nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒01‒01
nineteen papers chosen by
Thomas Andrén

  1. Fiscal Consolidation Programs and Income Inequality By Pedro Brinca; Miguel H. Ferreira; Francesco Franco; Hans A. Holter; Laurence Malafry
  2. Tax Reform, Unhealthy Commodities and Endogenous Health By Jiunn Wang; Laura Marsiliani; Thomas Renstrom
  3. The effects of the tax mix on inequality and growth By Oguzhan Akgun; Boris Cournède; Jean-Marc Fournier
  4. When You Know Your Neighbour Pays Taxes: Information, Peer Effects, and Tax Compliance By Alm, James; Bloomquist, Kim M.; McKee, Michael
  5. Tax avoidance and optimal income tax enforcement By Duccio Gamannossi degl’Innocenti; Matthew D. Rablen
  6. Income redistribution through taxes and transfers across OECD countries By Orsetta Causa; Mikkel Hermansen
  7. Population dynamics of tax avoidance with crowding effects By Lorenz, Johannes
  8. Effective Tax Rates and the User Cost of Capital when Interest Rates are Low By Creedy, John; Gemmell, Norman
  9. The Effects of Penalty Information on Tax Compliance: Evidence from a New Zealand Field Experiment By Gemmell, Norman; Ratto, Marisa
  10. The debt tax shield, economic growth and inequality By Fischer, Marcel; Jensen, Bjarne Astrup
  11. The case for NIT+FT in Europe. An empirical optimal taxation exercise By Islam, Nizamul; Colombino, Ugo
  12. Tax Policies in the European Union: 2017 Survey By European Commission
  13. Frictions and taxpayer responses: evidence from bunching at personal tax thresholds By Stuart Adam; James Browne; David Phillips; Barra Roantree
  14. The redistributive preferences of the well-off By Elvire Guillaud; Michaël Zemmour
  15. Democracy and taxation By Balamatsias, Pavlos
  16. Corruption, Taxes and Compliance By Anja Baum; Sanjeev Gupta; Elijah Kimani; Sampawende J Tapsoba
  17. Can taxation predict US top-wealth share dynamics? By Böhl, Gregor; Fischer, Thomas
  18. Individual Tax Planning and Small Business Creation: Evidence on the Impact of Special Tax Regimes in Chile By Claudio Agostini; Eduardo Engel; Andrea Repetto; Damian Vergara
  19. Optimal taxation in occupational choice models: an application to the work decisions of couples By Guy Laroque; Nicola Pavoni

  1. By: Pedro Brinca (Nova School of Business and Economics, Universidade Nova de Lisboa; Center for Economics and Finance, Universidade do Porto); Miguel H. Ferreira (Nova School of Business and Economics, Universidade Nova de Lisboa); Francesco Franco (Nova School of Business and Economics, Universidade Nova de Lisboa); Hans A. Holter (Department of Economics, University of Oslo); Laurence Malafry (Department of Economics, Stockholm University)
    Abstract: Following the Great Recession, many European countries implemented fiscal consolidation policies aimed at reducing government debt. Using three independent data sources and three different empirical approaches, we document a strong positive relationship 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, including 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 responses 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.
    Keywords: fiscal consolidation, income inequality, fiscal multipliers, public debt, income risk.
    JEL: E21 E62 H31 H50
    Date: 2017–12
  2. By: Jiunn Wang (Durham Business School); Laura Marsiliani (Durham Business School); Thomas Renstrom (Durham Business School)
    Abstract: This paper explores how tax reforms with taxes on unhealthy commodities impact consumer behaviours and welfare when individual health is endogenised. We employ a dynamic general equilibrium model which includes both goods and health sectors. Although unhealthy commodities provide utility, they pose a detrimental effect on health. The analytical results show that the introduction of taxes on unhealthy commodities does not have direct effects on health in the steady state. However, based on our simulation results, with a revenue-neutral tax reform where labour income taxes are adjusted, the introduction of taxes on unhealthy commodities improves both health and welfare, but reduces leisure in the long run. On the other hand, a tax reform where capital income taxes are adjusted contributes to even higher welfare as both health and leisure improve. Our analysis may inform policy making decisions on taxation of unhealthy commodities when government can adjust pre-existing taxes
    Keywords: Unhealthy commodities taxation, endogenous health, tax reform
    JEL: D91 E20 H20 I18
    Date: 2017–12
  3. By: Oguzhan Akgun; Boris Cournède; Jean-Marc Fournier
    Abstract: Can reforms that shift the balance among different taxes in the revenue mix lastingly influence the overall prosperity of an economy and the distribution of income across households? The present study takes this question to the data, using the experience of 34 OECD countries over 1980-2014 to assess the effects of changes in the tax structure on the long-term level of average output per capita and the distribution of disposable income across households. Changing the revenue mix while keeping government size constant typically lift long-term output per capita when they involve cuts in the labour tax wedge below or above average incomes, cuts in corporate income taxes or increases in property taxes. The relative-income effects of revenue-neutral reductions in labour tax wedges are broadly in line with intuition: the relative position of those benefitting from them typically improves. In absolute terms, however, nearly all the income distribution benefits from revenue-neutral reductions in labour tax wedges, be they focused on below or average income earners.
    Keywords: growth, household disposable income, inequality, tax, taxation
    JEL: H11 H2 H23 H24 H25 H27
    Date: 2017–12–15
  4. By: Alm, James; Bloomquist, Kim M.; McKee, Michael
    Abstract: In this paper, we suggest that individuals’ tax compliance behaviours are affected by the behaviour of their “neighbours†, or those about whom they may have information, whom they may know, or with whom they may interact on a regular basis. Individuals are more likely to file and to report their taxes when they believe that other individuals are also filing and reporting their taxes; conversely, when individuals believe that others are cheating on their taxes, they may well become cheaters themselves. We use experimental methods to test the role of such information about peer effects on compliance behaviour. In one treatment setting, we inform individuals about the frequency that their neighbours submit a tax return. In a second treatment setting, we inform them about the number of their neighbours who are audited, together with the penalties that they pay. In both cases, we examine the impact of information on filing behaviour and also on subsequent reporting behaviour. We find that providing information on whether one’s neighbours are filing returns and/or reporting income has a statistically significant and economically large impact on individual filing and reporting decisions. However, this “neighbour†information does not always improve compliance, depending on the exact content of the information.
    Keywords: Tax evasion, Tax compliance, Behavioural economics, Experimental economics,
    Date: 2017
  5. By: Duccio Gamannossi degl’Innocenti (Institute for Fiscal Studies); Matthew D. Rablen (Institute for Fiscal Studies and Sheffield University)
    Abstract: We examine the optimal auditing problem of a tax authority when taxpayers can choose both to evade and avoid. For a convex penalty function the incentive-compatibility constraints may bind for the richest taxpayer and at a positive level of both evasion and avoidance. The audit function is non-increasing in reported income, and is higher for progressive tax functions than for regressive tax functions. Higher marginal tax rates increase the incentives for non-compliance, overturning the well-known Yitzhaki paradox.
    Keywords: Tax avoidance, Tax evasion, Optimal auditing, Tax administration
    JEL: H26 K42 D82 H21
    Date: 2017–06–07
  6. By: Orsetta Causa; Mikkel Hermansen
    Abstract: This paper produces a comprehensive assessment of income redistribution to the working-age population, covering OECD countries over the last two decades. Redistribution is quantified as the relative reduction in market income inequality achieved by personal income taxes, employees’ social security contributions and cash transfers, based on household-level micro data. A detailed decomposition analysis uncovers the respective roles of size, tax progressivity and transfer targeting for overall redistribution, the respective role of various categories of transfers for transfer redistribution; as well as redistribution for various income groups. The paper shows a widespread decline in redistribution across the OECD, both on average and in the majority of countries for which data going back to the mid-1990s are available. This was primarily associated with a decline in cash transfer redistribution while personal income taxes played a less important and more heterogeneous role across countries. In turn, the decline in the redistributive effect of cash transfers reflected a decline in their size and in particular by less redistributive insurance transfers. In some countries, this was mitigated by more redistributive assistance transfers but the resulting increase in the targeting of total transfers was not sufficient to prevent transfer redistribution from declining.
    Keywords: income inequality, progressivity, redistribution, taxes, transfers
    JEL: D31 H23 H53 I38
    Date: 2017–12–21
  7. By: Lorenz, Johannes
    Abstract: There are two ways for taxpayers to avoid paying taxes: legally, through tax optimization and illegally, through tax evasion. The government reacts by altering the law, and by conducting audits, respectively. These phenomena are modeled as a population game, a strategic interaction between all taxpayers: the more taxpayers optimize, the lower the optimization result as a consequence of the government tightening the tax law. The more taxpayers evade, the higher the risk of detection because of the tax agencies increasing the audit probability. If the government reacts to changed optimization behavior with too large a delay, an equilibrium tax law cannot be reached. Tax codes should be updated rapidly in order to avoid a permanent change of the tax law, which is costly both for the legislator and the taxpayers facing legal uncertainty.
    Keywords: tax avoidance,tax evasion,population games
    JEL: C73 H26 K34
    Date: 2017
  8. By: Creedy, John; Gemmell, Norman
    Abstract: Interest rates are a key component of both user cost and effective tax rate measures of company taxation, and each is regularly used in empirical tests of tax impacts on investment. However, it is shown that when interest rates are low the two measures are not monotonically related. Using a simulated sample of observations, this feature is found to generate perverse estimates of the effects of taxation on the investment plans of firms.
    Keywords: Interest rates, Company taxation, Business taxes, Investment,
    Date: 2017
  9. By: Gemmell, Norman; Ratto, Marisa
    Abstract: The ‘standard’ Allingham-Sandmo-Yitzhaki (ASY) model of tax evasion predicts effects on compliance which depend on the perceived probability of detection, tax rate and penalty for evasion. Compliance effects of detection probabilities and tax rates have been extensively tested empirically, but penalty effects are rarely tested explicitly. This paper examines the effects of late payment penalties on tax compliance based on an experiment involving New Zealand goods and service tax (GST) ‘late payers’. Firstly, based on an ASY-type model of tax late payments in which the probability of enforcement, rather than detection, is central, we develop a number of testable hypotheses. Secondly, based on a field experiment involving a specific compliance intervention, we examine how taxpayers respond when given different penalty information. The experiment also allows us to consider differences between taxpayers’ stated intentions to comply and subsequently observed compliance. Results suggest that differences in penalty information given to taxpayers and reductions in penalty rates both affect taxpayers stated intentions to comply (pay overdue tax and penalties) as predicted. However, subsequently observed responses generally appear unresponsive to penalties. Nevertheless, various individual taxpayer characteristics are identifiable that affect both compliance intentions and actual behaviour.
    Keywords: Tax evasion, Late payment penalties, Tax experiment, Goods and service tax,
    Date: 2017
  10. By: Fischer, Marcel; Jensen, Bjarne Astrup
    Abstract: We study the implications of the corporate debt tax shield in a growth economy that taxes household income and firm profits and redistributes tax revenues in an attempt to harmonize the lifetime consumption opportunities of households that differ in their endowments. Our model predicts that the debt tax shield (1) increases the risk-free rate, (2) leads to a higher growth rate of the economy, and (3) increases the degree of disparity in households' lifetime consumption opportunities. We further show that the debt tax shield affects the tradeoff between the goals of achieving a high growth rate of the economy and a low degree of inequality and quantify this tradeoff.
    Keywords: debt tax shield,macroeconomic growth,redistributive tax system
    JEL: E21 E23 G11 H23 H31 H32
    Date: 2017
  11. By: Islam, Nizamul; Colombino, Ugo
    Abstract: We present an exercise in empirical optimal taxation for European countries from three areas: Southern, Central and Northern Europe. For each country, we estimate a microeconometric model of labour supply for both couples and singles. A procedure that simulates the households’ choices under given tax-transfer rules is then embedded in a constrained optimization program in order to identify optimal rules under the public budget constraint. The optimality criterion is the class of Kolm’s social welfare function. The tax-transfer rules considered as candidates are members of a class that includes as special cases various versions of the Negative Income Tax: Conditional Basic Income, Unconditional Basic Income, In-Work Benefits and General Negative Income Tax, combined with a Flat Tax above the exemption level. The analysis show that the General Negative Income Tax strictly dominates the other rules, including the current ones. In most cases the Unconditional Basic Income policy is better than the Conditional Basic Income policy. Conditional Basic Income policy may lead to a significant reduction in labour supply and poverty-trap effects. In-Work-Benefit policy in most cases is strictly dominated by the General Negative Income Tax and Unconditional Basic Income.
    Date: 2017–12–20
  12. By: European Commission
    Abstract: This report aims to improve the transparency of the European Semester process by publishing in a clear and accessible format the main indicators used to examine Member States' tax policies, alongside information on recent tax reforms. It also sets out some reform options and examples to act as inspiration for Member States looking to improve the fairness and efficiency of their tax systems.
    Keywords: European Union, taxation
    JEL: H23 H24 H25 H27 H71
    Date: 2017–12
  13. By: Stuart Adam (Institute for Fiscal Studies and Institute for Fiscal Studies); James Browne (Institute for Fiscal Studies and Institute for Fiscal Studies); David Phillips (Institute for Fiscal Studies and Institute for Fiscal Studies); Barra Roantree (Institute for Fiscal Studies and Institute for Fiscal Studies)
    Abstract: We investigate bunching at personal tax thresholds in the UK over a 40-year period. At kinks, where the marginal tax rate rises, we find bunching among company owner-managers and the self-employed, but not those with only employment income. Notches, where the average rate rises, provide compelling evidence that this is because most employees face substantial frictions: fewer than a quarter bunch even where doing so would increase consumption and leisure. We develop a new approach for identifying selection in who responds and for decomposing responses into hours and wage components. We find that employees who bunch at notches are higher-hours, lower-wage, part-time workers.
    Keywords: Behavioural response, income tax, social security con- tributions, optimisation frictions, elasticity of taxable income
    JEL: H20 H24 J22
    Date: 2017–08–22
  14. By: Elvire Guillaud (Centre d'Economie de la Sorbonne & LIEPP, Sciences Po); Michaël Zemmour (CLERSE, Université de Lille)
    Abstract: We argue that the structure of inequality (not only its level) has an impact on redistributive preferences. We test this argument on the well-off, as they stand in a pivotal position between households that have a reduced capacity to contribute to taxation due to limited labour income, and households with greater facility to achieve fiscal optimization thanks to capital income. Inequality is measured at different locations of the income distribution, nearby the income position of the well-off. Attitudes are measured through ISSP international survey, fielded from 1985 to 2006 across 19 countries. Consistent with Albert Hirschman's ‘tunnel effect’, our results show that support for redistribution amongst the well-off is conditioned by their prospect of mobility in both directions, proxied by the change in inequality next to them. Support amongst the well-off increases when their expected cost of downgrading rises, while it decreases when top incomes move further away in the income distribution
    Keywords: Preferences for redistribution; Inequality; Tunnel effect; Well-off
    JEL: D31 D63 H23
    Date: 2017–10
  15. By: Balamatsias, Pavlos
    Abstract: In this paper, the author argues that democracies tend to positively affect the size and composition of tax revenues. His argument is based on the hypothesis that democracies can increase direct taxation, such as income taxes and capital taxes, due to increased compliance of taxpayers and also because there is a diffusion of tax measures between neighboring democratic/autocratic countries. The main theoretical hypothesis is then tested on a dataset that consists of 74 countries over the period 1993-2012. His main explanatory variable will be a dichotomous measure of democracy; but he alters his analysis from previous research by assuming that democracy or autocracy is not an exogenous variable. Instead the author follows the theory of Huntington (The third wave: Democratization in the late twentieth century (Vol. 4), 1991) and the methodology of Acemoglu et al. (Democracy does cause growth, 2014) about regional democratization waves. According to this theory, democratizations occur in regional waves; consequently diffusion of demand or discontent for a political system is easier to happen in neighboring countries due to socio-political and historical similarities. This measure shows him that demand or discontent for a given political system in a geographical area, can in turn influence the power of a country's political regime and subsequently that regime's effect on taxation. The author then uses a two stage least square (2SLS) fixed effects to test our hypothesis. The empirical findings suggest that regional waves of democratization have a positive and statistically significant correlation with democracy, and in turn democracy also has a positive effect on direct taxation as well as the ratio of direct to indirect taxation in the countries of his sample. This result remains the same when several robustness tests are used. Finally when examining the long-run effect of regional waves, the author does not find any evidence of a significant relationship between regional waves of democratization and a country's own regime; however democracy still has a positive effect on direct taxes and tax ratio.
    Keywords: democracy,political development,regional democratization waves,taxation
    JEL: P16 H2
    Date: 2017
  16. By: Anja Baum; Sanjeev Gupta; Elijah Kimani; Sampawende J Tapsoba
    Abstract: This paper revisits the effects of corruption on the state’s capacity to raise revenue, building on the existing empirical literature using new and more disaggregated data. We use a comprehensive dataset for 147 countries spanning 1995-2014, compiled by the IMF. It finds that—consistent with the existing literature—corruption is negatively associated with overall tax revenue, and most of its components. This relationship is predominantly influenced by the way corruption interacts with tax compliance. The establishment of large taxpayer offices improves tax compliance by dampening the perception of corruption, thereby boosting revenue.
    Date: 2017–11–17
  17. By: Böhl, Gregor; Fischer, Thomas
    Abstract: The level of capital tax gains has high explanatory power regarding the question of what drives economic inequality. On this basis, the authors develop a simple, yet micro-founded portfolio selection model to explain the dynamics of wealth inequality given empirical tax series in the US. The results emphasize that the level and the transition of speed of wealth inequality depend crucially on the degree of capital taxation. The projections predict that - continuing on the present path of capital taxation in the US - the gap between rich and poor is expected to shrink whereas "massive" tax cuts will further increase the degree of wealth concentration.
    Keywords: wealth inequality,US top-wealth shares,capital taxation,Fokker-Planck equation,Kalman Filter
    JEL: D31 H23 G11
    Date: 2017
  18. By: Claudio Agostini (Escuela de Gobierno, Universidad Adolfo Ibáñez); Eduardo Engel; Andrea Repetto; Damian Vergara
    Date: 2017–10
  19. By: Guy Laroque (Institute for Fiscal Studies); Nicola Pavoni (Institute for Fiscal Studies and Bocconi)
    Abstract: We study a general model of occupational choice and optimal income taxation where agents have private cost of work that di ffer across occupations and have both deterministic and random components. We apply our framework to study the work decisions of couples in an extensive set up and give necessary and sufficient conditions under which joint-working households should be subsidized compared to single-worker households.
    Date: 2017–05–04

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