nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒04‒09
fourteen papers chosen by
Thomas Andrén

  1. Fiscal Consolidation Programs and Income Inequality By Pedro Brinca; Miguel H. Ferreira; Francesco Franco; Hans A. Holter; Laurence Malafry
  2. Strategic Responses to International Tax Competition: Fiscal (De) Centralization versus Partial Tax Harmonization By Sanz Córdoba, Patricia; Theilen, Bernd, 1965-
  3. The Costs of Corporate Tax Complexity By Eric Zwick
  4. Optimal Taxation with Behavioral Agents By Xavier Gabaix; Emmanuel Farhi
  5. Uncertain Length of Life, Retirement Age, and Optimal Pension Design By Thomas Aronsson; Sören Blomquist
  6. Tax Evasion, Embezzlement and Public Good Provision By Chowdhury Mohammad Sakib Anwar; Alexander Matros; Sonali Sen Gupta
  7. Paternalistic Taxation of Unhealthy Food and the Intensive versus Extensive Margin of Obesity By Zarko Kalamov; Marco Runkel
  8. Are fiscal budgets sustainable in South Africa? Evidence from provincial level data By Kambale Kavese; Andrew Phiri
  9. The Bedroom Tax By Stephen Gibbons; Olmo Silva; Maria Sánchez-Vidal
  10. Trade, Environment and Income Inequality: An Optimal Taxation Approach By Philippe Bontems; Estelle Gozlan
  11. Basic income or a single tapering rule? Incentives, inclusiveness and affordability compared for the case of Finland By Jon Kristian Pareliussen; Hyunjeong Hwang; Heikki Viitamäki
  12. Drivers of Participation Elasticities across Europe: Gender or Earner Role within the Household? By Bartels, Charlotte; Shupe, Cortnie
  13. Revenue Administration; Implementing a High-Wealth Individual Compliance Program By Lucilla Mc Laughlin; John Buchanan
  14. “Catch-Up Contributions” An Equitable and Affordable Solution to the Retirement Savings Crisis By Armon Rezai; Lance Taylor; Duncan Foley

  1. By: Pedro Brinca (Center for Economics and Finance at Universidade of Porto, Nova School of Business and Economics, Universidade Nova de Lisboa); Miguel H. Ferreira (Nova School of Business and Economics, Universidade Nova de Lisboa); Francesco Franco (Nova School of Business and Economics, Universidade Nova de Lisboa); Hans A. Holter (Department of Economics, University of Oslo); Laurence Malafry (Department of Economics, Stockholm University)
    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
  2. By: Sanz Córdoba, Patricia; Theilen, Bernd, 1965-
    Abstract: This paper analyzes a country’s optimal fiscal strategy among centralization, decentralization, and partial tax harmonization. Countries are asymmetric in productivity levels and characterized by multi-level government such that there is both horizontal and vertical tax competition. The main result from the analysis is that partial tax harmonization is more difficult to achieve in fiscally decentralized economies with high levels of productivity and low labor taxation. This result is confirmed by recent data from the OECD and explains the observed difficulties in achieving capital tax harmonization in the European Union. JEL Classification Numbers: F15, F38, H20, H87 Key Words: Centralization; Decentralization; Fiscal Competition; Partial Tax Harmonization.
    Keywords: Integració econòmica, Organització de Cooperació i Desenvolupament Econòmic, Països de la -- Política fiscal, Harmonització fiscal, 336 - Finances. Banca. Moneda. Borsa,
    Date: 2017
  3. By: Eric Zwick
    Abstract: Does tax code complexity alter corporate behavior? This paper investigates this question by focusing on the decision to claim refunds for tax losses. In a sample of 1.2M observations from the population of corporate tax returns, only 37% of eligible firms claim their refund. A simple cost-benefit analysis of the tax loss choice cannot explain low take-up, which motivates an investigation of how tax complexity alters this calculation. A research design exploiting tax preparer switches, deaths, and relocations shows that sophisticated preparers increase the claiming behavior of small and mid-market firms. Tax complexity decreases take-up among large firms through interactions of refund claims with other tax code provisions and with the audit process.
    JEL: D22 D92 E62 H2 H25 H3
    Date: 2018–03
  4. By: Xavier Gabaix (Harvard economics dpt); Emmanuel Farhi (Harvard University)
    Abstract: This paper develops a theory of optimal taxation with behavioral agents. We use a general behavioral framework that encompasses a wide range of behavioral biases such as misperceptions, internalities and mental accounting. We revisit the three pillars of optimal taxation: Ramsey (linear commodity taxation to raise revenues and redistribute), Pigou (linear commodity taxation to correct externalities) and Mirrlees (nonlinear income taxation). We show how the canonical optimal tax formulas are modified and lead to a rich set of novel economic insights. We also show how to incorporate nudges in the optimal taxation frameworks, and jointly characterize optimal taxes and nudges. We explore the Diamond-Mirrlees productive efficiency result and the Atkinson-Stiglitz uniform commodity taxation proposition, and find that they are more likely to fail with behavioral agents.
    Date: 2017
  5. By: Thomas Aronsson; Sören Blomquist
    Abstract: In this paper, we consider how the hours of work and retirement age ought to respond to a change in the uncertainty of the length of life. In a first best framework, where a benevolent government exercises perfect control over the individuals’ labor supply and retirement-decisions, the results show that a decrease in the standard deviation of life-length leads to an increase in the optimal retirement age and a decrease in the hours of work per period spent working. This result is robust, and is also derived in models of decentralized decision-making where individuals decide on their own consumption, labor supply, and retirement age, and where the government attempts to affect their behavior and welfare through redistribution and pension policy.
    Keywords: uncertain lifetime, retirement age, work hours, pension policy
    JEL: D61 D80 H21 H55
    Date: 2018
  6. By: Chowdhury Mohammad Sakib Anwar; Alexander Matros; Sonali Sen Gupta
    Abstract: This paper presents a model that links tax evasion, embezzlement, and the public good provision and suggests how they are interrelated. We characterize the conditions for three types of Nash equilibria: tax evasion, embezzlement, and efficient public good provision.
    Keywords: Tax evasion, Embezzlement, Corruption, Audits, Sanctions, Public goods
    JEL: H40 D83 D73
    Date: 2018
  7. By: Zarko Kalamov; Marco Runkel
    Abstract: This paper shows that if an individual’s health costs are U-shaped in weight with a minimum at some healthy weight level and if the individual has both self control problems and rational motives for over- or underweight, the optimal paternalistic tax on unhealthy food mitigates the individual’s weight problem (intensive margin), but does not induce the individual to choose healthy weight (extensive margin). Implementing healthy weight requires a further distortion (e.g. subsidy on other goods), which may render the tax on unhealthy food inferior to the option of not taxing the individual at all. In addition, with heterogeneous individuals the optimal uniform paternalistic tax may have the negative side effect of rendering otherwise healthy individuals underweight.
    Keywords: sin tax, paternalism, obesity, extensive versus intensive margin
    JEL: D03 D11 H21 I18
    Date: 2018
  8. By: Kambale Kavese (Eastern Cape Socio Economic Consultation Council); Andrew Phiri (Department of Economics, Nelson Mandela University)
    Abstract: This study uses the nonlinear autoregressive distributive lag (N-ARDL) model to investigate the expenditure-revenue relationship for all nine South African provinces using annual data spanning from 2000 to 2016. Whereas other cointegration models can only depict whether budgets are sustainable or not, the N-ARDL model presents features which further enable us to predict a course of action which individual provincial governments can take towards attaining higher levels of budgetary sustainability in both the short and the long-run. Ultimately, our empirical study demonstrates that the ‘one rule fit all’ strategy as suggested by previous studies may not be an appropriate approach seeing that provincial governments have differing requirements for attaining improved levels of budget sustainability.
    Keywords: Expenditure, Revenues, Budget sustainability, South Africa.
    JEL: C13 C32 H61 H72
    Date: 2018–01
  9. By: Stephen Gibbons; Olmo Silva; Maria Sánchez-Vidal
    Abstract: Housing subsidies for low income households are a central pillar of many welfare systems, but an expensive one. This paper investigates the consequences of an unusual policy aimed at reducing the burden of these subsidies by rationing tenants' use of space. Specifically, we study a policy introduced by the UK Government in 2013 which substantially cut housing benefits for tenants deemed to have a 'spare' bedroom - based on specific criteria related to household composition. Our study is the first to evaluate the impacts of the policy on its target group considering a range of outcomes. To do so, we use a difference-in-difference methodology that compares the observed behaviour of the treated households relative to a control group determined from the details of the policy rules. We find that - as expected - the treated group experienced losses to housing benefit and overall income. Although the policy was not successful in encouraging residential moves, it did incentivise people who moved to downsize - suggesting some success in terms of one of the policy goals, namely reducing 'under-occupancy' in the long run. We find no statistically significant effects on households' food consumption, savings or employment outcomes, despite the associated income reductions. Finally, we find some evidence of a reduction in self-reported satisfaction though this effect is not precisely estimated.
    Keywords: social housing, social rents, bedroom tax. Housing benefits
    JEL: H55 H2 R21 R28
    Date: 2018–04
  10. By: Philippe Bontems (TSE - Toulouse School of Economics - Toulouse School of Economics); Estelle Gozlan (ECO-PUB - Economie Publique - INRA - Institut National de la Recherche Agronomique - AgroParisTech)
    Abstract: In a small open economy, how should a government pursuing both environmental and redistributive objectives design domestic taxes when redistribution is costly? And how does trade liberalization affect the economy's levels of pollution and inequalities, when taxes are optimally and endogenously adjusted? Using a general equilibrium model under asymmetric information with two goods, two factors (skilled and unskilled labor), and pollution, this paper characterizes the optimal mixed tax system (nonlinear income tax and linear commodity and production taxes/subsidies) with both production and consumption externalities. While optimal income taxes are not directly affected by environmental externalities, conditions are derived under which under- or over-internalization of social marginal damage is optimal for redistributive considerations. Assuming that redistribution operates in favor of the unskilled workers and that the dirty sector is intensive in unskilled labor, simulations suggest that trade liberalization involves a clear trade-off between the reduction of inequalities and the control of pollution when the source of externality is only production; this is not necessarily true with a consumption externality. Finally, an increase in the willingness to redistribute income toward the unskilled results paradoxically in less pollution and more income inequalities.
    Abstract: Dans une petite économie ouverte, quel système fiscal est optimal pour un gouvernement concerné par l’environnement et les inégalités de revenu, lorsque la redistribution est coûteuse? Et comment la libéralisation des échanges affecte-t-elle les niveaux de pollution et les inégalités dans cette économie, lorsque les taxes sont optimales et ajustées de manière endogène? A l’aide d'un modèle d'équilibre général en information asymétrique avec deux biens, deux facteurs (main-d'œuvre qualifiée et non qualifiée) et la pollution, cet article caractérise le système fiscal mixte optimal (impôt non-linéaire sur le revenu et taxes/subventions linéaires sur la production et la consommation) en présence d’externalités de production et de consommation. Alors que les taux marginaux d’imposition sur le revenu sont pas directement affectés par les externalités environnementales, les conditions sont dérivées pour lesquelles la sous- ou sur-internalisation des dommages est optimale pour des considérations redistributives. En supposant que la redistribution opère en faveur des travailleurs non qualifiés et que le secteur polluant est relativement intensif en main-d'œuvre non qualifiée, les simulations suggèrent que la libéralisation du commerce implique un arbitrage clair entre la réduction des inégalités et la le contrôle de la pollution lorsque la pollution est une externalité de production; ce n'est pas nécessairement le cas avec une externalité de consommation. Enfin, une augmentation dans le poids des travailleurs non-qualifiés dans l’objectif du gouvernement se traduit paradoxalement par moins de pollution et plus d'inégalités de revenu.
    Keywords: Environnement,Inégalités de revenu,international trade,environmental control,modèle d'équilibre général,asymétrie d'information,inégalité des richesses,commerce international,taxation optimale,protection de l'environnement
    Date: 2018
  11. By: Jon Kristian Pareliussen; Hyunjeong Hwang; Heikki Viitamäki
    Abstract: The combination of different working-age benefits, childcare costs and income taxation creates complexity, reduces work incentives and holds back employment. This paper compares Finland’s benefit system with two benefit reform scenarios: a uniform benefit for all (“basic income”) and a universal tapering rule (“universal credit”). The scenarios are modelled in the OECD TaxBen model and the TUJA microsimulation model. We find that replacing current benefits with a basic income would improve incentives for many, but with a drastic redistribution of income and likely increasing poverty as a result. Merging working-age benefits with similar aims and coordinating their tapering against earnings would on the other hand consistently improve work incentives and transparency, while preserving or improving social protection.
    Keywords: basic income, Finland, inequality, universal credit, welfare reform, work incentives
    JEL: D31 H53 H55 J38
    Date: 2018–04–10
  12. By: Bartels, Charlotte (DIW Berlin); Shupe, Cortnie (DIW Berlin)
    Abstract: We compute participation tax rates across the EU and find that work disincentives inherent in tax-benefit systems largely depend on household composition and the individual's earner role within the household. We then estimate participation elasticities using an IV Group estimator that enables us to investigate the responsiveness of individuals to work incentives. We contribute to the literature on heterogeneous elasticities by providing estimates for different socioeconomic groups by country, gender and earner role within the household. Our results show an average elasticity of 0.08 for men and of 0.14 for women as well as a high degree of heterogeneity across countries. The commonly cited difference in elasticities between men and women stems predominantly from the earner role of the individual within the household and nearly disappears once we control for this factor.
    Keywords: participation elasticities, labor supply, taxation, cross-country comparisons
    JEL: H24 H31 J22 J65
    Date: 2018–02
  13. By: Lucilla Mc Laughlin; John Buchanan
    Abstract: This technical note is provided as guidance to tax administrations that are considering a program to enhance the tax compliance of high wealth individuals. The note explains the rationale for a specialized compliance program for this segment of the taxpayer base and provides guidance on defining the population of wealthy individuals. Advice is also given on how to assess readiness for such a compliance program, taking into account the legal framework, the political environment, the availability of the necessary data and the administration’s capacity to implement it. The note then gives practical advice on implementing a high wealth individual compliance program, using the compliance risk management model as its foundation.
    Keywords: Tax evasion;Tax Administration; Tax Compliance; Tax Avoidance; Tax Audit; Personal Income Tax; Compliance Risk Management; High Wealth Individual; Ultra-High Wealth Individual; HWI Compliance Program, Tax Administration, Tax Compliance, Tax Avoidance, Tax Audit; Personal Income Tax, Compliance Risk Management, High Wealth Individual, Ultra-High Wealth Individual, HWI Compliance Program, General, Personal Income and Other Nonbusiness Taxes and Subsidies, Household
    Date: 2017–05–05
  14. By: Armon Rezai; Lance Taylor; Duncan Foley (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: This research was performed pursuant to a grant from the AARP Innovation Challenge. To address the needs of two overlapping groups – low and moderate wage workers and workers in their 50s with no or inadequate retirement wealth – we propose a program of cost-neutral voluntary (at least initially) Social Security catch-up contributions, into which all workers would be defaulted, starting at age 40 or 50. The program would use the progressivity of the Social Security benefit formula to target low-wage workers and to prevent adverse selection.
    Keywords: Social Security, retirement savings, retirement wealth inequality
    JEL: H55 J26
    Date: 2017–05

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