nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒10‒08
fifteen papers chosen by
Thomas Andrén

  1. Jointly Optimal Taxes for Different Types of Income By Johannes Hermle; Andreas Peichl
  2. Income taxation of couples, spouses' labor supplies and the gender wage gap By Cremer, Helmuth; Roeder, Kerstin
  3. Payroll Taxes, Social Security and Informality. The 2012 Tax Reform in Colombia By Pablo Adrian Garlati Bertoldi
  4. Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs By Fabian Kindermann; Lukas Mayr; Dominik Sachs
  5. Long-term Changes in Married Couples’ Labor Supply and Taxes: Evidence from the US and Europe Since the 1980s By Alexander Bick; Bettina Brüggemann; Nicola Fuchs-Schündeln; Hannah Paule-Paludkiewicz
  6. Fiscal structural reforms: the effect of card payments on vat revenue in the euro area By George Hondroyiannis; Dimitrios Papaoikonomou
  7. If France continues this strategy, taxes will destroy domestic investment and economic growth By Bakari, Sayef
  8. Implications of Lower Trend Productivity Growth for Tax Policy By Karen Dynan
  9. Effects of Low Productivity Growth on Fiscal Sustainability in the United States By Louise Sheiner
  10. Linking Tax Morale and Personal Income Tax in Spain By Pilar Rey del Castillo; Jaime Villanueva-Garcia
  11. The effects of the new fiscal rule and creative accounting: Empirical evidence from Japanese municipalities By Hirota, Haruaki; Yunoue, Hideo
  12. Public Debt Frontier. A toolkit for analyzing fiscal policy and debt sustainability By Gonzalo F. de-Córdoba; Benedetto Molinari; José L. Torres
  13. Democratisation and tax structure: Greece versus Europe from a historical perspective By Vassilis Sarantides; Pantelis Kammas
  14. Uniting European fiscal rules: How to strenghten the fiscal framework By Christofzik, Désirée; Feld, Lars P.; Reuter, Wolf Heinrich; Yeter, Mustafa
  15. Trends in Spending by the Department of Defense for Operation and Maintenance By Congressional Budget Office

  1. By: Johannes Hermle; Andreas Peichl
    Abstract: We develop and estimate a model of jointly optimal income taxes for different types of income. Compared to standard optimal tax formulas, optimal schedular income tax rates additionally depend on cross-elasticities between tax bases capturing fiscal externalities. We discuss two applications: the taxation of different income sources such as labor or capital income and the taxation of couples. For these applications, we calculate income type-specific optimal tax rates for Germany using rich panel data from administrative tax records. We first estimate income-type specific elasticities with respect to the next-of-tax rate and show that responses to taxes differ substantially by income source and by gender. Second, we calculate social welfare weights implicit in the German personal income tax schedule which again differ between income sources and by gender. Using these estimates, we consider a tax simplification reform by calculating optimal schedular linear income tax rates. We find that optimal tax rates are significantly lower for labor income than for self-employment and capital income as well as for married women than men.
    Keywords: optimal taxation, income types, marginal social welfare weights, flat tax, administrative data
    JEL: H21 H24 H26 D60
    Date: 2018
  2. By: Cremer, Helmuth; Roeder, Kerstin
    Abstract: We study the taxation of couples when female wages do not re?ect their true productivity. We show that the expression for the marginal tax rates of the male spouses is the same as in a Mirrleesian world where wages re?ect true productivities. Marginal taxes for the female spouses are reduced because of a Pigouvian correction. Consequently, the wage discrimination pleads for a lower marginal tax on the female spouse. Furthermore, the distortion of a couples?tradeo¤ between male and female labor supply is the same as in a Mirrleesian world without a gender wage gap. It only depends on true productivities and not on wages. In other words, the tax system completely neutralizes the extra distortion introduced by the wedge between the female spouse?s wage and her true productivity.
    Keywords: Couples'income taxation; gender wage gap; optimal income taxation; household labor supply
    JEL: D10 H21 H31 J16 J22
    Date: 2018–09
  3. By: Pablo Adrian Garlati Bertoldi
    Abstract: I evaluate how the drastic reduction in payroll taxes in 2012 reduced informality in Colombia. By the end of 2012 the Colombian government implemented a tax reform that, among other things, substantially reduced payroll taxes. I evaluate the effect of this reform on informality both theoretically and empirically. Theoretically, I develop a labor market model incorporating the changes introduced by the reform. As the reduction in payroll taxes was accompanied by a change in social trans-fers' funding, which led to uncertain changes in profits and social benefits, straightforward predictions on informality are not possible. Empirically, I obtain difference-in-difference (DID) estimates from two household surveys- one composed by many repeated cross sections across many years and the other a much shorter panel dataset. Estimates from the repeated cross sections data indicate small, short-term effects and large long-term effects. Industry was the first sector to enjoy a reduction in informality, followed by services and agriculture. For workers earning around one minimum wage, I find large point estimates. Estimates from the household survey panel data are in line with these results.
    Keywords: informality, payroll taxes, social security, Colombia
    JEL: D21 H24 H30 J32 J38
    Date: 2018–09–21
  4. By: Fabian Kindermann (Universität Bonn); Lukas Mayr (University of Essex); Dominik Sachs (University of Munich)
    Abstract: The taxation of bequests can have a positive impact on the labor supply of heirs through wealth effects. This leads to an increase in future labor income tax revenue on top of direct bequest tax revenue. We first show in a theoretical model that a simple back-of-the-envelope calculation, based on existing estimates for the reduction in earnings after wealth transfers, fails: the marginal propensity to earn out of unearned income is not a sufficient statistic for the calculation of this effect because (i) heirs anticipate the reduction in net bequests and adjust their labor supply already prior to inheriting, and (ii) when bequest receipt is stochastic, even those who ex post end up not inheriting anything respond ex ante to the implied change in their distribution of net bequests. We quantitatively elaborate the size of the overall revenue effect due to labor supply changes of heirs by using a state of the art life-cycle model that we calibrate to the German economy. Besides the joint distribution of income and inheritances, quasi-experimental evidence regarding the size of wealth effects on labor supply is a key target for this calibration. We find that for each Euro of bequest tax revenue the government mechanically generates, it obtains an additional 9 Cents of labor income tax revenue (in net present value) through higher labor supply of (non-) heirs.
    Keywords: bequests, taxation, life-cycle, Labor Supply, dynamic scoring
    JEL: C68 D91 H22 H31 J22
    Date: 2018–09
  5. By: Alexander Bick (Arizona State University); Bettina Brüggemann (McMaster University); Nicola Fuchs-Schündeln (Goethe University Frankfurt); Hannah Paule-Paludkiewicz (Goethe University Frankfurt)
    Abstract: We document the time-series of employment rates and hours worked per employed by married couples in the US and seven European countries (Belgium, France, Germany, Italy, the Netherlands, Portugal, and the UK) from the early 1980s through 2016. Relying on a model of joint household labor supply decisions, we quantitatively analyze the role of non-linear labor income taxes for explaining the evolution of hours worked of married couples over time, using as inputs the full country- and year-specific statutory labor income tax codes. We further evaluate the role of consumption taxes, gender and educational wage premia, and the educational composition. The model is quite successful in replicating the time series behavior of hours worked per employed married woman, with labor income taxes being the key driving force. It does however capture only part of the secular increase in married women’s employment rates in the 1980s and early 1990s, suggesting an important role for factors not considered in this paper. We will make the non-linear tax codes used as an input into the analysis available as a user-friendly and easily integrable set of Matlab codes.
    Keywords: taxation, two-earner households, hours worked
    JEL: E60 H20 H31 J22
    Date: 2018–09
  6. By: George Hondroyiannis (Bank of Greece and Harokopio University); Dimitrios Papaoikonomou (Bank of Greece)
    Abstract: The use of traceable payment methods presents an additional reform option for improving tax compliance. As regards consumption, card payments are the main alternative to cash in the euro area. Although the use of micro-data has provided clear evidence in favour of increasing information trails, time series evidence on the role of card payments in increasing compliance have been scarce and confined to the recent experience of Greece. The effect of card payments on VAT revenue is investigated using quarterly panel data for the 19 euro area economies covering the period 2003q1-2016q4. Time-varying coefficient methods are employed in order to estimate the country-specific contribution of compliance to revenue growth as a function of card payments. In line with the micro-data literature, the analysis indicates that increasing the share of card payments in private consumption expenditure improves VAT tax compliance. The gains are found to increase: (i) the lower the initial level of card use; (ii) the higher the share of self-employment and (iii) the lower the level of revenue efficiency. The highest benefits are estimated for Greece and Italy.
    Keywords: VAT; card payments; tax compliance; time-varying coefficients; Euro area
    JEL: H21 H25 H26
    Date: 2018–09
  7. By: Bakari, Sayef
    Abstract: The aim of this article is to study empirically the nexus between tax revenue, domestic investment and economic growth in France, since it's never been done before. In addition, there were many problems and repercussions that criticized France's tax policy and its danger to the economic structure, which encourages us to do this research. To attempt this objective, annual data for the period 1972 - 2016 was tested by using correlation analysis and estimation based on vector error correction model. Our results suggest that in the long run there is a negative relationship between tax revenue, domestic investment and economic growth. It is seen that the strategy tax policy of France is not safe for domestic investment and economic growth. For this reason, immediate intervention should be encouraged to carry out the necessary measures before the situation becomes more disastrous.
    Keywords: Tax revenue, Domestic investment, Economic Growth, France
    JEL: E62 H21 O47 O52
    Date: 2018–07
  8. By: Karen Dynan (Peterson Institute for International Economics)
    Abstract: This paper considers the implications of a sustained period of low productivity growth for the design of tax systems. While the specific changes needed will vary by country and depend on how other features of the economic environment change, several broad conclusions emerge. First, lower productivity growth will exacerbate future fiscal shortfalls associated with aging populations; even assuming that interest rates are also lower, tax systems may need to collect more revenue per dollar of GDP to support their older populations. Second, with lower productivity growth likely to result in lower wages, labor force participation rates may drop further, bolstering the case for more tax incentives for working. Third, the potentially flatter lifetime income profiles associated with lower productivity growth, along with the possibility that fiscal strains will lead to cuts in government retirement benefits, may warrant increasing tax incentives for retirement saving. Finally, the lower real interest rates that would likely accompany sustained low productivity growth may reduce the future efficacy of monetary policy as a macroeconomic stabilization tool, suggesting that countries would be well-served by building more automatic stabilizers into their tax systems.
    Keywords: productivity, secular stagnation, taxes, fiscal sustainability
    JEL: E1 H2 H6
    Date: 2018–09
  9. By: Louise Sheiner (The Brookings Institution)
    Abstract: Productivity growth has slowed in the United States in the past decade, and some analysts expect growth to remain low in coming years. Besides being an important determinant of living standards and GDP, productivity growth also affects the fiscal outlook, because expenditures and revenues tend to move with GDP and because productivity growth might have a direct effect on government borrowing costs. The author calculates the likely effects of slower productivity growth on the long-term budget outlooks of federal and state and local governments. In particular, she examines how projections of deficits and debt change if annual labor productivity growth is 0.6 percentage points slower than in Congressional Budget Office’s current baseline. For the federal government, she finds that the effect of slower productivity growth is to worsen primary deficits, because some outlays are invariant to changes in productivity growth while revenues move more than one for one with it. These increased deficits imply that the federal debt will reach 146 to 173 percent of GDP by 2042, compared with the baseline estimate of 130 percent of GDP, with the range depending on the assumption about how interest rates move with productivity growth. Changes in productivity growth appear less important for the state and local sector. Revenues are more likely to move one for one with productivity growth, because state and local income taxes are less progressive than federal taxes and because sales taxes and property taxes make up a much larger fraction of tax collections. A slowdown in productivity growth is likely to exert some upward pressure on state and local spending relative to GDP, stemming from the somewhat heavier burden of pension spending and increased eligibility for Medicaid and other poverty-related programs, but these increases are likely to be small.
    Keywords: Deficits, Debt, Fiscal outlook, Productivity growth, Sustainability, Federal budget, State and local budgets, Government revenues, Government spending, Interest rates, Debt dynamics
    JEL: H0 H1 H2 H3 H5 H6 H7 E6
    Date: 2018–09
  10. By: Pilar Rey del Castillo; Jaime Villanueva-Garcia
    Abstract: The paper presents a study of the relationship between the tax morale and the individual payments of personal income tax using the statistical matching of opinion polls with a representative sample of the personal income tax returns in Spain. As an initial step, the method selected to execute the match -imputations using Bayesian Networks- is described. The relationship between a proxy variable of the individual tax morale and other variables in the declared income tax file is later analyzed using the matched files. A first result is that tax morale increases with the level of declared wages, salaries and capital gains, while it has no link with declared business income.
    Keywords: statistical matching, opinion polls, personal income tax, tax morale
    JEL: C10 C65 H24 H26
    Date: 2018
  11. By: Hirota, Haruaki; Yunoue, Hideo
    Abstract: The purpose of this paper is to analyze creative accounting by stock-flow adjustment in Japanese municipalities after the introduction of a new fiscal rule. We contribute to the literature by analyzing the interdependency of the new fiscal indexes, which comprise three flow indexes and one stock index. Our main contribution is the finding that municipalities tolerated an increase in their stock indexes while they decreased their flow indexes by reducing reserved funds to avoid exceeding the criteria of the new fiscal rule, as the stock index criterion is weaker than that of the three flow indexes.
    Keywords: fiscal rule, creative accounting, stock-flow adjustments
    JEL: H72 H74 H77
    Date: 2017–06–20
  12. By: Gonzalo F. de-Córdoba (University of Malaga, Spain); Benedetto Molinari (University of Malaga, Spain; Rimini Centre for Economic Analysis); José L. Torres (University of Malaga, Spain)
    Abstract: This paper provides a twofold contribution. First, it proposes a synthetic and visual indicator to assess public debt sustainability. This indicator summarizes in a single diagram the linkage between economic activity, government’s budget, and the maximum amount of public debt that is sustainable in the long run. The backing theory is a neoclassical growth model augmented with endogenous tax revenues, disaggregated public spending, different production technologies for public and private goods, non-atomistic wage setters in public labor (unions), and a fully specified maturity curve for public bonds. The second contribution of the paper is to develop and present a stand-alone software that analyzes public debt sustainability in response to variations of fiscal policy. This toolkit is useful for managing public debt or to place an additional constraint on government’s budget. We provide an example of its usage for the emblematic case of Greece during the last public debt crisis.
    Keywords: Fiscal policy, Public debt sustainability, Endogenous Tax revenues, DSGE model, Debt-dependent government spending, Python
    JEL: E13 H61 E62 H63 H81 H30
    Date: 2018–09
  13. By: Vassilis Sarantides (University of Sheffield); Pantelis Kammas (University of Ioannina)
    Abstract: "This paper focuses mainly on the effects of democratisation on the size and the composition of tax revenues in Greece during the 19th and the beginning of the 20th centuries. Our analysis builds on a unique tax dataset that contains 13 different tax categories of the Greek state over the period 1833-1933. Empirical analysis suggests that the radical reform that enfranchised all adult males in Greece in 1864 did not affect the level of taxation, but did exert a significant impact on its structure. More precisely, universal male suffrage was accompanied by an amazing reduction in rural taxes (e.g., taxes on land) and remarkable increases in indirect taxes – mostly in custom and excises duties. These findings clearly indicate that there were political economy motives behind this shift in the implemented fiscal policy. In particular, the Greek governments changed the structure of taxation in order to satisfy the large majority of the electorate, who were peasants and farmers, ensuring a minimum level of social cohesion. Subsequently, focusing on a sample of 12 Western European countries over the same period, findings indicate that the phase of economic development induced a differentiated effect of democratisation on the size and the structure of taxation."
    Keywords: "democracy, tax structure, fiscal capacity"
    JEL: P16 H2
    Date: 2017–04
  14. By: Christofzik, Désirée; Feld, Lars P.; Reuter, Wolf Heinrich; Yeter, Mustafa
    Abstract: The current European fiscal framework is highly complex. The multitude of fiscal rules and the discretion in their enforcement precludes an effective oversight and weakens the effectiveness of fiscal rules substantially. Against this background, we present a proposal for a careful refocusing of the framework to promote fiscal sustainability. The proposal is centered around an expenditure rule as an annual operational target supplemented by a debt-correction factor and a multi-purpose adjustment account which implements a medium-term structural balance rule. Together with a significant reduction in exemptions and escape clauses as well as less discretion in the imposition of sanctions, the proposal increases transparency and efficacy of fiscal rules at the European level.
    Keywords: Expenditure rule,Fiscal rules,Public finance,European fiscal framework
    JEL: H50 H60 E62
    Date: 2018
  15. By: Congressional Budget Office
    Abstract: The Department of Defense (DoD) spends about 40 percent of its budget on the operation and maintenance (O&M) of the department and military units—its largest budget category. O&M funding rose by almost 50 percent (excluding the effects of inflation) between 2000 and 2012. Increased funding for activities that are not easily tracked, notably contracted maintenance of equipment and property, technical and research services, and professional and other services, accounted for a significant share of that growth, CBO finds.
    JEL: H56 H60
    Date: 2017–01–05

This nep-pbe issue is ©2018 by Thomas Andrén. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.