nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒07‒30
seventeen papers chosen by
Thomas Andrén

  1. Inheritance tax planning at the end of life By Erixson, Oscar; Escobar, Sebastian
  2. National Fiscal Stimulus Packages And Consolidation Strategies In A Monetary Union By Christoph Bierbrauer
  3. Political Economy of Taxation, Debt Ceilings, and Growth By Tetsuo Ono; Yuki Uchida
  4. Nudging Businesses to Pay Their Taxes: Does Timing Matter? By Gillitzer, Christian; Sinning, Mathias
  5. Population Aging, Social Security and Fiscal Limits By Burkhard Heer; Vito Polito; Michael Wickens
  6. Multiple Misbehaving: Loss Averse and Inattentive to Monetary Incentives By Engström, Per; Nordblom, Katarina; Stefánsson, Arnaldur
  7. The Aggregate Consequences of Tax Evasion By Alessandro Di Nola; Georgi Kocharkov; Almuth Scholl; Anna-Mariia Tkhir
  8. The Kink and Notch Bunching Estimators Cannot Identify the Taxable Income Elasticity By Blomquist, Sören; Newey, Whitney K
  9. Tax Reform for Low Income Countries: Five Ideas for Simplifying Tax Systems to Fit Local Realities By Prichard, Wilson; Moore, Mick
  10. Production Efficiency and Profit Taxation By Stéphane Gauthier; Guy Laroque
  11. Numerical fiscal rules: framework or barrier for public policymaking? By Joanna Dzia?o; Beata Guziejewska
  12. Local Taxation and Tax Base Mobility: Evidence from a business tax reform in France By Tidiane Ly; Sonia Paty
  13. Thinking about pension systems for the 21st century: A few remarks based on the Polish example By Marek Góra
  14. Combatting Tax Evasion: Evidence from Comparing Commercial and Business Tax Registry By Collen Lediga; Nadine Riedel; Kristina Strohmaier
  15. A Kink that Makes You Sick: The Effect of Sick Pay on Absence By Petri, Böckerman; Ohto, Kanninen; Ilpo, Suoniemi
  16. Optimal Capital Taxation Revisited By Chari, V. V.; Nicolini, Juan Pablo; Teles, Pedro
  17. Taxes and Household Labor Supply: Estimating Distributional Effects of Nonlinear Prices on Multidimensional Choice By Liang, Che-Yuan

  1. By: Erixson, Oscar (Department of Economics); Escobar, Sebastian (Department of Economics)
    Abstract: There is an ongoing debate about whether inheritance and estate taxes are effective in raising revenues and in contributing to a more equal society. The different views on transfer taxes are largely dependent on beliefs about whether people plan their wealth to avoid these taxes. In this paper, we follow Kopczuk (2007) and study people’s planning response to the onset of terminal illness. An extension of Kopczuk’s work is that we can effectively control for responses in wealth caused by terminal illness but unrelated to tax planning. We do this by exploiting a tax reform in Sweden that removed the incentives for people to plan their estates to avoid inheritance taxation. We find some evidence of long-term terminal illness inducing responses consistent with tax planning, but that these are not widespread or efficient enough to reduce the overall tax burden in the study population. Our results, similarly to those of Kopczuk, show that people appear to postpone some decisions about their estates until shortly before death.
    Keywords: tax avoidance; tax evasion; tax reform; terminal illness
    JEL: D14 D64 H26 H31
    Date: 2018–03–01
  2. By: Christoph Bierbrauer (Hochschule Darmstadt)
    Abstract: We present a two-country New Open Economy Macroeconomics model of a currency union featuring an overlapping generations structure of the Blanchard (1985)-Yaari (1965) type as well as monopolistic frictions and staggered adjustment in the goods and labor market. We allow for public investment and distortionary taxation. We study the effects of fiscal policy measures such as public spending, tax cuts targeted to households and public investment as suggested by the European Commission (2008). In particular, we explore the effects of fiscal policy as a function of the financing decision of the implementing government. We find that the impact of fiscal measures on national variables as well as the spillovers depend on the assumed degree of household myopia and again, the financing decision of the government. However, the introduction of a complex fiscal sector which enables the government to choose between alternative financing schemes is an important determinant of the effects of fiscal expansions on key macroeconomic variables such as, output and consumptions. Thus, modeling a complex fiscal sector on both sides of the budgets is crucial for the results and therefore the effectiveness of fiscal stimulus packages.
    Keywords: Overlapping generations; New open economy macroeconomics; Public Debt; Decentralized fiscal policy; Monetary union
    JEL: E62 F33 F41 H31 H50 H63
    Date: 2017–11–22
  3. By: Tetsuo Ono (Graduate School of Economics, Osaka University); Yuki Uchida (Faculty of Economics, Seikei University)
    Abstract: This study presents an overlapping-generations model with physical and human capital accumulation and considers probabilistic voting over capital and labor taxes and public debt to finance public education expenditure. Our analysis shows that the greater political power of the old induces the government to raise the labor tax on the young and lower the capital tax on the old as well as issue debt. The analysis also shows that the introduction of a debt ceiling rule calls for a rise in the labor tax and thus lowers the welfare of the currently working generation. However, it increases the growth rate, and this growth effect raises the welfare of future generations. These benefits last for a long period even if the rule is imposed only for a limited time.
    Keywords: Capital taxation, Public debt, Economic growth, Probabilistic vot- ing, Overlapping-generations model
    JEL: D70 E24 H63
    Date: 2018–07
  4. By: Gillitzer, Christian (University of Sydney); Sinning, Mathias (Australian National University)
    Abstract: This paper provides theoretical and empirical evidence on the implications of the timing of reminders by studying the effect of varying the timing of reminder letters to taxpayers on their payment behavior. The collection of unpaid tax debts constitutes a considerable challenge for tax authorities. We show that varying the timing of a reminder letter has a theoretically ambiguous effect on tax payments. We study the payment behavior of business taxpayers in a field experiment in Australia and find that a simple reminder letter increases the probability of payment by about 25 percentage points relative to a control group that does not receive a letter from the tax authority. However, variation over a three-week period in the timing of the reminder letter has no effect on the probability of payment within seven weeks of the due date. Our findings indicate that sending reminders early results in faster payment of debts with no effect on the ultimate probability of payment.
    Keywords: tax compliance, business taxation, natural field experiment, behavioral insights
    JEL: C93 H25 H26
    Date: 2018–06
  5. By: Burkhard Heer; Vito Polito; Michael Wickens
    Abstract: We study the sustainability of pension systems using a life-cycle model with distortionary taxation that sets an upper limit to the real value of tax revenues. This limit implies an endogenous threshold dependency ratio, i.e. a point in the cross-section distribution of the population beyond which tax revenues can no longer sustain the planned level of transfers to retirees. We quantify the threshold using a computable life-cycle model calibrated on the United States and fourteen European countries which have dependency ratios among the highest in the world. We examine the effects on the threshold and welfare of a number of policies often advocated to improve the sustainability of pension systems. New tax data on dynamic Laffer effects are provided.
    Keywords: dependency ratio, fiscal space, Laffer effects, pensions, fiscal policy sustainability
    JEL: E62 H20 H55
    Date: 2018
  6. By: Engström, Per (Department of Economics and UCFS, Uppsala University, Sweden); Nordblom, Katarina (Department of Economics and CeCAR, University of Gothenburg, Sweden, and UCFS, Uppsala University); Stefánsson, Arnaldur (Department of Economics, UCFS and UCLS, Uppsala University)
    Abstract: We study what determines taxpayers’ deduction behavior when filing tax returns. Preliminary deficits might be viewed as losses assuming zero preliminary balance as reference point. Swedish taxpayers may escape these losses by claiming deductions after receiving information about the preliminary balance. Furthermore, the Swedish income tax system has a substantial kink (20 percentage points) where the central government tax applies. Taxpayers slightly above the governmental tax kink have substantially higher (standard economic) incentives to claim deductions than taxpayers slightly below the kink. Using a regression kink and discontinuity approach with individual fixed effects, we study a panel of 4.1 million Swedish taxpayers in 1999 to 2006. We find strong causal effects of preliminary deficits on the probability of claiming deductions. The initial empirical evidence for a kink in deduction probability at the central government threshold, anticipated by standard economic theory, is weaker but significant. However, a more detailed analysis reveals that the kink at the tax threshold is not likely due to the tax incentives per se. When controlling for the preliminary tax deficit, the kink at the tax threshold disappears. Taxpayers just above the tax kink are namely more likely to run a preliminary tax deficit than those just below it. Hence, the most plausible explanation also for the kink at the tax threshold is therefore loss aversion and not standard economic incentives. The Swedish taxpayers are thus “misbehaving”, in a Thaler (2015) sense, on two separate margins: they are highly loss averse but surprisingly inattentive to standard monetary incentives.
    Keywords: tax compliance; loss aversion; prospect theory; quasi-experiment; regression kink; regression discontinuity
    JEL: C21 D91 H24 H26
    Date: 2018–05–03
  7. By: Alessandro Di Nola (University of Konstanz); Georgi Kocharkov (Goethe University Frankfurt); Almuth Scholl (University of Konstanz); Anna-Mariia Tkhir (University of Konstanz)
    Abstract: There is a sizable overall tax gap in the U.S., albeit tax non-compliance differs sharply across income types. While only small percentages of wages and salaries are underreported, the estimated misreporting rate of self-employment business income is substantial. This paper studies how tax evasion in the self-employment sector affects aggregate outcomes and welfare. We develop a dynamic general equilibrium model with incomplete markets in which heterogeneous agents choose between being a worker or self-employed. Self-employed agents may hide a share of their business income but face the risk of being detected by the tax authority. Our model replicates important quantitative features of the U.S. economy in terms of income, wealth, self-employment, and tax evasion. Our quantitative ndings suggest that tax evasion leads to a larger self-employment sector but it depresses the average size and productivity of self-employed businesses. Tax evasion generates positive aggregate welfare effects because it acts as a subsidy for the self-employed. Workers, however, suffer from substantial welfare losses.
    Keywords: Tax evasion, Self-employment, Wealth inequality, Tax policy
    JEL: H24 H25 H26 C63 E62 E65
    Date: 2018–07–26
  8. By: Blomquist, Sören (Department of Economics); Newey, Whitney K (Department of Economics, M.I.T.)
    Abstract: Bunching estimators were developed and extended by Saez (2010), Chetty et al. (2011) and Kleven and Waseem (2013). Using this method one can get an estimate of the taxable income elasticity from the bunching pattern around a kink point. The bunching estimator has become popular, with a large number of papers applying the method. In this paper, we show that the bunching estimator cannot identify the taxable income elasticity when the functional form of the distribution of preference heterogeneity is unknown. We find that an observed distribution of taxable income around a kink point or over the whole budget set can be consistent with any positive taxable income elasticity if the distribution of heterogeneity is unrestricted. If one is willing to assume restrictions on the heterogeneity density some information about the taxable income elasticity can be obtained. We give bounds on the taxable income elasticity based on monotonicity of the heterogeneity density and apply these bounds in an example. We also consider identification from budget set variation. We find that kinks alone may not be informative even when budget sets vary. However, if the taxable income specification is restricted to be of the parametric isoelastic form assumed in Saez (2010) the taxable income elasticity can be well identified from variation among budget sets. The key condition is that the tax rates at chosen taxable income differ across budget sets for some individuals.
    Keywords: Identification; bunching; taxable income elasticty
    JEL: C13 H20 H21 H24
    Date: 2018–03–01
  9. By: Prichard, Wilson; Moore, Mick
    Abstract: There is no silver bullet to strengthen the tax systems of low-income countries. Dramatic changes in tax systems and tax collection are rare. Successful improvements more often involve a great deal of hard and steady work, and the gradual construction of popular trust and (grudging) support for reform. There remains, however, space for ‘organising ideas’ that can help identify potentially underexplored and underexploited opportunities for reform.
    Keywords: Governance,
    Date: 2018
  10. By: Stéphane Gauthier (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Guy Laroque (Sciences-Po - Département d'Economie, UCL - University College of London [London], Institute for Fiscal Studies)
    Abstract: Consider a simple general equilibrium economy with one representative consumer, a single competitive firm and the government. Suppose that the government has to finance public expenditures using linear consumption taxes and/or a lump-sum tax on profits redistributed to the consumer. This note shows that, if the tax rate on profits cannot exceed 100 percent, one cannot improve upon the second-best optimum of an economy with constant returns to scale by using a less efficient profit-generating decreasing returns to scale technology.
    Keywords: optimal taxation,taxation of profits,production efficiency
    Date: 2017–10
  11. By: Joanna Dzia?o (University of Lodz, Faculty of Economics and Sociology); Beata Guziejewska (University of Lodz, Faculty of Economics and Sociology)
    Abstract: The paper aims to assess the role of fiscal rules in the process of consolidating public finances and maintaining macroeconomic stability in the EU Member States in the period of the economic crisis. Additionally, the paper presents the case study on the efficiency of fiscal rules at the self-government (local) level in Poland. The article puts forward the thesis that fiscal rules were not an effective instrument for ensuring fiscal discipline in times of crisis. It presents the most important issues of the process of evolution of the rules during the crisis. A review and an analysis of legislation and literature on reforms implemented in the area of fiscal rules, confirms this thesis. The paper points to the need to create such fiscal rules that could contribute not only to fiscal stability but also to macroeconomic stability of the economy and concludes with recommendations for the creation of effective fiscal rules and their desirable features. The rules should be based on the structural balance or the over the cycle balance (but, in order for such rules to be effective, the structural deficit should be relatively low). Effective enforcement of the rules is necessary as well as a strong legal basis for the rules.
    Keywords: fiscal policy, fiscal rules, public debt, budget deficit
    JEL: E62 H74
    Date: 2017–07
  12. By: Tidiane Ly (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Sonia Paty (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    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-inDifferences 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
    Date: 2018
  13. By: Marek Góra
    Abstract: The end of 2018 will mark the 20th anniversary of the introduction of Poland’s current pension system. It has been subjected to constant modifications, in general dictated by either ideological or ad hoc goals, but it has resisted destruction, and in essence is working as it was designed. The need for its introduction, misleadingly called a reform, was dictated by a long-term shift in the age structure of the population. In essence, the earlier system was replaced by the current one. The essence of this switch is a shift from the quasi-tax financing suited to the population structure by age of the past, to quasi-savings financing suited to the structure in the 21st century. This text is not an overview of the 20-year history of the current system; it is a critical examination of the functioning of Poland’s pension system against the backdrop of the universal challenges that pension systems are facing in the 21st century. The text barely touches on many fundamental questions. A full discussion of them would require a longer discourse, for which there is no space here.
    Keywords: pension systems, demographic transition, NDC/FDC, tax-financing, savings-financing, political economy, Polish pension system
    JEL: H55 J18
    Date: 2018–07–24
  14. By: Collen Lediga; Nadine Riedel; Kristina Strohmaier
    Abstract: In 2008 and 2014, the South African Revenue Service (SARS) did snapshot synchronizations of its business tax registry with the country’s commercial register in an attempt to identify firms that are non-compliant with their obligation to register with SARS for business tax purposes. We analyse these interventions drawing on SARS’s business tax registry and the population of business tax returns between 2009 and 2014. Several findings emerge. First, in both years, the comparisons resulted in the identification of around 300,000 non-compliant taxpayers, providing prima facie evidence of significant extensive-margin tax evasion. The interventions significantly raised South African business tax revenues in the following years despite the fact that the identi-fied ‘extensive-margin evaders’ exhibit a lower propensity to submit tax returns and, conditional on return submission, report less income than comparable entities that voluntarily registered with SARS. The analysis further suggests that the observed gap in reported taxable income relates to underlying differences in firm size and corporate profitability rather than intensive-margin tax evasion. In line with ‘missing middle theories’, extensive-margin evaders that submit tax returns are, moreover, found to exhibit increased sales and asset growth after their forced registration with SARS.
    Keywords: tax evasion, less developed countries, tax administration
    JEL: H20 H70
    Date: 2018
  15. By: Petri, Böckerman; Ohto, Kanninen; Ilpo, Suoniemi
    Abstract: We exploit a regression kink design to estimate the elasticity of the duration of sickness absence with respect to replacement rate. Elasticity is a central parameter in defining the optimal social insurance scheme compensating for lost earnings due to sickness. We use comprehensive administrative data and a kink in the policy rule near the median earnings. We find a statistically significant estimate of the elasticity of the order of one.
    Keywords: Sick pay, labor supply, sickness absence, regression kink design, social insurance
    JEL: H55 I13 J22
    Date: 2018–06–20
  16. By: Chari, V. V. (Federal Reserve Bank of Minneapolis); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis); Teles, Pedro (Banco de Portugal)
    Abstract: We revisit the question of how capital should be taxed, arguing that if governments are allowed to use the kinds of tax instruments widely used in practice, for preferences that are standard in the macroeconomic literature, the optimal approach is to never distort capital accumulation. We show that the results in the literature that lead to the presumption that capital ought to be taxed for some time arise because of the initial confiscation of wealth and because the tax system is restricted.
    Keywords: Capital income tax; Long run; Uniform taxation
    JEL: E60 E61 E62
    Date: 2018–07–06
  17. By: Liang, Che-Yuan (Department of Economics)
    Abstract: We develop a method for distributional regression of joint multidimensional choice on nonlinear prices departing from a household model of labor supply that focuses on tax policy effects. Our distribution functions are derived under minimal theoretical assumptions and have a simple structure. We allow distribution-free estimation, collective decisionmaking, and identification based on tax reforms. In our empirical application on U.S. panel data from 1980 to 2006, we provide a deepened understanding of how the configuration of the tax system affects the distribution of transitions between combinations of spouse labor supply. We also quantify biases from commonly imposed restrictions.
    Keywords: household labor supply; nonlinear budget sets; distributional regression; collective choice; distribution-free estimation; tax reforms
    JEL: D11 H24 J22
    Date: 2018–02–01

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