nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒09‒10
eighteen papers chosen by
Thomas Andrén

  1. Wealth Taxes and Inequality By Borri, Nicola; Reichlin, Pietro
  2. Financial Incentives and Earnings of Disability Insurance Recipients: Evidence from a Notch Design By Ruh, Philippe; Staubli, Stefan
  3. The case for negative income tax with flat tax in Europe. An empirical optimal taxation exercise By Nizamul Islam; Ugo Colombino
  4. Microsimulation analysis of optimal income tax reforms. An application to New Zealand By John Creedy; Norman Gemmell; Nicolas Hérault; Penny Mok
  5. Globalization, income tax structure and the redistribution–progressivity tradeoff By Joël Hellier
  6. Optimal Unemployment Insurance and Redistribution By Boadway, Robin; Cuff, Katherine
  7. Welfare Implications of Switching to Consumption Taxation By Juan Carlos Conesa; Bo Li; Qian Li
  8. Optimal Income Taxation in Unionized Labor Markets By Albert Jan Hummel; Bas Jacobs
  9. Intra-Household Wealth and Welfare Inequality in the US: Estimations from a Collective Model of Labor Supply By Molina, José Alberto; Gimenez-Nadal, J. Ignacio; Velilla, Jorge
  10. Should Robots be Taxed? By Joao Guerreiro; Pedro Teles; Sergio Rebelo
  11. Ramsey-optimal Tax Reforms and Real Exchange Rate Dynamics By Stephane Auray; Aurelien Eyquem; Paul Gomme
  12. Redistribution through Income Taxation and Public Utility Pricing in the Presence of Energy Efficiency Considerations By Fabian Feger; Doina Radulescu
  13. Tax Morale: Framing and Fairness By Phillis Alexander; Merima Balavac; Suranjita Mukherjee; David Massey
  14. Simplified registration and collection mechanisms for taxpayers that are not located in the jurisdiction of taxation: A review and assessment By Walter Hellerstein; Stéphane Buydens; Dimitra Koulouri
  15. Designing a Basic Income Guarantee for Canada By Boadway, Robin; Cuff, Katherine; Koebel, Kourtney
  16. Corporate Tax Cuts and the Decline of the Labor Share By Baris Kaymak; Immo Schott
  17. Credit Channel and Business Cycle: The Role of Tax Evasion By Bruno Chiarini; Maria Ferrara; Elisabetta Marzano
  18. Globalization and Taxation: Theory and Evidence By Priya Ranjan; Giray Gozgor

  1. By: Borri, Nicola; Reichlin, Pietro
    Abstract: We analyze the optimal combination of wealth and labor tax rates in a model where wealth-to-income ratios and wealth inequality are rising endogenously due to unbalanced technological improvement in a two-sector economy. We consider rich and poor households, financial and housing wealth, and find that a "realistic" optimal steady state tax structure includes some taxation of labor, zero taxation of financial wealth, a housing wealth tax on rich households and a housing wealth subsidy on poor households. These findings are robust with respect to variations in the housing demand elasticity.
    Keywords: Housing; inequality; Wealth; Wealth Taxes
    JEL: E21 E62 G1 H2 H21
    Date: 2018–07
  2. By: Ruh, Philippe (University of Zurich); Staubli, Stefan (University of Calgary)
    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.
    Keywords: disability insurance, labor supply, benefit notch, bunching
    JEL: H53 H55 J14 J21
    Date: 2018–07
  3. By: Nizamul Islam (Luxembourg Institute of Socio-Economic Research); Ugo Colombino (University of Torino, Italy, and CHILD, LISER, IZA)
    Abstract: We present an exercise in empirical optimal taxation for a sample of European countries from three areas: Southern, Central and Northern Europe. For each country, we estimate a microeconometric model of labour supply for both couples and singles. A procedure that simulates the households’ choices under given tax-transfer rules is then embedded in a constrained optimization program in order to identify optimal rules under the public budget constraint. The optimality criterion is the class of Kolm's social welfare function. The tax-transfer rules considered as candidates are members of a class that includes as special cases various versions of the Negative Income Tax: Conditional (means-tested) Basic Income, Unconditional Basic Income, In-Work Benefits and General Negative Income Tax, combined with a Flat Tax above the exemption level. The analysis in most cases show that: the General Negative Income Tax strictly dominates the other rules, including the current ones; the Unconditional Basic Income policy is better than the Conditional Basic Income policy; Conditional Basic Income policy may lead to a significant reduction in labour supply and poverty-trap effects; In-Work-Benefit policy is strictly dominated by the General Negative Income Tax and by the Unconditional Basic Income.
    Keywords: Basic income, negative income tax, optimal tax, micro-simulation, welfare.
    Date: 2018–01
  4. By: John Creedy (Victoria University of Wellington, New Zealand); Norman Gemmell (Victoria University of Wellington, New Zealand); Nicolas Hérault (Melbourne Institute of Applied Economic and Social Research, Australia); Penny Mok (Ministry of Business, Innovation and Employment, New Zealand)
    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, social welfare function, money metric utility.
    JEL: D63 H21 H31 I31 J22
    Date: 2018–05
  5. By: Joël Hellier (University of Lille and University of Nantes, France)
    Abstract: We build a simple model in which (i) households select their country of residence depending on income taxation and on the cost of migrating and living abroad, and (ii) globalization comes with a decrease in the cost of migration. Globalization leads to (i) a maximum between-country income-tax gap which is lower for the high incomes, (ii) a decrease in income tax rates and (iii) a convergence in the taxation structures of the different countries. In addition, globalization generates changes in income tax schedules and redistribution which display three successive stages. In the first stage, the redistribution goal is consistent with tax progressivity. In the second stage, the tax schedule becomes regressive at the top. Thirdly, if the migration cost continues to decline, the government can typically not achieve its redistribution goal, even if redistribution is its first priority, and there is no equilibrium taxation schedule, the tax structure becoming volatile. These results are in line with observed facts. Finally, the model shows that globalization tends to generate and magnify a trade-off between less redistribution and less tax progressivity. This provides an explanation for the middle class curse and the social democrat curse experienced by a large majority of advanced countries over the last three decades.
    Keywords: globalization, income tax, migration, progressivity, redistribution, tax competition.
    JEL: F22 H23 H24 H26 I38
    Date: 2018–04
  6. By: Boadway, Robin; Cuff, Katherine
    Abstract: We characterize optimal income taxation and unemployment insurance in a search-matching framework where both voluntary and involuntary unemployment are endogenous and Nash bargaining determines wages. Individuals differ in utility when voluntarily unemployed (non-participants in the labour market) and decide whether to participate as a job seeker and if so, how much search effort to exert. Unemployment insurance trades of insurance versus moral hazard due to search. We show that it is optimal to have a positive linear wage tax without any redistributive concerns even if search is effcient so the Hosios condition is satisfied. We also allow for different productivity types so there is a redistributive role for the income tax and show that a proportional wage tax internalizes the macro effects arising from endogenous wages. Lump-sum income taxes and transfers can then redistribute between individuals of differing skills and employment states. Our analysis embeds optimal unemployment insurance into an extensive-margin optimal redistribution framework where transfers to the involuntary and voluntary unemployed can differ, and nests several standard models in the literature.
    Keywords: Demand and Price Analysis, Financial Economics
    Date: 2016–12
  7. By: Juan Carlos Conesa; Bo Li; Qian Li
    Abstract: We evaluate a reform of the US tax system switching to consumption taxation instead of income taxation. We do so in an environment that allows for progressivity of consumption taxes through differential tax rates between basic and non-basic consumption goods. The optimal tax system involves substantial subsidies to the consumption of basic goods. We find large efficiency gains in the long run, with a very small increase in inequality. However, once we consider the transitional dynamics associated to the reform, only very low productivity households and a handful of high productivity low wealth households experience welfare gains.
    Date: 2018
  8. By: Albert Jan Hummel; Bas Jacobs
    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
  9. By: Molina, José Alberto (University of Zaragoza); Gimenez-Nadal, J. Ignacio (University of Zaragoza); Velilla, Jorge (University of Zaragoza)
    Abstract: This paper analyzes the intra-household distribution of wealth and welfare in the United States, within a theoretical framework based on a collective model of labor supply, where household decisions are Pareto efficient, and spouses negotiate a sharing rule for non-labor income. Using the American Time Use Survey for the years 2003 to 2015, estimates show a positive correlation between individual wages and labor supply, while cross-wages go in the opposite direction. Additionally, we find that wives tend to be more altruistic in comparison to their husbands regarding the intra-household allocation of income, which leads to wealth inequalities. However, the intra-household processes appear to be efficient in terms of welfare, as increases in any source of household income are associated with decreases in intra-household inequality, as measured by the spouses' estimated indirect utility. Our results shed light on the spouses' wealth shares and the sharing rule guiding the individual allocations, which may be important in the design of policies aimed at alleviating poverty.
    Keywords: collective model, labor supply, sharing rule, intra-household inequality, welfare, American Time Use Survey
    JEL: J22
    Date: 2018–07
  10. By: Joao Guerreiro (Northwestern University); Pedro Teles (Banco de Portugal, Univ Catolica Portugu); Sergio Rebelo (Northwestern University)
    Abstract: We use a model of automation to show that with the current U.S. tax system, a fall in automation costs could lead to a massive rise in income inequality. This inequality can be reduced by raising marginal income tax rates and taxing robots. But this solution involves a substantial efficiency loss for the reduced level of inequality. A Mirrleesian optimal income tax can reduce inequality at a smaller efficiency cost, but is difficult to implement. An alternative approach is to amend the current tax system to include a lump-sum rebate. In our model, with the rebate in place, it is optimal to tax robots only when there is partial automation.
    Date: 2018
  11. By: Stephane Auray (CREST-Ensai and ULCO); Aurelien Eyquem (GATE, Universit\'e Lumiere Lyon 2, Institut Universitaire de France); Paul Gomme (Concordia University and CIREQ)
    Abstract: We solve the Ramsey-optimal tax plan for a small open economy with an endogenously-determined real exchange rate. The open economy constrains the government's setting of the capital income tax rate since physical capital cannot be dominated in rate of return by foreign assets. However, the endogenous real exchange rate loosens this constraint relative to a one good open economy model in which the real exchange rate is necessarily fixed. We find that, the dynamics of the two good small open economy model more closely resemble those of a closed economy model than a one good small open economy model.
    Keywords: optimal fiscal policy, tax reforms, welfare
    JEL: E32 E52 F41
    Date: 2018–08
  12. By: Fabian Feger; Doina Radulescu
    Abstract: Many OECD countries such as the USA, the UK or Switzerland are concerned with the affordability of utility services and the distributional consequences inherent in the pricing strategy of basic goods and services, such as electricity. However, the effectiveness of the electricity tariff as a redistribution device is questionable in the presence of a progressive income tax schedule. To shed light on this controversy, we structurally estimate a model that combines public utility pricing and income taxation. We employ a large panel data set on about 105,000 households in the Swiss Canton of Bern from 2008 to 2013, including detailed energy consumption and household income and tax payment characteristics. While the theoretical model predicts that electricity prices should be subsidised in the presence of purely income redistribution concerns, we find a positive mark-up of 49%, in our data. This suggests that, in practice, the government is concerned with energy conservation as well as income redistribution.
    Keywords: redistribution, public utility pricing, energy, asymmetric information
    JEL: D12 D31 H21 H23 H24 L94 L98
    Date: 2018
  13. By: Phillis Alexander (Department of Accounting, Finance and Economics, Bournemouth University); Merima Balavac (Univerzitiet u Sarajevu); Suranjita Mukherjee (Department of Accounting, Finance and Economics, Bournemouth University); David Massey (University of Central Lancashire)
    Abstract: This paper examines to the relationship between the perception of tax fairness and tax morale conditional on the level of financial and tax literacy (FTL). The findings are based on the survey responses of 627 US or UK citizens in either public or private employment. Using factor analysis, the researchers found that there is a systematic variation of the effect of perceived tax fairness conditional on the FTL. Further, the way in which questions are framed is found to be important. For positively framed tax morale questions, the moderating effect of tax fairness is significantly negative for low levels of FTL candidates and improves with literacy. However, in negatively framed tax morale questions, tax morale is improved as one views that the tax system is fair but the impact is significant for higher levels of literacy. This has further policy implications as the ‘framing’ of tax literature could be instrumental in improving the tax morale of taxpayers.
    Keywords: Income Tax; Tax Morale; Tax Law; Taxability; Tax Compliance
    JEL: K34
    Date: 2018–08
  14. By: Walter Hellerstein; Stéphane Buydens; Dimitra Koulouri
    Abstract: This paper reviews and evaluates the efficacy of simplified tax registration and collection mechanisms for securing compliance of taxpayers over which the jurisdiction with taxing rights has limited or no authority to effectively enforce a tax collection or other compliance obligation. The experience in addressing this problem has involved primarily consumption taxes, but the lessons that can be learned from it are applicable as well to other tax regimes that confront the same problem. The best available evidence at present indicates that simplified regimes can work well in practice, achieving a high level of compliance. The paper notes that the adoption of thresholds may be an appropriate solution to avoid imposing a disproportionate administrative burden on small businesses while a good communications strategy is essential to the success of a simplified regime.
    Keywords: collection, compliance costs, consumption tax, cross-border, enforcement, simplified registration and compliance, tax, thresholds, VAT, VAT/GST Guidelines
    Date: 2018–09–06
  15. By: Boadway, Robin; Cuff, Katherine; Koebel, Kourtney
    Abstract: We propose mechanism for implementing a two-stage harmonized Basic Income Guarantee with federal and provincial components. In Stage One, the federal government replaces its refundable and nonrefundable tax credits with an income-tested basic income delivered through the income tax system. The reform is revenue-neutral. In Stage Two, each province decides whether to implement a provincial basic income guarantee that is harmonized with the federal one but allows province-specific basic income levels. The provincial basic income replaces provincial refundable and nonrefundable tax credits as well as welfare and disability transfers, and is also revenue-neutral. All social services and contributory social insurance programs remain intact. An illustrative calculation using Statistical Canada’s SPSD/M model shows the financial feasibility of a national BIG of $20,000 per adult adjusted for family size with a benefit reduction rate of 30%.
    Keywords: Financial Economics, Public Economics
    Date: 2016–12
  16. By: Baris Kaymak (Universite de Montreal); Immo Schott (Université de Montréal)
    Abstract: We document a strong empirical connection between corporate taxation and the labor’s share of income in the manufacturing sector across OECD countries. The estimates indicate that the decline in corporate taxes is, on average, associated with 40% of the observed decline in labor’s share. We then present a model of industry dynamics where firms differ in their capital intensity as well as their productivity. A drop in the corporate tax rate reduces the labor share by shifting the distribution of production towards capital intensive firms. Industry con- centration rises as a result, and firm entry falls, consistent with the US experience documented in Kehrig and Vincent (2017) and Autor et al. (2017). Calibration of the model to the US economy indicates that corporate tax cuts explain at least a third of the decline in labor’s share in the US manufacturing industry.
    Date: 2018
  17. By: Bruno Chiarini; Maria Ferrara; Elisabetta Marzano
    Abstract: This paper examines the role of tax evasion in explaining the business cycle in a DSGE model with a financial accelerator. For this purpose, we assume that financially constrained agents are tax evaders, taking advantage of an additional margin of flexibility in coping with adverse shocks. In this setting, we simulate a risk shock that propagates its effects in the credit channel via the financial accelerator mechanism. The results show that tax evasion is pro cyclical and strengthens the effects of the financial accelerator. Unlike the standard literature, in which tax evasion cushions business cycle fluctuations, here we find that it amplifies macroeconomic fluctuations considerably.
    Keywords: tax evasion, financial accelerator, business cycle, risk shocks, DSGE modeling
    JEL: E32 E44 H26
    Date: 2018
  18. By: Priya Ranjan (Department of Economics, University of California-Irvine); Giray Gozgor (Istanbul Medeniyet University)
    Abstract: We construct a theoretical model to capture the compensation and efficiency effects of globalization in a set up where the redistributive tax rate is chosen by the median voter. The model predicts that the two alternative modes of globalization- trade liberalization and financial openness- could potentially have different effects on taxation. We then provide some empirical evidence on the relationship between taxation and the alternative modes of globalization using a large cross-country panel dataset. We make a distinction between de jure and de facto measures of globalization and find a robust negative relationship between de jure measures financial openness and tax rates. There is no robust relationship between de facto measures of finanical openness and taxation. As well, the relationship between trade liberalization (both de jure and de facto measures) and tax rates is not robust and depends on the measures of taxation as well as the time period of analysis.
    Keywords: Trade liberalization; capital market openness; redistributive taxation; median voter
    JEL: F11 F21 H11
    Date: 2018–08

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