nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒06‒11
eighteen papers chosen by
Thomas Andrén

  1. Corporate Tax Cuts Increase Income Inequality By Suresh Nallareddy; Ethan Rouen; Juan Carlos Suárez Serrato
  2. Inheritance taxation in a model with intergenerational time transfers By Pascal Belan; Erwan Moussault
  3. An Estimable Model of Income Redistribution in a Federation: Musgrave Meets Oates By Milligan Kevin; Michael Smart
  4. Corporate Income Taxes Around the World - A Survey on Forward-looking Tax Measures and Two Applications By Elias Steinmüller; Georg U. Thunecke; Georg Wamser
  5. Capital Income Taxation, Economic Growth, and the Politics of Public Education By Ono, Tetsuo; Uchida, Yuki
  6. The Effects of Official and Unofficial Information on Tax Compliance By Filomena Garcia; Luca David Opromolla; Andrea Vezzulli; Rafael Marques
  7. Relocation of the Rich: Migration in Response to Top Tax Rate Changes from Spanish Reforms By David R. Agrawal; Dirk Foremny
  8. Taxes and growth: new narrative evidence from interwar Britain By Cloyne, James; Dimsdale, Nicholas; Postel-Vinay, Natacha
  9. How Should Capital Be Taxed? Theory and Evidence from Sweden By Bastani, Spencer; Waldenström, Daniel
  10. On the fairness and the redistributive effects of PIT in Central and Eastern European countries By Stoian, Andreea; Vintila, Nicoleta; Tatu, Lucian; Miricescu, Emilian
  11. Aggressive tax planning indicators By IHS; Dondena; CPB
  12. The sources of VAT gaps in WAEMU: case studies on Benin and Burkina Faso. By Romain Houssa; Kelbesa Megersa; Roukiatou Nikiema
  13. Investing in People: The Case for Human Capital Tax Credits By Rui Costa; Nikhil Datta; Stephen Machin; Sandra McNally
  14. Measuring the Redistributive Effects of China's Personal Income Tax By Li Du and Zhongxiang Zhang
  15. Taxation and the Allocation of Risk Inside the Multinational Firm By Johannes Becker; Niels Johannesen; Nadine Riedel
  16. Taxpayer behaviour and institutions in Sub-Saharan Africa By Roukiatou Nikiema; Pam Zahonogo
  17. Uncertain altruism and non-linear long-term care policies By Canta, Chiara; Cremer, Helmuth
  18. Tax Policy Measures in Advanced and Emerging Economies: A Novel Database By David Amaglobeli; Valerio Crispolti; Era Dabla-Norris; Pooja Karnane; Florian Misch

  1. By: Suresh Nallareddy; Ethan Rouen; Juan Carlos Suárez Serrato
    Abstract: This paper studies the effects of corporate tax changes on income inequality. Using state corporate tax rate changes as a setting, we show that cutting state corporate tax rates leads to increases in income inequality. This result is robust to using regression and matching approaches, and to controlling for a host of potential confounders. Contrary to the effects of tax cuts, we find no effects of tax increases on income inequality at the state level. We then use data from the IRS Statistics of Income to explore the mechanism behind the rise in income inequality. We find tax cuts lead to higher reported capital income and a decrease in wage and salary income. These effects are concentrated among top earners, and we find no effects for those reporting less than $200,000 in income. This result provides evidence that one mechanism for the relation between tax cuts and inequality is that wealthy individuals shift their income to reduce taxes while others do not. Finally, we explore the effects of corporate tax cuts on capital investment using data from the Annual Survey of Manufactures. We find that tax cuts lead to an increase in real investment, suggesting a trade-off between investment and inequality at the state level.
    JEL: H2 H22 H25 H7 H71
    Date: 2018–05
  2. By: Pascal Belan; Erwan Moussault (Université de Cergy-Pontoise, THEMA)
    Abstract: We consider a two-period overlapping generation model with rational altruism a la Barro, where time transfers and bequests are available to parents. Starting from a steady state where public spendings are nanced through taxation on capital income and labor income, we analyze a tax reform that consists in a shift of the tax burden from capital income tax towards inheritance tax. In the standard Barro model with no time transfer and inelastic labor supply, such a policy decreases steady-state welfare. In our setting, inheritance tax modi es parent's trade-o between time transfers and bequests. We identify situations where the tax reform increases welfare for all generations. Welfare improvement mainly depends on the magnitude of the e ect of higher time transfers on the labor supply of the young.
    Keywords: family transfers, altruism, time transfers, inheritance tax.
    JEL: D64 H22 H24 J22
    Date: 2018
  3. By: Milligan Kevin; Michael Smart
    Abstract: We develop a theory of cross-border income shifting in response to subnational personal taxation in a federation and examine its implications for the excess burden of personal taxes. We show how a properly-chosen federal tax rate can offset the fiscal externality between states and facilitate decentralization, even in a heterogeneous federation where unitary taxation is suboptimal. Optimal taxes depend on the elasticities of national tax avoidance and of cross-state tax base shifting. We estimate these elasticities around a tax decentralization reform in Canada, finding both to be empirically relevant. We discuss the implications for optimal federalism.
    Keywords: taxation, redistribution, fiscal federalism
    JEL: H20
    Date: 2018
  4. By: Elias Steinmüller; Georg U. Thunecke; Georg Wamser
    Abstract: This study provides a survey on corporate taxes around the world. Our analysis has three main objectives. First, we collect tax data and calculate (forward-looking) effective tax measures for a large sample of countries and recent years. We particularly describe how these measures vary over time and across countries. Second, we augment the country-level information with firm- and industry-level data (providing weights for financial structure and asset composition) to contrast statutory measures at the level of countries with measures accounting for firm- and industry-specific weights. Third, we utilize our new data to (i) estimate Laffer-Curves, i.e., the relationship between statutory tax rate and tax revenue, based on non-parametric as well as parametric specifications; (ii) examine how taxes affect investment in fixed assets at the level of firms. As for the latter, our preferred specification, in which we use a firm-specific effective marginal tax rate to capture tax incentives, suggests an elasticity of -0.33.
    Keywords: corporate taxes, depreciation allowances, effective marginal (average) tax rates, Laffer-Curve, investment responses
    JEL: H25 H21 F23
    Date: 2018
  5. By: Ono, Tetsuo; Uchida, Yuki
    Abstract: This study considers the politics of public education and its impacts on economic growth and welfare across generations. Public education is funded by taxing the labor income of the working generation and capital income of the retired. We employ probabilistic voting to demonstrate the politics of taxes and expenditure and show that aging results in a shift of the tax burden from the old to the young and a slowdown of economic growth. We then consider three alternative constraints that limit the choice of taxes and/or expenditure: a minimum level of public education expenditure, an upper limit of the capital income tax rate, and a combination of the two. These constraints all create a trade-off between current and future generations in terms of welfare.
    Keywords: Public education, Economic growth, Capital income tax, Political equilibrium
    JEL: D70 E24 H52
    Date: 2018–02–20
  6. By: Filomena Garcia; Luca David Opromolla; Andrea Vezzulli; Rafael Marques
    Abstract: The administration of tax policy has shifted its focus from enforcement to complementary instruments aimed at creating a social norm of tax compliance. In this paper we provide an analysis of the effects of the dissemination of information regarding the past degree of tax evasion at the social level on the current individual tax compliance behavior. We build an experiment where, for given levels of audit probabilities, fines and tax rates, subjects have to declare their income after receiving either a communication of the official average tax evasion rate or a private message from a group of randomly matched peers about their tax behavior. We use the experimental data to estimate a dynamic econometric model of tax evasion. The econometric model extends the Allingham-Sandmo-Yitzhaki tax evasion model to include self-consistency and endogenous social interactions among taxpayers. We find four main results. First, tax compliance is very persistent. Second, the higher the official past tax evasion rate the higher the degree of persistence: evaders are more likely to evade again, and compliant individuals are more likely to comply again. Third, when all peers communicate to have evaded (complied) in the past, both evaders and compliant individuals are more likely to evade (comply). Fourth, while both treatments, and especially the unofficial information treatment, are associated, in the context of our experiment, with a significantly larger growth in evasion intensity, the aggregate effect depends on the characteristics of the population. In countries with inherently low levels of tax evasion, official information can have beneficial effects by consolidating the behavior of compliant individuals. However, in countries with inherently high levels of tax evasion, official information can have detrimental effects by intensifying the behavior of evaders. In both cases, the impact of official information is magnified in the presence of strong peer effects.
    Keywords: tax morale, information, tax evasion, experiment, peer effects
    JEL: H26 D63 C24 C92 Z13
    Date: 2018
  7. By: David R. Agrawal; Dirk Foremny
    Abstract: A recent Spanish tax reform granted regions the authority to set income tax rates, resulting in substantial tax differentials. We use individual-level information from Social Security records over a period of one decade. Conditional on moving, taxes have a significant effect on location choice. A one percent increase in the net of tax rate for a region relative to others increases the probability of moving to that region by 1.7 percentage points. Focusing on the stock of top-taxpayers, we estimate an elasticity of the number of top taxpayers with respect to net-of-tax rates of 0.85. Using this elasticity, a theoretical model implies that the mechanical increase in tax revenue due to higher tax rates is larger than the loss in tax revenue from the out-ow of migration.
    Keywords: migration, taxes, mobility, rich, fiscal decentralization
    JEL: H24 H31 H73 J61 R23
    Date: 2018
  8. By: Cloyne, James; Dimsdale, Nicholas; Postel-Vinay, Natacha
    Abstract: The impact of fiscal policy on economic activity is still a matter of great debate. And, ever since Keynes first commented on it, interwar Britain, 1918-1939, has remained a particularly contentious case - not least because of its high debt environment and turbulent business cycle. This debate has often focused on the effects of government spending, but little is known about the effects of tax changes. In fact, a number of tax reforms in the period focused on long-term and social objectives, often reflecting the personality of British Chancellors. Based on extensive historiographical research, we apply a narrative approach to the interwar period in Britain and isolate a new series of exogenous tax changes. We find that tax changes have a sizable effect on GDP, with multipliers around 0.5 on impact and exceeding 2 within two years. Our estimates contribute to the historical debate about fiscal policy in the interwar period and are remarkably similar to the sizable tax multipliers found after WWII.
    Keywords: Macroeconomic Policy; Fiscal Policy; Taxation; Public Finance; Fiscal History; Multiplier; Narrative Approach
    JEL: E23 E32 E62 H2 H30 N1 N44
    Date: 2018–05
  9. By: Bastani, Spencer (Uppsala University); Waldenström, Daniel (Paris School of Economics)
    Abstract: This paper presents a comprehensive analysis of the role of capital taxation in advanced economies with a focus on the Swedish experience. We synthesize the existing theoretical literature, present facts about the capital stock and its distribution, review current capital tax practices and empirical findings regarding their effects on economic activity. The paper also examines the political feasibility of capital taxation by presenting results from a unique attitude survey targeted to a large representative sample of the Swedish population. Finally, we tie together our findings and discuss their implications for tax policy.
    Keywords: optimal taxation, capital taxation, wealth tax, inheritance tax, corporate tax, income inequality, wealth inequality, political economy, preferences for redistribution
    JEL: D31 H21 H24
    Date: 2018–04
  10. By: Stoian, Andreea; Vintila, Nicoleta; Tatu, Lucian; Miricescu, Emilian
    Abstract: The aim of this paper is to investigate the fairness and the redistributive effects of personal income tax (PIT) in seven Central and Eastern European countries, namely: Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania and Romania. Following Kakwani and Lambert (1998) methodology, we test tax equity and progressivity. We study the asymmetry of salary income distribution in order to examine the horizontal equity among individuals in the same group. We calculate the Gini coefficients in order to investigate the redistributive effects of PIT regulatory frameworks. We find that tax equity is fulfilled by all countries. However, PIT regulations does not allow for strong progressivity and for redistributive effects.
    Keywords: horizontal equity; vertical equity; personal income tax; income distribution; inequality; Gini; Central and Eastern European
    JEL: H2 H24
    Date: 2018–03
  11. By: IHS; Dondena; CPB
    Abstract: The aim of this study is to provide economic evidence of the relevance of aggressive tax planning (ATP) structures for all EU Member States. The study relies on economic indicators available at macro-level and on indicators derived from firm-level data. The objective is indeed to look at the relevance of ATP for all Member States through these two complementary angles. For each indicator, the study identifies outliers based on a consistent methodology. None of the indicators provides per se an irrefutable causality towards aggressive tax planning. However, considered together, the set of indicators shall be seen as a "body of evidence". While there are some data limitation, the study provides a broad picture of which Member States appear to be exposed to ATP structures, and how it impacts on their tax base (erosion or increase). The discussed ATP structures can be grouped into three main channels: i) ATP via interest payments, ii) ATP via royalty payments and iii) ATP via strategic transfer pricing. In addition to general indicators assessing the overall exposure to ATP, we also derive specific indicators for each of the ATP channels. In combination, these indicators allow to classify entities within multinational enterprises (MNEs) into three types: i) target entities, where the tax base is reduced ii) the lower tax entities where the tax base is increased but taxed at a lower rate, and iii) conduit entities which are in a group with ATP activities but no clear effect on the tax base is observable.
    Keywords: taxation, aggressive tax planning, interest payments, royalty payments, transfer pricing
    JEL: H25 H26 O21
    Date: 2018–02
  12. By: Romain Houssa (CRED, University of Namur); Kelbesa Megersa (CRED, University of Namur); Roukiatou Nikiema (Ouaga II University)
    Abstract: This paper examines the performance of the Value-Added Tax (VAT) in Benin and Burkina Faso since its introduction in the early 1990s. Both countries are witnessing a gradual rise in tax revenue over the study period. The paper also delivers a sectoral breakdown of inefficiencies in VAT-revenue collection in the two countries. We additionally decompose VAT gap in to ‘compliance gap’ and the ‘policy gap’. We find that the sectors responsible for ‘compliance gap’ are largely similar in the two countries. The gaps in VAT collection represent a considerable loss in potential tax revenue. Addressing them will support the ‘Domestic Resource Mobilization’ (DRM) efforts of the two countries.
    Keywords: Value-Added Tax (VAT), Domestic Resources Mobilization (DRM), Tax Reform, Institutional Quality, Economic development
    JEL: H20 H21 H25 H26 O17 O11
    Date: 2017–10
  13. By: Rui Costa (London School of Economics); Nikhil Datta (London School of Economics); Stephen Machin (University College London); Sandra McNally (London School of Economics)
    Abstract: Estimates from the US suggest that increasing levels of human capital over the second half of the last century accounted for approximately one third of productivity growth, while some estimates of the social rate of return to R&D in the manufacturing sector have exceeded one hundred percent. Despite the contribution of both human capital and R&D to economic growth, the UK fiscal system does not treat the two equally when it comes to employer incentives to invest. Firms that invest in R&D are able to claim generous tax relief on their investments whereas there is no such across-the-board incentive to invest in the training of their workers. This is despite the fact that the rationale for government support to firm investment in human capital is similar to that for R&D and both are important for economic growth. We explain the economic rationale for government support in the form of tax credits, discuss current practice in the UK in relation to R&D, and address the evidence on effectiveness. We then discuss how the policy might be adapted to provide similar incentives for investing in human capital.
    Keywords: human capital, research and development, r&d, tax relief, United Kingdom
    JEL: H23 J24 O30
    Date: 2018–05
  14. By: Li Du and Zhongxiang Zhang
    Abstract: Personal income tax is a commonly used redistributive instrument to deal with inequality. Whether it achieves that efficacy requires an appropriate measurement. This paper aims to examine the redistributive effects of personal income tax (PIT) based on the generalized entropy indexes. Compared with the commonly used approach based on the Gini coefficient, the generalized entropy indexes are more sensitive to the structural features of the redistributive effects and can lead to more reliable evaluation about the redistributive policy adjustments. Based on this new approach, we assess the redistributive effects of the 2011 PIT adjustment in China by using the urban household survey data. Different from previous studies, our results show that the 2011 PIT adjustment has effectively reduced the inequality within high income group, and if hidden income is taken into consideration, the overall inequality reduction resulted from the tax adjustment turns out to be positive. This finding highlights the importance of judging the redistributive effects of PIT on the basis of right household income data and that China should pay more attention to the hidden income in designing the redistributive tax rules.
    Keywords: generalised entropy index, personal income tax, redistributive effects, hidden income, China
    Date: 2018–05–21
  15. By: Johannes Becker; Niels Johannesen; Nadine Riedel
    Abstract: This paper provides the first theoretical and empirical analysis of how taxation shapes the joint allocation of risk and profits inside the multinational firm. Theoretically, we show that unconstrained firms optimally allocate all their risk to high-tax countries to maximize risk sharing with governments and all their profits to low-tax countries to minimize expected tax payments. However, transfer pricing rules requiring risk to be compensated with a higher expected return introduce a trade-off: the risk sharing motive to allocate risk to high-tax countries must be balanced against a pro.t shifting motive to allocate risk to low-tax countries. Empirically, we consistently find that multinational firms disproportionately allocate risk to low-tax countries. This suggests that the intra-firm allocation of risk and profits is effectively constrained by transfer pricing rules and that the profit shifting motive dominates the risk sharing motive. Finally, we show that within-firm differences in risk can account for a significant fraction of the well-established correlation between profits and tax rates suggesting that risk shifting is a quantitatively important channel for profit shifting.
    JEL: H20
    Date: 2018
  16. By: Roukiatou Nikiema (Ouaga II University); Pam Zahonogo (Ouaga II University)
    Abstract: Taxation is crucial for national governments to finance key public goods and services. But in developing countries, tax mobilization levels are quite low. This research analyses taxpayer behaviour in Sub-Saharan Africa as a result of weak institutions. Using the generalized structural equation modelling with Afrobarometer’s round 5 (2011/2013) survey data in 29 SSA countries, the results show that individuals’ attitudes towards paying tax are significantly dependent on the quality of institutions. More precisely, when the quality of institutions is perceived as good, individuals are more likely to pay taxes. Results also indicate indirect effects of quality of institutions across different institutional components. Individuals’ perceptions on cheating, on the quality of public services and social interactions affect their behaviour.
    Keywords: Taxpayer behaviour, Institutions, Generalized Structural Equation Modelling, SubSaharan Africa
    JEL: H3 O43
    Date: 2017–03
  17. By: Canta, Chiara; Cremer, Helmuth
    Abstract: We study the design of public long-term care (LTC) insurance when the altruism of informal caregivers is uncertain. We consider non-linear policies where the LTC benefit depends on the level of informal care, which is assumed to be observable while children's altruism is not. The traditional topping up and opting out policies are special cases of ours. Both total and informal care should increase with the children's level of altruism. This obtains under full and asymmetric information. Social LTC, on the other hand, may be non-monotonic. Under asymmetric information, social LTC is lower than its full information level for the lowest level of altruism, while it is distorted upward for the higher level of altruism. This is explained by the need to provide incentives to highaltruism children. The implementing contract is always such that social care increases with formal care.
    Keywords: Long term care; uncertain altruism; private insurance; public insurance; topping up; opting out
    JEL: H2 H5
    Date: 2018–05
  18. By: David Amaglobeli; Valerio Crispolti; Era Dabla-Norris; Pooja Karnane; Florian Misch
    Abstract: This paper describes a new, comprehensive database of tax policy measures in 23 advanced and emerging market economies over the last four decades. We extract this information from more than 900 OECD Economic Surveys and 37,000 tax-related news from the International Bureau of Fiscal Documentation using text-mining techniques. The innovation of this dataset lies in its granularity: changes in the rates and bases of personal and corporate income taxes, value added and sale taxes, social security contributions, excise, and property taxes are systematically documented. In addition, the database provides information on the announcement and implementation dates, whether the measures represent major changes, are part of a broader tax package, and phased in over several years. The paper also presents a range of stylized facts suggesting that information from this database is useful to deepen the analysis of tax policy changes for research and policy purposes.
    Date: 2018–05–11

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