nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒09‒03
fifteen papers chosen by
Thomas Andrén

  1. Tax Evasion and Financial Instability By Ozili, Peterson
  2. Flexible Retirement and Optimal Taxation By Abdoulaye Ndiaye
  3. The Heterogeneous Effects of Government Spending : It’s All About Taxes By Axelle Ferrière; Gaston Navarro
  4. Income Taxation and the Equilibrium Allocation of Labor By Jesper Bagger; Mads Hejlesen; Kazuhiko Sumiya; Rune Vejlin
  5. Distributive Impacts of Social Protection Systems in OECD Countries: Public-Private Mix and Hidden Welfare States By Hideki Konishi; Naomi Miyazato
  6. Hidden Baggage : Behavioral Responses to Changes in Airline Ticket Tax Disclosure By Sebastien Bradley; Naomi E. Feldman
  7. Microsimulation Analysis of Optimal Income Tax Reforms. An Application to New Zealand By Creedy, John; Gemmell, Norman; Hérault, Nicolas; Mok, Penny
  8. The Decommissioning of the Middle Class By MAVROZACHARAKIS, EMMANOUIL; DIMARI, GEORGIA
  9. Bribes vs. Taxes: Market Structure and Incentives By Amodio, Francesco; Choi, Jieun; De Giorgi, Giacomo; Rahman, Aminur
  10. Tax Spillovers from US Corporate Income Tax Reform By Sebastian Beer; Alexander D Klemm; Thornton Matheson
  11. Dynamic Scoring of Tax Reforms in the European Union By Salvador Barrios; Mathias Dolls; Anamaria Mafei; Andreas Peichl; Sara Riscado; Janos Varga; Christian Wittneben
  12. Global Implications of U.S. Tax Reform By Jack Mintz
  13. Optimal Progressivity with Age-Dependent Taxation By Jonathan Heathcote; Gianluca Violante; Kjetil Storesletten
  14. The Globalized Myth of Ownership and Its Implications for Tax Competition By Risse, Mathias; Meyer, Marco
  15. The Elasticity of Taxable Income of Individuals in Couples By Creedy, John; Gemmell, Norman

  1. By: Ozili, Peterson
    Abstract: This article explores the association between tax evasion and financial instability. The discussion also examines the effect of tax evasion for financial instability. The discussion shows that tax evasion can reduce the tax revenue available to governments to manage the economy and can weaken the government’s ability to promote stability in financial systems, while on the other hand, taxpayers who evade taxes feel they can use the evaded tax money to rather improve their own financial stability.
    Keywords: tax evasion, tax avoidance, financial stability, banking stability, banks, public finance,
    JEL: G21 G28 H12 H21 H24 H25 H26 H27
    Date: 2018–08–11
  2. By: Abdoulaye Ndiaye (Northwestern University)
    Abstract: This paper studies optimal income taxes and retirement benefits in a life-cycle model with an intensive margin of labor supply and an endogenous retirement age. The government insures and redistributes resources across individuals who privately observe persistent shocks to their productivity. In this environment, the optimal labor tax is hump-shaped in age, unlike in existing models with no endogenous retirement choice, in which the optimal tax is everywhere increasing. Because of the retirement margin, the total Frisch elasticity of labor supply increases with age. This elasticity effect flattens the labor tax for old workers relative to the model without an extensive margin. In addition, as high-productivity workers retire later than low-productivity workers, the distribution of productivity in the labor force features, over time, a higher mean and lower variance than in the general population. This novel composition effect pushes for a labor tax that declines for old workers. Optimal policy balances these effects with the insurance benefits of taxation, yielding the hump-shape in tax rates. In numerical simulations, the optimum achieves sizable welfare gains that approximately optimal age-dependent taxes fail to capture under the current US Social Security system. Yet, an optimal combination of age-dependent linear taxes with increasing-in-age delayed retirement credits generates welfare gains that are close to those from the optimum.
    Date: 2018
  3. By: Axelle Ferrière; Gaston Navarro
    Abstract: This paper investigates how government spending multipliers depend on the distribution of taxes across households. We exploit historical variations in the financing of spending in the U.S. since 1913 to show that multipliers are positive only when financed with more progressive taxes, and zero otherwise. We rationalize this finding within a heterogeneous-household model with indivisible labor supply. The model results in a lower labor responsiveness to tax changes for higher-income earners. In turn, spending financed with more progressive taxes induces a smaller crowding-out, and thus larger multipliers. Finally, we provide evidence in support of the model’s cross-sectional implications.
    Keywords: Fiscal stimulus ; Government spending ; Transfers ; Heterogeneous agents
    JEL: D30 E62 H23 H31 N42
    Date: 2018–08–22
  4. By: Jesper Bagger (Royal Holloway and the Dale T. Mortensen Centre); Mads Hejlesen (Department of Economics and Business Economics, Aarhus University, Denmark); Kazuhiko Sumiya (Royal Holloway); Rune Vejlin (Department of Economics and Business Economics, Aarhus University, Denmark)
    Abstract: We study the impact of labor income taxation on workers' job search behavior and the implications it has for the equilibrium allocation of heterogenous workers across heterogenous firms. The analysis is conducted within a complete markets equilibrium on-the-job search model with two-sided heterogeneity, endogenous job search effort and hiring intensity, equilibrium wage formation, and firm entry and exit. In a nutshell, by appropriating part of the gain from finding a better paid job, income taxation reduces the return to job search effort, and distorts workers' job search effort, which, in turn, distorts the equilibrium allocation of labor. The model is estimated on Danish matched employer-employee data, and is used to evaluate a series of tax reforms in Denmark in the 1990s and 2000s, to provide new insights into the elasticity of taxable labor income, and to identify a Pareto optimal income tax reform.
    Keywords: Labor reallocation, Income taxation, Tax reforms, Worker heterogeneity, Firm heterogeneity, Matched employer-employee data
    JEL: H20 J30 J64 J63
    Date: 2018–08–20
  5. By: Hideki Konishi (Faculty of Political Science and Economics, Waseda University); Naomi Miyazato (Department of Economics, Nihon University)
    Abstract: Modern welfare states provide social protection benefits not only directly through the public sector but also through the private sector in conjunction with governmental engagement, e.g., by mandating employment-based provisions and giving tax breaks for voluntary transactions. Countries with sufficient social support provided largely via the private sector are called hidden welfare states. Integrating such private social expenditures, this paper estimates the overall distributive impacts of social protection systems in OECD countries, using the SOCX data base. Taking into account measurement biases in income inequality indices and reverse causality stemming from policy formation decisions, it found that the overall distributive impact decreases as the provision of social support relies more on the private sector and has no statistical difference from zero in some hidden welfare states.
    Keywords: Private social expenditure, Hidden welfare state, Income redistribution, Dynamic panel model
    JEL: H53 I38 P51
    Date: 2018–07
  6. By: Sebastien Bradley; Naomi E. Feldman
    Abstract: We examine the impact on air travelers of an enforcement action issued by the U.S. Department of Transportation in January 2012 that required U.S. air carriers and online travel agents to incorporate all mandatory taxes and fees into their advertised fares. Exploiting cross-itinerary ticket tax variation within international city market pairs, we provide evidence that the more prominent display of tax-inclusive prices is associated with a significant reduction in tax incidence on consumers and a decline in passenger volume along more heavily-taxed itineraries. Ticket revenues are commensurately reduced. These results suggest a pronounced degree of inattention to ticket taxes prior to the introduction of full-fare advertising and reinforces the theoretical predictions and experimental findings of the literature on tax salience in a quasi-experimental context where taxes average more than $100 per ticket and where firms may engage in price-setting behavior.
    Keywords: Tax salience ; Airlines ; Ticket taxes ; Tax incidence
    JEL: H22 H31 D90 D18 L5
    Date: 2018–08–14
  7. By: Creedy, John; Gemmell, Norman; Hérault, Nicolas; Mok, Penny
    Abstract: This paper examines the optimal direction of marginal income tax reform in the context of New Zealand, which recently reduced its top marginal income tax rate to one of the lowest in the OECD. A behavioural microsimulation model is used, in which social welfare functions are defined in terms of either money metric utility or net income. The model allows for labour supply responses to tax changes, in which a high degree of population heterogeneity is represented along with all the details of the highly complex income tax and transfer system. The implications of the results for specific combinations of tax rate or threshold changes, that are both revenue neutral and welfare improving, are explored in detail, recognising the role of distributional value judgements in determining an optimal reform. The potential impact of additional income responses is also examined, using the concept of the elasticity of taxable income. Results suggest, under a wide range of parameter values and assumptions, that raising the highest income tax rate and/or threshold, would be part of an optimal reform package.
    Keywords: Optimal taxation, Tax reform, Behavioural microsimulation, Money metric utility,
    Date: 2018
    Abstract: : The euro crisis has threatened the balance of social structures, through the impoverishment of the middle class, in almost all countries of the Old Continent. This trend has not only posed a threat to social cohesion, but it also threats the very nature of the so-called Western-style Democracy. The reason for this is that there is a class that has always been a "cushion" that absorbs both the vibrations of competition and the confrontation of the social elite with the socially weak, offering the latter the ability to overcome their misery. In most capitalist economies, the middle class label is based on an economic definition that is largely based on a lifestyle that is based on a certain economic robustness and endurance. With the deepening of the crisis, however, the diversity of the middle class not only has it been jeopardized, but rather, it has gradually been replaced by a new demographic category called the prekariat. This new category consists of a group of people once in the middle class and currently marginalized. All of this leads to generalized uncertainty and totally unstable political attitudes, with intense mobility at the extremes. The rapid rise of right and left-wing populism is an aspect of the threatened subjugation of the middle class strata. The consequences for societies when their layered center is lost are obvious and significant.
    Keywords: middle class; prekariat; decommissioning of middle class; elevator effect.
    JEL: A10 H20 H3 H4 H40 H41 H5 H50 H51 H52 H53 H54 H55 I0 I1 I2 J0 J00 J01 J1 Z00
    Date: 2018–07–09
  9. By: Amodio, Francesco (McGill University); Choi, Jieun (World Bank); De Giorgi, Giacomo (University of Geneva); Rahman, Aminur (World Bank)
    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, incentives, market structure, demand elasticity
    JEL: D22 D40 H26 H71 O12
    Date: 2018–07
  10. By: Sebastian Beer; Alexander D Klemm; Thornton Matheson
    Abstract: This paper describes, and where possible tentatively quantifies, likely tax spillovers from the U.S. corporate income tax reform that was part of the broader 2017 tax reform. It calculates effective tax rates under various assumptions, showing among other findings, how the interest limitation and the Foreign Derived Intangible Income provision can raise or reduce rates. It tentatively estimates that under constant policies elsewhere, the rate cut will reduce tax revenue from multinationals in other countries by on average 1.6 to 5.2 percent. If other countries react in line with historical reaction functions, the revenue loss from multinationals rises to an average of 4.5 to 13.5 percent. The paper also discusses profit-shifting, real location, and policy reactions from the more complex features of the reform.
    Date: 2018–07–13
  11. By: Salvador Barrios; Mathias Dolls; Anamaria Mafei; Andreas Peichl; Sara Riscado; Janos Varga; Christian Wittneben
    Abstract: This paper presents the first dynamic scoring exercise linking a microsimulation and a dynamic general equilibrium model for Europe. We illustrate our novel methodology by analysing hypothetical reforms of the social insurance contributions system in Belgium. Our approach takes into account the feedback effects resulting from adjustments and behavioural responses in the labour market and the economy-wide reaction to tax policy changes, essential for a comprehensive evaluation of the reforms. We find that the self-financing effect of a reduction in employers’ social insurance contribution is substantially larger than that of a comparable reduction in employees’ social insurance contributions.
    Date: 2018
  12. By: Jack Mintz
    Abstract: Tax reform adopted in United States for 1 January, 2018 will have a significant positive impact on the global economy in 2018. The ground-breaking corporate income tax will also substantially affect US tax competitiveness with many provisions drawing both capital and profits to the United States. With the sharply lower corporate income tax rate, dividend exemption system and new limitations on deductible interest, US companies will try to push debt and other costs onto foreign countries, reducing corporate taxes elsewhere. This paper outlines key facts on the corporate tax reform featured in the US Tax Cuts and Jobs Act, assesses the reform with respect to US investment and examines the impacts of interest and loss limitation rules, as well as new US taxes with respect to intangible income.
    Date: 2018
  13. By: Jonathan Heathcote (Federal Reserve Bank of Minneapolis); Gianluca Violante (Princeton University); Kjetil Storesletten (University of Oslo)
    Abstract: This paper studies optimal taxation of labor earnings when the degree of tax progressivity is allowed to vary with age. We analyze this question in a tractable equilibrium overlapping-generations model that incorporates a number of salient trade-offs in tax design. Tax progressivity provides insurance against ex-ante heterogeneity and earnings uncertainty that missing markets fail to deliver. However, taxes distort labor supply and human capital investments. Uninsurable risk cumulates over the life cycle, and thus the welfare gains from income compression via progressive taxation increase with age. On the other hand, average labor productivity rises with age, and thus the welfare losses from progressive taxation's distortionary impact on labor supply also increase with age. The optimal age-varying system balances these distortions. In a calibrated version of the economy, we quantify the welfare gains of moving from the optimal age-invariant to the optimal age-dependent system and find that they are negligible.
    Date: 2018
  14. By: Risse, Mathias (Harvard U); Meyer, Marco (U of York)
    Abstract: Tax competition (by states) and tax evasion (by individuals or companies) unfold at a dramatic scale. An obvious adverse effect is that some states lose their tax base. Perhaps less obviously, states lose out by setting tax policy differently--often reducing taxes--due to tax competition. Is tax competition among states morally problematic? We approach this question by identifying the globalized myth of ownership. We choose this name parallel to Liam Murphy and Thomas Nagel's myth of ownership. The globalized myth is the (false) view that one can assess a country's justifiably disposable national income simply by looking at its gross national income (or gross national income as it would be absent certain forms of tax competition). Much like its domestic counterpart, exposing that myth will have important implications across a range of domains. Here we explore specifically how tax competition in an interconnected world appears in this light, and so by drawing on the grounds-of-justice approach developed in Mathias Risse's On Global Justice.
    Date: 2018–06
  15. By: Creedy, John; Gemmell, Norman
    Abstract: This paper examines the effect on the elasticity of taxable income for individuals in couples, where there is no income splitting for tax purposes but joint decisions are taken regarding taxable incomes. Two approaches are considered. First, the effects of minimising the total tax increase arising from a marginal rate increase are examines. Second, the paper considers the effects of joint utility maximisation.
    Keywords: Income taxation, Taxable income, Elasticity of taxable income,
    Date: 2018

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