nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒08‒13
sixteen papers chosen by
Thomas Andrén

  1. Income Inequality and Economic Growth: A Re-Examination of Theory and Evidence By Mehmet Balcilar; Rangan Gupta; Wei Ma; Philton Makena
  2. Optimal Indirect Tax Design for a Developing Country By Yoshitomo Ogawa; Nobuhiro Hosoe
  3. Behavioral Public Economics By B. Douglas Bernheim; Dmitry Taubinsky
  4. Nudging businesses to pay their taxes: Does timing matter? By Gillitzer, Christian; Sinning, Mathias
  5. Loss Aversion, Transaction Costs, or Audit Trigger? Learning about Corporate Tax Compliance from a Policy Experiment with Withholding Regime By Carrillo, Paul; Emran, M. Shahe
  6. Bringing Tax Avoiders to Light: Moral Framing and Shaming in a Public Goods Experiment By Tsikas, Stefanos A.; Wagener, Andreas
  7. How Do Firms Respond to Place-Based Tax Incentives? By Hyejin Ku; Uta Schönberg; Ragnhild C. Schreiner
  8. Tax Morale and the Role of Social Norms and Reciprocity. Evidence from a Randomized Survey Experiment By Philipp Dörrenberg; Andreas Peichl
  9. The effect of retirement taxation rules on the value of guaranteed lifetime withdrawal benefits By Ulm, Eric
  10. Uncertain Altruism and Non-Linear Long-Term Care Policies By Chiara Canta; Helmuth Cremer
  11. Designing pension benefits when longevities increase with wages By Andras Simonovits
  12. Tax incidence and fiscal systems: some problems on tax compared history in XIX and XX centuries By José Alves
  13. The Tax-Efficient Use of Debt in Multinational Corporations By Jarle Møen; Dirk Schindler; Guttorm Schjelderup; Georg Wamser
  14. Progressive Taxation of Extractive Resources as Second-Best Optimal Policy By Jean-François Wen
  15. The Intergenerational Transmission of Welfare Dependency By Monique De Haan; Ragnhild C. Schreiner
  16. Tax expenditure and the treatment of tax incentives for investment By Redonda, Agustin; Diaz de Sarralde, Santiago; Hallerberg, Mark; Johnson, Lise; Melamud, Ariel; Rozemberg, Ricardo; Schwab, Jakob; von Haldenwang, Christian

  1. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus, Turkey; Department of Economics, University of Pretoria, Pretoria, South Africa; Montpellier Business School, Montpellier, France.); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Wei Ma (International Business School Suzhou, Xi'an Jiaotong-Liverpool University, Suzhou, China); Philton Makena (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: We re-examine the theoretical and empirical relationship between income inequality and economic growth in an endogenous growth model with a at tax on income, distributive conflicts among agents and median voter dynamics. We show that when government spends tax revenue on the provision of public goods in the form of both production and consumption services, the theoretical relationship between inequality and economic growth is neither strictly positive nor strictly negative but that it is ambiguous. An empirical evaluation of the theoretical findings is done by applying a semi-parametric model on a sample of 55 low-income, lower-middle-income, upper-middle-income and high-income countries for the period 1980 to 2010. Results show that the relationship between income inequality and growth takes the form of an inverted-U shape in that income inequality initially has a positive impact on growth up to an average Gini coefficient threshold of 35.92 beyond which it negatively impacts on growth.
    Date: 2018–07
  2. By: Yoshitomo Ogawa (Kindai University, Osaka, Japan); Nobuhiro Hosoe (National Graduate Institute for Policy Studies, Tokyo, Japan)
    Abstract: Given that tariffs continue to serve as a primary source of government revenue in many developing countries, we analyze the optimal indirect tax problem, consisting of commodity taxes and tariffs, under a revenue constraint. This study derives the revenue-constrained optimal commodity taxes and tariffs in both a small and a large country and then examines their structure and properties. We show that the optimal commodity tax structure follows the Ramsey rule regardless of whether a country is small or large, which implies that the same optimal commodity tax rules are applied across a range of situations. We also show that the optimal tariffs are not zero, but negative, even in the small country case, which implies stronger support for the World Bank fs recommendation of tariff reductions for a country facing a revenue constraint. In addition, this study analyzes the optimal commodity taxation when tariffs cannot be fully adjusted. Numerical examples demonstrate some of our major findings and the welfare gain of the optimal taxation for a few developing countries.
    Date: 2018–08
  3. By: B. Douglas Bernheim; Dmitry Taubinsky
    Abstract: This chapter surveys work in behavioral public economics, emphasizing the normative implications of non-standard decision making for the design of welfare-improving and/or optimal policies. We highlight combinations of theoretical and empirical approaches that together can produce robust qualitative and quantitative prescriptions for optimal policy under a range of assumptions concerning consumer behavior. The chapter proceeds in four parts. First, we discuss the foundations and methods of behavioral welfare economics, focusing on choice-oriented approaches and the measurement of self-reported well-being. Second, we examine commodity taxes and related policies: we summarize research on optimal corrective taxes, the efficiency costs of sales taxes that are not fully salient, the distributional effects of sin taxes, the use of non-price policies such as nudges, the tax treatment of giving, and luxury taxes. Third, we examine policies affecting saving, including capital income taxation, commitment opportunities, default contribution provisions for pension plans, financial education, and mandatory saving programs. Fourth, we detail the manner in which under-provision of labor supply and misunderstandings of policy instruments impact optimal labor income taxation and social insurance. We close with some recommendations for future work in behavioral public economics.
    JEL: H0
    Date: 2018–07
  4. By: Gillitzer, Christian; Sinning, Mathias
    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
  5. By: Carrillo, Paul; Emran, M. Shahe
    Abstract: We analyze firm's tax choices facing a withholding and enforcement regime with a focus on three salient mechanisms of bunching: (i) transaction costs, (ii) withholding threshold as a reference point for taxpayer that creates a kink due to loss aversion, and (iii) withholding threshold as a reference point for audit (audit trigger model). The transaction costs model predicts that none of the firms that bunch at the withholding threshold would declare higher taxes when withholding rate is increased, as was the case in Ecuador in 2007. Evidence from a triple-difference research design shows the opposite. A prospect theoretic model with the power value function of Kahneman and Tversky (1979) does not generate bunching at the withholding threshold. While linear prospect theory (LPT) can generate bunching under certain conditions, it also yields testable predictions that are not consistent with the behavior of a significant proportion of firms. Under the LPT, given an enforcement and withholding regime, if a firm bunches in one year it should also bunch in all the following years, or if it unbunches in a following year, it should declare taxes less than the withheld amount. The evidence from panel data on the universe of all corporations in Ecuador shows very low persistence in bunching: conditional on bunching at least once, only 3-4 percent firms bunch every year before changes in the withholding rate, and among the firms that unbunch 35-40 percent declare taxes more than the withheld amount, thus contradicting the LPT model for a substantial proportion of the firms. Using the Sasabuchi t test as developed by Lind and Mehlum (2010), we find that the relation between probability of bunching and assets of a firm is inverted-U which is consistent with the audit trigger model. The evidence suggests that the behavior of the firms cannot be captured by a single model. The strength of enforcement is important in determining bunching in an LPT model which suggests cross-country differences in the role played by loss aversion in bunching of taxpayers at policy thresholds.
    Keywords: Loss Aversion, Reference Dependence, Transaction Costs, Audit Trigger, Bunching, Withholding, Firms, Profit Tax, Tax Evasion, Ecuador
    JEL: H2 H25 H26 O1
    Date: 2018–06–16
  6. By: Tsikas, Stefanos A.; Wagener, Andreas
    Abstract: With a series of public goods games in a 2x2-design, we analyze two channels that might moderate social dilemmas and increase cooperation without using pecuniary incentives: moral framing and shaming. Cooperation increases when non-contributing to a public good is framed as morally debatable and socially harmful tax avoidance. However, cooperation is only durable when free-riders are "shamed" by disclosing their misdemeanor. We find shaming effects to be strong enough to make appeals to morality redundant for participants' decisions.
    Keywords: shaming; framing; tax avoidance; public goods experiment
    JEL: E62 H26 H30
    Date: 2018–07
  7. By: Hyejin Ku (University College London, Department of Economics and CReAM); Uta Schönberg (University College London, Department of Economics, CReAM, and Institute for Employment Research (IAB)); Ragnhild C. Schreiner (University College London, Department of Economics, CReAM, and Ragnar Frisch Centre for Economic Research)
    Abstract: In this paper, we evaluate the effects of payroll tax changes on firm behavior, by exploiting a unique policy setting in Norway, where a system of geographically differentiated payroll taxes was suddenly abolished due to an EU regulation. We find that firms are only partially able to shift the increased costs from higher payroll tax rates onto workers’ wages. Instead, firms respond to the tax increase primarily by reducing employment. The drop in employment following the tax reform is particularly pronounced in labor intensive firms—which experience a larger windfall loss due to the tax reform than non-labor intensive firms—and in multi-establishment firms—which respond to the payroll tax increase in part by reducing the number of establishments per firm. Overall, our findings point to liquidity effects whereby a sudden and largely unexpected payroll tax increase aggravates firms’ liquidity constraints, forcing them to cut employment to bring down costs.
    Keywords: Payroll taxes, regional tax incentive, firm behavior, labor demand
    JEL: D22 H25 H32 J18 J23
    Date: 2018–08
  8. By: Philipp Dörrenberg; Andreas Peichl
    Abstract: We present the first randomized survey experiment in the context of tax compliance to assess the role of social norms and reciprocity for intrinsic tax morale. We find that participants in a social-norm treatment have lower tax morale relative to a control group while participants in a reciprocity treatment have significantly higher tax morale than those in the social-norm group. This suggests that a potential backfire effect of social norms is outweighed if the consequences of violating the social norm are made salient. We further document the anatomy of intrinsic motivations for tax compliance and present first evidence that previously found gender effects in tax morale are not driven by differences in risk preferences.
    Keywords: tax compliance, tax evasion, intrinsic motivations, tax morale, social norms, reciprocity
    JEL: H20 H32 H50 C93
    Date: 2018
  9. By: Ulm, Eric
    Abstract: We examine the value of GLWB options embedded in variable annuities in two different tax regimes. The New Zealand system taxes investment income when it is earned whereas the system in the US defers taxes on annuity investment income until it is paid out. We examine the effects of these tax differences on the charges collected by the issuer as well as on the value of the contract to the policyholder. We find that the issuer’s charges are typically lower (higher) in the NZ tax regime when the expected fund earnings are low (high) or the fund volatility is high (low). On the other hand, the value to the policyholder is always lower in the NZ tax regime due to the earlier tax payments. We also find that the value of the GLWB in the NZ tax regime is nearly always below the value of an ordinary payout annuity with the same tax rules.
    Keywords: GLWB, Retirement, Taxation, Variable Annuities,
    Date: 2018
  10. By: Chiara Canta; Helmuth Cremer
    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 high-altruism 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: H20 H50
    Date: 2018
  11. By: Andras Simonovits (Institute of Economics Centre for Economic and Regional Studies, Hungarian Academy of Sciences also Mathematical Institute of Budapest University of Technology)
    Abstract: At the design of public pension systems, the designers frequently neglect that higher earners statistically live longer, and possibly also retire later. Since the first difference has recently been rising steeply, this negligence is less and less tolerable, especially with nonfinancial defined contribution system (NDC). We analyze three simple connected pension models to understand how the redistribution from the low-earners to the high-earners can be reduced or reversed. Our answers: either mixing NDC and flat benefit or reducing the weight of wage indexation of benefits. It is an open question how the neglected behavioral reactions (lower share of NDC implies lower labor supply and greater tax evasion) influence the social welfare.
    Keywords: public pension system, retirement age, wage indexation, wage-dependent life expectancy
    JEL: D10 H55
    Date: 2018–02
  12. By: José Alves
    Abstract: The study of tax systems have been deeply discussed regarding the early modern period. However, there is a lack of comparative historical studies about the last two centuries in what respect the tax state developments. In our article we analyse the tax history of the last two hundred years for five countries, intending to analyse the mechanisms levied by the different governments to efficiently collect more revenues and the power to coerce several economic agents as well as we reflect about the power of those agents to condition the tax political policies
    Keywords: Tax history; Tax developments; Fiscal systems; State building
    Date: 2018–07
  13. By: Jarle Møen; Dirk Schindler; Guttorm Schjelderup; Georg Wamser
    Abstract: Some multinationals use the parent company as a lender to the group, whereas others set up an internal bank in a low tax jurisdiction. This paper discusses the link between capital structure choices and tax planning motives in multinational groups. We model the trade-off between the use of external debt, parental debt and an internal bank. We test the theory model using data on the universe of German multinationals. The empirical analysis largely supports our model in that: (i) smaller firms often rely on parental debt financing; (ii) larger multinationals are more likely to use internal banks; (iii) parental debt and external debt are substitutes and the mix depends on the relative cost of raising capital through the parent and the affiliates; (iv) both parental debt and external debt increase when the tax rate increases, all else equal.
    Keywords: corporate taxation, multinationals, capital structure, international debt-shifting, parental debt
    JEL: H25 G32 F23
    Date: 2018
  14. By: Jean-François Wen
    Abstract: The paper provides a critical review of the literature on the concept of progressivity in the taxation of petroleum and mineral resources and offers a fresh perspective on its purpose and measurement. Regressive taxes, such as royalties, exist to satisfy policy objectives other than revenue maximization, such as achieving early revenues, while rent-based or profit-sensitive fiscal instruments must be designed with progressive marginal rates to maximize government revenues. Hence, the emphasis should be placed on tax rate progression of the direct taxation of profit or rent, rather than progressivity in the overall government take. However, as regressive taxes, by their very nature, tend to be distortionary, the optimal degree of progression in the rent- or profit-tax rates must take these distortions into account. The central ideas are illustrated with a simple analytical model in which a second-best optimal tax rate schedule on profit is characterized in the presence of the tax distortions caused by the regressive taxes. Some practical implications of the analysis are discussed.
    Keywords: Progressive taxation;Effective tax rate;Optimal taxation;Minerals;Petroleum;rent tax, average effective tax rate, second-best optimality, Business Taxes and Subsidies, General
    Date: 2018–06–13
  15. By: Monique De Haan; Ragnhild C. Schreiner
    Abstract: There is a strong intergenerational correlation in welfare participation, but this does not imply that parental welfare receipt induces child receipt. While there are a few quasi-experimental studies that provide estimates of the causal effect of parental welfare participation for children from marginal welfare participants, we know very little about intergenerational spillovers of welfare participation onto the children of average welfare participants. By combining rich administrative data from Norway with weak mean-monotonicity assumptions, we estimate nonparametric bounds around the average causal effect of parental welfare participation on children’s welfare participation in the general population, as well as the average causal effect for children growing up in welfare-dependent families. We find that these average causal effects are considerably lower than the intergenerational correlation in welfare participation, and substantially below available local average treatment effect estimates in the literature. We further find important differences between intergenerational spillovers of disability insurance and intergenerational spillovers of financial assistance, a traditional means-tested welfare program.
    Keywords: welfare dependency, intergenerational spillovers, disability insurance, financial assistance, partial identification
    JEL: H55 I38 J62
    Date: 2018
  16. By: Redonda, Agustin; Diaz de Sarralde, Santiago; Hallerberg, Mark; Johnson, Lise; Melamud, Ariel; Rozemberg, Ricardo; Schwab, Jakob; von Haldenwang, Christian
    Abstract: Governments use tax expenditures to boost investment, innovation and employment. However, these schemes are largely opaque, costly and often ineffective in reaching their stated goals. They also frequently trigger unwanted side effects. In order to improve the performance of these tools, the authors present three concrete policy proposals: First, governments should increase transparency on tax benefits. G20 members should take the lead on this with frequent and comprehensive tax expenditure reports. Second, G20 governments should improve the design of tax incentives with the aim of minimizing the generation of windfall profits and negative spillover effects within and across (in particular, on poorer) countries. Third, governments should phase out tax expenditures that are environmentally harmful, including tax incentives for fossil fuels and other schemes that promote an unsustainable use of natural resources.
    Keywords: tax expenditure,tax competition,investment,fossil fuel subsidies
    JEL: H2 H87 N4
    Date: 2018

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