nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒05‒28
eight papers chosen by
Thomas Andrén

  1. Tax reform to support growth and employment in Finland By Christophe André; Hyunjeong Hwang
  2. Benefit reform for employment and equal opportunity in Finland By Jon Kristian Pareliussen; Hyunjeong Hwang
  3. The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States: Reply to Jentsch and Lunsford By Mertens, Karel; Ravn, Morten O.
  4. An assessment of local fiscal autonomy: facts and myths By Beata Guziejewska
  5. Immigrant Responses to Social Insurance Generosity By Bratsberg, Bernt; Raaum, Oddbjørn; Røed, Knut
  6. Effects of Taxes and Safety Net Pensions on life-cycle Labor Supply, Savings and Human Capital: the Case of Australia By Fedor Iskhakov; Michael Keane
  7. Corporate Profit Taxes, Capital Expenditure and Real Wages: The analytics behind a contentious debate By Buiter, Willem H.; Sibert, Anne
  8. Does the framing of patient cost-sharing incentives matter? The effects of deductibles vs. no-claim refunds By Hayen, Arthur; Klein, Tobias; Salm, Martin

  1. By: Christophe André (OECD); Hyunjeong Hwang (OECD)
    Abstract: Finland raises a large amount of taxes to finance high-quality public services and redistribute income. Public finances are currently relatively solid and taxes and transfers reduce income inequality significantly. However, a rapidly ageing population pushes up public spending, while globalisation creates challenges in raising revenue. Hence, ensuring long-term fiscal sustainability requires both containing spending through efficiency gains in the provision of public services and raising revenue in a way that minimises deadweight costs and distortions weighing on growth and employment. Reducing further the tax wedge on labour income would lift employment. More revenue could be raised through a reduction in the range of goods and services subject to reduced VAT rates, higher taxes on consumption that is harmful to the environment or health and higher property taxes. A competitive corporate taxation, combined with international cooperation to avoid base erosion and profit shifting, is needed to foster local production.
    Keywords: corporate income tax, environmental taxation, Finland, personal income tax, subsidies, tax evasion, taxation
    JEL: H23 H24 H25 H26
    Date: 2018–05–29
  2. By: Jon Kristian Pareliussen; Hyunjeong Hwang
    Abstract: The combination of different working-age benefits, childcare costs and income taxation creates complexity, reduces work incentives and holds back employment. Major disincentives in Finland are related to tapering rules for unemployment benefits, social assistance and the housing benefit, the extended unemployment benefit for older workers, the childcare fee structure and the homecare allowance. Improved benefit design combined with efficient activation policies can reduce complexity and remove the strongest disincentives while minimising adverse fiscal and social impacts. 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 social protection. Once the new income registry comes online, linking benefit payments to real-time incomes, combined with strengthened work incentives, would make for a truly efficient and inclusive benefit system, fit for the future of work. This Working Paper relates to the 2018 OECD Economic Survey of Finland ( y-finland.htm).
    Keywords: basic income, Finland, inequality, universal credit, welfare reform, work incentives
    JEL: D3 H53 H55 J38
    Date: 2018–05–25
  3. By: Mertens, Karel (Federal Reserve Bank of Dallas); Ravn, Morten O. (University College London)
    Abstract: In this reply to a comment by Jentsch and Lunsford, we show that, when focusing on the relevant impulse responses, the evidence for economic and statistically significant macroeconomic effects of tax changes in Mertens and Ravn (2013) remains present for a range of asymptotically valid inference methods.
    Keywords: Fiscal Policy; structural vector autoregressions; tax shocks
    JEL: C32 E62 H24 H25 H31 H32
    Date: 2018–05–01
  4. By: Beata Guziejewska (University of Lodz)
    Abstract: The presentation deals with the problem of shaping the decentralized system of public finance and interpretation of fiscal autonomy indicators. The analysis is theoretical and empirical. In the theory we can discuss two extreme scenarios: decentralised (60% own revenue, 40 % external revenue) and centralised system of public finance (40% own revenue, 60 % external revenue). If we assume only 40% share of own revenue, taxes, in the structure of financing sources for local government units, the consequence of this is low budget resilience to unfavourable external and internal factors and high probability of occurrence of broadly understood negative income shocks. The aim of the discussion is to analyse the trends in the practice of local government finances in Poland and selected countries of Central and Eastern Europe. The literature of the subject, studies by international institutions as well as data from Eurostat and EC are used in the deliberations. The discussed countries differ significantly in the scope of fiscal decentralisation. Latvia, the Czech Republic and Poland seem to be most advanced in the process. However the example of Poland shows limits and difficulties with interpretation of statistical measures. It is necessary to look at the categories of revenues which belong to the so-called "own revenues". It is questionable that in Poland we treat in the statistics the shares in Personal Income Tax and Corporate Income Tax as own revenues. Local government units do not exert any influence on the structure and amount of PIT and CIT (category of shared taxes). The autonomy in expenditure without real fiscal autonomy and responsibility leads to fiscal illusions and undermine the local democracy.
    Keywords: public finance, fiscal decentralization, local self-government, fiscal autonomy
    JEL: H70 H71 H77
    Date: 2018–04
  5. By: Bratsberg, Bernt (Ragnar Frisch Centre for Economic Research); Raaum, Oddbjørn (Ragnar Frisch Centre for Economic Research); Røed, Knut (Ragnar Frisch Centre for Economic Research)
    Abstract: Immigrants from low‐income source countries tend to be underrepresented in employment and overrepresented in social insurance programs. Based on administrative data from Norway, we examine how these gaps reflect systematic differences in the impacts of social insurance benefits on work incentives. Drawing on a benefit formula reform of the temporary disability insurance program, we identify behavioral employment and earnings responses to changes in benefits, and find that responses are significantly larger for immigrants. Among female immigrant program participants, earnings of the male spouse also drop in response to more generous benefits. We uncover stronger behavioral responses among natives with characteristics similar to those of immigrants.
    Keywords: immigrants, labor supply, social insurance
    JEL: H53 J15 J22
    Date: 2018–04
  6. By: Fedor Iskhakov; Michael Keane
    Abstract: In this paper we structurally estimate a life-cycle model of consumption/savings, labor supply and retirement, using data from the Australian HILDA panel. We use the model to evaluate effects of the Australian aged pension system and tax policy on labor supply, consumption and retirement decisions. Our model accounts for human capital accumulation via learning by doing, as well as wealth accumulation and decumulation over the life cycle, uninsurable wage risk, credit constraints, a non-absorbing retirement decision, and labor market frictions. We account for the ’bunching’ of hours by discretizing job offers into several hours levels, allowing us to investigate labor supply on both intensive and extensive margins. Our model allows us to quantify the effects of anticipated and unanticipated tax and pension policy changes at different points of the life cycle. Our results imply that the Australian Aged Pension system as currently designed is very poorly targeted, so that means testing and other program rules could be improved.
    Keywords: Labor supply, human capital accumulation, retirement, pensions, taxes, struc-tural model, anticipated and unanticipated policy changes, counterfactual simulations
    JEL: J22 J24 J26 C63
    Date: 2018–05
  7. By: Buiter, Willem H.; Sibert, Anne
    Abstract: The recent reduction in the US corporate profit tax rate from 35 percent to 21 percent has triggered renewed interest in the impact of a cut in the corporate tax rate on capital accumulation and real wages. This theoretical contribution demonstrates that the familiar proposition that a cut in the corporate profit tax rate boosts the capital intensity of production and the real wage is sensitive to a number of key assumptions. Even when the real interest rate is exogenously given, full deductibility of capital expenditure from the corporate profit tax base will result in no impact of a corporate profit tax rate cut on the incentive to invest. Adding deductibility of interest can result in a negative effect on the capital intensity of production of a corporate profit tax rate cut. When the real interest rate is endogenous, we use the "perpetual youth" OLG model to demonstrate that the effects on consumption demand of a corporate profit tax cut will reduce the impact on capital intensity of a corporate profit tax cut if the tax cut is funded by higher lump-sum taxes on "permanent income" households. We have not been able to find examples where the capital intensity impact is reversed. Alternative funding rules (e.g. lower public consumption purchases) and the introduction of "Keynesian" consumers could lead to a larger positive effect on capital intensity from a cut in the corporate profit tax rate.
    Keywords: corporate profit tax; expensing; capital expenditure; OLG model.; Public Finance; taxation
    JEL: E21 E22 E62 E63 H2 H25 H3
    Date: 2018–05
  8. By: Hayen, Arthur; Klein, Tobias; Salm, Martin
    Abstract: In light of increasing health care expenditures, patient cost-sharing schemes have emerged as one of the main policy tools to reduce medical spending. We show that the effect of patient cost-sharing schemes on health care expenditures is not only determined by the economic incentives they provide, but also by the way these economic incentives are framed. Patients react to changes in economic incentives almost twice as strongly under a deductible policy than under a no-claims refund policy. Our preferred explanation is that individuals are loss-averse and respond differently to both schemes because they perceive deductible payments as a loss and no-claim refunds as a gain.
    Keywords: framing; Health Insurance; loss aversion.; Patient cost-sharing
    JEL: D91 H51 I13
    Date: 2018–05

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