nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒01‒15
fifteen papers chosen by
Thomas Andrén

  1. Tax Havens, Accounting Experts, and Fee-Setting Rules By Thomas A. Gresik; Kai A. Konrad
  2. The Case for NIT+FT in Europe: An Empirical Optimal Taxation Exercise By Islam, Nizamul; Colombino, Ugo
  3. Tax Compliance in India: An Experimental Approach. By Tandon, Suranjali; Rao, R. Kavita
  4. Tax Simplicity and Heterogeneous Learning By Aghion, Philippe; Akcigit, Ufuk; Lequien, Matthieu; Stantcheva, Stefanie
  5. On the interdependency of profit shifting channels and the effectiveness of anti-avoidance legislation By Nicolay, Katharina; Nusser, Hannah; Pfeiffer, Olena
  6. How well targeted are soda taxes? By Dubois, Pierre; Griffith, Rachel; O'Connell, Martin
  7. Corporate tax incidence and its implications for the labor market By Olena, Sokolovska
  8. Collateral effects of a pension reform in France By Hélène Blake; Clémentine Garrouste
  9. Wealthier, Happier and More Self-Sufficient: When Anti-Poverty Programs Improve Economic and Subjective Wellbeing at a Reduced Cost to Taxpayers By Titus Galama; Robson Morgan; Juan E. Saavedra
  10. Estimating the Revenue Impacts of Tax Harmonisation By Ayoki, Milton
  11. Inverse Optimal Taxation in Closed Form By Hitoshi Tsujiyama; Jonathan Heathcote
  12. Tax evasion by domestic and foreign-owned Portuguese firms: a bunching analysis By PAVIA Risa
  13. The Dynamics of Disability and Benefit Receipt in Britain By Jones, Melanie K.; McVicar, Duncan
  14. The bunching estimator cannot identify the taxable income elasticity By Soren Blomquist; Whitney K. Newey
  15. Taxation, redistribution and observability in social dilemmas By Daniel Brent; Lata Gangadharan; Anca Mihut; Marie Villeval

  1. By: Thomas A. Gresik; Kai A. Konrad
    Abstract: Tax havens differ in the specific tax planning arrangements multinational firms can use to reduce their tax liabilities. Given the complexity and cost associated with identifying the most effective tax haven to use, an accounting firm can act as an intermediary between tax havens and multinational corporations. We analyze a model with horizontally differentiated multinationals and tax havens to study the role accounting firm intermediation has on tax haven prices, multinational tax planning choices, accounting firm profits, and tax revenues. In equilibrium, uniform accounting firm fees generate higher accounting firm profit, less tax avoidance, and higher tax revenues than either full price discrimination or haven-specific fees.
    Keywords: tax haven, accounting firm, horizontal differentiation, double marginalization, fee-setting rules
    JEL: M41 H26 H73
    Date: 2017
  2. By: Islam, Nizamul (LISER (CEPS/INSTEAD)); Colombino, Ugo (University of Turin)
    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 Basis Income, Unconditional Basic Income, In-Work Benefits and General Negative Income Tax, combined with a Flat Tax above the ex-emption 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.
    Keywords: optimal tax, negative income tax, basic income, micro-simulation, welfare
    JEL: H21 C18
    Date: 2017–11
  3. By: Tandon, Suranjali (National Institute of Public Finance and Policy); Rao, R. Kavita (National Institute of Public Finance and Policy)
    Abstract: The study presents an analysis of results of a laboratory experiment, conducted in 2015 to assess compliance behaviour in India. The experiment evaluates responses of 133 participants, to changes in key policy instruments like tax rate, penalty rate and audit probability. We find that changes in policy parameters generate varied responses across taxpayers. Audit probability is the only policy instrument that generates relatively consistent response. Further, the results show that individuals can be divided into those who respond to change in audit probability and those who respond to other policy variables, suggesting that no single policy would be adequate to induce suitable behavioural changes in all taxpayers.
    Keywords: tax compliance ; laboratory experiment ; audit probability ; tax rate ; penalty ; exemption threshold ; stigma
    JEL: H26 H3 C91
    Date: 2017–11
  4. By: Aghion, Philippe; Akcigit, Ufuk; Lequien, Matthieu; Stantcheva, Stefanie
    Abstract: We study how strongly individuals respond to tax simplicity and how they learn about the complexities of the tax system. We focus on the self-employed, who can more easily adjust to tax incentives and whose responses directly stem from their own understanding of the tax system. We use new French tax returns data from 1994 to 2012. France serves as a good quasi-laboratory: it has three fiscal regimes -- or modes of taxation-- for the self-employed, which differ in their monetary tax incentives and in their tax simplicity. Two key features are that, first, these regimes are subject to eligibility thresholds; we find large excess masses (bunching) right below the latter. Second, the regimes impact different agents heterogeneously and have changed extensively over time. Taken together, these two key elements give us measures of tax responses (the bunching) as well as the variation needed to jointly estimate a value of tax simplicity and taxable income elasticities. They also give us an opportunity to study how individuals learn about and respond over time to changing policy parameters. We estimate a large value for tax simplicity of up to 650 euros per year per individual depending on the regime and activity. We also find sizable costs of tax complexity; agents are not immediately able to understand what the right regime choice is, leave significant money on the table, and learn over time. The cost of complexity is ``regressive'' in that it affects mostly the uneducated, low income, and low skill agents. Agents who can be viewed as more informed and knowledgable (e.g., the more educated or high-skilled) are more likely to make the correct regime choice and to learn faster.
    Keywords: Complexity; entrepreneurship; learning; Self-employment; taxation
    JEL: H21
    Date: 2017–11
  5. By: Nicolay, Katharina; Nusser, Hannah; Pfeiffer, Olena
    Abstract: The issue of base erosion and profit shifting has been on the international policy agenda for several years now. The aim of this paper is to examine how firms adjust their profit shifting mechanisms in a changing institutional environment. In particular, we test whether firms substitute one profit shifting strategy for another if respective costs change. To this end, we exploit changes in the strictness of transfer pricing regulations and thin capitalization rules over time in a panel of European multinational firms and study a quasi-experimental reform setting in France. We confirm existing evidence that tightening transfer pricing regulations reduces the tax sensitivity of earnings before interest and taxes (EBIT) substantially. Our results show, however, that this reduction includes both a reduction in profit shifting activity via the transfer pricing channel and a substitution with debt shifting. Moreover, firms using debt shifting to begin with rely more heavily on tax optimization of transfer prices when thin capitalization rules are strengthened. If transfer pricing regulations are also strict, the conditional reform effects show that the substitutive response is more pronounced for a subsample of firms with a high share of intangible property (IP). The difference-in-difference approach for the French tax reform illustrates an increase in profit shifting based on transfer prices for treated firms facing new restrictions on debt shifting. Again, the effect is stronger for IP intensive firms.
    Keywords: profit shifting channels,tax planning,corporate taxation,anti-avoidance legislation
    JEL: H25 F23 H26 H3
    Date: 2017
  6. By: Dubois, Pierre; Griffith, Rachel; O'Connell, Martin
    Abstract: Soda taxes aim to reduce excessive sugar consumption. Their effectiveness depends on whether they target individuals for whom the harm of consumption is largest. We estimate demand and account for supply-side equilibrium pass-through. We exploit longitudinal data to estimate individual preferences, which allows exible heterogeneity that we relate to a wide array of individual characteristics. We show that soda taxes are effective at targeting young consumers but not individuals with high total dietary sugar; they impose the highest monetary cost on poorer individuals, but are unlikely to be strongly regressive if we account for averted future costs from over consumption.
    Keywords: preference heterogeneity; discrete choice demand; pass-through; soda tax
    JEL: D12 H31 I18
    Date: 2017–12
  7. By: Olena, Sokolovska
    Abstract: The paper investigates the relationship between corporate taxation and labor market indicators. This research supports the idea that the increase in corporate income tax rates in the open economy will lead to the capital outflow to the low-tax jurisdictions, resulting in tax incidence on labor with consequent decrease in labor productivity. An empirical analysis demonstrated the negative relationship between labor freedom index and corporate tax rate. In countries with higher GDP per capita the strength of such relationship differs from countries where GDP per capita is relatively low. In terms of corporate tax incidence, this means that in developed countries the corporate tax burden is shifted onto workers in lesser extent compared with developing and emerging economies. The estimation of specific elements of labor freedom index allowed to identify main tendencies of impact of change of the corporate income tax rate on certain labor market indicators in countries with different GDP per capita. We suggested that corporate tax incidence diversely affects the labor productivity in countries with different GDP per capita, and the direction of such impact is determined by composition of labor force and openness of economy.
    Keywords: corporate income tax, labor, tax burden, tax incidence, comparative analysis, labor productivity
    JEL: C10 E1 E10 E24 H22 H25 O57
    Date: 2017–12
  8. By: Hélène Blake (PSE - Paris School of Economics); Clémentine Garrouste (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)
    Abstract: How does the retirement age affect the physical and mental health of seniors? We identify this effect based on the 1993 reform of the French pension system, which was heterogeneously introduced among the population. With each cohort, the French government gradually increased the incentive to work using two tools: the contribution period required for entitlement to a full pension and the number of reference earning years taken to calculate pensions. We use a unique database on health and employment in France in 1999 and 2005, when the cohorts affected by the reform started to retire. A difference-in-differences approach, with the control group comprising public sector employees (not concerned by the 1993 reform), finds that the people more affected by the reform, and hence with a stronger incentive to work, were those posting less of an improvement and even a deterioration in their health between 1999 and 2005. Subsequently, taking the reform as a tool to filter out the potential influence of health on employment choices, we show that retirement improves physical and social health. The more physically impacted are the low-educated individuals.
    Keywords: Retirement,Health,Pension Reform
    Date: 2017
  9. By: Titus Galama (University of Southern California); Robson Morgan (University of Southern California); Juan E. Saavedra (University of Southern California)
    Abstract: We document how an anti-poverty program improves economic and subjective wellbeing, and self-sufficiency. Familias en Accion Urbano, a conditional cash transfer program implemented at scale in the country of Colombia, uses a means-test cutoff score selection rule that provides exogenous variation in program participation. We reproduce the score assignment rule in a nationally representative living standards household survey that measures multiple dimensions of economic and evaluative wellbeing. Three years into the program, beneficiary households at the margin report greater income, consumption and formal employment participation for both the household head and partner. Household income increased by ten times the amount of the government transfer, likely because of gains in formal employment. Beneficiary households at the margin also report greater overall satisfaction with life, greater happiness and greater satisfaction with food. These results support the hypothesis that among households with basic unmet needs, policies that have a permanent impact on income and consumption may also have a lasting impact on subjective wellbeing and self-sufficiency. Moreover, relatively small subsidies, further offset by additional government tax receipt, may generate substantial benefits to poor families at a reduced cost to taxpayers.
    Keywords: subjective well-being, self-sufficiency, evaluation of social programs, score assignment rule
    JEL: H53 I30 I32 I38 O38 O54
    Date: 2017–12
  10. By: Ayoki, Milton
    Abstract: This paper reviews studies that attempt to measure empirically, revenue gains from tax harmonisation. Three groups of studies emerge, those that use cross-country regression, partial equilibrium analysis, and applied general-equilibrium (CGE) models—they all suggest (explicitly or implicitly) that the relationship between tax rates and tax revenues is ambiguous. In some special circumstances, there are gains that can be realized from tax harmonization, but those gains are usually modest in scope. Tax harmonization tends to disadvantage certain countries especially when the participating countries are different in size, and disparities in their initial tax structures are wide.
    Keywords: Policy Coordination, Tax Harmonisation, Tax Revenue, Computable General Equilibrium Models, Social Accounting Matrix.
    JEL: C18 C68 D78 F13 F15 H20 H23 H87
    Date: 2017–12–31
  11. By: Hitoshi Tsujiyama (Goethe University Frankfurt); Jonathan Heathcote (Federal Reserve Bank of Minneapolis)
    Abstract: For any policy question with distributional implications, the planner's social welfare function plays an important role in shaping the optimal policy. In the context of an optimal taxation problem in which individuals differ ex ante with respect to labor productivity, the planner's social welfare function defines the relative Pareto weights placed on individuals with different productivities. In this paper, we show that if one assumes that the observed income tax schedule has been chosen optimally, then it is sometimes possible to derive a closed-form expression for the social welfare function. This social welfare function involves parameters defining the shape of the observed tax and transfer system, as well as parameters defining preference elasticities and the shape of the underlying cross-sectional productivity distribution. The key result is that inverse optimum problem (finding a social welfare function that justifies a given tax function) is tractable in quantitatively relevant cases where the optimum problem (solving for the optimal tax function for a given social welfare function) is not. In particular, the inverse optimum problem is tractable given a standard utility specification with curvature over both consumption and labor effort. This tractability makes it easier to understand how optimal taxation works.
    Date: 2017
  12. By: PAVIA Risa (Université catholique de Louvain, CORE, Belgium)
    Abstract: In this paper I examine whether firms report zero profits as a tax evasion strategy by testing the e ects on bunching at zero of an exogenous shock to the cost of evasion in Portugal. I develop a unique identification strategy by exploiting the targeting of
    Keywords: ITaxation, Firms, Bunching, Portugal
    JEL: H25 H26
    Date: 2017–07–28
  13. By: Jones, Melanie K. (Cardiff University); McVicar, Duncan (Queen's University Belfast)
    Abstract: This paper exploits rarely-used longitudinal data to examine the impacts of disability onset on benefit receipt in Britain over the period 2004–2012. Differences in the timing of onset are exploited for identification in a framework that combines propensity score matching with difference-in-differences estimation. Disability onset increases receipt of disability insurance, a wider measure of sickness and disability benefits, and receipt of non-sickness benefits by six, eight and six percentage points respectively in the first year. These effects do not vary significantly by individual characteristics, but are larger for more severe disability onset, for those who did not previously report a long-term health condition, and for those who experienced disability onset under the less restrictive pre-2009 disability benefit regime. Contrary to the perception of disability benefits being an absorbing state, disability exit has an almost symmetrical impact on receipt of disability insurance and on wider sickness benefits in the first year.
    Keywords: disability, disability onset, disability exit, welfare benefits, disability insurance, propensity score matching
    JEL: H51 H53 I38 J14
    Date: 2017–11
  14. By: Soren Blomquist (Institute for Fiscal Studies); Whitney K. Newey (Institute for Fiscal Studies and MIT)
    Abstract: Saez (2010) introduced an influential estimator that has become known as the bunching estimator. Using this method one can get an estimate of the taxable income elasticity from the bunching pattern around a kink point. The bunching estimator has become popular, with a large number of papers applying the method. In this paper, we show that the bunching estimator cannot identify the taxable income elasticity when the functional form of the distribution of preference heterogeneity is unknown. We find that an observed distribution of taxable income around a kink point in a budget set can be consistent with any taxable income elasticity if the distribution of heterogeneity is unrestricted. If one is willing to assume restrictions on the heterogeneity density some information about the taxable income elasticity can be obtained. We give bounds on the taxable income elasticity based on monotonicity of the heterogeneity density and apply these bounds to the data in Saez (2010). We also consider identification from budget set variation. We find that kinks alone are still not informative even when budget sets vary. However, if the taxable income specification is restricted to be of the parametric isoelastic form assumed in Saez (2010) the taxable income elasticity can be well identified from variation among linear segments of budget sets.
    Date: 2017–10–02
  15. By: Daniel Brent (LSU - Louisiana State University - Louisiana State University [Baton Rouge]); Lata Gangadharan (Department of Economics and Business - Monash University); Anca Mihut (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Marie Villeval (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In the presence of social dilemmas, cooperation is more difficult to achieve when populations are heterogeneous because of conflicting interests within groups. We examine cooperation in the context of a non-linear common pool resource game, in which individuals have unequal extraction capacities and have to decide on their extraction of resources from the common pool. We introduce monetary and nonmonetary policy instruments in this environment. One instrument is based on two variants of a mechanism that taxes extraction and redistributes the tax revenue. The other instrument varies the observability of individual decisions. We find that the two tax and redistribution mechanisms reduce extraction, increase efficiency and decrease inequality within groups. The scarcity pricing mechanism, which is a per-unit tax equal to the marginal extraction externality, is more effective at reducing extraction than an increasing block tax that only taxes units extracted above the social optimum. In contrast, observability impacts only the Baseline condition by encouraging free-riding instead of creating moral pressure to cooperate.
    Keywords: Common Pool Resource game, taxation mechanisms, observability, cooperation, heterogeneity, experiment
    Date: 2017–10–04

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