nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒10‒22
fifteen papers chosen by
Thomas Andrén

  1. Effective Tax Rates on Different Corporate Investments By John Freebairn; ;
  2. Optimal Taxation Under Different Concepts of Justness By Jessen, Robin; Metzing, Maria; Rostam-Afschar, Davud
  3. The Aggregate Consequences of Tax Evasion By Di Nola, Alessandro; Kocharkov, Georgi; Scholl, Almuth; Tkhir, Anna-Mariia
  4. Redistribution and Insurance in Welfare States around the World By Charlotte Bartels; Dirk Neumann
  5. Increasing tax transparency: Investor reactions to the country-by-country reporting requirement for EU financial institutions By Dutt, Verena Katharina; Ludwig, Christopher Alexander; Nicolay, Katharina; Vay, Heiko; Voget, Johannes
  6. The Pass-Through of the Largest Tax on Sugar-Sweetened Beverages: The Case of Boulder, Colorado By John Cawley; Chelsea Crain; David Frisvold; David Jones
  7. Intertemporal income shifting around a large tax cut: The case of depreciations By Dobbins, Laura; Eichfelder, Sebastian; Hechtner, Frank; Hundsdoerfer, Jochen
  8. Fiscal discipline in EMU? Testing the effectiveness of the Excessive Deficit Procedure By Jasper de Jong; Niels Gilbert
  9. Fiscal Incentives and Local Tax Competition: Evidence from China By Yongzheng Liu; Bingyang Lv; Hang Tai; Chenping Yang
  10. Social Security Incentives in Belgium: An Analysis of Four Decades of Change By Fraikin, Anne-Lore; Jousten, Alain; Lefèbvre, Mathieu
  11. Increasing social insurance coverage in Viet Nam’s SMEs By Paulette Castel; Alexander Pick
  12. Does the Old Age Pension Scheme Improve Household Welfare? Evidence from India By Vidhya UNNIKRISHNAN; Katsushi S. Imai
  13. How Local Authorities Can Exploit the Potential for Effective Property Taxes: A Case Study of Harare By Nengeze, Munatswi
  14. Unemployment Insurance, Strategic Unemployment and Firm-Worker Collusion By Bernardus Van Doornik; David Schoenherr; Janis Skrastins
  15. Unemployment insurance union By Clemens, Marius; Claveres, Guillaume

  1. By: John Freebairn (Department of Economics, The University of Melbourne); ;
    Abstract: An effective tax rate is measured by the difference between the pre-tax return earned by the company investor and the after-tax return received by the saver providing the funds. The personal income and foreign withholding taxes as well as the corporate income tax are considered. Under current taxation in Australia, effective tax rates vary between debt and equity, resident and nonresident savers, distributed and retained earnings, and across companies of different sizes. Corporate income tax reforms, including changes to the tax base and the tax rate, change the patterns of, as well as the magnitudes of, effective tax rates. By way of illustration, effects of a lower corporate tax rate and of accelerated depreciation on the pattern and magnitudes of effective tax rates are assessed.
    Date: 2018–05
  2. By: Jessen, Robin; Metzing, Maria; Rostam-Afschar, Davud
    Abstract: A common assumption in the optimal taxation literature is that the social planner maximizes a welfarist social welfare function with weights decreasing with income. However, high transfer withdrawal rates in many countries imply very low weights for the working poor in practice. We reconcile this puzzle by generalizing the optimal taxation framework by Saez (2002) to allow for alternatives to welfarism. We calculate weights of a social planner’s function as implied by the German tax and transfer system based on the concepts of welfarism, minimum absolute and relative sacrifice, as well as subjective justness. For the latter we use a novel question from the German Socio-Economic Panel. We find that the minimum absolute sacrifice principle is in line with social weights that decline with net income. Absolute subjective justness is roughly in line with decreasing social weights, which is reflected by preferences of men, West Germans, and supporters of the grand coalition parties.
    Keywords: Justness,Optimal Taxation,Income Redistribution,Equal Sacrifice,Inequality,Subjective Preferences
    JEL: D63 D60 H21 H23 I38
    Date: 2018
  3. By: Di Nola, Alessandro; Kocharkov, Georgi; Scholl, Almuth; Tkhir, Anna-Mariia
    Abstract: There is a sizeable overall tax gap in the U.S., albeit tax noncompliance differs sharply across income types. While only small percentages of wages and salaries are underreported, the estimated misreporting rate of self-employment business income is substantial. This paper studies how tax evasion in the self-employment sector affects aggregate outcomes and inequality. To this end, we develop a dynamic general equilibrium model with incomplete markets in which heterogeneous agents choose between being a worker and being self-employed. Self-employed agents may hide a share of their business income but are confronted with the probability of being detected by the tax authority. Our model replicates important quantitative features of U.S. data, in particular, the misreporting rate, wealth inequality, and the firm size distribution. Our quantitative findings suggest that tax evasion induces self-employed businesses to stay small. In the aggregate, tax evasion increases the size but decreases the productivity of the self-employment sector. Moreover, it increases aggregate savings and reduces wealth inequality. We show that tax revenues follow a Laffer curve in the size of the tax evasion penalty.
    Keywords: Tax evasion,Self-Employment,Wealth inequality,Tax policy.
    JEL: H24 H25 H26 C63 E62 E65
    Date: 2018
  4. By: Charlotte Bartels; Dirk Neumann
    Abstract: Redistribution across individuals in a one-year-period framework is an empirically intensely studied question. However, a substantial share of annual redistribution might turn out to serve individual insurance in a longer perspective. In particular, public pensions, that smooth incomes over the life-cycle and are funded by high taxes, play an increasingly important role in welfare states with aging societies. This paper investigates to what extent long-run redistribution diverges from annual redistribution in welfare states of different types. Exploiting panel data from the Cross-National Equivalent File (CNEF) for Australia, Germany, Korea, Switzerland, the United Kingdom and the United States, we find that supposedly highly redistributive welfare states like Germany provoke comparably less redistribution between individuals in the long-run than the United Kingdom or the United States. Regression results show that a higher share of elderly is associated with higher annual redistribution, but with less long-run redistribution between individuals.
    Keywords: Welfare states, redistribution, insurance
    JEL: D31 D63 H53 H55 I38
    Date: 2018
  5. By: Dutt, Verena Katharina; Ludwig, Christopher Alexander; Nicolay, Katharina; Vay, Heiko; Voget, Johannes
    Abstract: We employ an event study methodology to investigate the stock price reaction around the day of the political decision to include a country-by-country reporting obligation for EU financial institutions. We do not find significant abnormal returns for the banks affected. Sample splits according to the effective tax rate and the degree of B2C orientation do not reveal a more pronounced negative investor response for banks engaging more strongly in tax avoidance or being potentially more concerned about reputational risks, respectively. We conclude that the implementation of a CbCR requirement for EU financial institutions did not trigger a noticeable investor response. Contrary prior findings regarding other public tax disclosure obligations might be driven by the distinct motivation of the rules and the way the information is presented. We contend that capital market reactions to an upcoming increase in tax transparency are not generalizable to other industries and settings, but that consideration must be given to the context and the exact design of the rule.
    Keywords: Tax Avoidance,Profit Shifting,Country-by-Country Reporting,Financial Institutions,Market Reaction
    JEL: H25 H26 G21 G28 H25 H26 G21 G28
    Date: 2018
  6. By: John Cawley; Chelsea Crain; David Frisvold; David Jones
    Abstract: We estimate the incidence of a relatively new type of excise tax, a tax on sugar-sweetened beverages (SSBs). We examine the largest such tax to date, which is two cents per ounce, in Boulder, CO. Using data that were hand-collected from stores and restaurants in both Boulder and two control communities, as well as internet data of restaurant menus, we find that the tax was largely, but not completely, passed through to consumers 5-7 weeks after implementation. Some retailers add the tax only at the register, indicating that estimates solely from posted prices would result in an underestimate of pass-through.
    JEL: H22 H75 I18
    Date: 2018–09
  7. By: Dobbins, Laura; Eichfelder, Sebastian; Hechtner, Frank; Hundsdoerfer, Jochen
    Abstract: A corporate tax rate cut provides an incentive for corporations to shift taxable income from years before the tax rate cut to post-reform years. Our study analyzes whether depreciations and write-offs are used to achieve intertemporal income shifting. Using a panel of German manufacturing firms, we test in a difference-in-differences setting whether firms reacted to the announced 2008 corporate tax rate cut of 10 percentage points by accumulating depreciation expenses in the pre-reform year. Our results suggest that depreciation expenses in 2007 are on average about 2.5% higher than in the other observation years. Our analysis also sheds light on heterogeneity in intertemporal income shifting across firms. We provide evidence for a weaker reaction of loss firms resulting from a lower tax incentive. By contrast, we find stronger intertemporal income shifting of large firms and especially firms with a relatively high share of new investments in the capital stock. While the first result is consistent with a higher cost-efficiency of tax planning of large firms, the second finding suggests that investments in the current year provide more discretion for (tax-induced) earnings management.
    Keywords: Tax planning,Intertemporal income shifting,Tax avoidance opportunity,Depreciations,Write-offs
    JEL: H25 M41
    Date: 2018
  8. By: Jasper de Jong; Niels Gilbert
    Abstract: The Excessive Deficit Procedure (EDP), central to the Stability and Growth Pact, is criticized for both its procyclical effects and - in contrast - a perceived lack of enforcement. To test its actual effects, we construct a real-time database of EDP recommendations and estimate augmented real-time and ex-post fiscal reaction functions for a panel of EMU member states. We find that a 1% of GDP larger EDP recommendation leads to close to 1% of GDP of additional fiscal consolidation plans, and around 0.8% of actual consolidation. For countries in financial support programs we find that, while they did implement substantial consolidation measures, required and delivered consolidation efforts are less connected. Overall, our results suggest that EDP recommendations have substantially shaped euro area fiscal policy, especially in the years 2010-2014, when EDP recommendations were both largest and most frequent.
    Keywords: EMU; Stability and Growth Pact; fiscal policy; real-time data
    JEL: E02 E62 H30 H68
    Date: 2018–09
  9. By: Yongzheng Liu (Renmin University of China); Bingyang Lv (Renmin University of China); Hang Tai (People’s Bank of China); Chenping Yang (Renmin University of China)
    Abstract: This paper explores how fiscal incentives affect capital tax decisions by local governments in the Chinese context. We develop a model in which local governments, facing different fiscal incentives, compete for mobile capital over corporate taxes. The key prediction of the model, borne out in data from Chinese cities over the years 20042013, is that an increase in the local corporate income tax-sharing ratio, proxying local fiscal incentives, makes city governments’ horizontal tax reactions stronger. Our results contribute to the fiscal federalism literature by providing evidence in support of the argument that fiscal incentives faced by local governments significantly shape their policy choices. Additionally, we provide explicit evidence on local tax competition within provinces in China, which has long been regarded as one of the driving forces of China’s rapid economic growth.
    Date: 2018–09
  10. By: Fraikin, Anne-Lore (University of Liège); Jousten, Alain (University of Liège); Lefèbvre, Mathieu (Université de Strasbourg)
    Abstract: The paper traces labor market reforms over the last four decades. It provides estimates of retirement incentives for a selected set of typical worker profiles across time and socio-economic groups and links these series to the labor market performance in Belgium. The results show that the numerous retirement and social security program reforms have had a marked impact on incentives at the micro level. At the aggregate level, results are less clear-cut given the extreme diversity of programs and features in the Belgian institutional context.
    Keywords: retirement, social security, pension, labor supply
    JEL: J21 J26 H31 I38
    Date: 2018–08
  11. By: Paulette Castel; Alexander Pick
    Abstract: Viet Nam has made significant progress in expanding social insurance coverage in recent years. However, coverage amongst small and medium-sized enterprises (SMEs) remains very low and very few workers in this sector are expected to receive a pension in retirement. Drawing on two datasets for SMEs in Viet Nam, this paper seeks to explain this phenomenon by examining the characteristics of enterprises that are enrolled and those that opt out, and it identifies possible barriers to enrolment, such as high contribution rates. It also examines how enforcement mechanisms and formalisation policies might deter enterprises from enrolling. Drawing on lessons from international experience, the paper recommends a series of policy responses that seek both to address these barriers and to protect the livelihoods of those workers who are not yet covered.
    Keywords: formalisation, minimum wage, SMEs, social insurance, social protection, Viet Nam
    JEL: H24 H55 I38 J32
    Date: 2018–10–19
  12. By: Vidhya UNNIKRISHNAN (Global Development Institute, The University of Manchester, UK); Katsushi S. Imai (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan, and Department of Economics, The University of Manchester, UK)
    Abstract: As India’s population has been ageing due to declines in fertility and mortality rates, more policy emphasis has been placed on reducing poverty among the elderly. The aim of the present study is to examine the effect of Indira Gandhi National Old Age Pension Scheme (IGNOAPS) on both short and long-term household welfare indicators, such as consumption expenditure. Using the household longitudinal data based on the Indian Human Development Survey in 2004-05 and 2011-12, we have applied the Propensity Score Matching (PSM) to build a counterfactual group and have used the fixed effects model to eliminate time-invariant unobservable characteristics to estimate the effect of IGNOAPS on household welfare. To address the issue of endogeneity, we have used the instrumental variable model. The results show that IGNOAPS reduces household poverty by increasing consumption expenditure, food and non-food expenditure. We have also estimated the effect of transfer payments received on the outcome variables and found that the amount of transfer determines the size of the welfare effect. Despite the positive welfare effects of the programme, it has a small adverse effect on household labour supply.
    Keywords: Pension, Ageing, IGNOAPS, Poverty, Household Welfare, India
    JEL: C23 I38 H75
    Date: 2018–10
  13. By: Nengeze, Munatswi
    Abstract: This paper explores administrative challenges that developing countries face in property tax administration. It is internationally acknowledged that local authorities play a vital role in enhancing a country’s economic growth and provision of public goods. Their activities rely on revenue collection. It is therefore in the public interest and the interest of all governments to support their activities. The author identified that the main source of revenue for the City of Harare is property tax. Property tax has the potential to perform better given the boom in urban population. Despite the potential of property tax, it has not been able to generate more revenue because local authorities lack capacity and face a number of challenges. This paper argues that, in addition to solutions intended to resolve the usual technical and political difficulties associated with property taxation, it is crucial for Harare to improve systems for property taxation. There is a need to invest in information technology, including the use of digital technology, electronic billing and payment systems.
    Keywords: Governance,
    Date: 2018
  14. By: Bernardus Van Doornik; David Schoenherr; Janis Skrastins
    Abstract: Recent years have seen a spread of unemployment insurance (UI) programs to mid-income and developing countries. Yet little is known about how labor market characteristics in these countries, for example large informal labor markets, interact with the incentive effects of UI. In this paper, we show that firms and workers collude to extract rents from the UI system in the presence of large informal labor markets. Exploiting a discontinuous effect of an unemployment insurance reform in Brazil, we document layoff and rehiring patterns consistent with collusion between firms and workers to extract rents from the UI system. Firms and workers time formal unemployment spells to coincide with workers' eligibility for UI benefits. Survey evidence suggests that firms employ workers informally while they are eligible for UI benefits and rehire them when benefits end. Combined with a lower probability of hiring replacement workers when laying off workers eligible for UI benefits, this suggests that firms employ workers informally while they are on benefits. Firms and workers share the rents extracted from the UI system through lower equilibrium wages. All the observed patterns are mostly driven by industries and municipalities with large informal labor markets. Our findings thus suggest that optimal UI design in mid-income and developing countries needs to take into account adverse incentive effects generated by collusion between firms and workers in the presence of informal labor markets
    Date: 2018–09
  15. By: Clemens, Marius; Claveres, Guillaume
    Abstract: A European unemployment insurance scheme has gained increased attention as a new and ambitious common fiscal instrument which could be used for temporary cross-country transfers. Part of the national stabilizers composing unemployment insurance schemes would be transferred to the central level. Unemployed are then insured by both layers. When a country is hit by an asymmetric shock, it would receive positive net transfers from the central fund in the form of reduced taxes and increased benefits, providing risk-sharing for the whole union. We build a two-country DSGE model with supply, demand and labor market shocks in order to capture the recent national insurance system and the unemployment insurance union (UIU) design. The model is calibrated to the euro area core and periphery data and matches the empirically observed cyclicality of the net replacement rate, the wage and unemployment dynamics. This baseline scenario is then compared to an optimal unemployment insurance union with passive and active benefit policies. For all underlying shocks, we find that the UIU reduces the fluctuation of consumption and unemployment while it increases the fluctuations of the trade balance. In case of a positive domestic government spending shock the UIU reduces the negative crowding out effect on private consumption and investment. The model will be used to analyze the effects of national and supranational benefit policies on labour market patterns and welfare.
    Keywords: Unemployment insurance,search and matching,fiscal union
    JEL: E32 E61 J65
    Date: 2018

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