nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒10‒29
eleven papers chosen by
Thomas Andrén

  1. Tax Cuts Starve the Beast! Evidence from Germany By Stöhlker, Daniel; Neumeier, Florian; Fuest, Clemens
  2. Tax Influence on Financial Structures of M&As By Harendt, Christoph
  3. Long-Term Changes in Married Couples' Labor Supply and Taxes: Evidence from the US and Europe since the 1980s By Bick, Alexander; Brüggemann, Bettina; Fuchs-Schündeln, Nicola; Paule-Paludkiewicz, Hannah
  4. Optimal Tax Structure for Consumption and Income Inequality:an Empirical Assessment By António Afonso; José Alves
  5. Optimal fiscal policy with Epstein-Zin preferences and utility-enhancing government services: lessons from Bulgaria (1999-2016) By Vasilev, Aleksandar
  6. Optimal Public Investment in Economic Centers and the Periphery By Meurers, Martin; Moenius, Johannes
  7. Royalty Taxation under Tax Competition and Profit Shifting By Juranek, Steffen; Schindler, Dirk; Schneider, Andrea
  8. The tourist tax in the Italian municipalities By Laura Conti; Elena Gennari; Fabio Quintiliani; Roberto Rassu; Elena Sceresini
  9. The government spending multiplier, fiscal stress, and the zero lower bound By Strobel, Felix
  10. Taxes, benefits and labour force participation: A survey of the quasi-experimental literature By Lundberg, Jacob; Norell, John
  11. Equalisation among the states in Germany: TheJunction between Solidarity and Subsidiarity By Jan Werner

  1. By: Stöhlker, Daniel; Neumeier, Florian; Fuest, Clemens
    Abstract: This paper empirically evaluates how fiscal policy reacts to changes in the government's fiscal situation. Utilizing panel data from the German states covering the period from 1992 to 2011, we assess to what extent exogenous changes in tax revenues affect total public revenues, aggregate public expenditure as well as specific sub-categories of government spending. Applying the narrative approach pioneered by Romer and Romer (2010), we construct a measure of exogenous tax shocks, allowing us to identify the causal effect of tax changes on fiscal policy. Our findings indicate that tax changes trigger expenditure adjustments into the same direction after 2 to 3 years, specifically with respect to spending on governmental administration, health expenditures and spending on infrastructure.
    Keywords: Taxation,Fiscal Policy,Tax-Spend,Public Expenditure,Narrative Approach
    JEL: E62 H11 H20 H62 H72
    Date: 2018
  2. By: Harendt, Christoph
    Abstract: A well-known strategy of tax avoidance by multinationals is to locate debt in subsidiaries in countries with a high tax rate. In case of M&As it is particularly advantageous to locate debt at the level of holdings. By using firm-level data provided by the German Central Bank, I show empirically that indeed the probability that a firm is held by a holding in the same country increases with the local tax rate. Furthermore, consolidating the balance sheets of firms and their holdings leads to a stronger effect of taxes on the debt ratio. However, I find this effect only for a sample of all firms and no additional effect in case of M&As. I conclude that those findings may be one explanation why previous studies have found relatively low effects of taxes on debt financing.
    Keywords: Corporate Taxation,Multinational Entities,Foreign Direct Investment,Capital structure,Mergers and acquisitions,Empirical Analysis,Firm-level data
    JEL: F23 G32 G34 H25 H26 H32
    Date: 2018
  3. By: Bick, Alexander (Arizona State University); Brüggemann, Bettina (McMaster University); Fuchs-Schündeln, Nicola (Goethe University Frankfurt); Paule-Paludkiewicz, Hannah (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
  4. By: António Afonso; José Alves
    Abstract: In the present empirical analysis, we try to assess the impact of taxation on investment, growth. In particular, and by using gross fixed capital formation as a proxy for investment, we intend to evaluate the impact of the taxation structure in investment dynamics, in a short and a long-run perspectives. This empirical exercise was conducted for all OECD countries, during the 1980-2015 period. Through panel data econometric techniques, we find optimal tax-investment threshold values, especially higher for short-term than for long-term horizon. In addition, we find optimal income taxation around 9%, in percentage of GDP, an average optimal value of 12.7% for consumption taxes to promote annual investment growth.
    Keywords: Investment Growth;Tax systems;Fiscal Policy;Optimal taxation
    JEL: E62 H21 O47
    Date: 2018–10
  5. By: Vasilev, Aleksandar
    Abstract: This paper explores the effects of fiscal policy in an economy with Epstein-Zin (1989, 1991) preferences, with indirect (consumption) taxes, and all (labor and capital) in- come being taxed at the same rate. To this end, a dynamic general-equilibrium model, calibrated to Bulgarian data (1999-2016), is augmented with a government sector. Two regimes are compared and contrasted - the exogenous (observed) vs. optimal policy (Ramsey) case. The focus of the paper is on the relative importance of consumption vs. income taxation, as well as on the provision of utility-enhancing public services. The main findings from the computational experiments performed in the paper are: (i) The optimal steady-state income tax rate is zero; (ii) The benevolent Ramsey planner provides the optimal amount of the utility-enhancing public services, which are now 25% higher; (iii) The optimal steady-state consumption tax needed to finance the optimal level of government spending is more than fifty percent higher, as compared to the exogenous policy case.
    Keywords: Epstein-Zin preferences,consumption tax,income tax,general equilibrium,optimal (Ramsey) fiscal policy,Bulgaria
    JEL: D58
    Date: 2018
  6. By: Meurers, Martin; Moenius, Johannes
    Abstract: We analyze productivity enhancing public expenditure in a spatial economic model with labor mobility, firm-specific increasing returns to scale, and transport costs. Building on Krugman (1991), Fujita, Krugman and Venables (1999) and Redding (2016), we compare optimal investment and tax policies of fiscally autonomous regions to those of a benevolent central planer. We find transport costs and the size of scale effects to influence optimal tax and spending rates under both regimes. For sufficiently low transport costs and low substitutability between manufactured goods, regional fiscal autonomy leads to underinvestment: The lower the transport costs, the lower the local investment, and the higher the potential welfare gain through centralized policies. Our results challenge the view that local public goods should be financed entirely by local governments. They also help explain the recent decline of public investment at the municipal level in fiscally decentralized countries like Germany.
    Keywords: quantitative spatial economics,public investment,fiscal federalism
    JEL: R12 R53 H72 H77
    Date: 2018
  7. By: Juranek, Steffen; Schindler, Dirk; Schneider, Andrea
    Abstract: The increasing use of intellectual property as a means to shift profits to low-tax jurisdictions or jurisdictions with so-called `patent boxes' is a major challenge for the corporate tax base of medium- and high-tax countries. Extending a standard tax competition model for capital-enhancing technology, royalty payments, and profit shifting, this paper suggests a simple fix: It is always optimal to set a withholding tax on (intra-firm) royalty payments equal to the corporate tax rate and deny any deductibility of royalties. As the tax applies to the full payment, the problem of identifying the arm's-length component in a digital economy (OECD BEPS Action 1) does not apply. Most importantly, the denial of royalty deductions is the Pareto-efficient solution under coordination and the unilaterally optimal policy under competition for mobile capital. In the latter case, a weakened thin capitalization rule is a crucial part of the policy package in order to avoid negative investment effects. Our results question the ban of royalty taxes in double tax treaties and the EU Interest and Royalty Directive.
    Keywords: source tax on royalties,tax competition,multinationals,profit shifting
    JEL: H25 F23
    Date: 2018
  8. By: Laura Conti (Bank of Italy); Elena Gennari (Bank of Italy); Fabio Quintiliani (Bank of Italy); Roberto Rassu (Bank of Italy); Elena Sceresini (Bank of Italy)
    Abstract: We study the implementation of the tourist tax in Italian municipalities, highlighting the link between its reach and the inbound tourist flows. The reference period is the year 2016. Municipalities with the tourist tax in 2016 are only one ninth of all Italian municipalities and one sixth of those eligible to do so, but they attract 70 per cent of inbound tourists. Revenues are on average about 4 per cent of all local taxation (around €20 per resident). Rome, Milan, Florence and Venice head the municipalities in terms of revenues. In fact, although these four towns only account for 7 per cent of total nights spent by tourists in Italy, their revenue share is over 50 per cent. A simple econometric estimation shows that the probability of introducing a tourist tax in a municipality is highly correlated to the tourist attractions of the local area and to the same tax being applied in the neighbouring municipalities, suggesting possible strategic interaction between them
    Keywords: ecotax, tourist tax, local taxation, lodging tax
    JEL: H23 H71
    Date: 2018–10
  9. By: Strobel, Felix
    Abstract: The recent sovereign debt crisis in the Eurozone was characterized by a monetary policy, which has been constrained by the zero lower bound (ZLB) on nominal interest rates, and several countries, which faced high risk spreads on their sovereign bonds. How is the government spending multiplier affected by such an economic environment? While prominent results in the academic literature point to high government spending multipliers at the ZLB, higher public indebtedness is often associated with small government spending multipliers. I develop a DSGE model with leverage constrained banks that captures both features of this economic environment, the ZLB and fiscal stress. In this model, I analyze the effects of government spending shocks. I find that not only are multipliers large at the ZLB, the presence of fiscal stress can even increase their size. For longer durations of the ZLB, multipliers in this model can be considerably larger than one.
    Keywords: Government spending multiplier,Fiscal stress,Zero lower bound,Financial frictions
    JEL: E32 E44 E62 H30 H60
    Date: 2018
  10. By: Lundberg, Jacob (Timbro); Norell, John (Timbro)
    Abstract: We review the literature that uses quasi-experimental methods to estimate the elasticity of labour force participation with respect to the financial gain from work. We find a wide range of elasticities, with an average of 0.38. 26 out of 31 papers find elasticities larger than 0.1, providing strong evidence that individuals respond to incentives on the extensive margin of labour supply. Elasticities are larger for women and older workers, and have declined over time.
    Keywords: participation elasticity; quasi-experimental methods; labour supply; extensive margin
    JEL: H24 J22
    Date: 2018–10–19
  11. By: Jan Werner
    Abstract: Germany's fiscal federalism has undergone a process of perpetual reform. On the one hand, some tax revenues such as the national corporate income tax generated a lower volume of fiscal resources because of changes in the system, or fluctuated extremely like the local trade tax due to economic effects. On the other hand, the judgement by the Constitutional Court has necessitated a renewal of Germany's equalisation system. Besides illustrating the tax sharing system between the three tiers of government, the main part of this paper deals with the equalisation among the 16 federal states. Moreover, in June 2017 a new system of intergovernmental fiscal relations was stipulated. It is to be implemented from 2020 onwards, and it will change the federal structure of Germany considerably. The legislative package alone comprises 13 constitutional amendments, which the Bundestag and Bundesrat must each adopt by a two-thirds majority. In addition, there are a number of other legislative changes that redefine the cooperation between the central government and the federal states on financial matters. Based on these descriptions of Germany, suggestions are made as to how Spain can avoid pitfalls in the area of fiscal federalism and what lessons they can learn from negative experiences in Germany. Overall Germany has a sound fiscal federalism with minor political mildew.
    Keywords: Fiscal Federalism, Germany, Grants, Fiscal Autonomy, Germany
    JEL: H7 H2 H1
    Date: 2018–04

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