | We propose an infinitely repeated game of tax competition with an endogenous capital supply. Our results show that the larger the capital supply elasticity to interest rates, the easier it is for interregional tax coordination within a country to be achieved. The capital supply elasticity is lower when countries are less integrated into the international capital market, and vice versa. Thus, our finding suggests that the regions in the country with a lower (higher) degree of integration in the global market are less (more) likely to achieve tax coordination. |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2017cf1071&r=pbe |
| By: | Kyle, Margaret K; Ridley, David; Zhang, Su |
| Abstract: | How do governments respond to other governments when providing a global public good? Using data from 2007-2014 on medical research funding for infectious and parasitic diseases, we examine how governments and foundations in 41 countries respond to funding changes by the US government (which accounts for half of funding for these diseases). Because funding across governments might be positively correlated due to unobserved drivers they have in common, we use variation in the representation of research-intensive universities on US Congressional appropriations committees as an instrument for US funding. We find that a 10 percent increase in US government funding for a disease is associated with a 2 to 3 percent reduction in funding for that disease by another government in the following year. |
| Keywords: | free riding; health; Innovation; pharmaceuticals; Public Goods |
| JEL: | H4 H5 I18 O1 O3 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12419&r=pbe |
| By: | van der Kwaak, Christiaan; van Wijnbergen, Sweder |
| Abstract: | Abstract We investigate the effectiveness of fiscal stimuli when banks are undercapitalized and have large holdings of government bonds subject to sovereign default risk. Deficit-financed government purchases then crowd out private expenditure and fiscal multipliers can turn negative. Crowding out increases for longer maturity bonds and higher sovereign default risk. We estimate a DSGE model with financial frictions for Spain and find that investment crowding out indeed leads to a negative cumulative fiscal multiplier. When monetary policy is exogenous, like at the ZLB or in a currency union, fiscal stimuli become more effective but multipliers are reduced when banks are undercapitalized. |
| Keywords: | Financial Intermediation; Macrofinancial Fragility; Fiscal Policy; Sovereign Default Risk |
| JEL: | E44 E62 H30 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12394&r=pbe |
| By: | Vitor Gaspar; Paolo Mauro; Tigran Poghosyan |
| Abstract: | How can a society’s well-being be measured to include not only average incomes but also their distribution? How can the effects of policies be assessed by considering both equity and efficiency? This primer outlines the seminal contributions of influential economists of the past, including Arthur Okun, who developed a simple method to elicit people’s preferences regarding redistribution, and Anthony Atkinson, who showed how equity and efficiency can be measured simultaneously and summarized in a single, intuitive index expressed in monetary units (such as dollars). These methods are applied to recent data to gauge how countries fare when both mean incomes and their distribution are considered together, and to a hypothetical tax-and-transfer scheme assessed through a general equilibrium model for household-level data. |
| Date: | 2017–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/214&r=pbe |
| By: | Jeffrey Clemens; Benedic Ippolito |
| Abstract: | We analyze potential reforms to Medicaid financing through the lens of fiscal federalism. Because substantial dollars are at stake, both the economic and political sides of intergovernmental transfers have high relevance in this setting. We show that changes in Medicaid financing formulas can shift amounts exceeding several hundred dollars per capita from "winning" states to "losing" states. In some cases, these amounts exceed 10 percent of states' own-source revenues. States' balanced budget requirements imply that such changes would, if not phased in gradually, require significant budgetary adjustment over short time horizons. We next show that alternative Medicaid financing structures have significant implications for states' exposure to budgetary stress during recessions. During the Great Recession, an acyclical block grant structure would have increased states' shortfalls by 2--3.5 percent of own-source revenues relative to either an explicitly countercyclical block grant or the current matching system. Finally, we assess the implications of several financing structures for the extent to which they subsidize states' decisions on both the "extensive" and "intensive" margins of coverage generosity over the short and long term. |
| JEL: | H72 H75 H77 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23965&r=pbe |
| By: | Emmanuel Saez; Benjamin Schoefer; David Seim |
| Abstract: | This paper uses administrative data to analyze a large and long-lasting employer payroll tax rate cut from 31% down to 15% for young workers (aged 26 or less) in Sweden. We find a zero effect on net-of-tax wages of young treated workers relative to slightly older untreated workers, even in the medium run (after six years). Simple graphical cohort analysis shows compelling positive effects on the employment rate of the treated young workers, of about 2-3 percentage points, which arise primarily from fewer separations (rather than more hiring). These employment effects are larger in places with initially higher youth unemployment rates. We also analyze the firm-level effects of the tax cut. We sort firms by the size of the tax windfall and trace out graphically the time series of firms' outcomes. We proxy a firm's windfall with its share of treated young workers just before the reform. First, heavily treated firms expand after the reform: employment, capital, sales, value added, and profits all increase. These effects appear stronger in credit-constrained firms, consistent with liquidity effects. Second, heavily treated firms increase the wages of all their workers – young as well as old – collectively, perhaps through rent sharing. Wages of low paid workers rise more in percentage terms. Rather than canonical market-level adjustment, we uncover a crucial role of firm-level mechanisms in the transmission of payroll tax cuts. |
| JEL: | H31 H32 J23 J31 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23976&r=pbe |
| By: | Duernecker, Georg; Herrendorf, Berthold |
| Abstract: | Basic theory suggests that increases in labor-income taxes induce people to substitute household production for market work. Time-use surveys for 12 OECD countries during 1970-2010, however, show that instead people substituted leisure for market work. To understand why this happened, we carefully measure the labor productivity of household production and find that it grew strongly in many countries of our sample. Employing a calibrated model of household production, we show that strong growth in the labor productivity of household production implies that leisure absorbs the reductions in market work after labor-income tax increases. |
| Keywords: | Household production; income tax; labor productivity; leisure |
| JEL: | E1 J4 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12393&r=pbe |
| By: | Saez, Emmanuel; Schoefer, Benjamin; Seim, David |
| Abstract: | This paper uses administrative data to analyze a large and long-lasting employer payroll tax rate cut from 31% down to 15% for young workers (aged 26 or less) in Sweden. We find a zero effect on net-of-tax wages of young treated workers relative to slightly older untreated workers, even in the medium run (after six years). Simple graphical cohort analysis shows compelling positive effects on the employment rate of the treated young workers, of about 2--3 percentage points, which arise primarily from fewer separations (rather than more hiring). These employment effects are larger in places with initially higher youth unemployment rates. We also analyze the firm-level effects of the tax cut. We sort firms by the size of the tax windfall and trace out graphically the time series of firm outcomes. We proxy a firm's windfall with its share of treated young workers just before the reform. First, heavily treated firms expand after the reform: employment, capital, sales, value added, and profits all increase. These effects appear stronger in credit-constrained firms, consistent with liquidity effects. Second, heavily treated firms increase the wages of all their workers -- young as well as old -- collectively, perhaps through rent sharing. Wages of low paid workers rise more in percentage terms. Rather than canonical market-level adjustment, we uncover a crucial role of firm-level mechanisms in the transmission of payroll tax cuts. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12391&r=pbe |
| By: | Andrew Samwick |
| Abstract: | Recent federal legislation has linked the price paid for health insurance benefits to current income. Under the Patient Protection and Affordable Care Act of 2010, individuals and families with income as high as 400 percent of the federal poverty level are eligible for premium tax credits that limit their health insurance premiums to under 10 percent of their income. Under the Medicare Modernization Act of 2003, higher-income beneficiaries face income-related premiums over three times the standard premium for Part B coverage. For workers at or near retirement age, means-testing based on current income provides an incentive for early retirement, dissaving, and income manipulation, raising concerns about the efficiency of such means-testing. Further, current income is subject to short-term fluctuations, making it a noisy predictor of ability to pay. Using the Health and Retirement Study and linked Social Security earnings histories, this paper introduces a measure of lifetime income that compares favorably to current income as a basis for means-testing. It offers less short-term variation in premiums while improving incentives for pre-retirement work and saving. |
| JEL: | H51 I13 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23990&r=pbe |
| By: | Aqib Aslam; Alpa Shah |
| Abstract: | The growth of the peer-to-peer (P2P) economy over the last decade has captivated both stock markets and policymakers alike. While the means for transacting might be different to existing firm structures—with the emergence of digital platforms that connect individual buyers and sellers directly—the tax behavior of individuals operating in this new economy are very familiar. What is clear is that while the P2P economy has potentially exacerbated existing policy, administrative, and revenue-mobilization challenges associated with small business taxation—such as the choice of the tax base and how to set tax thresholds—, the technology behind P2P platforms presents a valuable opportunity to eventually solve them. |
| Date: | 2017–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/187&r=pbe |
| By: | Kenneth Brevoort; Daniel Grodzicki; Martin B. Hackmann |
| Abstract: | This paper investigates the effects of the Medicaid expansion provision of the Affordable Care Act (ACA) on households' financial health. Our findings indicate that, in addition to reducing the incidence of unpaid medical bills, the reform provided substantial indirect financial benefits to households. Using a nationally representative panel of 5 million credit records, we find that the expansion reduced unpaid medical bills sent to collection by $3.4 billion in its first two years, prevented new delinquencies, and improved credit scores. Using data on credit offers and pricing, we document that improvements in households' financial health led to better terms for available credit valued at $520 million per year. We calculate that the financial benefits of Medicaid double when considering these indirect benefits in addition to the direct reduction in out-of-pocket expenditures. |
| JEL: | D14 H51 I13 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24002&r=pbe |
| By: | William B.P. Robson (C.D. Howe Institute); Colin Busby (C.D. Howe Institute); Aaron Jacobs (C.D. Howe Institute) |
| Abstract: | Canada’s greying workforce will spell big fiscal trouble for future taxpayers, according to a new C.D. Howe Institute report. In “The Fiscal Implications of Canadians’ Working Longer,” authors William Robson, Colin Busby, and Aaron Jacobs find that demographic change is squeezing the budgets of Canadian governments—increasing the costs of public programs and eroding the tax base as the growth in traditional working-age people flatlines. |
| Keywords: | Health, Fiscal and Tax Policy |
| JEL: | H5 J1 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdh:ebrief:268&r=pbe |