nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒02‒26
twelve papers chosen by
Thomas Andrén

  1. Insurance, Redistribution, and the Inequality of Lifetime Income By Haan, Peter; Kemptner, Daniel; Prowse, Victoria L.
  2. Loss carryover provisions: Measuring effects on tax symmetry and automatic stabilisation By Tibor Hanappi
  3. Revisiting Tax on Top Income By Ayse Imrohoroglu; Cagri S. Kumru; Arm Nakornthab
  4. Locally Optimal Three-Bracket Piecewise Linear Income Taxation By Alan Krause
  5. Minimum Wage Policy with Optimal Taxes and Unemployment By Adam M. Lavecchia
  6. Tax-Free Savings Accounts: Who uses them and how? By Adam M. Lavecchia
  7. Tax Morale, Fiscal Capacity, and Wars By Alessandro Belmonte; Désirée Teobaldelli; Davide Ticchi
  8. Earnings Test, Non-actuarial Adjustments and Flexible Retirement By Axel H. Börsch-Supan; Klaus Härtl; Duarte N. Leite
  9. The Right Type of Legislator: A Theory of Taxation and Representation By Andrea Mattozzi; Erik Snowberg
  10. What do we know about the effects of Austerity? By Alberto F. Alesina; Carlo Favero; Francesco Giavazzi
  11. Unemployment Insurance in Finland: A Review of Recent Changes and Empirical Evidence on Behavioral Responses By Kyyrä, Tomi; Pesola, Hanna; Rissanen, Aarne
  12. A parametric social security system with skills heterogeneous agents By Thomaidou, Fotini

  1. By: Haan, Peter (DIW Berlin); Kemptner, Daniel (DIW Berlin); Prowse, Victoria L. (Purdue University)
    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: 2018–01
  2. By: Tibor Hanappi
    Abstract: Loss carryover provisions are an essential part of corporate tax systems. Economic theory suggests that perfect intertemporal loss offsets are a necessary condition for the neutrality of corporate taxation across investment projects with different risk profiles. However, in practice the tax treatment of losses does often not reach this standard, e.g., due to lack of inflation indexation or tax offset restrictions. Using detailed country-level information, this paper presents two tax policy indices capturing the effects of carryover provisions on tax symmetry and stabilisation across a total of 34 OECD and non-OECD countries. The tax symmetry index captures the effectiveness of carryover provisions, including carry-forwards and carry-backs, relative to full symmetry, while the stabilisation index captures the proportion of an adverse revenue shock on loss-making firms which is absorbed by the corporate tax system. The results show that only 18 countries provide unlimited carry-forwards and most countries do not index tax losses to inflation; only 9 countries provide carry-backs while 8 countries limit the amount of tax losses which can be offset in any given year. Cross-country comparison of the two indices suggests that these restrictions have significant impacts on tax symmetry and stabilisation. Perfect tax symmetry is not achieved by the majority of the included corporate tax systems thus implying possible tax-induced distortions towards less risky projects.
    JEL: G11 H21 H25
    Date: 2018–02–22
  3. By: Ayse Imrohoroglu; Cagri S. Kumru; Arm Nakornthab
    Abstract: In this paper, we study optimal income taxation in a model with entrepreneurial activity. We conduct two types of changes in tax policy: changing the overall progressivity of taxes versus changing the tax rate of the richest 1% of the population. We study the implications of these tax policies on welfare, inequality, and government revenues. Our results indicate that increasing the overall progressivity of taxes results in lower wealth inequality and higher welfare relative to increasing the tax rate on the richest 1% of the population.
    Keywords: Entrepreneurship, taxation, progressivity, labor supply
    JEL: D31 E21 H2
    Date: 2018–02
  4. By: Alan Krause
    Abstract: The aim of this paper is to examine the setting of income tax policy from the perspective faced by governments. The government takes the current income tax schedule as the starting point, and seeks to implement a small change in the tax schedule that is both feasible and desirable. If no such change is possible, the current income tax schedule is said to be locally optimal, because it cannot be improved upon via a small reform. We assume that the current income tax schedule is piecewise linear with three tax brackets, which approximates most real-world income tax schedules. The characteristics of locally-optimal piecewise linear income tax schedules are then derived, with particular attention paid to the extent to which they depart from linearity.
    Keywords: piecewise linear income taxation, tax reform
    JEL: H21 H24
    Date: 2018–02
  5. By: Adam M. Lavecchia (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: This paper sheds new light on the desirability of the minimum wage in the presence of an optimal non-linear income tax. Using a search-and-matching framework, I derive a novel condition that links the desirability of the minimum wage to three sufficient statistics: (1) the macro or general equilibrium labor force participation response to the minimum wage by low-skilled individuals; (2) the macro employment response to the minimum wage for low-skilled individuals; and (3) the welfare weight on low-skilled workers. This condition shows that the minimum wage is welfare improving if it pushes the labor market tightness – the ratio of the aggregate number of vacancies to low-skilled job seekers – closer to its efficient level. Guided by the theory, I estimate the first two sufficient statistics using an event study design, as well as state and federal minimum wage variation between 1979-2014. I estimate a macro participation elasticity of -0.24 and a macro employment elasticity of -0.32. The former represents new evidence on a previously overlooked margin of the minimum wage. With these estimates in hand, I simulate the total welfare gains from introducing a minimum wage beginning from the optimal income tax allocation. The simulations show that the minimum wage is welfare improving only if the government has very strong redistributive tastes.
    Keywords: Minimum wage; Sufficient statistics; Optimal policy; Labor force participation
    JEL: H21 H23 J21 J38 J64
    Date: 2018
  6. By: Adam M. Lavecchia (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: This paper studies the savings effect of Canadian Tax-Free Savings Account (TFSAs) using microdata from the 2012 Survey of Financial Security. TFSA contributions are made with after-tax income, balances accumulate tax-free and withdrawals do not increase taxable income. The paper makes two important contributions. First, I characterize the profiles of TFSA owners, documenting new patterns in account ownership and balances. The age profile of TFSA ownership is U-shaped and balances are positively correlated with educational attainment and saving in other retirement accounts. Second, I develop a new instrumental variables strategy to estimate whether TFSA balances crowd-out saving in taxable financial assets and saving in traditional tax-deferred plans. The results suggest that TFSA balances crowd-out saving in taxable fixed income assets and have no statistically significant effect on balances in tax-deferred accounts.
    Keywords: Tax-preferred savings accounts; pre-paid versus post-paid; Tax-Free Savings Account;crowd-out
    JEL: H2 H31
    Date: 2018
  7. By: Alessandro Belmonte (IMT School for advanced studies); Désirée Teobaldelli (University of Urbino); Davide Ticchi (Marche Polytechnic University)
    Abstract: This paper studies how mobilization for war motivates citizens to contribute to their own community and therefore help forming tax morale in a constituency. We derive a theoretical model to investigate government's decision to expand tax revenues from alternative sources, namely changing the country's culture of tax compliance or expanding fiscal capacity. Despite the two are initially substitute, we show how in equilibrium dynamic complementarity arises. Our mechanism exploits exogenous variation in the cost of tax morale formation, induced by an expected war (either internal or external) that makes easier for the government to mobilize the constituency. We motivate our theory through a novel cross-country analysis that uses information on war frequency, tax morale, and fiscal capacity. We additionally discuss some historical cases consistent with our mechanism.
    Keywords: tax morale, state capacity, external threat, civil wars, dynamic complementarity, culture and institutions
    JEL: P16 H11 H26 H41
    Date: 2018–02
  8. By: Axel H. Börsch-Supan; Klaus Härtl; Duarte N. Leite
    Abstract: In response to the challenges of increasing longevity, an obvious policy response is to gradually increase the statutory eligibility age for public pension benefits and to shut down pathways to early retirement such as special rules for women. This is, however, very unpopular. As an alternative, many countries have introduced “flexibility reforms” which allow combining part-time work and partial retirement. A key measure of these reforms is the abolishment of earnings tests. It is claimed that these reforms increase labor supply and therefore, also the sustainability of pension systems. We show that these claims may not be true in the circumstances of most European countries. To this end, we employ a life-cycle model of consumption and labor supply where the choices of labor force exit and benefit claiming age are endogenous and potentially separate. Earnings tests force workers to exit the labor market when claiming a pension. After abolishing the earnings test, workers can claim their benefits and can keep on working, potentially increasing labor supply. Our key result is that the difference between exit and claiming age strongly depends on the actuarial neutrality of the pension system and can become very large. Abolishing an earnings test as part of a “flexibility reform” may therefore create more labor supply but at the same time, reduce the average claiming age when adjustments remain less than actuarial, thereby worsening rather than improving the sustainability of public pension systems.
    JEL: D91 E17 E21 H55 J11 J22 J26
    Date: 2018–02
  9. By: Andrea Mattozzi; Erik Snowberg
    Abstract: We develop a theory of taxation and the distribution of government spending in a citizen-candidate model of legislatures. Individuals are heterogeneous in two dimensions: productive ability in the private sector and negotiating ability in politics. When these are positively correlated, rich voters always prefer a rich legislator, but poor voters face a trade-off. A rich legislator will secure more pork for the district, but will also prefer lower taxation than the poor voter. Our theory organizes a number of stylized facts across countries about taxation and redistribution, parties, and class representation in legislatures. We demonstrate that spending does not necessarily increase when the number of legislators increases, as the standard common-pool intuition suggests, and that many policies aimed at increasing descriptive representation may have the opposite effect.
    JEL: D72 D78 H10 H23
    Date: 2018–02
  10. By: Alberto F. Alesina; Carlo Favero; Francesco Giavazzi
    Abstract: This paper summarizes the results of a large recent literature on multi year fiscal plans for deficit reduction (austerity). The key results are that deficit reduction policies based upon spending cuts are much less costly in terms of short run output losses than tax based adjustments. On average fiscal adjustment based upon spending cuts have very small output costs and in some cases they are expansionary. We then discuss which possible models can explain these findings and discuss how the evidence can disentangle them.
    JEL: E0 H0
    Date: 2018–01
  11. By: Kyyrä, Tomi; Pesola, Hanna; Rissanen, Aarne
    Abstract: The goal of this report is twofold. The first is to provide an overview of the Finnish unemployment insurance (UI) system. We describe all major changes in eligibility criteria, benefit levels and benefit durations since 2000. We also assess how these have changed the overall generosity of the benefit scheme over time. The second is to summarize what we know about the effects of UI benefits in the context of the Finnish labor market. For background we provide a brief look at the economic theory of UI, but our main focus is on empirical evidence on behavioral responses. We survey the existing evidence and present some new results for the effects of eligibility criteria, benefit levels and benefit durations on labor market outcomes in Finland.
    Keywords: Unemployment insurance, layoffs, unemployment,
    Date: 2017
  12. By: Thomaidou, Fotini
    Abstract: The purpose of this study is to explore the effects of exogenous social security system parameters on welfare. The set up is an overlapping generations economy, with skills heterogeneity, which distinguishes consumers between high and low skilled. The lowskilled receive an extra supplement pension. The social security system has three exogenous parameters: the benefits, the contributions, and the funding parameter. The author examines and compares the effects of these three exogenous social security parameters, first under inelastic and then under elastic labor supply, on individuals welfare. He finds that when labor supply is inelastic, the parameters affect differently the welfare of the high and the low-skilled, since for the latter, we must also take into account the indirect effects through the supplement pension provision. When labor supply is elastic, the effects of changes in the social security parameters on welfare are the same for both the high and the low skilled, as in the case of inelastic labor supply.
    Keywords: social security,pensions,PAYGO,funded systems,welfare,skills heterogeneity
    JEL: D11 E21 H55
    Date: 2018

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