nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒04‒02
seventeen papers chosen by
Thomas Andrén

  1. Wealth Taxation and Wealth Accumulation: Theory and Evidence from Denmark By Jakobsen, Katrine; Jakobsen, Kristian; Kleven, Henrik; Zucman, Gabriel
  2. Tax-Response Heterogeneity and the Effects of Double Taxation Treaties on the Location Choices of Multinational Firms By Simon Behrendt; Georg Wamser
  3. The case for NIT+FT in Europe. An empirical optimal taxation exercise By Nizamul Islam; Ugo Colombino
  4. Optimal Mixed Taxation, Credit Constraints and the Timing of Income Tax Reporting By Robin Boadway; Jean-Denis Garon; Louis Perrault
  5. Risk Taking to Succeed: Occupational Choice and the Positive Effects of Progressive Taxation By Pedro Silos; German Cubas
  6. Tax Evasion and Inequality By Alstadsaeter, Annette; Johannesen, Niels; Zucman, Gabriel
  7. Behavioral Effects of Withholding Taxes on Labor Supply By Johannes Becker; Jonas Fooken; Melanie Steinhoff
  8. An age-differentiated tax on bequests By PESTIEAU Pierre; PONTHIERE Gregory
  9. Optimal Domestic Taxation and Sovereign Lending By Pricila Maziero
  10. Does Taxation Stifle Corporate Investment? Firm-Level Evidence from ASEAN Countries By Serhan Cevik; Fedor Miryugin
  11. The Dynamic Effects of Computerized VAT Invoices on Chinese Manufacturing Firms By Fan, Haichao; Liu, Yu; Qian, Nancy; Wen, Jaya
  12. How to Establish a Tax Policy Unit By Martin Grote
  13. The use of hypothetical household data for policy learning – EUROMOD HHoT baseline indicators By Gasior, Katrin; Recchia, Pasquale
  14. Distributional Effects of Welfare Reform for Young Adults: An Unconditional Quantile Regression Approach By Hernaes, Øystein
  15. The tax tectonics: Well-being and wealth inequality in relation to a shift in the tax mix from direct to indirect taxes By Wijtvliet, Laurens
  16. Earnings Management, Effective Tax Rate (Etr) And Book-Tax Gap (Btg) By Jasrial
  17. Labour tax reforms, cross-country coordination and the monetary policy stance in the euro area: a structural model-based approach By Jacquinot, Pascal; Lozej, Matija; Pisani, Massimiliano

  1. By: Jakobsen, Katrine; Jakobsen, Kristian; Kleven, Henrik; Zucman, Gabriel
    Abstract: Using administrative wealth records from Denmark, we study the effects of wealth taxes on wealth accumulation. Denmark used to impose one of the world's highest marginal tax rates on wealth, but this tax was drastically reduced and ultimately abolished between 1989 and 1997. Due to the specific design of the wealth tax, these changes provide a compelling quasi- experiment for understanding behavioral responses among the wealthiest segments of the population. We find clear reduced-form effects of wealth taxes in the short and medium run, with larger effects on the very wealthy than on the moderately wealthy. We develop a simple lifecycle model with utility of residual wealth (bequests) allowing us to interpret the evidence in terms of structural primitives. We calibrate the model to the quasi-experimental moments and simulate the model forward to estimate the long-run effect of wealth taxes on wealth accumulation. Our simulations show that the long-run elasticity of wealth with respect to the net-of-tax return is sizeable at the top of distribution. Our paper provides the type of evidence needed to assess optimal capital taxation.
    JEL: E2 E6 H2 H3
    Date: 2018–03
  2. By: Simon Behrendt; Georg Wamser
    Abstract: This paper examines location choices of multinational enterprises (MNEs). We particularly focus on the consequences of double taxation treaties (DTTs) and corporate profit taxes on the probability to choose a location. DTTs have become a key policy instrument used by countries to regulate international tax issues related to the cross-border activities of MNEs. Based on three alternative location choice models, which all allow parameter estimates to vary randomly across firms, we show that firm responses to policy variables are highly heterogeneous. Postestimation statistics suggest that the heterogeneity of parameters is strongly correlated with firm size and effective tax burden, which is consistent with tax-avoidance behavior and provides an explanation for why tax-responses are heterogeneous in the first place. We quantify the (positive) effect of DTTs and demonstrate that the negative tax-responsiveness becomes larger if a DTT is implemented. The latter is evidence that provisions intended to prevent tax avoidance are effective.
    Keywords: location choice, multinational firm, double taxation treaties, corporate income taxes
    JEL: F23 H25 H26
    Date: 2018
  3. By: Nizamul Islam; Ugo Colombino
    Abstract: We present an exercise in empirical optimal taxation for European countries from three areas: Southern, Central and Northern Europe. For each country, we estimate a microeconometric model of labour supply for both couples and singles. A procedure that simulates the households’ choices under given tax-transfer rules is then embedded in a constrained optimization program in order to identify optimal rules under the public budget constraint. The optimality criterion is the class of Kolm’s social welfare function. The tax-transfer rules considered as candidates are members of a class that includes as special cases various versions of the Negative Income Tax: Conditional Basis Income, Unconditional Basic Income, In-Work Benefits and General Negative Income Tax, combined with a Flat Tax above the exemption level. The analysis show that the General Negative Income Tax strictly dominates the other rules, including the current ones. In most cases the Unconditional Basic Income policy is better than the Conditional Basic Income policy. Conditional Basic Income policy may lead to a significant reduction in labour supply and poverty-trap effects. In-Work-Benefit policy in most cases is strictly dominated by the General Negative Income Tax and Unconditional Basic Income.
    Keywords: Basic Income, Negative Income Tax, Optimal tax, Micro-simulation, Welfare
    Date: 2017
  4. By: Robin Boadway; Jean-Denis Garon; Louis Perrault
    Abstract: We study optimal income and commodity tax policy with credit-constrained low-income households. Workers are assumed to receive an even ow of income during the tax year, but make tax payments or receive transfers at the end of the year. They use their disposable income to purchase multiple commodities over the year. We show that differentiated subsidies on commodities can be optimal even if the Atkinson-Stiglitz Theorem conditions apply. When the optimal policy leaves low-income households with binding credit constraints, it is optimal to subsidize the good that is consumed in higher proportion by them. We show that this involves subsidizing more goods that fulfill basic needs, such as food or dwelling. The benefits of such subsidies have to be balanced with the costs of financing them, since unconstrained households also benefit from the rebate early in the fiscal year.
    Keywords: commodity taxation, optimal taxation, credit constraints
    Date: 2018
  5. By: Pedro Silos (Temple University); German Cubas (University of Houston)
    Abstract: Occupations differ in their degree of earnings uncertainty. Progressive taxation provides insurance to risk-averse workers against adverse earnings outcomes. As a result, progressive tax systems distort the price of risk and influence the mo- bility and sorting of workers across occupations. This paper proposes a theory to understand the effect of the degree of tax progressivity on workers’ career choices when markets are incomplete. We quantify the distortion and we find that tax progressivity incentives young workers to take on risk, thus partially completing the insurance markets. Hence, we provide a new perspective on the welfare cost of uninsurable earnings risk. To that end, we employ micro-data on occupational mobility and earnings from the United States and Germany to estimate a model of occupational choice and uninsurable earnings uncertainty. The model predicts that, as observed in the data, everything else equal, were US workers to face the relatively more progressive earnings tax function of Germany, a larger fraction of young workers will take risk and they will end up working into safer occupations.
    Date: 2017
  6. By: Alstadsaeter, Annette; Johannesen, Niels; Zucman, Gabriel
    Abstract: This paper estimates the size and distribution of tax evasion. We combine random audits, tax amnesties, and leaks from offshore financial institutions matched to wealth records in Scandinavia. Tax evasion rises sharply with wealth: 3% of personal taxes are evaded on average, versus 25%–30% in the top 0.01% of the wealth distribution. A model of the supply of evasion services can explain this gradient. Taking tax evasion into account increases inequality substantially. After using tax amnesties, evaders do not seem to increase legal tax avoidance, suggesting that fighting evasion can allow governments to collect more taxes from the wealthy.
    Date: 2018–03
  7. By: Johannes Becker (University of Muenster); Jonas Fooken (School of Economics, The University of Queensland); Melanie Steinhoff (University of Muenster)
    Abstract: Income tax collection in most advanced economies uses third-party reporting and withholding at the employer level before the employee receives her wage income. Since withholding taxes do not necessarily reflect the true effective tax burden, they may give false signals on the net-of-tax pay. We report results of laboratory experiments in which labor supply effects of such misperceptions are tested. Withholding taxes (and resulting tax refunds) should be behaviorally neutral in the experiment, but our results suggest that withholding taxes reduce effort and tax adjustments lead to adjustments of effort for our most relevant group of participants, those motivated by monetary incentives. This indicates that withholding taxes may be behaviorally relevant and deserve attention of policy-makers
    Keywords: Withholding taxes; experiment; tax perceptions
    JEL: H25 M41 G32
    Date: 2018–03–07
  8. By: PESTIEAU Pierre (Université de Liège, CORE and Paris School of Economics); PONTHIERE Gregory (Université Paris 12, Paris School of Economics and Institut universitaire de France)
    Abstract: Although fiscal systems around the world tax bequests at rates that do not explicitly depend on the age of the deceased, there exist several theoretical reasons to use that observable characteristic to differentiate the tax rate on bequests. This paper presents four arguments supporting an age-differentiated tax on bequests, that is, a tax rate on bequests that is varying with the age of the deceased. A first argument, which relies on the standard utilitarian criterion, supports a tax rate decreasing with the age of the deceased on the grounds that, as age increases, the accidental (inelastic) component of bequests declines, making taxation less desirable on efficiency grounds. However, three other arguments - avoiding influence of the tax on testamentary dispositions, compensating the unlucky short-lived and redistributing towards orphans in need - all support a tax rate on bequests increasing with the age of the deceased.
    Keywords: bequest, taxation, age discrimination, mortality
    JEL: H21 H23
    Date: 2018–03–12
  9. By: Pricila Maziero (University of Pennsylvania)
    Abstract: This paper studies the optimal lending contract between an international lender and a sovereign country. A benevolent government finances uncertain expenditures - which are privately observed by the country - using external debt and optimally choosing domestic debt and taxes as in a standard Ramsey environment. Without imposing any restriction on the structure of the loan, we determine the optimal lending contract offered by the lender when the domestic fiscal policy is observed and when the fiscal policy is not observed by the lender. In the first case, we show under which conditions the optimal loan contract is contingent not only on the realization of government expenditures, but also on the sovereign fiscal policy. Finally we show how the optimal loan contract influences equilibrium taxes and prices in a welfare increasing manner. In particular, the external loan can be used as instrument to reduce the distortions induced by the Ramsey government on the domestic economy.
    Date: 2017
  10. By: Serhan Cevik; Fedor Miryugin
    Abstract: This paper conducts a firm-level analysis of the effect of taxation on corporate investment patterns in member states of the Association of Southeast Asian Nations (ASEAN). Using large-scale panel data on nonfinancial firms over the period 1990–2014, and controlling for macro-structural differences among countries, we find a significant degree of persistence in firms’ net fixed investments over time, which vary with firm characteristics, such as size, sales, profitability, leverage, and age. Our analysis brings up interesting empirical results, including nonlinear patterns of behavior in firms’ capital investment decisions acrosss ASEAN countries. Concerning the main variable of interest, we find that a moderate level of taxation does not hinder business investment, but this effect turns negative as higher tax burden raises the user cost of capital and distorts resource allocations.
    Date: 2018–03–02
  11. By: Fan, Haichao; Liu, Yu; Qian, Nancy; Wen, Jaya
    Abstract: This paper uses a balanced panel of large manufacturing firms to study the dynamic effects of computerizing VAT invoices on tax revenues and firm behavior in China, 1998-2007. We find that computerization explains 10.8% of cumulative VAT revenues and increases the effective average tax rate by approximately 9-12% in the seven subsequent years. The evidence suggests that the effects of computerization change over time: tax revenue gains are likely to be smaller in the long run. Meanwhile, firms reduce output and input, and increase productivity monotonically over time.
    Keywords: economic development; Firm Growth; state capacity; taxation; technology
    JEL: H25 H26 O12
    Date: 2018–03
  12. By: Martin Grote
    Abstract: How to Establish a Tax Policy Unit
    Date: 2017–10–19
  13. By: Gasior, Katrin; Recchia, Pasquale
    Abstract: Tax-benefit microsimulation models are typically used to assess the impact of policy changes on the income distribution based on micro data representative of the population. Such analysis assesses the effects of tax-benefit policies by considering their interaction effects and the population structure, which are both important elements for an overall assessment of complex realities. However, it can be helpful to abstract from this complexity and to explain the effects of tax-benefit policies using concrete examples. Using hypothetical households visualises how single policies are linked with each other while leaving the additional complexity of the population structure aside. This paper uses the Hypothetical Household Tool (HHoT) to generate hypothetical household data that can be used in EUROMOD, the tax and benefit microsimulation model of the European Union, to analyse current tax and benefit policies as well as the effects of policy changes in a comparative manner. The paper provides a brief introduction of the use of hypothetical data in general and presents concrete examples of its application. The main part proposes a set of basic indicators that can be used to learn about European tax-benefit systems in a comparative perspective.
    Date: 2018–03–19
  14. By: Hernaes, Øystein (Ragnar Frisch Centre for Economic Research)
    Abstract: The paper evaluates the distributional effects on earnings and income of requiring young welfare recipients to fulfill conditions related to work and activation. It exploits within-social insurance office variation in policy arising from a geographically staggered reform in Norway. The reform reduced welfare uptake and for women had large, positive effects in the lower part of the earnings distribution. The effect on the distribution of total income is also positive, thus gains in earnings more than offset reduced welfare benefits. Fewer welfare payments and smaller caseloads make the policy highly cost-effective.
    Keywords: social assistance, activation, conditionality, welfare reform, labor supply, quantile treatment effects
    JEL: C21 D31 H55 I38 J18 J22
    Date: 2018–02
  15. By: Wijtvliet, Laurens (Tilburg University, School of Economics and Management)
    Abstract: Indirect taxes are on the rise – both in terms of geographical spread and fiscal importance – at the expense of the proportion of direct taxes. This shift from direct to indirect taxes (tax shift) is primarily driven by a desire to boost economic growth (GDP) and job creation. At the same time, scholars and supranational bodies are increasingly arguing that economic policy should not solely be directed at economic growth, but at more-encompassing, multidimensional well-being. This study confronts both bodies of thought. It examines how the tax shift can be consonant with the general goal of promoting well-being that is paramount in many countries. It does so by assessing the tax shift’s impact on the distribution of wealth and identifying various well-being-related tendencies that this changing distribution could potentially entail.
    Date: 2018
  16. By: Jasrial (Universitas Terbuka, Jalan Cabe Raya, Pamulang, 15418, Tangerang Selatan, Indonesia Author-2-Name: Susy Puspitasari Author-2-Workplace-Name: Universitas Terbuka, Jalan Cabe Raya, Pamulang, 15418, Tangerang Selatan, Indonesia Author-3-Name: Ali Muktiyanto Author-3-Workplace-Name: Universitas Terbuka, Jalan Cabe Raya, Pamulang, 15418, Tangerang Selatan, Indonesia)
    Abstract: Objective – This research examines the effect of company size, changes in out-cash flow, return on assets, conservatism, and profit levelling on earnings management. Methodology/Technique – The results of this research show that banking capital structure, capital intensity, intensity of inventory, and intensity of R & D have a significant impact on effective tax rates. Further, the results also show that, with respect to the non-banking sector, R & D expenditure contributes significantly to effective tax rates. Simultaneously, earnings management and effective tax rates, as well as other factors, also have an effect on book tax gap. Findings – This study shows that profit management has a significantly positive effect on book tax gap, and effective tax rates has a significant negative effects o book tax gap. In terms of the non-banking sector, earnings management and effective tax rate have no effect on book tax gap. Deferred tax expenses have a lower capability to detect earnings management than accrual, in both the banking and non-banking sector. Novelty – The study of management capabilities optimizes the role of book tax gap and effective tax rate for earning management. Both tax management and earnings management are closely related to behavior management in managing a company based on the agency theory. Furthermore, the study identifies a relationship between earnings management and book tax gap
    Keywords: Book Tax Gap; Effective Tax Rate; Earnings Management; Accrual Total; Indonesia.
    JEL: H26 H29
    Date: 2018–03–10
  17. By: Jacquinot, Pascal; Lozej, Matija; Pisani, Massimiliano
    Abstract: We evaluate the effects of permanently reducing labour tax rates in the euro area (EA) by simulating a large-scale open economy dynamic general equilibrium model. The model features the EA as a monetary union, split in two regions (Home and the rest of the EA - REA), the US, and the rest of the world, region-specific labour markets with search and matching frictions, and public employment. Our results are as follows. First, a permanent reduction in labour tax rates in the Home region would have stimulating effects on domestic economic activity and employment. Second, reducing labour tax rates simultaneously in both Home and REA would have additional expansionary effects on the Home region. Third, in the short run the expansionary effects on the EA economy of a EA-wide tax reduction are enhanced if the EA monetary policy is accommodative. JEL Classification: E24, E32, E52, E62, F45
    Keywords: DSGE models, labour taxes, monetary union, open-economy macroeconomics, unemployment
    Date: 2018–02

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