nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒06‒18
seventeen papers chosen by
Thomas Andrén

  1. Microsimulation Analysis of Optimal Income Tax Reforms. An Application to New Zealand By Creedy, John; Gemmell, Norman; Hérault, Nicolas; Mok, Penny
  2. Structural Labour Supply Models and Microsimulation By Rolf Aaberge; Ugo Colombino
  3. The Optimum Quantity of Capital and Debt By Acikgöz, Ömer; Hagedorn, Marcus; Holter, Hans; Wang, Yikai
  4. Taxation, Work and Gender Equality in Ireland By Doorley, Karina
  5. Elite taxation, rent-seeking and income inequality in Brazil By Marc Morgan
  6. Optimal Progressive Income Taxation in a Bewley-Grossman Framework By Juergen Jung; Chung Tran
  7. Are Moderate Leviathans Harmful to Tax Coordination? By Itaya, Jun-ichi; Chikara, Yamaguchi
  8. The Fiscal and Welfare Consequences of the Price Indexation of Spanish Pensions By Julian Diaz Saavedra
  9. Effective tax rates, endogenous mark-ups and heterogeneous firms By Irlacher, Michael; Unger, Florian
  10. Local Taxation and Tax Base Mobility: Evidence from a business tax reform in France By Tidiane Ly; Sonia Paty
  11. Tax on Large Fortunes: recent international debates and the situation in Brazil By Pedro Carvalho Jr.; Luana Passos
  12. Deferred Taxation under Default Risk By Cristian Carini; Michele Moretto; Paolo Panteghini; Sergio Vergalli
  13. On Welfare Effects of Increasing Retirement Age By Joanna Tyrowicz; Krzysztof Makarski
  14. Early Social Security Claiming and Old-Age Poverty: Evidence from the Introduction of the Social Security Early Eligibility Age By Gary V. Engelhardt; Jonathan Gruber; Anil Kumar
  15. Optimal Public Debt with Life Cycle Motives By William B. Peterman; Erick Sager
  16. Smooth Income Tax Schedules: Derivation and Consequences By Estévez Schwarz, Diana; Sommer, Eric
  17. Tax Evasion on a Social Network By Duccio Gamannossi degl'Innocenti; Matthew D. Rablen

  1. By: Creedy, John; Gemmell, Norman; Hérault, Nicolas; Mok, Penny
    Abstract: This paper examines the optimal direction of marginal income tax reform in the context of New Zealand, which recently reduced its top marginal income tax rate to one of the lowest in the OECD. A behavioural microsimulation model is used, in which social welfare functions are defined in terms of either money metric utility or net income. The model allows for labour supply responses to tax changes, in which a high degree of population heterogeneity is represented along with all the details of the highly complex income tax and transfer system. The implications of the results for specific combinations of tax rate or threshold changes, that are both revenue neutral and welfare improving, are explored in detail, recognising the role of distributional value judgements in determining an optimal reform.The potential impact of additional income responses is also examined, using the concept of the elasticity of taxable income. Results suggest, under a wide range of parameter values and assumptions, that raising the highest income tax rate and/or threshold, would be part of an optimal reform package.
    Keywords: Optimal taxation,tax reform,behavioural microsimulation,social welfare function,money metric utility
    JEL: D63 H21 H31 I31 J22
    Date: 2018
  2. By: Rolf Aaberge (Statistics Norway); Ugo Colombino
    Abstract: The purpose of the paper is to provide a discussion of the various approaches for accounting for labour supply responses in microsimulation models. The paper focus attention on two methodologies for modelling labour supply: • The discrete choice model • The random utility – random opportunities model The paper then describes approaches to utilising these models for policy simulation in terms of producing and interpreting simulation outcomes, outlining an extensive literature of policy analyses utilising these approaches. Labour supply models are not only central for analyzing behavioural labour supply responses but also for identifying optimal tax-benefit systems, given some of the challenges of the theoretical approach. Combining labour supply results with individual and social welfare functions enables the social evaluation of policy simulations. Combining welfare functions and labour supply functions, the paper discusses how to model socially optimal income taxation.
    Keywords: Behavioural microsimulation; Labour supply; Discrete choice; Tax reforms
    JEL: C50 D10 D31 H21 H24 H31 J20
    Date: 2018–06
  3. By: Acikgöz, Ömer; Hagedorn, Marcus; Holter, Hans; Wang, Yikai
    Abstract: In this paper we solve the dynamic optimal Ramsey taxation problem in a model with incomplete markets, where the government commits itself ex-ante to a time path of labor taxes, capital taxes and debt to maximize the discounted sum of agents' utility starting from today. Whereas the literature has bee limited mainly to studying policies that maximize steady-state welfare only, we instead characterize the optimal policy along the full transition path. We show theoretically that in the long run the capital stock satisfies the modified golden rule. More importantly, we prove that in contrast to complete markets economies, in incomplete markets economies the long run steady state resulting from an infinite sequence of optimal policy choices is independent of initial conditions. This result is not only of theoretical interest but moreover, enables us to compute the long-run optimum independently from the transition path such that a quantitative analysis becomes tractable Quantitatively we find, robustly across various calibrations, that in the long run the government debt-to-GDP ratio is high, capital is taxed at a low rate and labor income at a high rate when compared to current U.S. values. Along the optimal transition to the steady state, labor taxes initially are lowered, financed through issuing more debt and taxing capital income heavily, before they are eventually increased to their steady-state level.
    Keywords: Capital taxation; Dynamically Optimal Taxation; incomplete markets; Optimal Government Debt
    JEL: E62 H20 H60
    Date: 2018–05
  4. By: Doorley, Karina (Economic and Social Research Institute, Dublin)
    Abstract: In most developed countries, economies are facing population ageing, falling fertility rates and stagnating labour force participation. The ability of governments to fund future pension and health-care expenditure relies to a large extent on income tax and social security receipts from workers. Policymakers are generally in agreement that increasing the labour force participation of women, without reducing the fertility rate, is needed. In the year 2000, with the aim of increasing women's labour market participation, a partial individualisation of the Irish income tax system was initiated. Using the Living in Ireland survey and a difference-in-differences framework, I investigate whether this reform had any effect on female labour supply and caring duties. I find that the labour force participation rate of married women increased by 5-6 percentage points in the wake of the reform, hours of work increased by two per week and hours of unpaid childcare decreased by approximately the same margin.
    Keywords: individual taxation, labour supply, Ireland
    JEL: J08 J20 H31
    Date: 2018–04
  5. By: Marc Morgan (IPC-IG)
    Abstract: "Brazil is a notable case of high fiscal income inequality coexisting with a weak regulatory personal income tax. These findings are a clear reflection of the separation of incomes in the country for fiscal purposes. As one moves up in the pre-tax fiscal income distribution, it is the sources of income received that matter most for the individual tax burden (Morgan, 2017). And such a fiscal separation of income can have a positive feedback on pre-tax income inequality. Figure 1 shows the different average effective tax rates applying on different categories of income in Brazil in 2015". (...)
    Keywords: Elite, taxation, rent-seeking, income, inequality, Brazil
    Date: 2018–02
  6. By: Juergen Jung; Chung Tran
    Abstract: We study optimal income tax progressivity in an environment where individuals are exposed to idiosyncratic income and health risks over the lifecycle. Our results, based on a calibration for the US economy, indicate that the presence of health risk combined with incomplete insurance markets amplies the social insurance role of progressive income taxes. The government is required to set higher optimal levels of tax progressivity in order to provide more social insurance for unhealthy low income individuals who have limited access to health insurance. The optimal progressive income tax system includes a tax break for income below $36; 400 and high marginal tax rates of over 50 percent for income above $200; 000: The tax progressivity (Suits) indexa Gini coecient for income tax contributions by incomeof the optimal tax system is around 0:53, compared to 0:17 in the benchmark tax system. Yet, the optimal tax system in our model is more progressive than the optimal tax systems in models abstracting from health risk (e.g., Conesa and Krueger (2006) and Heathcote, Storesletten and Violante (2017)). Importantly, the optimal level of tax progressivity is strongly aected by the design of the health insurance system. When health expenditure risk is reduced or removed from the model, the optimal tax system becomes less progressive and thus more similar to the optimal progressivity levels reported in the previous literature.
    Keywords: Health and income risks, Inequality, Social insurance, Tax progressivity, Suits index, Optimal taxation, General equilibrium.
    JEL: E62 H24 I13 D52
    Date: 2018–06
  7. By: Itaya, Jun-ichi; Chikara, Yamaguchi
    Abstract: This paper investigates how the sustainability of partial tax coordination between several governments is affected when the governments' objective function is moderate Leviathan in that policymakers are neither entirely benevolent nor fully self-interested. We show that partial tax coordination is more likely to prevail when moderate Leviathan-type governments become more revenue-maximizing Leviathans. In this case, the increased intensity of fiscal externality due to different tax rates makes partial tax coordination more sustainable at the cost of the tax union member countries' well-being.
    Keywords: Tax coordination, moderate Leviathan, tax competition,
    Date: 2018–05
  8. By: Julian Diaz Saavedra (Department of Economic Theory and Economic History, University of Granada.)
    Abstract: The 2013 Spanish Pension Reform, aimed at guaranteeing the nancial sustainability of the system, introduced, among other measures, the Pension Revaluation Index (PRI), which uncouples annual pension updates from the Consumer Price Index (CPI) increases and makes the annual rise in all pensions conditional upon the system's revenue and expenditure being balanced, with ceilings and oors set in place. This automatic adjustment mechanism, however, has posed serious concerns about future pension adequacy, this being the degree of poverty alleviation and consumption smoothing that the pensions system provides to retirees, due to the expected large future reductions in the real value of the average pension. In this paper, we use a general equilibrium life cycle model, calibrated to micro and macro data in Spain, to study the scal and welfare consequences of three options for increasing pension generosity in Spain; (i) disability and minimum pensions are again fully indexed with the CPI; (ii) minimum and lower value pensions are fully indexed with the CPI; and (iii) returning to full price indexation of all Spanish pensions. While these three reforms increase, on average, pension adequacy, the tax increases needed to nance the higher future pension expenditure di er signi cantly. Moreover, most current cohorts prefer returning to the full price indexation of all Spanish pensions, but future cohorts prefer that only disability and minimum pensions be fully indexed with the CPI.
    Keywords: Computable general equilibrium, social security reform, retirement.
    JEL: C68 H55 J26
    Date: 2018–06–10
  9. By: Irlacher, Michael; Unger, Florian
    Abstract: We provide a new explanation why effective tax rates are smaller for larger firms even in the absence of common channels like profit shifting and lobbying. This result emerges in a heterogeneous firms model with endogenous mark-ups. Our framework features imperfect tax pass-through into prices and partial deductibility of production costs. Corporate taxes reduce mark-ups and hence pre-tax profits, especially for high cost firms. As production costs are only partially deductible, high cost producers are affected most by taxes. We further show that shocks which affect mark-ups through competition, like globalization, reinforce the heterogeneity in effective tax rates across firms.
    Keywords: Heterogeneous firms; Corporate taxation; Effective tax rate; Linear demand; Endogenous mark-ups
    JEL: H25 F12 L11
    Date: 2018–05–24
  10. By: Tidiane Ly (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Sonia Paty (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France)
    Abstract: This paper investigates the impact of tax base mobility on local taxation. We first develop a theoretical model in order to examine the connection between local business property taxation and tax base mobility within a metropolitan area. We find that decreasing capital intensity in the tax base increases the business property tax rates unambiguously. We then test this result using a French reform, which changes the composition of the main local business tax base in 2010. Estimations using Difference-in-Differences show that the reduction in the mobility of the tax base indeed results in higher business property tax rates. Housing tax rates were not affected by the reform.
    Keywords: Local taxation, Tax base mobility, Tax competition, Difference-in-Differences
    JEL: H71 H72 R50 R51
    Date: 2018
  11. By: Pedro Carvalho Jr. (IPC-IG); Luana Passos (IPC-IG)
    Abstract: "Many discussions have taken place in Brazil about legislation pertaining to subparagraph VII of article 153 of the 1988 Federal Constitution?the regulation, through a Complementary Law, of the Tax on Large Fortunes (Imposto sobre Grandes Fortunas?IGF). In the current scenario, with the country facing a second consecutive annual decrease in tax revenue, the subject of the implementation of the IGF is gaining traction, with its proponents vehemently arguing that it can represent a balancing mechanism for a possible increase in the tax burden, so that this increased burden would not fall exclusively on the poorest population through indirect taxes". (...)
    Keywords: Tax, Large Fortunes, recent, international, debates, situation, Brazil
    Date: 2018–03
  12. By: Cristian Carini; Michele Moretto; Paolo Panteghini; Sergio Vergalli
    Abstract: In this article, we have used a continuous EBIT-based model to study deferred taxation under default risk. Quite surprisingly, default risk has been disregarded in research on deferred taxation. In order to underline its importance, we first calculated the probability of default, over a given time period, together with the contingent value of tax deferral. We then applied our theoretical model to a sample of 27,749 OECD companies. We showed that, when accounting for both firms with a negative EBIT and firms with a probability of default higher than 50% (over a 10-year period), a relevant percentage of firms were close enough to default. Hence, these taxpayers should not consider deferred taxation in their financial statements, for the sake of prudence. Moreover, under default, the expected present value of deferred taxes was much lower than that obtained in a deterministic context. Hence, if we look at deferred taxes from the Government’s point of view, we must consider them as being risk-free loans. However, only a portion are subsequently repaid, due to default. This implies that, when a Government allows accelerated tax depreciation it should be aware of future losses due to default. So far, these estimates have been missing, although techniques do exist and are quite practical.
    Keywords: capital structure, contingent claims, corporate taxation and tax depreciation allowances
    JEL: H25 M41
    Date: 2018
  13. By: Joanna Tyrowicz (Institute for Labour Law and Industrial Relations in the European Union IAAEU), Trier University); Krzysztof Makarski (Warsaw School of Economics)
    Abstract: We develop an OLG model with realistic assumptions about longevity to analyze the welfare effects of raising the retirement age. We look at a scenario where an economy has a pay-as-you-go defined benefit scheme and compare it to a scenario with defined contribution schemes (funded or notional). We show that, initially, in both types of pension system schemes the majority of welfare effects comes from adjustments in taxes and/or prices. After the transition period, welfare effects are predominantly generated by the preference for smoothing inherent in many widely used models. We also show that although incentives differ between defined benefit and defined contribution systems, the welfare effects are of comparable magnitude under both schemes. We provide an explanation for this counter-intuitive result.
    Keywords: longevity, PAYG, retirement age, pension system reform, welfare
    JEL: C68 E21 J11 H55
    Date: 2018–04
  14. By: Gary V. Engelhardt; Jonathan Gruber; Anil Kumar
    Abstract: Social Security faces a major financing shortfall. One policy option for addressing this shortfall would be to raise the earliest age at which individuals can claim their retirement benefits. A welfare analysis of such a policy change depends critically on how it affects living standards. This paper estimates the impact of the Social Security early entitlement age on later-life elderly living standards by tracing birth cohorts of men who had access to different potential claiming ages. The focus is on the Social Security Amendments of 1961, which introduced age 62 as the early entitlement age (EEA) for retired-worker benefits for men. Based on data from the Social Security Administration and March 1968-2001 Current Population Surveys, reductions in the EEA in the long-run lowered the average claiming age by 1.4 years, which lowered Social Security income for male-headed families in retirement by 1.5% at the mean, 3% at the median, and 4% at the 25th percentile of the Social Security income distribution. The increase in early claiming was associated with a decrease in total income, but only at the bottom of the income distribution. There was a large associated rise in elderly poverty and income inequality; the introduction of early claiming raised the elderly poverty rate by about one percentage point. Finally, for the 1885-1916 cohorts, the implied elasticity of poverty with respect to Social Security income for male-headed families is 1.6−. Overall, we find that the introduction of early claiming was associated with a reduction in income and an increase in the poverty rate in old age for male-headed households.
    JEL: H31 J26
    Date: 2018–05
  15. By: William B. Peterman; Erick Sager
    Abstract: Public debt can be optimal in standard incomplete market models with infinitely lived agents, since the associated capital crowd-out induces a higher interest rate. The higher interest rate encourages individuals to save and, hence, better self-insure against idiosyncratic labor earnings risk. Even though individual savings behavior is a crucial determinant of the optimality of public debt, this class of economies abstracts from empirically observed life cycle savings patterns. Thus, this paper studies how incorporating a life cycle affects optimal public debt. We find that while the infinitely lived agent model's optimal policy is public debt equal to 24\% of output, the life cycle model's optimal policy is public savings equal to 61\% of output. Although public debt also encourages life cycle agents to hold more savings during their lifetimes, the act of accumulating this savings mitigates the potential welfare benefit. Moreover, public savings improves life cycle agents' welfare by encouraging a flatter allocation of consumption and leisure over their lifetimes. Accordingly, abstracting from the life cycle yields an optimal policy that reduces average welfare by more than 0.6% of expected lifetime consumption. Furthermore, ignoring the life cycle overstates the influence of wealth inequality on optimal policy, since optimal policy is far less sensitive to wealth inequality in the life cycle model than in the infinitely lived agent model. These results demonstrate that studying optimal debt policy in an infinitely lived agent model, which abstracts from the realism of a life cycle in order to render models more computationally tractable, is not without loss of generality.
    Keywords: Government debt ; Heterogeneous agents ; Incomplete markets ; Life cycle
    JEL: H6 E21 E6
    Date: 2018–04–20
  16. By: Estévez Schwarz, Diana (Beuth University of Applied Sciences); Sommer, Eric (IZA)
    Abstract: Existing tax schedules are often overly complex and characterized by discontinuities in the marginal tax burden. In this paper we propose a class of progressive smooth functions to replace personal income tax schedules. These functions depend only on three meaningful parameters, and avoid the drawbacks of defining tax schedules through various tax brackets. Based on representative micro data, we derive revenue-neutral parameters for four different types of tax regimes (Austria, Germany, Hungary and Spain). We then analyze possible implications from a hypothetical switch to smoother income tax tariffs. We find that smooth tax functions eliminate the most extreme cases of bracket creep, while the impact on income inequality is mostly negligible, but uniformly reducing.
    Keywords: personal income taxation, income distribution, nonlinear smooth tax tariff, microsimulation
    JEL: H24 C63
    Date: 2018–04
  17. By: Duccio Gamannossi degl'Innocenti; Matthew D. Rablen
    Abstract: We relate tax evasion behavior to a substantial literature on self and social comparison in judgements. Tax payers engage in tax evasion as a means to boost their expected consumption relative to others in their “local” social network, and relative to past consumption. The unique Nash equilibrium of the model relates optimal evasion to a (Bonacich) measure of network centrality: more central taxpayers evade more. The indirect revenue effects from auditing are shown to be ordinally equivalent to a related Bonacich centrality. We generate networks corresponding closely to the observed structure of social networks observed empirically. In particular, our networks contain celebrity taxpayers, whose consumption is widely observed, and who are systematically of higher wealth. In this context we show that, if the tax authority can observe the social network, it is able to raise its audit revenue by around six percent.
    Keywords: tax evasion, social networks, network centrality, optimal auditing, social comparison, self comparison, habit, indirect effects, relative consumption
    JEL: H26 D85 K42
    Date: 2018

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