nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒08‒20
eighteen papers chosen by
Thomas Andrén

  1. Fiscal Consolidation Programs and Income Inequality By Pedro Brinca; Francesco Franco; Hans Holter; Laurence Malafry; Miguel Ferreira
  2. Financial Incentives and Earnings of Disability Insurance Recipients: Evidence from a Notch Design By Philippe Ruh; Stefan Staubli
  3. The effects of official and unofficial information on tax compliance By Filomena Garcia; Andrea Vezzulli; Rafael Marques; Luca David Opromolla
  4. Politically feasible reforms of non-linear tax systems By Bierbrauer, Felix; Boyer, Pierre
  5. Are Elasticities of Taxable Income Rising? By Alexander D Klemm; Li Liu; Victor Mylonas; Philippe Wingender
  6. Labor Market and Distributional Effects of an Increase in the Retirement Age By Geyer, Johannes; Haan, Peter; Hammerschmid, Anna; Peters, Michael
  7. The Macroeconomics of Border Taxes By Omar Barbiero; Emmanuel Farhi; Gita Gopinath; Oleg Itskhoki
  8. Optimal Income Taxation in Unionized Labor Markets By Albert Jan Hummel; Bas Jacobs
  9. Corporate Income Tax as a Genuine own Resource By Fabien Candau; Jacques Le Cacheux
  10. Tax Compliance and Enforcement By Joel Slemrod
  11. Fiscal Space, Poverty and Inequality in Africa By Odusola, Ayodele
  12. Household Tax Evasion By Nigar Hashimzade; Gareth Myles; Hana Yousefi
  13. Bribes vs. Taxes: Market Structure and Incentives By Amodio, Francesco; De Giorgi, Giacomo; Rahman, Aminur
  14. Redistributing the Gains From Trade Through Progressive Taxation By Spencer G. Lyon; Michael E. Waugh
  15. Should There Be Lower Taxes on Patent Income? By Fabian Gaessler; Bronwyn H. Hall; Dietmar Harhoff
  16. Unintended Consequences of Eliminating Tax Havens By Juan Carlos Suárez Serrato
  17. Public Contracting for Private Innovation: Government Expertise, Decision Rights, and Performance Outcomes By Joshua R. Bruce; John M. de Figueiredo; Brian S. Silverman
  18. Did Austerity Cause Brexit? By Thiemo Fetzer

  1. By: Pedro Brinca (NovaSBE); Francesco Franco (Universidade Nova de Lisboa); Hans Holter (University of Oslo); Laurence Malafry (Stockholm University); Miguel Ferreira (Nova SBE)
    Abstract: Following the Great Recession, many European countries implemented fiscal consolidation policies aimed at reducing government debt. Using three independent data sources and three different empirical approaches, we document a strong positive relationship between higher income inequality and stronger recessive impacts of fiscal consolidation programs across time and place. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of European economies, including the distribution of wages and wealth, social security, taxes and debt, and study the effects of fiscal consolidation programs. We find that higher income risk induces precautionary savings behavior, which decreases the proportion of credit-constrained agents in the economy. Credit-constrained agents have less elastic labor supply responses to fiscal consolidation achieved through either tax hikes or public spending cuts, and this explains the relationship between income inequality and the impact of fiscal consolidation programs. Our model produces a cross-country correlation between inequality and the fiscal consolidation multipliers, which is quite similar to that in the data.
    Date: 2018
  2. By: Philippe Ruh; Stefan Staubli
    Abstract: Most countries reduce Disability Insurance (DI) benefits for beneficiaries earning above a specified threshold. Such an earnings threshold generates a discontinuous increase in tax liability—a notch—and creates an incentive to keep earnings below the threshold. Exploiting such a notch in Austria, we provide transparent and credible identification of the effect of financial incentives on DI beneficiaries’ earnings. Using rich administrative data, we document large and sharp bunching at the earnings threshold. However, the elasticity driving these responses is small. Our estimate suggests that relaxing the earnings threshold reduces fiscal cost only if program entry is very inelastic.
    JEL: H53 H55 J14 J21
    Date: 2018–07
  3. By: Filomena Garcia; Andrea Vezzulli; Rafael Marques; Luca David Opromolla
    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.
    JEL: C24 C92 D63 H26 Z13
    Date: 2018
  4. By: Bierbrauer, Felix; Boyer, Pierre
    Abstract: We present a conceptual framework for the analysis of politically feasible tax reforms. First, we prove a median voter theorem for monotonic reforms of non-linear tax systems. This yields a characterization of reforms that are preferred by a majority of individuals over the status quo and hence politically feasible. Second, we show that every Pareto-efficient tax system is such that moving towards lower tax rates for below-median incomes and towards higher rates for above median incomes is politically feasible. Third, we develop a method for diagnosing whether a given tax system admits reforms that are politically feasible and/or welfare-improving.
    Keywords: Non-linear income taxation; optimal taxation; political economy; Tax Reforms
    JEL: C72 D72 D82 H21
    Date: 2018–07
  5. By: Alexander D Klemm; Li Liu; Victor Mylonas; Philippe Wingender
    Abstract: This paper assesses a possible explanation for the global downward trend in top personal income tax rates over the last decades: globalization and the related tax evasion and avoidance opportunities could have raised elasticities of taxable income, which would imply lower optimal tax rates. The paper estimates elasticities of taxable income for top income earners using a large sample of economies and years with a common method, allowing an analysis of trends in such elasticities. The paper finds that elasticities do not appear to exhibit any clear pattern over the years. The downward trend in tax rates must have other possible explanations, which are briefly discussed.
    Date: 2018–06–13
  6. By: Geyer, Johannes (DIW Berlin); Haan, Peter (DIW Berlin); Hammerschmid, Anna (DIW Berlin); Peters, Michael (DIW Berlin)
    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
  7. By: Omar Barbiero; Emmanuel Farhi; Gita Gopinath; Oleg Itskhoki
    Abstract: We analyze the dynamic macroeconomic effects of border adjustment taxes, both when they are a feature of corporate tax reform (C-BAT) and for the case of value added taxes (VAT). Our analysis arrives at the following main conclusions. First, C-BAT is unlikely to be neutral at the macroeconomic level, as the conditions required for neutrality are unrealistic. The basis for neutrality of VAT is even weaker. Second, in response to the introduction of an unanticipated permanent C-BAT of 20% in the U.S. the dollar appreciates strongly, by almost the size of the tax adjustment, U.S. exports and imports decline significantly, while the overall effect on output is small. Third, an equivalent change in VAT by contrast generates only a weak appreciation of the dollar, a small decline in imports and exports, but has a large negative effect on output. Lastly, border taxes increase government revenues in periods of trade deficit, however, given the net foreign asset position of the U.S., they result in a long-run loss of government revenues and an immediate net transfer to the rest of the world.
    JEL: E0 F0 H0
    Date: 2018–06
  8. By: Albert Jan Hummel (Erasmus University Rotterdam); Bas Jacobs (Erasmus University Rotterdam)
    Abstract: This paper extends the Diamond (1980) model with labor unions to study optimal income taxation and to analyze whether unions can be desirable for income redistribution. Unions bargain with firms over wages in each sector and firms unilaterally determine employment. Unions raise the efficiency costs of income redistribution, because unemployment benefits and income taxes raise wage demands and thereby generate involuntary unemployment. Optimal unemployment benefits and optimal income taxes are lower in unionized labor markets. We show that unions are socially desirable only if they represent (low-income) workers whose participation is subsidized on a net basis. By creating implicit taxes on work, unions alleviate the labor-market distortions caused by income taxation. Numerical simulations demonstrate that optimal taxes and transfers are much less redistributive in unionized labor markets than in competitive labor markets.
    Keywords: optimal taxation; unions; wage bargaining; labor participation
    JEL: H21 H23 J51 J58
    Date: 2018–07–29
  9. By: Fabien Candau (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour); Jacques Le Cacheux (OFCE - Observatoire Français des Conjonctures économiques - Institut d'Études Politiques [IEP] - Paris - Fondation Nationale des Sciences Politiques [FNSP])
    Abstract: This article proposes an original review of the literature on tax competition, providing new evidence on tax competition concerning different types of capital (intangibles, industrial building, etc). We also present fiscal optimization of Multi-National Firms (MNFs) and document some case studies regarding the foregone tax revenue due to evasion. Amounts saved by firms are comparable to the contributions to the EU budget by countries like the UK, Ireland, the Netherlands or Luxembourg. We estimate the revenue losses for the national governments of EU15 due to corporate tax avoidance through profit shifting under three scenarios considering different levels of `CIT efficiency' to raise revenue for the year 2015. The 'intermediate' scenario predicts that the revenue losses for the EU governments due to corporate tax avoidance amount to approximately 98 billion euros. After this description of the failure of the current system of taxation, the defense of corporate income tax at the European level as a genuine own resource for the EU budget, this article analyzes alternative schemes such as the Common Consolidated Corporate Tax Base (CCCTB).
    Date: 2017–03
  10. By: Joel Slemrod
    Abstract: This paper reviews recent economic research in tax compliance and enforcement. After briefly laying out the economics of tax evasion, it focuses on recent empirical contributions. It first discusses what methodologies and data have facilitated these contributions, and then presents critical summaries of what has been learned. It discusses a promising new development, the analysis of randomized controlled trials mostly delivered via letters from the tax authority, and then reviews recent research using various methods about the impact of the principal enforcement tax policy instruments: audits, information reporting, and remittance regimes. I also explore several understudied issues worthy of more research attention. The paper closes by outlining a normative framework based on the behavioral response elasticities now being credibly estimated that allows one to assess whether a given enforcement intervention is worth doing.
    JEL: H20 H26
    Date: 2018–07
  11. By: Odusola, Ayodele
    Abstract: The benefit of growth experienced since 2000 in Africa has not been broadly shared. Poverty fell by only 8.0 percentage points between 1990 and 2010 compared to the targeted 28.3 percentage points by 2015. Although income inequality fell by 4.3 percent between 1990 and 2009, Africa remains the second most unequal region globally after Latin America and the Caribbean region. Fiscal policies play important roles in reducing poverty and inequality through such instruments as taxes, transfers and government spending. Countries with high fiscal space tend to have lower poverty rates than those with lower tax revenue to GDP ratios. Indeed, fiscal space alone tends to account for 16.5 percent of changes in poverty reduction. Institutions play an important role in increasing fiscal space in Africa. Countries with increasing participatory, transparent and accountable budgetary process tend to have stronger impact of fiscal space on poverty and inequality reduction. Although 29 countries recorded declines in the distributional effectiveness of their fiscal policies over time, the distributional impact rose by 35 percent or more in countries such as Angola, Mozambique, South Africa and Togo. This paper calls for enhancing the non-extractive revenues by diversifying revenues sources from the extractive sectors and improving progressive taxation in countries with high fiscal space and high income inequality. Heavy investment in quality and accessible education and health services, and social programs are also vital to reduce poverty and inequality in Africa.
    Keywords: International Development
    Date: 2017–01–02
  12. By: Nigar Hashimzade (Durham University); Gareth Myles (University of Adelaide and Institute for Fiscal Studies); Hana Yousefi (KPMG)
    Abstract: Empirical evidence shows that both gender and household roles are significant explanatory variable for tax evasion. Why these variables matter cannot be explained by current evasion models which consider only individual choice. In this paper we study the evasion decision in a non-cooperative model of household decision making. Two members of a household choose how much to contribute to a household public good, how much self-employment income to evade, and how much income to shift between partners. We are interested in how different evasion possibilities interact with the contribution decisions to the household public good and the role of income transfers within the household. We show the household evasion decision differs from the individual decision because it affects the outcome of the household contribution game. When household members are taxed as individuals neutrality applies when choices are not constrained. If the evasion level of one household member is constrained then an income transfer can generate a Pareto improvement. When the household members are jointly taxed there is a couple constraint on strategies and corner solutions can emerge.
    Date: 2018–02
  13. By: Amodio, Francesco; De Giorgi, Giacomo; Rahman, Aminur
    Abstract: Firms in developing countries often avoid paying taxes by making informal payments to tax officials. These bribes may raise the cost of operating a business, and the price charged to consumers. To decrease these costs, we designed a feedback incentive scheme for business tax inspectors that rewards them according to the anonymous evaluation submitted by inspected firms. We show theoretically that feedback incentives decrease the equilibrium bribe amount, but make firms with more inelastic demand more attractive for inspectors. A tilted scheme that attaches higher weights to the evaluation of smaller firms limits the scope for targeting and decreases the bribe amount to a lesser extent. We evaluate both schemes in a field experiment in the Kyrgyz Republic and find evidence that is consistent with the model predictions. By decreasing bribes, our intervention reduces the average cost for firms and the price they charge to consumers. Since fewer firms substitute bribes for taxes, tax revenues increase. Our study highlights the role of firm heterogeneity and market structure in shaping the relationship between firms and tax inspectors, and provides clear evidence of pass-through of bribes to consumers.
    Keywords: business tax; demand elasticity; incentives; market structure
    JEL: D22 D40 H26 H71 O12
    Date: 2018–07
  14. By: Spencer G. Lyon; Michael E. Waugh
    Abstract: Should a nation's tax system become more progressive as it opens to trade? Does opening to trade change the benefits of a progressive tax system? We answer these question within a standard incomplete markets model with frictional labor markets and Ricardian trade. Consistent with empirical evidence, adverse shocks to comparative advantage lead to labor income losses for import-competition-exposed workers; with incomplete markets, these workers are imperfectly insured and experience welfare losses. A progressive tax system is valuable, as it substitutes for imperfect insurance and redistributes the gains from trade. However, it also reduces the incentives for labor to reallocate away from comparatively disadvantaged locations. We find that optimal progressivity should increase with openness to trade with a ten percentage point increase in openness necessitating a five percentage point increase in marginal tax rates for those at the top of the income distribution.
    JEL: E1 F11 H21
    Date: 2018–06
  15. By: Fabian Gaessler; Bronwyn H. Hall; Dietmar Harhoff
    Abstract: A “patent box” is a term for the application of a lower corporate tax rate to the income derived from the ownership of patents. This tax subsidy instrument has been introduced in a number of countries since 2000. Using comprehensive data on patent filings at the European Patent Office, including information on ownership transfers pre- and post-grant, we investigate the impact of the introduction of a patent box on international patent transfers, on the choice of ownership location, and on invention in the relevant country. We find that the impact on transfers is small but present, especially when the tax instrument contains a development condition and for high value patents (those most likely to have generated income), but that invention itself is not affected. This calls into question whether the patent box is an effective instrument for encouraging innovation in a country, rather than simply facilitating the shifting of corporate income to low tax jurisdictions.
    JEL: H25 H32 K34 O34
    Date: 2018–07
  16. By: Juan Carlos Suárez Serrato
    Abstract: We show that eliminating firms’ access to tax havens has unintended consequences for economic growth. We analyze a policy change that limited profit shifting for US multinationals, and show that the reform raised the effective cost of investing in the US. Exposed firms respond by reducing global investment and shifting investment abroad — which lowered their domestic investment by 38% — and by reducing domestic employment by 1.0 million jobs. We then show that the costs of eliminating tax havens are persistent and geographically concentrated, as more exposed local labor markets experience declines in employment and income growth for over 15 years. We discuss implications of these results for other efforts to limit profit shifting, including new taxes on intangible income in the Tax Cuts and Jobs Act of 2017.
    JEL: F23 H25 H26 H32 J23
    Date: 2018–07
  17. By: Joshua R. Bruce; John M. de Figueiredo; Brian S. Silverman
    Abstract: We examine how the U.S. Federal Government governs R&D contracts with private-sector firms. The government chooses between two contractual forms: grants and cooperative agreements. The latter provides the government substantially greater discretion over, and monitoring of, project progress. Using novel data on R&D contracts and on the geo-location and technical expertise of each government scientist over a 12-year period, we test implications from the organizational economics and contracting literatures. We find that cooperative agreements are more likely to be used for early-stage projects and those for which local government scientific personnel have relevant technical expertise; in turn, cooperative agreements yield greater innovative output as measured by patents, controlling for endogeneity of contract form. The results are consistent with multi-task agency and transaction-cost approaches that emphasize decision rights and monitoring.
    JEL: H11 H57 L14 L24 L33 O32
    Date: 2018–06
  18. By: Thiemo Fetzer
    Abstract: Did austerity cause Brexit? This paper shows that the rise of popular support for the UK Independence Party (UKIP), as the single most important correlate of the subsequent Leave vote in the 2016 European Union (EU) referendum, along with broader measures of political dissatisfaction, are strongly and causally associated with an individual’s or an area’s exposure to austerity since 2010. In addition to exploiting data from the population of all electoral contests in the UK since 2000, I leverage detailed individual level panel data allowing me to exploit within-individual variation in exposure to specific welfare reforms as well as broader measures of political preferences. The results suggest that the EU referendum could have resulted in a Remain victory had it not been for a range of austerity-induced welfare reforms. Further, auxiliary results suggest that the welfare reforms activated existing underlying economic grievances that have broader origins than what the current literature on Brexit suggests. Up until 2010, the UK’s welfare state evened out growing income differences across the skill divide through transfer payments. This pattern markedly stops from 2010 onwards as austerity started to bite.
    Keywords: political economy, austerity, globalization, voting, EU
    JEL: H20 H30 H50 P16 D72
    Date: 2018

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