nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒01‒29
fourteen papers chosen by
Thomas Andrén

  1. Fiscal Consolidation Programs and Income Inequality By Brinca, Pedro; Ferreira, Miguel H.; Franco, Francesco; Holter, Hans A.; Malafry, Laurence
  2. Insurance, Redistribution, and the Inequality of Lifetime Income By Peter Haan; Daniel Kemptner; Victoria Prowse
  3. Optimal Taxation with Private Insurance By Yongsung Chang; Yena Park
  4. Optimal automatic stabilizers By McKay, Alisdair; Reis, Ricardo
  5. NDC Schemes and Heterogeneity in Longevity: Proposals for Redesign By Holzmann, Robert; Alonso-García, Jennifer; Labit-Hardy, Heloise; Villegas, Andres M.
  6. Estimating the Scale of Profit Shifting and Tax Revenue Losses Related to Foreign Direct Investment By Petr Jansky; Miroslav Palansky
  7. Two-Parent Families with Children: How Effective Tax Rates Affect Work Decisions By Alexandre Laurin
  8. The efficient combination of taxes on fuel and vehicles By Geir H. M. Bjertnæs
  9. Taxes and Turnout By Felix Bierbrauer; Aleh Tsyvinski; Nicolas D. Werquin
  10. Mechanics of Replacing Benefit Systems with a Basic Income: Comparative Results from a Microsimulation Approach By Browne, James; Immervoll, Herwig
  11. Further Results on the Inequality Reducing Properties of Income Tax Schedules By Oriol Carbonell-Nicolau; Humberto Llavador
  12. Business Tax Burdens in Canada’s Major Cities: The 2017 Report Card By Adam Found; Peter Tomlinson
  13. Does Unemployment Insurance Affect Productivity? By Michal Soltes
  14. Business capital accumulation and the user cost: is there a heterogeneity bias? By Serena, Fatica

  1. By: Brinca, Pedro; Ferreira, Miguel H.; Franco, Francesco; Holter, Hans A.; Malafry, Laurence
    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: 2017–11–14
  2. By: Peter Haan; Daniel Kemptner; Victoria Prowse
    Abstract: In this paper, we study how the tax-and-transfer system reduces the inequality of lifetime income by redistributing lifetime earnings between individuals with different skill endowments and by providing individuals with insurance against lifetime earnings risk. Based on a dynamic life-cycle model, we find that redistribution through the tax-and-transfer system offsets around half of the inequality in lifetime earnings that is due to differences in skill endowments. At the same time, taxes and transfers mitigate around 60% of the inequality in lifetime earnings that is attributable to employment and health risk. Progressive taxation of annual earnings provides little insurance against lifetime earnings risk. The lifetime insurance effects of taxation may be improved by moving to a progressive tax on lifetime earnings. Similarly, the lifetime insurance and redistributive effects of social assistance may be improved by requiring wealthy individuals to repay any social assistance received when younger.
    Keywords: Lifetime earnings; lifetime income; tax-and-transfer system; taxation; unemployment insurance; disability benefits; social assistance; inequality; redistribution; insurance; endowments; risk; dynamic life-cycle models
    JEL: D63 H23 I24 I38 J22 J31
    Date: 2017
  3. By: Yongsung Chang (University of Rochester / Yonsei Univ.); Yena Park (University of Rochester)
    Abstract: We derive a fully-nonlinear optimal income tax schedule in the presence of private insurance market. The optimal tax formula is expressed in terms of sufficient statistics—such as Frisch elasticity of labor supply, social preferences, and hazard rates of the income distributions—as in the standard Mirrleesian taxation without private insurance (e.g., Saez (2001)). However, in the presence of private market, the standard sufficient statistics are no longer sufficient to determine the exact shape of optimal tax schedule. The optimal tax rates also depends on how private savings interact with public insurance—through substitution and crowding in/out. Based on our formula, we compute the optimal tax schedule using a quantitative general-equilibrium model that is calibrated to reproduce the U.S. income distribution.
    Date: 2017
  4. By: McKay, Alisdair; Reis, Ricardo
    Abstract: Should the generosity of unemployment benefits and the progressivity of income taxes depend on the presence of business cycles? This paper proposes a tractable model where there is a role for social insurance against uninsurable shocks to income and unemployment, as well as inefficient business cycles driven by aggregate shocks through matching frictions and nominal rigidities. We derive an augmented Baily-Chetty formula showing that the optimal generosity and progressivity depend on a macroeconomic stabilization term. Using a series of analytical examples, we show that this term typically pushes for an increase in generosity and progressivity as long as slack is more responsive to social programs in recessions. A calibration to the U.S. economy shows that taking concerns for macroeconomic stabilization into account raises the optimal unemployment benefits replacement rate by 13 percentage points but has a negligible impact on the optimal progressivity of the income tax. More generally, the role of social insurance programs as automatic stabilizers affects their optimal design.
    Keywords: Counter-cyclical fiscal policy; Redistribution; Distortionary taxes.
    JEL: E62 H21 H30
    Date: 2016–06–29
  5. By: Holzmann, Robert (University of New South Wales); Alonso-García, Jennifer (ARC Centre of Excellence in Population Ageing Research (CEPAR)); Labit-Hardy, Heloise (ARC Centre of Excellence in Population Ageing Research (CEPAR)); Villegas, Andres M. (UNSW Sydney)
    Abstract: Strong and rising empirical evidence across countries finds that longevity is highly heterogeneous in key socioeconomic characteristics, including income. A positive relationship between lifetime income and life expectancy at retirement amounts to a straight tax/subsidy mechanism when the average cohort life expectancy is applied for annuity calculation, as done under nonfinancial defined contribution (NDC) schemes. Such a regressive redistribution and the ensuing labor market distortion put into doubt main features of the NDC scheme and call for alternative benefit designs to compensate for the heterogeneity. This paper explores five key mechanisms of compensation: individualized annuities; individualized contribution rates/account allocations; a two-tier contribution structure with socialized and individual rate structure; and two supplementary approaches under the two-tier approach to deal with the income distribution tails, and the distortions above a ceiling and below a floor. Using unique data from England and Wales and the United States, the analysis indicates that both individualized annuities and a two-tier contribution scheme are feasible and effective and thus promising policy options. To this end, however, a de-pooling of gender will be required.
    Keywords: tax/subsidy structure, proxied life expectancy, two-tier contribution structure, gender de-pooling
    JEL: D9 G22 H55 J13 J14 J16
    Date: 2017–12
  6. By: Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic); Miroslav Palansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: Governments’ revenues are lower when multinational enterprises avoid paying corporate income tax by shifting their profits to tax havens. In this paper, we ask which countries’ tax revenues are affected most by this tax avoidance and how much. To estimate the scale of profit shifting, we start by observing that the higher is the share of foreign direct investment from tax havens, the lower is the reported rate of return on this investment. Similarly to the 2015 World Investment Report of the United Nations Conference on Trade and Development, we assume that the reported rate of return is lower due to profit shifting. Unlike the report, however, we provide illustrative country-level estimates of profit shifting related to foreign direct investment which enable us to study the distributional impact of international corporate tax abuse. We find that, on average, higher-income countries lose least and lower-income countries lose most corporate tax revenue relative to their GDP. On the basis of these estimates, we conclude that profit shifting thus deepens the existing income inequalities and the differences in government revenues between countries. Furthermore, we compare our results with three other recent studies that use different methodologies to derive country-level estimates of tax revenue losses that can be related to profit shifting. In a first such comparison made, we find that every study identifies differences across income groups, but the nature of these differences varies across the four studies.
    Keywords: foreign direct investment; corporate income tax; tax avoidance; base erosion; profit shifting; inequality
    JEL: F21 F23 H25
    Date: 2017–11
  7. By: Alexandre Laurin (C.D. Howe Institute)
    Abstract: Working parents with children—particularly low-income families— face prohibitive tax rates that discourage taking on extra employment to get ahead, according to a new report from the C.D. Howe Institute. In “Two-Parent Families with Children: How Effective Tax Rates Affect Work Decisions” author Alexandre Laurin finds that mothers and poorer families are the most adversely affected by this tax trap.
    Keywords: Fiscal and Tax Policy
    JEL: H2
  8. By: Geir H. M. Bjertnæs (Statistics Norway)
    Abstract: A tax on fuel combined with tax-exemptions or subsidies for purchase of fuel-efficient vehicles is implemented in many countries to reduce greenhouse gas emissions and other negative externalities from road traffic. This study, however, shows that a tax on fuel should be combined with heavier taxation of fuel-efficient vehicles to curb externalities from road traffic. The tax on fuel is implemented to curb externalities linked to both consumption of fuel and road use. The heavier tax on fuel-efficient vehicles prevents that motorists avoid the road user charge on fuel by purchasing fuel-efficient vehicles.
    Keywords: Transportation; optimal taxation; environmental taxation; global warming
    JEL: H2 H21 H23 Q58 R48
    Date: 2017–10
  9. By: Felix Bierbrauer; Aleh Tsyvinski; Nicolas D. Werquin
    Abstract: We develop a model of political competition with endogenous turnout and endogenous platforms. Parties face a trade-off between maximizing their base and getting their supporters out to vote. We study the implications of this framework for non-linear income taxation. In equilibrium, both parties propose the same tax policy. This equilibrium policy is a weighted combination of two terms, one reflecting the parties’ payoff from mobilizing their own supporters, one reflecting the payoff from demobilizing the supporters of the other party. The key determinant of the equilibrium policy is the distribution of the voters’ party attachments rather than their propensity to swing vote. Our analysis also provides a novel explanation for why even left-leaning parties may not propose high taxes on the rich.
    JEL: D72 D82 H21
    Date: 2017–12
  10. By: Browne, James (OECD); Immervoll, Herwig (OECD)
    Abstract: Recent debates of basic income (BI) proposals shine a useful spotlight on the challenges that traditional forms of income support are increasingly facing, and highlight gaps in social provisions that largely depend on income or employment status. A universal "no questions asked" public transfer would be simple and have the advantage that no-one would be left without support. But an unconditional payment to everyone at meaningful but fiscally realistic levels would likely require tax rises as well as reductions in existing benefits. We develop a comprehensive BI scenario that facilitates an assessment of the resulting fiscal and distributional effects in a comparative context, undertake a microsimulation study to quantify them, and propose a simple decomposition to identify the mechanisms that drive effects in different country contexts. Results illustrate the challenges, but also the strengths, of existing social protection systems. A BI would fix benefit coverage gaps that exist in many countries, but would require very substantial tax rises if it were to be set at a meaningful level. As support would not be targeted on those most in need, it would not be a cost-effective way of directly reducing income poverty.
    Keywords: basic income, targeting, individualisation, conditionality, microsimulation
    JEL: C81 D31 H22 H55
    Date: 2017–12
  11. By: Oriol Carbonell-Nicolau (Rutgers University); Humberto Llavador (Universitat Pompeu Fabra and Barcelona GSE)
    Abstract: Carbonell-Nicolau and Llavador (forthcoming) extend the classic result of Jakobsson (1976) and Fellman (1976)—according to which average-rate progressive, and only average-rate progressive income taxes, reduce income inequality—to the case of endogenous income. There it is shown that marginal-rate progressivity—in the sense of increasing marginal tax rates on income—is necessary for tax structures to be inequality reducing, and necessary and sufficient conditions on the social utility function are identified under which progressive and only progressive taxes are inequality reducing. This paper takes a further step and furnishes conditions on primitives under which various subclasses of progressive taxes are inequality reducing. The main results in CarbonellNicolau and Llavador (forthcoming) are obtained as particular cases of the more general framework presented here. Restricting the set of taxes allows for larger classes of preferences consistent with inequality reducing income taxation. As an illustration of the results’ practical implications, we provide a precise characterization of the subclass of (progressive) taxes that are inequality reducing for some standard families of preferences.
    Keywords: progressive taxation, income inequality, incentive effects of taxation
    JEL: D63 D71
    Date: 2018–01–16
  12. By: Adam Found (Trent University); Peter Tomlinson (University of Toronto)
    Abstract: The best and worst major cities for business investment are identified in a new report from the C.D. Howe Institute. In “Business Tax Burdens in Canada’s Major Cities: The 2017 Report Card” authors Adam Found and Peter Tomlinson compare business tax burdens in 10 Canadian cities, the largest in each province.
    Keywords: Business and Capital Taxation;Business Investment;Property Taxes;Provincial Comparisons;Provincial Taxation and Budgets;Sales and Excise Taxes;Urban Issues;Value Added Taxes
    JEL: H25 H71
    Date: 2017–12
  13. By: Michal Soltes (CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences, Politickych veznu 7, 111 21 Prague, Czech Republic)
    Abstract: This study provides evidence that more generous unemployment insurance system is associated with faster growth of productivity. The results are consistent with the theory that higher social insurance allows workers to search for more suited jobs and as a result, the worker-job match is more productive (e.g. Acemoglu and Shimer (1999)). This study also discusses reasons why the observed relationship is unlikely to be explained by the fact that richer countries provide more generous unemployment insurance. Our results extend the previous literature on generosity of unemployment insurance and quality of post-unemployment worker-job match by studying the effect on aggregate productivity.
    Keywords: Unemployment Insurance, TFP Growth, Generosity of Unemployment Insurance, Productivity
    JEL: J65 O43
    Date: 2017–09
  14. By: Serena, Fatica (European Commission – JRC)
    Abstract: Empirical models of capital accumulation estimated on aggregate data series are based on the assumption that capital asset types respond in the same way to cost variables. Likewise, aggregate models do not consider potential heterogeneity in investment behaviour originating on the demand side for capital, e.g. at the sector level. We show that the underlying assumption of homogeneity may indeed lead to misspecification of standard aggregate investment models. Using data from 23 sectors in 10 OECD countries over the period 1984-2007, we adopt a fully disaggregated approach – by asset types and sectors – to estimate the responsiveness of investment to the tax-adjusted user cost of capital. While accounting for the different sources of heterogeneity, we find that fixed capital accumulation is significantly affected by changes in the user cost. However, the estimated substitution elasticities are smaller than one - the benchmark value under a Cobb-Douglas production function. We do not find robust evidence that the long run substitution elasticities are statistically different across asset types.
    Keywords: capital accumulation; user cost of capital; corporate taxation; panel data
    JEL: E22 H25 C33
    Date: 2017–12

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