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on Public Economics |
| By: | Florian Buhlmann (Center for European Economic Research (ZEW)); Benjamin Elsner (University College Dublin, IZA and CReAM); Andreas Peichl (ifo Institute, CESifo, University of Munich, ZEW and IZA) |
| Abstract: | Welfare programs are important in terms of reducing poverty, although they create incentives for recipients to maximize their income by either reducing their labor supply or manipulating their taxable income. In this paper, we quantify the extent of such behavioral responses for the Earned Income Tax Credit (EITC) in the US. We exploit the fact that US states can set top-up rates, which means that at a given point in time, workers with the same income receive different tax refunds in different states. Using event studies as well as a border pair design, we document that raising the state EITC leads to more bunching of self-employed tax filers at the first kink point of the tax schedule. While we document a strong relationship up until 2007, we find no effect during the Great Recession. These findings point to important behavioral responses to the largest welfare program in the US. |
| Keywords: | EITC, bunching, income manipulation |
| JEL: | H20 H24 |
| Date: | 2018–06–18 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:201811&r=pbe |
| By: | Isabel Z. Martinez; Emmanuel Saez; Michael Siegenthaler |
| Abstract: | This paper estimates the intertemporal labor supply (Frisch) elasticity of substitution exploiting an unusual tax policy change in Switzerland. In the late 1990s, Switzerland switched from an income tax system where current taxes were based on the previous two years' income to a standard annual pay as you earn system. This transition created a two-year long, salient, and well-advertised tax holiday. This change occurred both for the federal and local income taxes. Swiss cantons switched to the new regime at different points in time during the 1997--2003 period. Exploiting this variation in timing and using population-wide administrative social security earnings data matched with census data, we identify the Frisch elasticity. We find significant but quantitatively small responses of earnings with a Frisch elasticity of .05 overall. Some groups, such as high wage income earners and especially the self-employed display larger responses with Frisch elasticities of .1 and .27. We find no effects along the extensive margin at all and almost no effects on hours of work suggesting that responses are driven primarily by tax avoidance rather than real labor supply. Therefore, our estimates constitute upper bounds for the labor supply Frisch elasticity. |
| JEL: | H31 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24634&r=pbe |
| By: | Prichard, Wilson |
| Abstract: | The past decade has witnessed an unprecedented surge in international attention to the challenge of expanding tax collection in developing countries; this accelerated in 2017. This has, however, come with a risk that too little attention will be given to how that revenue is raised, with potential perverse impacts on the poor. It is correspondingly very important to put an equal emphasis on tax equity, and there has been significant recent movement in that direction. But the notion of tax equity raises difficult questions. There is no single right definition of the term. It is very hard to measure precisely the distributional effects of taxation and fiscal activities, especially in low-income countries where compliance is highly imperfect, relevant statistics are few and sometimes inaccurate, and where poorer people in particular may be obliged to pay significant informal, unrecorded taxes. And what is best in abstract may be limited by both technical and political constraints. This brief seeks to clarify definitions, evidence and points of potential disagreement, and to suggest key elements of a potential future agenda: (1) stronger and broader personal income taxes, (2) more effective and simplified property taxes, (3) transparency around tax exemptions, (4) improved taxation of multinational corporations (MNCs), (5) reducing opportunities and incentives for informal taxation, (6) pairing consumption taxes with simple exemptions for essential goods, (7) efforts to expand civic engagement around tax issues and strengthen fiscal contracts, and (8) reasonable efforts to balance potentially poverty-increasing taxes with new transfers. |
| Keywords: | Governance, |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:13822&r=pbe |
| 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 sizeable tax multipliers found after WWII. |
| Keywords: | Fiscal History; Fiscal policy; Macroeconomic Policy; multiplier; narrative approach; Public Finance; taxation |
| JEL: | E23 E32 E62 H2 H30 N1 N44 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12962&r=pbe |
| By: | James Cloyne; Nicholas Dimsdale; Natacha Postel-Vinay |
| 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. |
| JEL: | E32 E62 H2 N1 N44 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24659&r=pbe |
| By: | David Bartolini |
| Abstract: | Slow productivity growth in advanced economies holds back income gains and therefore improvements in well-being. Sluggish productivity gains in aggregate hide a growing gap between firms at the frontier, which display sustained productivity growth, and the rest of firms whose productivity stagnates. The empirical analysis – based on firm-level data for the period 1998–2014 – uncovers the existence of a tax burden gap alongside the productivity gap: firms at the frontier pay less for each dollar of profits than lagging firms. This heterogeneous impact of taxation may hinder productivity diffusion, as it reduces incentives (and opportunities) for lagging firms to catch up with the frontier. The negative impact of taxation is particularly important when associated with cash constraints, weak demand and other framework conditions (e.g. labour market legislation, trade openness). The analysis shows that complementing tax incentives with policies to ease cash constraints would help to narrow the productivity gap. |
| Keywords: | access to credit, effective business taxation, market regulation, Productivity |
| JEL: | D24 H25 |
| Date: | 2018–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1475-en&r=pbe |
| By: | Bilancini, Ennio; Boncinelli, Leonardo |
| Abstract: | The authors investigate the desirability of income taxes when the objective is to mitigate wasteful conspicuous consumption generated by people's status-seeking behavior. They consider the joint role of pre-tax wage inequality and of social norms determining how social status is assigned. They find that if social status is ordinal (i.e., only one's rank in the income distribution matters) then an income tax can decrease waste in conspicuous consumption only if the inequality of pre-tax wages (or earning potentials) is low enough - i.e., inequality and taxation are substitutes. Instead, if status is cardinal (i.e., also the shape of the income distribution matters) then the relationship between the inequality of pre-tax wages and the change in waste can be positive - i.e., inequality and taxation can be complements - although it is in general non-monotonic. This is because the value of social status is endogenous, potentially giving rise to a perverse self-reinforcing mechanism where more waste in conspicuous consumption induces a greater competition for status and vice versa. |
| Keywords: | social status,relative standing,consumption externalities,labor income,income tax,signalling,conspicuous consumption,income inequality |
| JEL: | D6 H3 J2 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201841&r=pbe |
| By: | Geyer, Johannes (DIW); Haan, Peter (DIW); Hammerschmid, Anna (DIW); Peters, Michael (DIW) |
| Abstract: | We evaluate the labor market and distributional effects of an increase in the early retirement age (ERA) from 60 to 63 for women. We use a regression discontinuity design which exploits the immediate increase in the ERA between women born in 1951 and 1952. The analysis is based on the German micro census which includes about 370,000 households per year. We focus on heterogeneous labor market effects on the individual and on the household level and we study the distributional implications using net household income. In this respect we extend the previous literature which mainly studied employment effects on the individual level. Our results show sizable labor market effects which strongly differ by subgroups. We document larger employment effects for women who cannot rely on other income on the household level, e.g. women with a low income partner. The distributional analysis shows on average no significant effects on female or household income. This result holds as well for heterogeneous groups: Even for the most vulnerable groups, such as single women, women without higher education, or low partner income, we do not find significant reductions in income. One reason for this result is program substitution. |
| Keywords: | retirement age; pension reform; labor supply; early retirement; distributional effects; spillover effects; household; |
| JEL: | J14 J18 J22 J26 H31 |
| Date: | 2018–06–18 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:101&r=pbe |
| By: | Luigi Bernardi (Università di Pavia) |
| Abstract: | The paper aims to give a picture of the present nature of taxation of sex working in a large number of European countries. Sex working is widespread, and yet it is only taxed in a few countries. There is a move to extend the taxation of sex working to other countries. Consequently, a number of different tax regimes are applied to this field of activity. Following an overview of such taxation, particularly in Europe (its origins, entity and social acceptance), the paper then discusses the classification of general countries’ “models” of sex working taxation. The corresponding regimes of each country are then examined in greater depth. Finally, the paper considers the main “sex industry taxes” applied in a number of countries, as well as the current proposals to enlarge that number. |
| Keywords: | sex working, taxation, European Countries |
| JEL: | H20 H24 H70 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:ipu:wpaper:71&r=pbe |
| By: | Bohne, Albrecht (University of Mannheim); Nimczik, Jan Sebastian (Humboldt University Berlin) |
| Abstract: | We show how experience and dynamic learning processes reduce the obstacles to optimization imposed by information frictions when individuals newly enter the formal sector economy. Most importantly, we provide causal evidence on the exact mechanisms through which individuals learn about the functioning of government programs. To this aim, we exploit novel and rich administrative data on the universe of taxpayers in Ecuador and the introduction of generous tax deduction policies. Key to the identification of information transmission is exogenous worker mobility between firms. We find that the spread of information is driven by mobility of managers and tax experts. |
| Keywords: | learning, tax avoidance, information frictions, taxation and development, bunching, behavioral responses to taxation |
| JEL: | D83 H24 H26 H32 O17 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11536&r=pbe |
| By: | Diller, Markus; Lorenz, Johannes |
| Abstract: | We propose a game theoretical model where a multinational company with divisions in two countries and the respective tax authorities interact with each other. Prior to an audit the functional profile of the divisions is unknown to the tax authorities. In equilibrium, tax avoidance emerges in both countries. It turns out that the audit pressure is highest for firms with a hybrid functional profile, dampening their production and reducing their after-tax profit. We find that introducing a bilateral Tax Information Exchange Agreement reduces tax avoidance by aggressive transfer pricing in the high-tax ("domestic") country and precludes tax avoidance in the lowtax ("foreign") country. The volume of production increases. The foreign tax authority discontinues its audit activities, while the domestic tax authority audits less often at least if the foreign division is a toll manufacturer ("routine function"). While the expected net tax revenues increase in the foreign country, they may decrease in the domestic country. |
| Keywords: | transfer pricing,tax evasion,cooperation |
| JEL: | H26 F23 K34 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:upadbr:b2917&r=pbe |
| By: | James Banks; Carl Emmerson; Gemma Tetlow |
| Abstract: | We document employment rates of older men and women in the UK over the last forty years. In both cases growth in employment since the mid 1990s has been stronger than for younger age groups. On average, older men are still less likely to be in work than they were in the mid 1970s although this is not true for those with low education. We highlight issues with using years of schooling as a measure of educational achievement for analysing labour market trends at older ages, not least because a large proportion of men who left school at young ages without any formal qualifications, have subsequently acquired some. Reforms – such as the abolition of the earnings test and rises in the female State Pension Age, have pushed up employment rates. But other factors – such as the shift from defined benefit to defined contribution pensions being offered by private sector employers and the growth in employment rates at younger ages among successive cohorts of women – are also important. We discuss the role of other cohort and economy-wide trends, highlighting that the proportion of older men and women employed in professional, managerial and technical occupations has been particularly strong. |
| JEL: | H55 J26 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24606&r=pbe |
| By: | Gamannossi degl’Innocenti, Duccio (University of Exeter); Rablen, Matthew D. (University of Sheffield) |
| Abstract: | We relate tax evasion behavior to a substantial literature on self and social comparison in judgements. Taxpayers 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: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11535&r=pbe |
| By: | Ilja Boelaars; Roel Mehlkopf |
| Abstract: | A well established believe in the pension industry is that collective pension funds should take more stock market risk (compared to individual retirement accounts) since risk may be shared with future generations. We extend the OLG model of Gollier (2008) by adding labor income risk in the spirit of Benzoni, Collin-Dufresne, and Goldstein (2007) and show that this idea may be misguided. For the empirical range of parameter values reported by Benzoni et. al., we find that optimal risk-sharing actually implies that collective pension funds should take less stock market risk, not more. If labor income and dividend income are co-integrated, efficient risk-sharing policies should transfer risk from future generations to current generations instead of the other way around. Furthermore, we find that the potential welfare gains from intergenerational risk-sharing are significantly lowered. |
| Keywords: | Dynamic portfolio choice; Labor income risk; Pension; Retirement; Intergenerational risk-sharing; Funded pension systems |
| JEL: | H55 G11 G23 J26 J32 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:595&r=pbe |