nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒08‒27
fifteen papers chosen by
Thomas Andrén

  1. The Tax Cuts and Jobs Act (TCJA) : A Quantitative Evaluation By Herve Zeida
  2. Optimal Taxation with On-the-Job Search By Jesper Bagger; Espen Moen; Rune Vejlin
  3. Effects of institutional history and leniency on collusive corruption and tax evasion By Johannes Buckenmaier; Eugen Dimant; Luigi Mittone
  4. Distributing the Green (Cards): Permanent Residency and the Income Tax after the Immigration Reform and Control Act of 1986 By Elizabeth U. Cascio; Ethan G. Lewis
  5. A Reevaluation of the Effects of State and Federal Dependent Coverage Mandates on Health Insurance Coverage By Barkowski, Scott; McLaughlin, Joanne Song; Ray, Alex
  6. Immigrant Voters, Taxation and the Size of the Welfare State By Arnaud Chevalier; Benjamin Elsner; Andreas Lichter; Nico Pestel
  7. Uncertain Altruism and Non-Linear Long-Term Care Policies By Canta, Chiara; Cremer, Helmuth
  8. On Public Education Spending under Nonlinear Income Taxation By Alan Krause
  9. Child care, parental labor supply and tax revenue By Martin Eckhoff Andresen; Tarjei Havnes
  10. Notching R&D Investment with Corporate Income Tax Cuts in China By Zhao Chen; Zhikuo Liu; Juan Carlos Suárez Serrato; Daniel Yi Xu
  11. Taxes, Regulations of Businesses and Evolution of Income Inequality in the US By Sebastian Dyrda; Benjamin Pugsley
  12. The Missing Profits of Nations By Thomas R. Tørsløv; Ludvig S. Wier; Gabriel Zucman
  13. Taxing capital and labor when both factors are imperfectly mobile internationally By Hippolyte D'Albis; Agnès Bénassy-Quéré; Amélie Schurich-Rey
  14. Nonlinear household earnings dynamics, self-insurance, and welfare By Mariacristina De Nardi; Giulio Fella; Gonzalo Paz Pardo
  15. Taxation of a Digital Monopoly Platform By Marc Bourreau; Bernard Caillaud; Romain De Nijs

  1. By: Herve Zeida (University of Montreal)
    Abstract: Should entrepreneurs be taxed preferentially over wage earners? The recent overhaul of the US tax code rekindles public debate surrounding differential taxation and fairness, since entrepreneurs receive more generous tax deductions. This paper then addresses the quantitative implications of a differential income taxation using a life cycle model with occupational choice and accumulation of entrepreneurial human capital. Calibrated to US data, the model economy shows as much heterogeneity within entrepreneurs’ group as within that of workers with respect to the effective tax burden. This provides rationale for alleviating taxation on entrepreneurs, at least, up to the median of the income distribution. When salient provisions of the Tax Cuts and Jobs Act (TCJA) are implemented, the economy experiences over a ten-year window, an average GDP growth rate of 0.64% and capital stock increases by 1.40%. These effects are reinforced in the long run given that output and capital stock grow on average by 1.7% and 4.5%, respectively. The 20%-deduction provision for entrepreneurs is the key driver of the TCJA’s effects since the corporate tax cut generates adverse outcomes. Nonetheless, economic growth is mitigated by a rise of inequality. On average, entrepreneurs are better off while workers experience welfare loss even with a wage increase of 2%. An optimal flat tax of 26.75% solely applied to entrepreneurs, surprisingly generates 2.4% reduction in output and is costly for poor-income individuals. On the welfare basis, preferential business income taxation over wage income does not have majority support.
    Date: 2018
  2. By: Jesper Bagger (Royal Holloway, University of London); Espen Moen (Norwegian Business School); Rune Vejlin (Aarhus University)
    Abstract: We provide a theoretical and empirical study of the optimal taxation of labor income in the presence of search frictions and unobservable amenities using comprehensive Danish matched employer-employee data. Heterogeneous workers undertake costly search off- and on-the-job in order to locate more productive jobs that pay higher wages. More productive workers search harder, resulting in equilibrium sorting where low-type workers are overrepresented in low-wage jobs while high-type workers are overrepresented in high-wage jobs. Absent taxes, worker search effort is efficient, because the social and private gains from search coincide. The optimal tax system balance efficiency and equity concerns at the margin. Equity concerns make it desirable to levy low taxes on (or indeed, subsidize) low-wage jobs including unemployment, and levy high taxes on high-wage jobs. Efficiency concerns limit how much taxes an optimal tax system levy on high-paid jobs, as high taxes distort the workers' incentives to search. Using detailed micro data on wages, labor market transitions, and income tax filings we estimate the structural model and compare the the actual Danish tax regime with the optimal one. Preliminary results suggest the optimal tax schedule exhibits less progressivity than the actual tax system in place. The model allows us to quantify the welfare gains from adopting an optimal income tax schedule.
    Date: 2018
  3. By: Johannes Buckenmaier; Eugen Dimant; Luigi Mittone
    Abstract: We investigate the effects of an institutional mechanism that incentivizes taxpayers to blow the whistle on collusive corruption and tax compliance. We explore this through a formal leniency program. In our experiment, we nest collusive corruption within a tax evasion framework. We not only study the effect of the presence of such a mechanism on behavior, but also the dynamic effect caused by the introduction and the removal of leniency. We find that in the presence of a leniency mechanism, subjects collude and accept bribes less often while paying more taxes, but there is no increase in bribe offers. Our results show that the introduction of the opportunity to blow the whistle decreases the collusion and bribe acceptance rate, and increases the collected tax yield. It also does not encourage bribe offers. In contrast, the removal of the institutional mechanism does not induce negative effects, suggesting a positive spillover effect of leniency that persists even after the mechanism has been removed.
    Keywords: Collusive bribery, institutions, tax compliance, leniency, spillover
    JEL: C92 D02 D73 H26 K42
    Date: 2018–08
  4. By: Elizabeth U. Cascio; Ethan G. Lewis
    Abstract: We explore how permanent residency affects the income tax using variation from the Immigration Reform and Control Act of 1986 (IRCA), which authorized the largest U.S. amnesty to date. We exploit the timing and geographic unevenness of IRCA’s legalization programs alongside newly digitized data on the income tax in California, home to the majority of applicants. Green Cards induced the previously unauthorized to file state income tax returns at rates comparable to other California residents. While the new returns generated little additional revenue through the end of the 1990s, they did raise the earnings of families with children through new claims of the federal Earned Income Tax Credit.
    JEL: H24 H53 H71 J61
    Date: 2018–07
  5. By: Barkowski, Scott; McLaughlin, Joanne Song; Ray, Alex
    Abstract: State governments have been passing laws mandating insurers to allow young adults to stay on their parents' health insurance plans past the age of 19 since the 1970s. These laws were intended to increase coverage, but research has been inconclusive on whether they were successful. We reconsider the issue with an improved approach featuring three key elements: a new, accurate dataset on state mandates; recognition that effects could differ greatly by age due to take up rate differences; and avoidance of endogenous characteristics when identifying mandate eligible young adults. We find the impact of the state mandates was concentrated among the 19 to 22 age group, for which dependent coverage increased sharply by about 6 percentage points. Overall coverage increased by almost 3 percentage points, with the difference explained by crowd out of public insurance. Crowd out of coverage through young adults own jobs was negligible. For those above age 22, we find little evidence of changes in coverage. We incorporate these insights into analysis of the Affordable Care Act (ACA) dependent coverage mandate, showing its effects were focused among those whom were previously ineligible for state mandates, or were eligible but older than 22. We argue the ACA's impact was broader because it had fewer eligibility conditions that implied parental dependence; young adults could be on their parents' insurance but still be relatively independent.
    Keywords: Health Insurance; Dependent Coverage Mandates; Affordable Care Act
    JEL: H11 H75 I13 I18
    Date: 2018–07–27
  6. By: Arnaud Chevalier (Royal Holloway University of London and the Institute of Labor Economics); Benjamin Elsner (University College Dublin, IZA and CReAM); Andreas Lichter (IZA); Nico Pestel (IZA and ZEW Mannheim)
    Abstract: This paper studies the impact of immigration on public policy setting. As a natural experiment, we exploit the sudden arrival of eight million forced migrants in West Germany after World War II. These migrants were on average poorer than the West German population, but unlike most international migrants they had full voting rights and were eligible for social welfare. Using panel data for West German cities and applying difference-in-differences and an instrumental variables approach, we show that local governments responded to this migration shock with selective and persistent tax raises as well as shifts in spending. In response to the inflow, farm and business owners were taxed more while residential property and wage bill taxes were left unchanged. Moreover, high-inflow cities significantly raised welfare spending while reducing spending on infrastructure and housing. Election data suggest that these policy changes were partly driven by the political influence of the immigrants: in high-inflow regions, the major parties were more likely to nominate immigrants as candidates, and a pro-immigrant party received high vote shares. We further document that this episode of mass immigration had lasting effects on people’s preferences for redistribution. In areas with larger inflows in the 1940s, people have substantially higher demand for redistribution more than 50 years later.
    Date: 2018–08–06
  7. By: Canta, Chiara (Toulouse Business School); Cremer, Helmuth (Toulouse School of Economics)
    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: H2 H5
    Date: 2018–06
  8. By: Alan Krause
    Abstract: This paper examines a model in which public education spending is skill specific. It may be directed towards low-skill or high-skill individuals, increasing their respective skills and wages. Education spending is financed by nonlinear income taxation. We show that the tax and education-spending policy most preferred by low-skill individuals may include more education spending for high-skill individuals than for themselves. The tax and education-spending policy most preferred by high-skill individuals has no spending on education for low-skill individuals. Our results provide support for previous findings that education policy should favour the high-skilled, despite the government's redistributive goals.
    Keywords: Public education, nonlinear income, taxation
    JEL: H21 H42
    Date: 2018–08
  9. By: Martin Eckhoff Andresen; Tarjei Havnes (Statistics Norway)
    Abstract: We study the impact of child care for toddlers on the labor supply of mothers and fathers in Norway. For identification, we exploit the staggered expansion across municipalities following a large reform from 2002. Our IV-estimates indicate that child care use causes an increase in the labor supply of mothers. Results suggest that cohabiting mothers move towards full time employment, while single mothers move to part time. Meanwhile, we find no impact for fathers or grandparents. We also find an increase in the taxes paid from cohabiting mothers, lending some support to the argument that parts of the cost of child care is offset by increased taxes.
    Keywords: Child care; female labor supply; tax revenue; instrumental variables
    JEL: H24 H52 J13 J22
    Date: 2018–08
  10. By: Zhao Chen; Zhikuo Liu; Juan Carlos Suárez Serrato; Daniel Yi Xu
    Abstract: We analyze the effects of a Chinese policy that awards substantial corporate tax cuts to firms that increase R&D investment over a given threshold, or notch. We exploit this quasi-experimental variation with administrative tax data in order to shed light on longstanding questions on the effects of fiscal incentives for R&D. We find large responses of reported R&D using a cross-sectional "bunching" estimator that is new to the R&D literature. We also find significant increases in firm-level productivity, even though about 30% of the increase in R&D is due to relabeling of administrative expenses. Anchored by these reduced-form effects, we estimate a structural model of R&D investment and relabeling that recovers a 9.8% return to R&D. We simulate alternative policies and show that firm selection into the program and the relabeling of R&D determine the cost-effectiveness of the policy, and the effects on productivity growth.
    JEL: H2 O3
    Date: 2018–06
  11. By: Sebastian Dyrda (University of Toronto); Benjamin Pugsley (University of Notre Dame)
    Abstract: From 1980 to 2012 the share of U.S.~business receipts from businesses organized as pass-through entities (for example LLCs and S-corporations) rather than traditional C-corporations nearly triples following a sequence of tax reforms that reduced the tax rate on business income that "passes through" to an entrepreneur's individual income tax form. We show this shift in the pattern of business organization is economically significant. We provide novel evidence, using firm-level administrative data, that the tax reforms had significant effects on the employment dynamics of the US firms. We also propose a reduced form decomposition of data from the Survey of Consumer Finances, which reveals the increase in pass through entities explains over 50 percent of the increase in the share of pre-tax income for the top 1 percent of households. Importantly, this increase is not just accounting: there is an economic trade-off when choosing a legal form that affects the investment behavior of the entrepreneurs. We develop a heterogeneous agent equilibrium model with workers, entrepreneurs and endogenous choice of legal forms to capture a key trade-off between tax benefits and diversification of investment risk. We test the model using confidential firm-level microdata from the U.S.~ Census, and with the model calibrated to capture the actual firm dynamics across legal forms following several tax reform episodes, we quantify the contribution of tax reforms through the business reorganization channel on the evolution of income, wealth and consumption inequality of workers and entrepreneurs.
    Date: 2018
  12. By: Thomas R. Tørsløv; Ludvig S. Wier; Gabriel Zucman
    Abstract: By combining new macroeconomic statistics on the activities of multinational companies with the national accounts of tax havens and the world's other countries, we estimate that close to 40% of multinational profits are shifted to low-tax countries each year. Profit shifting is highest among U.S. multinationals; the tax revenue losses are highest for the European Union and developing countries. We show theoretically and empirically that in the current international tax system, tax authorities of high-tax countries do not have incentives to combat profit shifting to tax havens. They instead focus their enforcement effort on relocating profits booked in other high-tax countries—in effect stealing revenue from each other. This policy failure can explain the persistence of profit shifting to low-tax countries despite the high costs involved for high-tax countries. We provide a new cross-country database of GDP, corporate profits, trade balances, and factor shares corrected for profit shifting, showing that the global rise of the corporate capital share is significantly under-estimated.
    JEL: F23 H26 H87
    Date: 2018–06
  13. By: Hippolyte D'Albis (PSE - Paris School of Economics); Agnès Bénassy-Quéré (PSE - Paris School of Economics); Amélie Schurich-Rey (UP1 - Université Panthéon-Sorbonne)
    Abstract: We revisit the standard theoretical model of tax competition to consider imperfect mobility of both capital and labor. We show that the mobility of one factor affects the taxation of both factors, and that the race-to-the-bottom narrative (with burden shifting) applies essentially to capital exporting countries. We test our predictions for a panel of 28 OECD countries over 1997-2014. We find capital taxation to be less sensitive to capital mobility in net capital importing countries than for net capital exporters. We also show that labor mobility has a negative impact on labor taxation but a positive impact on capital taxation. Finally, we show evidence of a non-linear effect of labor mobility on capital taxation depending on the level of skills.
    Keywords: tax competition,globalization,imperfect factor mobility
    Date: 2018–07
  14. By: Mariacristina De Nardi (UCL, Federal Reserve Bank of Chicago, CE); Giulio Fella (Queen Mary, University of London); Gonzalo Paz Pardo (University College London)
    Abstract: Earnings dynamics are much richer than typically assumed in macro models with heterogenous agents. This holds for individual-pre-tax and household-post-tax earnings and across administrative (Social Security Administration) and survey (Panel Study of Income Dynamics) data. We study the implications of two household-post-tax earnings processes in a standard life-cycle model: the canonical earnings process (that includes a persistent and a transitory shock) and a rich earnings dynamics process (that allows for age-dependence of moments, non-normality, and nonlinearity in previous earnings and age). Allowing for richer earnings dynamics implies a substantially better fit of the evolution of the cross-sectional consumption inequality over the life cycle and of the individual-level degree of consumption insurance against persistent earnings shocks. Richer earnings dynamics also imply lower welfare costs of earnings risk, but, as the canonical earnings process, do not generate enough concentration at the upper tail of the wealth distribution.
    Date: 2018
  15. By: Marc Bourreau (Télécom ParisTech); Bernard Caillaud (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); Romain De Nijs (X - École polytechnique)
    Abstract: This paper investigates the impact on fiscal revenues of taxing a two-sided mo-nopolistic platform offering personalized services to users and targeted advertising to sellers, based on the collection of users' personal data. We show that the introduction of a small tax on data collection, which has been proposed in the French context by Colin and Collin (2013), fails to increase fiscal revenues if the value added tax (VAT) rate is high enough, due to a tax base interdependence effect between the two taxes. Under a supermodularity condition on the platform's profit function as a function of its prices, this result generalizes to any per-unit tax. However, in some cases, an ad valorem tax on subscriptions or on advertising may raise fiscal revenues, irrespective of the VAT rate, as well as welfare.
    Keywords: data,online advertising,two-sided market,digital economy
    Date: 2016–10–25

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