nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒04‒23
twelve papers chosen by
Thomas Andrén

  1. Optimal Taxation of Secondary Earners in the Netherlands: Has Equity Lost Ground? By Henk-Wim de Boer; Egbert Jongen; Patrick Koot
  2. The case for NIT+FT in Europe. An empirical optimal taxation exercise By ISLAM Nizamul; COLOMBINO Ugo
  3. Should CBA’s include a correction for the marginal excess burden of taxation? By Frits Bos; Thomas van der Pol; Gerbert Romijn
  4. Optimal Income Support for Lone Parents in the Netherlands: Are We There Yet? By Henk-Wim de Boer; Egbert Jongen
  5. Optimal Tax Routing: Network Analysis of FDI diversion By Maarten van 't Riet; Arjan Lejour
  6. The Elasticity of Taxable Income for the Self-Employed: Heterogeneity across Reforms and Income Levels By Nicole Bosch; Henk-Wim de Boer
  7. Firm types, price-setting strategies, and consumption-tax incidence? By Nordström Skans, Oskar; Harju, Jarkko; Kosonen, Tuomas
  8. Tax Competition - An intertemporal perspective By Nora Paulus; Patrice Pieretti; Benteng Zou
  9. Using Tax Deductions to Promote Lifelong Learning: Real and Shifting Responses By Wiljan van den Berge; Egbert Jongen; Karen van der Wiel
  10. Evaluating the Aggregate Effects of Tax and Benefit Reforms By Michal Horvath; Matus Senaj; Zuzana Siebertova; Norbert Svarda; Jana Valachyova
  11. Optimal Capital Taxation with Incomplete Markets and Schumpeterian Growth By Marco Cozzi
  12. Lobbying and the International Fight Against Tax Havens By Hauck, Tobias

  1. By: Henk-Wim de Boer (CPB Netherlands Bureau for Economic Policy Analysis); Egbert Jongen (CPB Netherlands Bureau for Economic Policy Analysis); Patrick Koot (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: The Netherlands witnessed major reforms in the taxation of (potential) secondary earners over the past decade. Using the inverse-optimal method of optimal taxation we recover the implicit social welfare weights of single- and dual-earner couples over time. The social welfare weights are grosso modo well-behaved before the reforms. However, after the reforms, they are no longer monotonically declining in income and sometimes negative, suggesting that Pareto-improving reforms are possible. Taken at face value, these results suggest an imbalance between equity and efficiency. However, other considerations may rationalize these fi ndings, like differences in preferences over formal income and informal care.
    JEL: C63 H21 H31
    Date: 2018–02
  2. By: ISLAM Nizamul; COLOMBINO Ugo
    Abstract: We present an exercise in empirical optimal taxation for a sample of 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 (means-tested) Basic Income, Unconditional Basic Income, In-Work Benefits and General Negative Income Tax, combined with a Flat Tax above the exemption level. The analysis in most cases show that: the General Negative Income Tax strictly dominates the other rules, including the current ones; 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 is strictly dominated by the General Negative Income Tax and by the Unconditional Basic Income.
    Keywords: Basic Income; Negative Income Tax; Optimal tax; Micro-simulation; Welfare
    JEL: C18 H21
    Date: 2018–04
  3. By: Frits Bos (CPB Netherlands Bureau for Economic Policy Analysis); Thomas van der Pol (CPB Netherlands Bureau for Economic Policy Analysis); Gerbert Romijn (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: According to economic theory, taxation drives a wedge between private and public benefits, which distorts labour supply, consumption and investment and leads to loss of welfare. One would therefore expect that in cost-benefit analysis (CBA) of public expenditure a correction is made for the costs of taxation, i.e. for the marginal excess burden of taxation (MEB). However, looking at CBA practice all over the world, textbooks on CBA and various specific CBA guidelines no consensus exists about such a correction. This paper provides for the first time an overview of the theoretical, empirical and practical arguments in favor or against a MEB correction. It argues that in general the best approach for CBA’s is to assume that the MEB is broadly counterbalanced by the benefits of redistribution of these taxes. This assumption is consistent with the preferences for equality in a country’s current tax system and is a simple, pragmatic and politically neutral assumption. This assumption does not imply that the tax system is optimal or that CBA’s should be distributionally weighted. As a consequence, the preferred approach is to assume in general that the marginal cost of public funds is equal to one and then no correction is needed in CBAs for the MEB. Choosing an alternative source of financing, i.e. other than general tax revenues, should be regarded as a separate policy measure that should be analysed separately in a CBA.
    JEL: D61 H20 H43
    Date: 2018–01
  4. By: Henk-Wim de Boer (CPB Netherlands Bureau for Economic Policy Analysis); Egbert Jongen (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: The Netherlands witnessed major reforms in income support for lone parents over the past decade. The goals of these reforms were to improve the financial incentives to work and to simplify the system. We consider whether the new system can be considered (closer to) `optimal'. We employ the inverse-optimal method of optimal taxation to recover the implicit social welfare weights before and after the reforms. Before the reforms, the social welfare weights are not monotonically declining in income. After the reforms, this anomaly has disappeared for the group of lone parents as a whole, but remains for the subgroup of lone parents with a youngest child 0-3 years old. An optimal tax analysis suggests that, for a wide range of redistributive preferences, subsidies for working lone parents with a low income could be increased further.
    JEL: C63 H21 H31
    Date: 2017–09
  5. By: Maarten van 't Riet (CPB Netherlands Bureau for Economic Policy Analysis); Arjan Lejour (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: The international corporate tax system is considered as a network and, just like for transportation, ‘shortest’ paths are computed, minimizing tax payments for multinational enterprises when repatriating profits. We include corporate income tax rates, withholding taxes on dividends, double tax treaties and the double taxation relief methods. We find that treaty shopping leads to an average potential reduction of the tax burden on repatriated dividends of about 6 percentage points. Moreover, an indicator for centrality in the tax network identifies the United Kingdom, Luxembourg and the Netherlands, amongst others, as the most important conduit countries. Tax havens do not have a crucial role in treaty shopping. In the regression analysis we find that the centrality indicators are robustly significant explanatory variables for bilateral FDI stocks. This also holds for our treaty shopping indicator.
    JEL: F23 H25 H26 H87
    Date: 2017–04
  6. By: Nicole Bosch (CPB Netherlands Bureau for Economic Policy Analysis); Henk-Wim de Boer (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: This paper studies the causal relation between effective marginal tax rates for the self-employed and their taxable income using panel data for the period 1999-2012. This period contains three tax reforms that we use to identify the elasticity of taxable income (ETI). We estimate an ETI of 0.3 for the self-employed. Individuals respond stronger to the major tax reform in 2001 than to two smaller reforms in 2005 and 2007. We reveal signifi cant heterogeneity in ETI across the income distribution and occupational choice. Contrary to earlier studies, the ETI is higher for self-employed with a lower income than for self-employed with a higher income. We also find that self-employed respond much stronger to financial incentives than wage earners. However, there is little heterogeneity in responses for demographic subgroups: women only have a slightly higher ETI than men, and the ETI is roughly similar across educational levels. We carefully assess our instruments using recent insights in the ETI literature. Instruments based on lagged income are not preferable for our sample of self-employed who experience high variation in income. And the choice of sampling weights - base-year income or lagged income - matters in our analysis which again demonstrates the high heterogeneity across income levels.
    JEL: H24 H31 J22
    Date: 2017–06
  7. By: Nordström Skans, Oskar (Uppsala Universitet, Nationalekonomiska institutionen); Harju, Jarkko (Labour Institute for Economic Research in Helsinki and CESifo); Kosonen, Tuomas (Labour Institute for Economic Research in Helsinki and CESifo)
    Abstract: We analyze price responses to large restaurant VAT rate reductions in two different European countries. Our results show that responses in the short and medium run were clustered around two focal points of zero passthrough and full pass-through. Differences between independent restaurants and chains is the key explanation for this pattern. While nearly all independent restaurants effectively ignored the tax reductions and left consumer prices unchanged, a substantial fraction of restaurants belonging to chains chose a rapid and complete pass-through. In the longer run, prices converged, but primarily through a price reversion among chain restaurants. The stark difference in price responses does not appear to arise because of different market characteristics such as location, initial price levels, meal types or restaurant segment.
    Keywords: firm types; VAT incidence; price setting; restaurants
    JEL: E31 H22 H32
    Date: 2018–04–12
  8. By: Nora Paulus (CREA, Université du Luxembourg); Patrice Pieretti (CREA, Université du Luxembourg); Benteng Zou (CREA, Université du Luxembourg)
    Abstract: The paper focuses on intertemporal tax competition between jurisdictions that differ in size. Given that the existing literature is mainly based on static models, it is in- teresting to investigate which new insights tax competition in an intertemporal setting may provide. In this respect, how does the fact that agents anticipate possible future changes, once they moved capital abroad, modify their behavior and the tax policy of the competing jurisdictions? Does tax competition become more intense? Are capital outflows and tax losses incurred by high tax jurisdictions exacerbated ? To answer these questions, we assume that a small and a large country compete for internationally mobile capital within a two-period model. We demonstrate that tax competition is less fierce in an intertemporal setting relative to a static one. It also appears that the tax loss of the large country induced by tax competition is higher relative to a static model. This means that tax competition becomes more deleterious for the country that suffers from capital outflows.
    Keywords: Intertemporal tax competition, Mobile capital, Home attachment, Country size asymmetry
    JEL: F21 H21 H73
    Date: 2018
  9. By: Wiljan van den Berge (CPB Netherlands Bureau for Economic Policy Analysis); Egbert Jongen (CPB Netherlands Bureau for Economic Policy Analysis); Karen van der Wiel (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: Policymakers are concerned about potential underinvestment in lifelong learning. In this paper we study to what extent a tax deduction helps to stimulate post-initial training. Speci fically, we employ a regression kink and regression discontinuity design as jumps in tax bracket rates generate exogenous variation in the effective costs of lifelong learning. Using high quality data on tax returns of the universe of Dutch taxpayers, we nd that the tax deduction has heterogeneous effects on lifelong learning. Low-income singles show no response. For high-income singles we nd an effect of 10% on the probability to use the tax deduction. Furthermore, ignoring shifting of expenses between partners leads to spurious large estimates for primary earners and spurious negative estimates for secondary earners.
    JEL: C21 H20 J24
    Date: 2017–06
  10. By: Michal Horvath (University of York); Matus Senaj (Council for Budget Responsibility); Zuzana Siebertova (Council for Budget Responsibility); Norbert Svarda (Council for Budget Responsibility); Jana Valachyova (Council for Budget Responsibility)
    Abstract: The paper introduces a new way of linking microsimulation models with dynamic general equilibrium frameworks to obtain an evaluation of the impact of detailed tax and benefit measures on the aggregate economy. The approach involving polynomial approximation to aggregated output from behavioural microsimulation permits the solution for the long-run steady state and the transition path in one numerical simulation of the dynamic aggregate economy. The practical usefulness of the approach is demonstrated by evaluating actual and hypothetical tax reforms in the context of Slovakia.
    Keywords: microsimulation, dynamic general equilibrium, unemployment, labour supply elasticity, tax reform
    JEL: E24 H24 H31 J22
    Date: 2018–04
  11. By: Marco Cozzi (Department of Economics, University of Victoria)
    Abstract: This paper characterizes quantitatively the optimal capital income tax rate in an OLG economy with uninsurable income risk, incomplete markets and endogenous Schumpeterian growth. Contrary to the most recent literature, it is found that it is virtually never optimal to tax capital: under the optimal scheme, in a series of cases, the highest proportional tax rate on capital is found to be less than 0.2%. The reason for this result lies in the reduced GDP (and wage) growth rate stemming from a higher capital tax rate. In General Equilibrium, the interest rate rises, and the increased cost of capital reduces the endogenous rate of innovation, leading to a negative response of the growth rate. Although the equilibrium effect on the growth rate is found to be quantitatively modest (approximately half a percentage point), it still has a first order consequence on welfare. The results show that moving to the optimal income tax schedule entails large welfare gains, approximately 5% in consumption equivalent. The results are robust along a number of dimensions, including the specification of preferences. An alternative formulation of the utility function,taken from a class consistent with a Balanced Growth Path, is calibrated to obtain an empirically plausible value for the Frisch elasticity of 0.5, and confirms all the results, both qualitatively and quantitatively. JEL Classification: D15, E21, H21, O41
    Keywords: Capital and Income Taxation, Heterogeneous Agents, Incomplete Markets,Endogenous Growth, Welfare.
    Date: 2018–04–17
  12. By: Hauck, Tobias
    Abstract: Despite a variety of measures taken by high tax countries, the international fight against tax havens so far remained rather ineffective. This paper introduces lobbying as a possible explanation for this observation. I analyze the international fight against tax havens in a two country model in which the onshore country exerts pressure on domestic profit shifting firms and the low tax country lobbies against this measure. In this framework, I find that pressure and lobbying are strategic substitutes and that there is an extensive margin incentive for offshore lobbying. I also show that an increase in international integration leads to a decrease in the level of profit shifting, when starting out at high levels of international frictions. Finally, when allowing for a second low tax jurisdiction, the overall level of lobbying increases, but less than proportionally, as free-riding occurs.
    Keywords: International Taxation; Tax Avoidance; Pressure Policies; Tax Havens; International Lobbying
    JEL: H25 H26 F23
    Date: 2018–04

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