nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒01‒22
nineteen papers chosen by
Thomas Andrén

  1. Optimal Time-Consistent Taxation with Default By Karantounias, Anastasios G.
  2. The impact of taxes on income mobility By Alloza, Mario
  3. A Tax Plan for Endogenous Innovation By Croce, Mariano; Karantounias, Anastasios G.; Raymond, Stephen; Schmid, Lukas
  4. Tax Simplicity and Heterogeneous Learning By Philippe Aghion; Ufuk Akcigit; Matthieu Lequien; Stefanie Stantcheva
  5. Intergovernmental Cooperation and Tax Enforcement By Ugo Troiano
  6. Entrepreneurship and State Taxation By E. Mark Curtis; Ryan Decker
  7. Digitalization and taxation: Beware ad hoc measures By Weichenrieder, Alfons
  8. Mobility and the lifetime distributional impact of tax and transfer reforms By Peter Levell; Barra Roantree; Jonathan Shaw
  9. Do Taxes Increase Economic Inequality? A Comparative Study Based on the State Personal Income Tax By Ugo Troiano
  10. Tax design in the alcohol market By Rachel Griffith; Martin O'Connell; Kate Smith
  11. The dynamic effects of tax audits By Arun Advani; William Elming; Jonathan Shaw
  12. Taxation, Social Protection, and Governance Decentralization By Epstein, Gil S.; Gang, Ira N.
  13. The Long-Run Effects of the Earned Income Tax Credit on Women’s Earnings By David Neumark; Peter Shirley
  14. Measuring well-being by a multidimensional spatial model in OECD Better Life Index framework By Greco, Salvatore; Ishizaka, Alessio; Resce, Giuliano; Torrisi, Gianpiero
  15. Optimal Mirrleesian Taxation in Non-competitive Labor Markets By Carlos da Costa
  16. The optimal timing of unemployment benefits: theory and evidence from Sweden By Kolsrud, Jonas; Landais, Camille; Nilsson, J. Peter; Spinnewijn, Johannes
  17. Working Paper 07-17 - Tax Expenditure and the Cost of Labour Taxation - An application to company car taxation By Benoît Laine; Alex Van Steenbergen
  18. The health benefits of a targeted cash transfer: the UK Winter Fuel Payment By Thomas Crossley; Federico Zilio
  19. Does a Discount Rate Rule Ensure a Pension Plan Can Pay Promised Benefits without Excessive Asset Accumulation? By Landon, Stuart; Smith, Constance

  1. By: Karantounias, Anastasios G. (Federal Reserve Bank of Atlanta)
    Abstract: We study optimal time-consistent distortionary taxation when the repayment of government debt is not enforceable. The government taxes labor income or issues noncontingent debt in order to finance an exogenous stream of stochastic government expenditures. The government can repudiate its debt subject to some default costs, thereby introducing some state-contingency to debt. We are motivated by the fact that domestic sovereign default is an empirically relevant phenomenon, as Reinhart and Rogoff (2011) demonstrated. Optimal policy is characterized by two opposing incentives: an incentive to postpone taxes by issuing more debt for the future and an incentive to tax more currently in order to avoid punishing default premia. A generalized Euler equation (GEE) captures these two effects and determines the optimal back-loading or front-loading of tax distortions.
    Keywords: labor tax; sovereign default; Markov-perfect equilibrium; time-consistency; generalized Euler equation; long-term debt
    JEL: D52 E43 E62 H21 H63
    Date: 2017–11–01
  2. By: Alloza, Mario
    Abstract: This paper investigates how taxes affect relative mobility in the income distribution in the US. Household panel data drawn from the PSID between 1967 and 1996 is employed to analyse the relationship between marginal tax rates and the probability of staying in the same income decile. Exogenous variation in marginal tax rates is identified by using counterfactual rates based on legislated changes in the tax schedule. I find that higher marginal tax rates reduce income mobility. An increase in one percentage point in marginal tax rates causes a decline of around 0.8% in the probability of changing to a different income decile. Tax reforms that reduce marginal rates by 7 percentage points are estimated to account for around a tenth of the average movements in the income distribution in a year. Additional results suggest that the effect of taxes on income mobility differs according to the level of human capital and that it is particularly significant when considering mobility at the bottom of the distribution.
    Keywords: income mobility; inequality; marginal tax rate
    JEL: D31 D63 E24 E62 H24 H31
    Date: 2016–10–04
  3. By: Croce, Mariano (University of North Carolina at Chapel Hill,); Karantounias, Anastasios G. (Federal Reserve Bank of Atlanta); Raymond, Stephen (University of North Carolina at Chapel Hill); Schmid, Lukas (Duke University)
    Abstract: In times when elevated government debt raises concerns about dimmer global growth prospects, we ask: How can the government provide incentives for innovation in a fiscally sustainable way? We address this question by examining the Ramsey problem of finding optimal tax and subsidy schemes in a model in which growth is endogenously sustained by risky innovation. We characterize the shadow value of growth and entry in the innovation sector. We find that a profit tax is required to replicate the first-best in order to balance the externalities associated with innovative activity. At the second-best, the profit tax is designed to optimally respond to growth shocks above and beyond what is prescribed by the standard tax-smoothing incentives in economies with exogenous growth. The interplay of risk and innovation opens a new margin for optimal taxation.
    Keywords: innovation; R&D investment; endogenous growth; government debt; labor tax; subsidy; profit tax
    JEL: E32 E62 H21 H63 O3
    Date: 2017–11–01
  4. By: Philippe Aghion; Ufuk Akcigit; Matthieu Lequien; Stefanie Stantcheva
    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 knowledgeable (e.g., the more educated or high-skilled) are more likely to make the correct regime choice and to learn faster.
    JEL: H21 H24 H25 H26
    Date: 2017–11
  5. By: Ugo Troiano
    Abstract: Improving the efficiency of tax collection is important for development and fairness purposes. I study the Audit Exchange Information Agreements, which are agreements between the states and the U.S. federal government to exchange information about income tax audit plans and techniques, signed between the 1950s and the 1970s. Adopting an augmented difference-in-differences identification strategy, I show that the program increased state income tax revenues by about 15 percent. I show that mobility and the reported income do not appear to react to the policy, suggesting that the effects may be linked to higher quality auditing. The effects are stronger in places where there are more civic and social organizations, suggesting that tax compliance is higher when there is more cooperative gathering.
    JEL: H21 H26 H77 N92
    Date: 2017–12
  6. By: E. Mark Curtis; Ryan Decker
    Abstract: Entrepreneurship plays a vital role in the economy, yet there exists little well-identified research into the effects of taxes on startup activity. Using recently developed county-level data on startups, we examine the effect of states' corporate, personal and sales tax rates on new firm activity and test for cross-border spillovers in response to these policies. We find that new firm employment is negatively—and disproportionately—affected by corporate tax rates. We find little evidence of an effect of personal and sales taxes on entrepreneurial outcomes. Our results are robust to changes in the tax base and other state-level policies.
    Keywords: Labor supply and demand ; Entrepreneurship ; Firm dynamics ; Taxation
    JEL: L26 D22 H71 H25 J23
    Date: 2018–01–11
  7. By: Weichenrieder, Alfons
    Abstract: Digitalization expands the possibility for corporations to reduce taxes, mainly, but not exclusively, by allowing improved planning where profits can be shifted. Against this background, the European Commission and several countries emphatically demand and design new tax instruments. However, a selective turning away from internationally accepted principles of international taxation will bring up more questions than solutions. While there are good reasons to think about a fundamental regime switch in international corporate taxation, there are also good arguments for not turning to ad hoc measures that selectively target the relatively small market of Google and Facebook and raise only negligible tax revenues.
    Keywords: digitalization,taxation
    Date: 2018
  8. By: Peter Levell (Institute for Fiscal Studies and Institute for Fiscal Studies); Barra Roantree (Institute for Fiscal Studies and Institute for Fiscal Studies); Jonathan Shaw (Institute for Fiscal Studies and Turing Institute)
    Abstract: This paper examines the distributional impact of increases to out-of-work transfers, increases to work-contingent transfers, and increases in higher rates of income tax over the whole of life. We find that, in contrast to what is implied by standard snapshot analyses, increases to work-contingent benefits are just as effective at redistributing resources to the lifetime poor as increases to out-of-work benefits. This has important implications for the equity-efficiency trade-off typically thought to apply to work-contingent transfers. However, we find that higher rates of tax on annually assessed income are an effective way of targeting the lifetime rich, as incomes are more persistent towards the top of the distribution. Our results illustrate the importance of moving beyond an exclusively snapshot perspective when analysing tax and transfer reforms. This working paper is an updated version of W16/17.
    Keywords: inequality; redistribution; income mobility; lifetime; tax and transfer reform
    JEL: D31 H20
    Date: 2017–08–25
  9. By: Ugo Troiano
    Abstract: I present new quasi-experimental evidence on the relationship between tax policies and the distribution of income. I focus on the twentieth century United States, and on the personal income tax, since its inception. I study three major policy events that, as the existing literature shows, significantly raised the revenues from the income tax: the introduction of the state personal income tax, the introduction of tax withholding together with third-party reporting, and the intergovernmental agreements between the federal and state governments to coordinate tax auditing efforts. All the three policies were introduced in a staggered fashion and increased tax revenues, but had different fiscal consequences. Despite this, I find that income inequality raised after all the tax policy events. The result is robust to different measures of economic inequality and econometric specifications.
    JEL: D63 H23 N32
    Date: 2017–12
  10. By: Rachel Griffith (Institute for Fiscal Studies and IFS and Manchester); Martin O'Connell (Institute for Fiscal Studies and Institute for Fiscal Studies); Kate Smith (Institute for Fiscal Studies and Institute for Fiscal Studies)
    Abstract: We study optimal corrective taxation in the alcohol market. Consumption generates negative externalities that are non-linear in the total amount of alcohol consumed. If tastes for products are heterogeneous and correlated with marginal externalities, then varying tax rates on different products can lead to welfare gains. We study this problem in an optimal tax framework and empirically for the UK alcohol market. Welfare gains from optimally varying rates are higher the more concentrated externalities are amongst heavy drinkers. A sufficient statistics approach is informative about the direction of reform, but not about optimal rates when externalities are highly concentrated. This is an updated version of previous working paper see here.
    Keywords: externality, corrective taxes, alcohol
    JEL: D12 D62 H21 H23
    Date: 2017–12–11
  11. By: Arun Advani (Institute for Fiscal Studies); William Elming (Institute for Fiscal Studies and Institute for Fiscal Studies); Jonathan Shaw (Institute for Fiscal Studies and Turing Institute)
    Abstract: Understanding tax non-compliance and the effectiveness of strategies to tackle it is crucial for a modern tax authority. In this paper we study how and why audits impact reported tax in the years after audit - the dynamic effect - for individual income taxpayers. We exploit data from a random audit program covering almost 35,000 income tax self assessment returns in the UK. We show that audits raise reported tax liabilities for at least ve years after audit, with the magnitude of the impact declining over time. In total this raises an additional $1; 230 per audited individual in the fi ve years after audit, 1.5 times the direct revenue raised from the audit. Looking by income source, we see that the magnitude of the initial impact is lower for income components which are third party reported, and the impact declines more quickly for components that are more volatile. We develop a model to allow us to distinguish different mechanisms that might explain the presence of dynamic effects, and show our fi ndings can only be explained by audits providing improved information to the tax authority.
    Keywords: tax audits, tax revenue, tax reporting decisions, income tax, self assessment, HMRC
    JEL: D04 H26 H83
    Date: 2017–10–26
  12. By: Epstein, Gil S. (Bar-Ilan University); Gang, Ira N. (Rutgers University)
    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: rentseeking, contests, economic models of political processes, decentralization, governance, intergovernmental relations
    JEL: H77 D72 H73
    Date: 2017–11
  13. By: David Neumark; Peter Shirley
    Abstract: We use longitudinal data on marriage and children from the Panel Study of Income Dynamics to characterize women’s exposure to the federal and state Earned Income Tax Credit (EITC) during their first two decades of adulthood. We then use measures of this exposure to estimate the long-run effects of the EITC on women’s earnings as mature adults. We find some evidence indicating that exposure to a more generous EITC when women were unmarried and had young (pre-school) children leads to higher earnings and hours, and perhaps wages, in the longer run. We also find some evidence that exposure to a more generous EITC when women had young children but were married leads to lower earnings and hours in the longer run. These longer-run effects are to some extent consistent with what we would expect if the short-run effects of the EITC on employment that are documented in other work, and predicted by theory, are reflected in effects of the EITC on cumulative labor market experience (and other consequences of labor market attachment) that influence earnings.
    JEL: H24 H71 J18 J22 J24
    Date: 2017–12
  14. By: Greco, Salvatore; Ishizaka, Alessio; Resce, Giuliano; Torrisi, Gianpiero
    Abstract: We propose a multidimensional spatial model to evaluate the well-being using the Better Life Index (BLI) in 36 countries according to a two-steps procedure. First, we position the countries as points in the Euclidean K-dimensional space in which each dimension is a specific aspect of well-being as measured in the BLI. Second, we consider each individual/voter’s opinions on the same dimensions to calculate the personal optimal point in that same K-dimensional space. Hence, we measure the distance between optimal point of well-being and the actual observed point at individual level. This distance is interpreted as the individuals’ loss in well-being. We show that this loss is negatively related (i) to the overall well-being in terms of BLI and (ii) the main indices of quality of democracy.
    Keywords: Better life Index, OECD, Well-being, Loss function
    JEL: H31 H41 I3 I38
    Date: 2017–12–29
  15. By: Carlos da Costa (Fundação Getulio Vargas)
    Abstract: We study optimal labor income taxation in non-competitive labor markets. Firms with market power offer screening contracts to workers privately informed about their own productivity. We provide necessary and sufficient conditions for tax implementation of constrained efficient allocations in such environment. For a Utilitarian objective, if an allocation is implementable almost all workers face negative marginal tax rates, however, not all allocations that are implementable in a competitive setting are implementable in this non-competitive environment.
    Date: 2017
  16. By: Kolsrud, Jonas; Landais, Camille; Nilsson, J. Peter; Spinnewijn, Johannes
    Abstract: This paper provides a simple, yet robust framework to evaluate the time profile of benefits paid during an unemployment spell. We derive sufficient-statistics formulae capturing the marginal insurance value and incentive costs of unemployment benefits paid at different times during a spell. Our approach allows us to revisit separate arguments for inclining or declining profiles put forward in the theoretical literature and to identify welfare-improving changes in the benefit profile that account for all relevant arguments jointly. For the empirical implementation, we use administrative data on unemployment, linked to data on consumption, income, and wealth in Sweden. First, we exploit duration-dependent kinks in the replacement rate and find that, if anything, the moral hazard cost of benefits is larger when paid earlier in the spell. Second, we find that the drop in consumption affecting the insurance value of benefits is large from the start of the spell, but further increases throughout the spell. In trading off insurance and incentives, our analysis suggests that the at benefit profile in Sweden has been too generous overall. However, both from the insurance and the incentives side, we find no evidence to support the introduction of a declining tilt in the profile.
    Keywords: unemployment; dynamic policy; sufficient statistics; consumption soothing
    JEL: H20 J64
    Date: 2017–12–02
  17. By: Benoît Laine; Alex Van Steenbergen
    Abstract: The goal of this paper is to estimate the efficiency cost of one additional euro of revenue through the personal income tax system, considering its simultaneous effects on the labour market and the transport market. More precisely, we seek to derive estimates of the Marginal Excess Burden of marginal personal income tax rates in Belgium considering the subsidization of company cars. We find that taking into account of welfare losses in the transport market adds 5-7 cents to the welfare cost of an additional euro of tax revenue, compared to models that consider only the effects on the labour market. The cost of raising the top marginal tax rate rises by 28% to 58% depending on the model assumptions. As an aside, we estimate tax expenditure on the transport sector via the personal income tax system to be 1.9 billion euro. We conclude that there is scope for welfare improving by base broadening and rate cutting. The framework is applied to analyse the merits of cash-for-car proposals.
    Keywords: Efficiency, Optimal taxation, Externalities, Redistributive effects, Personal income tax, Transport
    JEL: H21 H23 H24 R41
    Date: 2017–06–28
  18. By: Thomas Crossley (Institute for Fiscal Studies and Institute for Fiscal Studies, University of Essex); Federico Zilio (Institute for Fiscal Studies and Institute for Social & Economic Research)
    Abstract: Each year the UK records 25,000 or more excess winter deaths, primarily among the elderly. A key policy response is the “Winter Fuel Payment” (WFP), a labelled but unconditional cash transfer to households with a member above the Female State Pension Age. The WFP has been shown to raise fuel spending among eligible households. We examine the causal effect of the WFP on health outcomes, including self-reports of chest infection, measured hypertension and biomarkers of infection and inflammation. We find a robust and statistically significant six percentage point reduction in the incidence of high levels of serum fibrinogen. Reductions in other disease markers point to health benefits, but the estimated effects are not robustly statistically significant.
    Keywords: benefits, health, biomarkers, heating, regression discontinuity
    JEL: H51 I12
    Date: 2017–10–18
  19. By: Landon, Stuart (University of Alberta, Department of Economics); Smith, Constance (University of Alberta, Department of Economics)
    Abstract: The choice of discount rate makes a substantial difference to the magnitude of the assets required to ensure a pension plan is fully funded. Finance theory suggests that the discount rate should equal the default-free rate, but pension plan administrators argue for a rate equal to the long run return on plan assets. We evaluate the ability of a fully funded pension plan to meet its promised benefit payments when the plan's liabilities are determined using different discount rate-setting rules. To account for the uncertainty of the return to plan assets and future benefit payments, we employ Monte Carlo techniques and estimates using U.S. data. Due to the volatility of pension fund asset returns and payouts, to generate a high probability of meeting promised pension payments, a plan must use a discount rate that leads, on average, to the accumulation of significant assets in excess of those required to cover promised benefits. The better performing rules are a function of economic variables, such as the return on government bonds or the inflation rate. Two rules that yield a relatively high probability that pension obligations can be met, combined with the relatively low accumulation of excess assets, set the discount rate equal to a proxy for the corporate bond yield or an inflation forecast plus 3 percent. These rates are greater than the default free rate, but lower than the return on the plan portfolio.
    Keywords: Pension plans; discount rate; pension sustainability; defined benefit pension; policy rules
    JEL: H55 H75 H83 J26 J32
    Date: 2018–01–11

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