nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒02‒19
fourteen papers chosen by
Thomas Andrén

  1. Insurance, Redistribution, and the Inequality of Lifetime Income By Victoria Prowse; Daniel Kemptner; Peter Hahn
  2. How Large is the Corporate Tax Base Erosion and Profit Shifting? A General Equilibrium Approach By Alvarez-Martinez, Maria; Barrios, Salvador; d'Andria, Diego; Gesualdo, Maria; Nicodème, Gaëtan; Pycroft, Jonathan
  3. The New Tax Law’s Impact on Inequality: Minor but Worse if Accompanied by Regressive Spending Cuts By William R. Cline
  4. How will Brexit Affect Tax Competition and Tax Harmonization? The Role of Discriminatory Taxation By Clemens Fuest; Samina Sultan
  5. Ramsey Strikes Back: Optimal Commodity Taxes and Redistribution in the Presence of Salience Effects By Hunt Allcott; Benjamin Lockwood; Dmitry Taubinsky
  6. Dynamic scoring of tax reforms in the European Union By Salvador Barrios; Mathias Dolls; Anamaria Maftei; Andreas Peichl; Sara Riscado; Janos Varga; Christian Wittneben
  7. Optimal Production Tax and Privatization Policies under an Endogenous Market Structure By Cato, Susumu; Matsumura, Toshihiro
  8. Superstars and mediocrities: a solution based on personal income taxation By Diego d'Andria
  9. Fiscal consolidations and finite planning horizons By Lustenhouwer, Joep; Mavromatis, Kostas
  10. Fiscal consolidations and heterogeneous expectations By Hommes, Cars H.; Lustenhouwer, Joep; Mavromatis, Kostas
  11. Commodity taxes and taste heterogeneity By Stéphane Gauthier; Fanny Henriet
  12. Statutory tax rates on dividends, interest and capital gains: The debt equity bias at the personal level By Michelle Harding; Melanie Marten
  13. Understanding Earnings, Labor Supply, and Retirement Decisions By Xiaodong Fan; Ananth Seshadri; Christopher Taber
  14. Targeting with In-kind Transfers: Evidence from Medicaid Home Care By Ethan M.J. Lieber; Lee M. Lockwood

  1. By: Victoria Prowse; Daniel Kemptner; Peter Hahn
    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 nd that redistribution through the tax-andtransfer 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 bene ts; social assistance; inequality; redistribution; insurance; endowments; risk; dynamic life-cycle models.
    JEL: D63 H23 I24 I38 J22 J31
    Date: 2017–12
  2. By: Alvarez-Martinez, Maria; Barrios, Salvador; d'Andria, Diego; Gesualdo, Maria; Nicodème, Gaëtan; Pycroft, Jonathan
    Abstract: This paper estimates the size and macroeconomic effects of base erosion and profit shifting (BEPS) using a computable general equilibrium model designed for corporate taxation and multinationals. Our central estimate of the impact of BEPS on corporate tax losses for the EU amounts to €36 billion annually or 7.7% of total corporate tax revenues. The USA and Japan also appear to loose tax revenues respectively of €101 and €24 billion per year or 10.7% of corporate tax revenues in both cases. These estimates are consistent with gaps in bilateral multinationals' activities reported by creditor and debtor countries using official statistics for the EU. Our results suggest that by increasing the cost of capital, eliminating profit shifting would slightly reduce investment and GDP. It would however raise corporate tax revenues thanks to enhanced domestic production. This in turn could reduce other taxes and increase welfare.
    Keywords: BEPS; CGE model; Corporate taxation; Profit shifting; Tax avoidance
    JEL: C68 E62 H25 H26 H87
    Date: 2018–01
  3. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: The centerpiece of the Tax Cuts and Jobs Act (TCJA) of 2017 is the reduction in the corporate tax rate from 35 percent to 21 percent. The Joint Committee on Taxation has estimated the net revenue loss from the tax overhaul at $1 trillion over the next decade. The underlying premise of the legislation is that lower corporate taxes will spur growth, with trickle-down wage benefits that spread the resulting economic gains. This approach, however, risks increasing inequality in income distribution, potentially leaving those in the lower income groups worse off than before. Two factors contribute to this risk. First, the personal tax cuts expire after 2025 whereas the corporate tax cuts are permanent. Second, there will be a sizable loss of revenue, and compensating cuts in federal expenditures could wind up being concentrated on benefits received by lower-income groups. This Brief uses the estimates of the congressional Joint Committee on Taxation (JCT) to examine the distributional impact of the tax bill. It then considers the further changes that would occur if there were regressive expenditure cuts applied to make up for the revenue loss (as illustrated using the distributional profile of Medicaid spending). The broad result is that the direct effect of the legislation on income inequality is relatively minor, but the overall effect could be much more unequal if induced spending cuts were concentrated on programs oriented toward low-income groups.
    Date: 2018–02
  4. By: Clemens Fuest; Samina Sultan
    Abstract: This paper develops a model of tax competition with three countries, which initially form a union where countries refrain from using different tax rates in different sectors of the economy. We study the impact of one country leaving the union. We show that the introduction of discriminatory taxation in one country increases tax policy heterogeneity within the remaining union. Moreover, the incentives for the two remaining countries to harmonize their tax rates decline. We discuss these results in the context of the debate about the tax policy implications of Brexit.
    Keywords: International taxation, tax competition, preferential tax regimes
    JEL: H20 H73
    Date: 2018
  5. By: Hunt Allcott; Benjamin Lockwood; Dmitry Taubinsky
    Abstract: An influential result in modern optimal tax theory, the Atkinson and Stiglitz (1976) theorem, holds that for a broad class of utility functions, all redistribution should be carried out through labor income taxation, rather than differential taxes on commodities or capital. An important requirement for that result is that commodity taxes are known and fully salient when consumers make income-determining choices. This paper allows for the possibility consumers may be inattentive to (or unaware of) some commodity taxes when making choices about income. We show that commodity taxes are useful for redistribution in this setting. In fact, the optimal commodity taxes essentially follow the classic “many person Ramsey rule” (Diamond 1975), scaled by the degree of inattention. As a result, to the extent that commodity taxes are not (fully) salient, goods should be taxed when they are less elastically consumed, and when they are consumed primarily by richer consumers. We extend this result to the setting of corrective taxes, and show how nonsalient corrective taxes should be adjusted for distributional reasons.
    JEL: H21 H23
    Date: 2018–01
  6. By: Salvador Barrios; Mathias Dolls; Anamaria Maftei; Andreas Peichl; Sara Riscado; Janos Varga; Christian Wittneben
    Abstract: In this paper, we present the first dynamic scoring exercise linking a microsimulation and a dynamic general equilibrium model for Europe. We illustrate our novel methodology analysing hypothetical reforms of the social insurance contributions system in Belgium. Our approach takes into account the feedback effects resulting from adjustments and behavioral responses in the labor market and the economy-wide reaction to the tax policy changes, essential for a comprehensive evaluation of the reforms. We find that the self-financing effect of a reduction in employers’ social insurance contribution is substantially larger than that of a comparable reduction in employees’ social insurance contributions.
    Keywords: Tax Reform, European Union.
    JEL: H20
    Date: 2018
  7. By: Cato, Susumu; Matsumura, Toshihiro
    Abstract: We investigate the optimal tax and privatization policies in a mixed oligopoly in which a state-owned public firm competes against private firms in a free-entry market. First, we investigate the domestic private firm case. The optimal tax rate is strictly positive except for the full privatization and full nationalization cases, and the relationship between the optimal tax rate and degree of privatization is inverted U-shaped. Further, the optimal degree of privatization is decreasing in the tax rate. Next, we investigate the foreign private firm case and find that the two policies are mutually independent.
    Keywords: industrial policy; privatization; free entry; unit tax-subsidy; foreign ownership
    JEL: H42 H44 L13
    Date: 2017–12–20
  8. By: Diego d'Andria (European Commission - JRC)
    Abstract: The markets for talent often produce large income inequality and therefore raise political attention. While such inequality can be due to superstar dynamics or factor complementarities, Terviö ("Superstars and Mediocrities: Market Failure in The Discovery of Talent", the Review of Economic Studies, 2009) first proposed a market failure that was previously unknown to the literature, pointing to long-term contracts as a solution. I extend the model in Terviö (2009) to include personal income tax policy reforms and demonstrate that tax design can be employed as a solution to the market failure when long-term contracts are unfeasible. With small enough entry payments that novice workers would sustain to compensate employers for the cost of learning, both a progressive tax and a tax incentive on entry wages are found effective. The tax incentive on entry wages, though, can be used even with very large deductible entry payments and with overall negative net entry wages.
    Keywords: superstars, personal income tax, entry wage, talent, learning
    JEL: H21 H24 J31 J6
    Date: 2018–01
  9. By: Lustenhouwer, Joep; Mavromatis, Kostas
    Abstract: We analyze fiscal consolidations using a New-Keynesian model where agents have finite planning horizons and are uncertain about the future state of the economy. Both consumers and firms are infinitely lived, but only plan and form expectations up to a finite number of periods into the future. The length of agents' planning horizons plays an important role in determining how spending cuts or tax increases affect output and inflation. We find that for low degrees of relative risk aversion spending-based consolidations are less costly in terms of output losses, in line with empirical evidence. A stronger response of monetary policy to inflation makes spending-based consolidations more favorable as well. Interestingly, for short planning horizons, our model captures the positive comovement between private consumption and government spending observed in the data.
    Keywords: Fiscal policy,Finite planning horizons,Bounded rationality
    JEL: E60 E62 E63 H63
    Date: 2017
  10. By: Hommes, Cars H.; Lustenhouwer, Joep; Mavromatis, Kostas
    Abstract: We analyze fiscal consolidations using a New Keynesian model where agents have heterogeneous expectations and are uncertain about the composition of consolidations. We look at spending-based and tax-based consolidations and analyze their effects separately. We find that the effects of consolidations and the output multipliers are sensitive to heterogeneity in expectations before and after implementation of a specific fiscal plan. Depending on the beliefs about the type of consolidation prior to implementation, we show that heterogeneity in expectations may lead to optimism in the economy, improving thus the performance of a specific fiscal plan, or can work towards the opposite direction leading to pessimism, amplifying the contractionary effects of the consolidation. In general, we find that spending-based consolidations last longer and lead to deeper recessions when agents are boundedly rational compared to the rational expectations benchmark, while the opposite holds for tax-based consolidations.
    Keywords: fiscal policy,uncertainty,heterogeneous expectations,bounded rationality
    JEL: H60 D83 E32 E62 E63 H30
    Date: 2017
  11. By: Stéphane Gauthier (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Fanny Henriet (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)
    Abstract: We study optimal linear commodity taxes in the presence of non-linear income taxes when agents differ in skills and tastes for consumption. We show that optimal commodity taxes are partly determined by a many-person Ramsey rule when there is taste heterogeneity within income classes. The usual role of commodity taxes in relaxing incentive constraints explains the remaining part of these taxes when there is taste heterogeneity between income classes. We quantify these two parts using French consumption microdata and find that commodities taxes are only shaped by many-person Ramsey considerations.
    Keywords: Social valuations,Income taxation,Taste heterogeneity,Commodity taxes
    Date: 2018–01
  12. By: Michelle Harding; Melanie Marten
    Abstract: This paper presents statutory tax rates on several forms of capital income, including dividends, interest on bonds and bank accounts, and capital gains on shares and real property, including integration between the corporate and personal levels. It updates the rates from an earlier tax working paper (Harding, 2013) and extends the analysis to consider the debt-equity bias of the tax system when the personal level of taxation is considered.
    Keywords: Capital income taxation, Debt-equity bias
    Date: 2018–02–15
  13. By: Xiaodong Fan (University of New South Wales); Ananth Seshadri (University of Wisconsin-Madison); Christopher Taber (University of Wisconsin-Madison)
    Abstract: We develop and estimate a model in which individuals make decisions on consumption, human capital investment, labor supply, and retirement. Unlike all previous work, our model allows both an endogenous wage process (which is typically assumed exogenous in the human capital and earnings dynamics literature). In addition, we introduce health shocks. We estimate the model and match the life-cycle profiles of wages, hours and retirement from SIPP data. We analyze the impact of health shocks on retirement, as well as the effect of changes in payroll taxes and increases in the Normal Retirement Age on labor force participation of older Americans.
    Date: 2017–09
  14. By: Ethan M.J. Lieber; Lee M. Lockwood
    Abstract: Many of the most important government programs make transfers in kind as opposed to in cash. Making transfers in kind has the obvious cost that recipients would often prefer cost-equivalent cash transfers. But making transfers in kind can have benefits as well, including better targeting transfers to desired recipients or states of the world. In this paper, we develop a framework for evaluating this tradeoff and apply it to home care. Exploiting large-scale randomized experiments run by three state Medicaid programs, we find that in-kind provision of formal home care significantly reduces the value of benefits to recipients while targeting benefits to a small fraction of the eligible population that has greater demand for formal home care, is sicker, and has worse informal care options than the average eligible. Under a wide range of assumptions within a standard model, the targeting benefit of in-kind provision exceeds the distortion cost. This highlights an important cost of recent reforms that move toward more flexible, cash-like benefits.
    JEL: H21 H51 I13 I38
    Date: 2018–01

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