nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒03‒19
sixteen papers chosen by
Thomas Andrén

  1. Optimal Taxes on Capital in the OLG Model with Uninsurable Idiosyncratic Income Risk By Dirk Krueger; Alexander Ludwig
  2. Political Alignment, Attitudes Toward Government and Tax Evasion By Julie Berry Cullen; Nicholas Turner; Ebonya L. Washington
  3. Increasing resource rent taxation when the corporate income tax is reduced? By Lund, Diderik
  4. How Will Brexit Affect Tax Competition and Tax Harmonization? The Role of Discriminatory Taxation By Clemens Fuest; Samina Sultan
  5. Public Tax-Return Disclosure By Jeffrey L. Hoopes; Leslie Robinson; Joel Slemrod
  6. Optimal Redistribution with a Shadow Economy By Pawel Doligalski; Luis E. Rojas
  7. Mechanics of replacing benefits systems with a basic income: Comparative results from a microsimulation approach By James Browne; Herwig Immervoll
  8. Tax evasion in Former Yugoslavian countries By Marko Crnogorac; Santiago Lago-Peñas
  9. Taxation of Insurance By Vidar Christiansen
  10. Optimal capital and labor income taxation in small and developing countries By Avdiu, Besart
  11. Tax certainty: Proposals for the short term and the long term By Diaz de Sarralde, Santiago; von Haldenwang, Christian; Hentze, Tobias; Monkam, Nara
  12. Would UDAY brighten up Rajasthan Finances? By Chakraborty, Pinaki; Gupta, Manish; Chakraborty, Lekha
  13. Nonlinear Household Earnings Dynamics, Self-insurance, and Welfare By Mariacristina De Nardi; Giulio Fella; Gonzalo Paz Pardo
  14. Why the Current Tax Rate Tells You Little: Competing for Mobile and Immobile Firms By Dominika Langenmayr; Martin Simmler
  15. The effect of Double Taxation Treaties and Territorial Tax Systems on Foreign Direct Investment: Evidence for Spain By Castillo-Murciego, Ángela; López Laborda, Julio
  16. Taxes, Regulations of Businesses and Evolution of Income Inequality in the US By Benjamin Pugsley; Sebastian Dyrda

  1. By: Dirk Krueger; Alexander Ludwig
    Abstract: We characterize the optimal linear tax on capital in an Overlapping Generations model with two period lived households facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium feedback of private precautionary saving. For logarithmic utility our full analytical solution of the Ramsey problem shows that the optimal aggregate saving rate is independent of income risk. The optimal time-invariant tax on capital is increasing in income risk. Its sign depends on the extent of risk and on the Pareto weight of future generations. If the Ramsey tax rate that maximizes steady state utility is positive, then implementing this tax rate permanently generates a Pareto-improving transition even if the initial equilibrium is dynamically efficient. We generalize our results to Epstein-Zin-Weil utility and show that the optimal steady state saving rate is increasing in income risk if and only if the intertemporal elasticity of substitution is smaller than 1.
    JEL: E21 H21 H31
    Date: 2018–02
  2. By: Julie Berry Cullen; Nicholas Turner; Ebonya L. Washington
    Abstract: We ask whether attitudes toward government play a causal role in the evasion of U.S. personal income taxes. We first use individual-level survey data to demonstrate a link between sharing the party of the president and trust in the administration generally and opinions on taxation and spending policy, more specifically. Next, we move to the county level, and measure tax behavior as elections, decided by the voting behavior in swing-states, push voters in partisan counties into and out of alignment with the party of the president. Using IRS data, we find that reported taxable income increases as a county moves into alignment, with the increases concentrated in income sources that are easily evaded, due to lack of third-party reporting. Corroborating the view that evasion falls, potentially suspect EITC claims and audit rates also fall. Our results provide real-world evidence that a positive outlook on government lowers tax evasion.
    JEL: D72 H24 H26 H3
    Date: 2018–02
  3. By: Lund, Diderik (Dept. of Economics, University of Oslo)
    Abstract: Under international tax competition, corporate income tax rates are predicted to decrease, and the tax burden will shift onto immobile factors. This case study considers tax changes that illustrate the predictions for Norway 2012–2018. Petroleum rent was taxed at high rates in 2012, and while corporate income tax rates were reduced in four steps, the marginal tax on rent was kept constant. The four steps are analyzed in light of the tax burden shift predicted by theory, and possible intentions of the government. The tax on petroleum rent has not been increased. Government intentions seem to have been shifting.
    Keywords: rent taxation; tax competition; immobile factors; petroleum; Norway
    JEL: H21 H25 H87 Q30
    Date: 2018–02–15
  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: 2017
  5. By: Jeffrey L. Hoopes; Leslie Robinson; Joel Slemrod
    Abstract: We investigate the consequences of public disclosure of information from company income tax returns filed in Australia. Supporters of more disclosure argue that increased transparency will improve tax compliance, while opponents argue that it will divulge sensitive information that is, in many cases, misunderstood. Our results show that in Australia large private companies experienced some consumer backlash and, perhaps partly in anticipation, some acted to avoid disclosure. We detect a small increase (decrease) in tax payments for private (public) firms subject to disclosure suggesting differential costs of disclosure across firms. Finally, we find that investors react negatively to anticipated and actual disclosure of tax information, most likely due to anticipated policy backlash rather than consumer backlash or the revelation of negative information about cash flows. These findings are important for both managers and policy makers, as the trend towards increased tax disclosure continues to rise globally.
    JEL: H25 H26 M4
    Date: 2018–02
  6. By: Pawel Doligalski; Luis E. Rojas
    Abstract: We extend the theory of the optimal redistributive taxation to economies with an informal labor market. The optimal tax formula contains two new terms capturing reported income responses of informal workers on an intensive and an extensive margin. Both terms decrease the optimal tax rates. We quantitatively show that this reduction can be substantial, exceeding 30 percentage points, and we document a large welfare gain of up to 6.4% of consumption from following our tax formula rather than the standard formula. We also provide a novel decomposition of the welfare impact of the shadow economy into labor efficiency and redistribution components. In the quantitative model estimated with Colombian data the shadow economy benefits efficiency at the expense of redistribution. As a result, conditional on the optimal tax policy, the presence of the informal sector does not substantially affect social welfare unless social preferences for redistribution are strong.
    Keywords: informal sector, optimal taxation.
    JEL: H21 H26
    Date: 2018–03–13
  7. By: James Browne (OECD); Herwig Immervoll (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.
    JEL: C81 D31 H22 H55
    Date: 2018–03–09
  8. By: Marko Crnogorac; Santiago Lago-Peñas
    Abstract: This article estimates tax evasion in all Former Yugoslavian countries during the last two decades. The scarcely available fiscal and national accounts data only allow an estimate of tax evasion based on data on the shadow economy. Nevertheless, the contribution of this paper to the existing literature is unique since tax evasion is estimated for the first time for some of the countries. We also estimate evasion of some single taxes. Lastly, we derive implications for the control of tax evasion and observed tax collections.
    Keywords: Tax evasion, Yugoslavia.
    JEL: H26
    Date: 2018–03
  9. By: Vidar Christiansen
    Abstract: Should we exempt the services of insurance companies from VAT? Addressing this issue, the paper distinguishes between insurance against a general loss of resources and a loss of a specific commodity (property insurance). There is a case for exempting the former kind of insurance, but not the latter. Finally, comparing insurance through a producer warranty with insurance provided separately by an insurance company, it is conceivable that tax exemption of the latter will distort the choice of product quality.
    Keywords: insurance, warranties, value added tax, VAT exemptions
    JEL: H21
    Date: 2017
  10. By: Avdiu, Besart
    Abstract: This paper argues that smaller and poorer countries have lower optimal tax rates on capital and labor income than their larger and richer counterparts. It further provides an alternative explanation for such empirically observed differences in tax rates. The model focuses on a closed economy, but is extended by introducing mobile capital. The difference in tax rates here is efficient and not due to tax competition. For the result, less than perfect competition is necessary. The intuition is that monopolistic markups distort markets in a similar way as taxes. Hence, optimal tax rates are inversely related to markups and I show theoretically that smaller and poorer countries have larger markups. Therefore, these countries have lower optimal tax rates. Since smaller and poorer countries face larger competition distortions, there is less space for tax distortions. Hence, a smaller tax rate itself is insufficient to conclude a country is engaging in tax competition. Empirical analysis of the banking industry also shows that smaller and poorer countries have larger markups.
    Keywords: Optimal Taxation, Monopolistic Competition, Developing Countries, International Fiscal Issues, Tax Competition
    JEL: D43 H21 O23
    Date: 2018–03–01
  11. By: Diaz de Sarralde, Santiago; von Haldenwang, Christian; Hentze, Tobias; Monkam, Nara
    Abstract: Tax certainty aims at the stabilization of expectations of both, taxpayers and governments. Improving tax payer service, easing cooperation channels and clarifying legal framework are strategies already in place to increase tax certainty, even though to different extent depending on the countries level of development. For the short run, concrete measures can be recommended through which international cooperation can contribute to strengthening tax certainty. These measures concern the establishment of enhanced engagement programs, the development of model legislation as a tool for the implementation of international rules and standards, the alignment of bilateral treaties and domestic legislation to international good practices, using the country-by-country-report as an indicator for the adequacy of tax payments and setting up investment incentives. In the long run, a radical change in the international tax scheme is suggested since, amongst others, the current rules do not match with the emerging digital economy. A unitary taxation system might be therefore the appropriate response even if the implementation on an international level is complex.
    Keywords: corporate taxation,international profit shifting,tax certainty
    JEL: H25 H26 O19
    Date: 2018
  12. By: Chakraborty, Pinaki (National Institute of Public Finance and Policy); Gupta, Manish (National Institute of Public Finance and Policy); Chakraborty, Lekha (National Institute of Public Finance and Policy)
    Abstract: Ujwal DISCOM Assurance Yojana (UDAY) required number of State governments to take over debt of power distribution companies in their books of accounts. Though this one time intervention made both debt and deficit measures more comprehensive, this has raised many challenges including comparability of deficit across States and long run fiscal implications of power sector debt on State finances.
    Keywords: Power distribution companies ; debt restructuring ; deficits ; Rajasthan
    JEL: H72 H74 H77 H81
    Date: 2018–03
  13. By: Mariacristina De Nardi; Giulio Fella; Gonzalo Paz Pardo
    Abstract: Earnings dynamics are much richer than typically assumed in macro models with heterogenous agents. This holds for individual-pre-tax and household-post-tax earnings and across administrative (Social Security Administration) and survey (Panel Study of Income Dynamics) data. We study the implications of two household-post-tax earnings processes in a standard life-cycle model: the canonical earnings process (that includes a persistent and a transitory shock) and a rich earnings dynamics process (that allows for age-dependence of moments, non-normality, and nonlinearity in previous earnings and age). Allowing for richer earnings dynamics implies a substantially better fit of the evolution of the cross-sectional consumption inequality over the life cycle and of the individual-level degree of consumption insurance against persistent earnings shocks. Richer earnings dynamics also imply lower welfare costs of earnings risk, but, as the canonical earnings process, do not generate enough concentration at the upper tail of the wealth distribution.
    JEL: E21 H21 J3
    Date: 2018–02
  14. By: Dominika Langenmayr; Martin Simmler
    Abstract: Firms should use all available information to anticipate future tax rates. Firm mobility, as a key determinant of corporate tax rates, is one such source of information. We first show theoretically that a government sets a higher tax rates on firm profits if average firm mobility in its jurisdiction is low, and that the potential entry of immobile firms in the future deters firms from entering a jurisdiction today. We then test and confirm these predictions in a well-identified setting, using the rapid growth of wind power plants (a very immobile industry) and the large variation in local business taxes across Germany for identification.
    Keywords: corporate taxation, firm mobility, commitment, tax competition
    JEL: H25 H71 F21
    Date: 2017
  15. By: Castillo-Murciego, Ángela; López Laborda, Julio
    Abstract: The present paper evaluates the effect of Double Taxation Treaties and the Territorial Tax System of countries on Spain's inward and outward FDI for the period 1993-2013. Estimations produce a positive and statistically significant effect of Treaties for both samples when using a simple binary variable for measuring the effect of the mere existence of the same. These outcomes keep for old and new Treaties and for the sub-sample of developed partner countries of Spain. However, regarding developing countries, the positive result exists only for the outbound sample. Also for the global samples and the sub-samples of developed countries, there is an additional positive effect on investments for countries applying the Territorial Tax System for taxing foreign income.
    Keywords: Foreign Direct Investment,Double Taxation Treaty,Territorial Tax System,Spain
    JEL: F21 F23 H25 H32 H87
    Date: 2018
  16. By: Benjamin Pugsley (Federal Reserve Bank of NY); Sebastian Dyrda (University of Toronto)
    Abstract: From 1980 to 2012 the share of U.S.~business receipts from businesses organized as pass-through entities (for example LLCs and S-corporations) rather than traditional C-corporations nearly triples following a sequence of tax reforms that reduced the tax rate of business income that "passes through" to an entrepreneur's individual income tax form. We show this shift in the pattern of business organization is economically significant. We propose a novel reduced form decomposition of data from the Survey of Consumer Finances, which reveals the increase in pass through entities explains over 50 percent of the increase in the share of pre-tax income for the top 1 percent of households. Importantly, this increase is not just accounting: there is an economic trade-off when choosing a legal form that affects the investment behavior of the entrepreneurs. We develop a heterogeneous agent equilibrium model with workers, entrepreneurs and endogenous choice of legal forms to capture a key trade-off between tax benefits and diversification of investment risk. We test the model using confidential firm-level microdata from the U.S.~ Census, and with the model calibrated to capture the actual firm dynamics across legal forms following several tax reform episodes, we quantify the contribution of tax reforms through the business reorganization channel on the evolution of income, wealth and consumption inequality of workers and entrepreneurs.
    Date: 2017

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