nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒09‒17
twelve papers chosen by
Thomas Andrén

  1. Capital Taxes and Redistribution: The Role of Management Time and Tax Deductible Investment By Juan Carlos Conesa; Begona Dominguez
  2. Estimating Bargaining-related Tax Advantages of Multinational Firms By Egger, Peter; Strecker, Nora; Zoller-Rydzek, Benedikt
  3. Effects of State Taxation on Investment: Evidence from the Oil Industry By Brown, Jason; Maniloff, Peter; Manning, Dale T.
  4. Tax Morale and the Role of Social Norms and Reciprocity: Evidence from a Randomized Survey Experiment By Doerrenberg, Philipp; Peichl, Andreas
  5. Tax Evasion with a Conscience By Dufwenberg, Martin; Nordblom, Katarina
  6. The effects of tax changes on economic activity: a narrative approach to frequent anticipations By Sandra García- Uribe
  7. Subnational government investment and dynamic fiscal rules By Sasa Drezgic
  8. The Role of Corporate Taxes in the Decline of the Startup Rate By Julian Neira; Rish Singhania
  9. To what extent do welfare states compensate for the cost of children? A hypothetical household approach to policy evaluations By Tess Penne; Tine Hufkens; Tim Goedemé; Bérénice Storms
  10. A Dichotomous Analysis of Unemployment Welfare By Xingwei Hu
  11. Redistributing the Gains From Trade Through Progressive Taxation By Mike Waugh
  12. Inequality in an OLG economy with heterogeneous cohorts and pension systems By Joanna Tyrowicz; Krzysztof Makarsk; Marcin Bielecki

  1. By: Juan Carlos Conesa; Begona Dominguez
    Abstract: Should capital income be taxed for redistributional purposes? Judd (1985) suggests that it should not. He finds that the optimal capital tax is zero at steady state from the point of view of any agent. This paper re-examines this question in an innitely-lived worker-capitalist model, in which capitalists devote management time to build capital. Two forms of capital taxation are considered: one for which investment is not tax deductible (corporate tax) and a second one for which investment is fully and immediately tax deductible (dividend tax). Our main results are as follows. The optimal corporate tax is zero at steady state from the point of view of any agent. However, the optimal dividend tax is in general not zero at steady state and depends on preference parameters, life-time wealth and the point of view (Pareto weights) of the benevolent policymaker. For Pareto weights that lead to Pareto-improving reforms, we find that labor tax rates should be eliminated while dividend tax rates should be increased to around 36 percent at steady state.
    Date: 2018
  2. By: Egger, Peter; Strecker, Nora; Zoller-Rydzek, Benedikt
    Abstract: The effective corporate profit tax rates (ETRs) of multinational enterprises (MNEs) differ from those of national enterprises (NEs). In this paper, we argue that the bargaining power of MNEs is an important factor in explaining these differences beyond profit shifting. First, larger and more profitable firms are more valuable for various reasons (in terms of absolute tax revenues, employment, etc.) for tax authorities. Thus, in threatening to move their operations to other jurisdictions, larger firms may be able to extract greater deductions. This potential bargaining advantage of larger firms may result in a regressive ETR schedule. As MNEs tend to be larger and more profitable than NEs, they may pay lower ETRs for merely size-related reasons. Second, MNEs face arguably lower costs to relocate their business (or profits) to foreign countries with a lower tax rate than NEs. This enhances their bargaining position even further when negotiating tax deductions. To quantify the importance of bargaining in the tax gap between MNEs and NEs, it is elemental to rigorously condition on the determinants of MNE status, profit taxation, as well as possible profit-shifting activities. To that end, we use French firm-level data and entropy balancing of the joint determinants of MNE status (including the possibility of profit shifting) and a firm's ETR. Empirically, we find that the empirical regressivity of the French tax schedule reduces French MNEs' ETRs by 2.52 percentage points on average due to their larger size, while the relocation threat of the same firms reduces their ETR by 3.58 percentage points relative to comparable NEs. The former is a tax advantage that any firm (MNE or NE) of the same size could obtain, while the latter is specific to MNEs and beyond the reach of NEs.
    Keywords: Profit taxation; Multinational firms; Entropy balancing.
    JEL: C2 F2 H2
    Date: 2018–08
  3. By: Brown, Jason (Federal Reserve Bank of Kansas City); Maniloff, Peter; Manning, Dale T.
    Abstract: We provide theoretical and empirical evidence that firms do not in general respond equally to changes in prices and taxes in the setting of oil well drilling in the United States. Our key theoretical contribution is that in a multi-state model, a change in output price changes both the benefit and opportunity cost of drilling, whereas a change in a state tax rate only changes the benefit of drilling in that state. Thus, a firm responds more to a change in tax than a change in price. Our econometric results support this theoretical prediction. We find that a one dollar per barrel increase in price leads to a 1 percent increase in wells drilled, but a one dollar per barrel increase in tax leads to at least an 8 percent decrease in wells drilled. These estimates correspond to elasticities of about 0.5 and -0.3, respectively. These results are robust to interstate spillovers, other state regulations, and econometric specification. They imply that using state tax rate decreases to incentivize investment may lead to losses of government revenue.
    Keywords: Severance Tax; Drilling; Supply Elasticity
    JEL: Q32 Q48 R51
    Date: 2018–09–05
  4. By: Doerrenberg, Philipp (ZEW Mannheim); Peichl, Andreas (Ifo Institute for Economic Research)
    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: 2018–07
  5. By: Dufwenberg, Martin (University of Arizona, University of Gothenburg); Nordblom, Katarina (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: How do moral concerns affect tax compliance and the need for audits? We propose answers by exploring an inspection game, modified to incorporate belief-dependent taxpayer guilt, unawareness, and third-party audience effects. Novel conclusions are drawn regarding whose behavior is affected by moral concerns (it's the authority's more than the citizen's) and regarding policy, in particular fines vs. jail, the role of information campaigns, and the use of a principle of public access whereby tax returns are made public information.
    Keywords: tax evasion; guilt; inspection game; policy
    JEL: D03 H26 H83
    Date: 2018–08
  6. By: Sandra García- Uribe (Banco de España)
    Abstract: This paper studies the effects of anticipations of tax changes in the USA through the release of tax news in the media. I construct a new measure that captures the anticipation of tax bill approvals by exploiting the content of news in the US television. Since this information typically flows faster than standard measures of GDP, I propose a mixed frequency dynamic factor model to estimate both the economic activity latent factor and the effects of anticipated tax shocks on it. I find that onemonth-ahead media anticipations of tax approvals significantly stimulate current economic activity. This stimulation comes from anticipations of tax cuts.
    Keywords: fiscal policy, taxation, mass media, information, beliefs, random forests
    JEL: E62 H20 N12 D80
    Date: 2018–09
  7. By: Sasa Drezgic (University of Rijeka Faculty of Economics)
    Abstract: The paper tries to deal with issue how to increase local government investment finance without jeopardizing fiscal position of local government as well as overall macroeconomic stability. One of the key challenges is to resolve an everlasting conflict between central and subnational government tier related to different perspectives of each jurisdiction. Namely, central government level is more concerned for macroeconomic position and usually is more inclined to centralise debt management and limit borrowing powers of subnational government. On the other hand, subnational government utilizes borrowing for large local communal infrastructure needs but faces short-term perspective of political mandate, which demands control aimed for prevention of excessive borrowing. In addition, heterogeneity of local governments in terms of fiscal capacity and fiscal position makes general deficit sharing mechanisms as poor solution to intergovernmental fiscal management. General deficit sharing mechanisms usually base on fixed budgetary limits, which do not enable control for weak subnational government units and exert too high limitations for more progressive ones. Introduction of more precise dynamic fiscal rules, which account for specific fiscal standing of each local government and fiscal system, would provide incentive for more productive borrowing policies. Such mechanism overcomes short-term financing perspective that comes from short-term political horizon and mid-term focus of budgetary documentation. The results of the research brings clear policy recommendations. It is possible to replace existing deficit sharing mechanisms by more productive and efficient dynamic system. This would bring not just improved debt management control but provide incentive for more efficient borrowing.
    Keywords: subnational government investment, fiscal rules, borrowing, dynamic fiscal rules, deficit sharing
    JEL: E62 H60 H70
    Date: 2018–06
  8. By: Julian Neira (University of Exeter); Rish Singhania (University of Exeter)
    Abstract: The Role of Corporate Taxes in the Decline of theStartup Rate∗Julian NeiraUniversity of ExeterRish SinghaniaUniversity of ExeterOctober 26, 2017AbstractThe business startup rate in the United States has exhibited a large secular declinein recent decades. The reasons behind the decline are not well understood. This paperhypothesizes that the startup rate declined in large part because corporate taxes raisedthe opportunity cost of entrepreneurship. We formalize this thesis using a model ofoccupational choice that features firm entry and exit. Quantitatively, the model accountsfor much of the decline in the startup rate. Taxes alone account for one-fifth of thedecline. Cross-sectoral patterns in US data support our results.
    Date: 2018
  9. By: Tess Penne; Tine Hufkens; Tim Goedemé; Bérénice Storms
    Abstract: In order to alleviate child poverty, contemporary European welfare states have shifted their focus increasingly towards child-centred investment strategies. However, studies assessing the generosity of welfare states to families with children focus mainly on the role of cash benefit packages, or on government expenditure, disregarding the actual costs families face when accessing essential goods and services. This paper takes a hypothetical household approach to family policy evaluations and aims at contributing to existing studies by: (1) empirically assessing the needs and costs of children across welfare states by making use of cross-nationally comparable reference budgets, while taking into account publicly-provided or subsidized services, (2) simulating the cash benefits that households with children receive through the tax-benefit system, by making use of the new Hypothetical Household Tool (HHoT), and, (3) combining both types of information in order to compare the essential out-of-pocket costs of children between 6 and 18 years old with the simulated cash benefit packages. The paper focuses on six European welfare states: Belgium, Finland, Greece, Hungary, Italy and Spain. We propose a new indicator that can be used to assess welfare state generosity to families with children: the child cost compensation indicator. By making use of this indicator, we show that, even though with important cross-national variation, the out-of-pocket cost of children is generally compensated to a small extent through cash policies. Although support for families is higher at the lower end of the income distribution, for households living on a low gross wage, the income of a family with children is less adequate compared to a similar childless family, and is in many cases insufficient to participate adequately in society.
    Date: 2018–05
  10. By: Xingwei Hu
    Abstract: In an economy which could not accommodate full employment of its labor force, it employs some but does not employ others. The bipartition of the labor force is random, and we characterize it by a probability distribution with equal employment opportunity. We value each employed individual by his marginal contribution to the production; we also value each unemployed individual by the potential marginal contribution he would make if the market hired him. We fully honor both the individual value and its national aggregate in our distribution of the net production to the unemployment welfare and the employment benefits. Using a balanced budget rule of taxation, we derive a fair, debt-free, and risk-free tax rate for any given unemployment rate. The tax rate minimizes both the asymptotic mean and variance of the underlying posterior unemployment rate; it also stimulates employment, boosts productivity, and mitigates income inequality. One could also apply the rate and valuation approach to areas other than the labor market. This framework is open to alternative identification strategies and other forms of equal opportunity.
    Date: 2018–08
  11. By: Mike Waugh (New York University)
    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 loses 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 to work and for labor to reallocate away from comparatively disadvantaged locations. We find that progressivity should increase with openness to trade and that progressivity is an important tool to mitigate the negative consequences of globalization.
    Date: 2018
  12. By: Joanna Tyrowicz (Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University); Krzysztof Makarsk (Warsaw School of Economics); Marcin Bielecki (University of Warsaw)
    Abstract: We analyze the consumption and wealth inequality in an OLG model with mandatory pension systems. Our framework features within cohort heterogeneity of endowments and heterogeneity of preferences. We allow for population aging and gradual decline in TFP growth. We show four main results. First, increasing longevity translates to substantial increases in aggregate consumption inequality and wealth inequality. Second, a pension system reform from a defined benefit to a defined contribution works to reinforce consump- tion inequality and reduce wealth inequality. Third, minimum pension benefits are able to partially counteract an increase in inequality introduced by the defined contribution system, at a fiscal cost. Fourth the minimum pension benefit guarantee mostly addresses the sources of inequality which stem from differentiated endowments rather than those which stem from heterogeneous preferences.
    Keywords: consumption, wealth, inequality, longevity, defined contribution, defined benefit
    JEL: H55 E17 C60 C68 E21 D63
    Date: 2018–08

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