nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒12‒17
eighteen papers chosen by
Thomas Andrén

  1. Will Destination-Based Taxes be Fully Exploited when Available? An Application to the U.S. Commodity Tax System By David R. Agrawal; Mohammed Mardan
  2. Tax Refunds and Income Manipulation - Evidence from the EITC By Florian Buhlmann; Benjamin Elsner; Andreas Peichl
  3. Optimal Taxation of Robots By Uwe Thuemmel
  4. Unilateral Tax Reform: Border Adjusted Taxes, Cash Flow Taxes, and Transfer Pricing By Eric Bond; Thomas A. Gresik
  5. The elasticity of taxable income: A meta-regression analysis By Carina Neisser
  6. Tax Policies for Inclusive Growth: Prescription versus Practice By Robert Hagemann
  7. Heterogeneous Tax Sensitivity of Firm-level Investments By Egger, Peter; Erhardt, Katharina; Keuschnigg, Christian
  8. Immigrant Voters, Taxation and the Size of the Welfare State By Arnaud Chevalier; Benjamin Elsner; Andreas Lichter; Nico Pestel
  9. Relocation of the rich: migration in response to top tax rate changes from Spanish reforms By David R. Agrawal; Dirk Foremny
  10. The tenuous case for an annual wealth tax By Robin Boadway; Pierre Pestieau
  11. 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 Goedeme; Berenice M L Storms
  12. Public finance structure and inclusive growth By Boris Cournède; Jean-Marc Fournier; Peter Hoeller
  13. What Happened to CIT Collection? Solving the Rates-Revenues Puzzle By Nicodeme Gaetan; Caiumi Antonella; Majewski Ina
  14. Optimal Redistributive Income Taxation and Efficiency Wages By Thomas Aronsson; Luca Micheletto
  15. A Lifetime of Changes: State Pensions and Work Incentives at Older Ages in the UK, 1948-2018 By James Banks; Carl Emmerson
  16. What Matters for Whistleblowing on Tax Evaders? Survey and Experimental Evidence By Armenak Antinyan; Luca Corazzini; Filippo Pavesi
  17. A Second Thought on Estimating Expansionary Fiscal Policy Effects in the U.S. By JIA, BIJIE
  18. Pareto-improving structural reforms By Saint-Paul, Gilles

  1. By: David R. Agrawal; Mohammed Mardan
    Abstract: We develop a tax competition model that allows for the setting of both an origin-based and a destination-based commodity tax rate in the presence of avoidance and evasion. In the presence of evasion, jurisdictions will give cross-border shoppers tax preferential treatment, thus not fully exploiting the potential of destination-based taxation. Moreover, the divergence between origin-based and destination-based taxes is stronger when the incentives for consumers’ tax-arbitrage opportunities increase. The United States is one example of many such systems. While sales taxes are due at the point of sale, use taxes are due on goods purchased out-of-state. We document that when able to set both rates, a majority of jurisdictions levy destination-based use taxes at a lower rate than origin-based sales taxes. In response to changes in state-level policies that increase tax avoidance opportunities, the results of the empirical model broadly confirm our theory.
    Keywords: tax evasion, tax avoidance, destination taxation, origin taxation, tax competition, use tax, sales tax
    JEL: C72 H21 H25 H26 H77 P16 R51
    Date: 2018
  2. By: Florian Buhlmann; Benjamin Elsner; Andreas Peichl
    Abstract: Welfare programs are important in terms of reducing poverty, although they create incentives for recipients to maximize their income by either reducing their labor supply or manipulating their taxable income. In this paper, we quantify the extent of such behavioral responses for the Earned Income Tax Credit (EITC) in the US. We exploit the fact that US states can set top-up rates, which means that at a given point in time, workers with the same income receive different tax refunds in different states. Using event studies as well as a border pair design, we document that raising the state EITC leads to more bunching of self-employed tax filers at the first kink point of the tax schedule. While we document a strong relationship up until 2007, we find no effect during the Great Recession. These findings point to important behavioral responses to the largest welfare program in the US.
    Keywords: EITC; Bunching; Income manipulation
    JEL: H20 H24
    Date: 2018–06
  3. By: Uwe Thuemmel
    Abstract: I study the optimal taxation of robots and labor income. In the model, robots substitute for routine labor and complement non-routine labor. I show that while it is optimal to distort robot adoption, robots may be either taxed or subsidized. The robot tax exploits general-equilibrium effects to compress the wage distribution. Wage compression reduces income-tax distortions of labor supply, thereby raising welfare. In the calibrated model, the optimal robot tax for the US is positive and generates small welfare gains. As the price of robots falls, inequality rises but the robot tax and its welfare impact become negligible.
    Keywords: optimal taxation, input taxation, production efficiency, technological change, robots, inequality, general equilibrium, multidimensional heterogeneity
    JEL: D31 D33 D50 H21 H23 H24 H25 J24 J31 O33
    Date: 2018
  4. By: Eric Bond; Thomas A. Gresik
    Abstract: We study the economic effects of unilateral adoption of corporate tax policies that include destination-based taxes and/or cash ow taxes in a heterogeneous agent model in which multinational firms can endogenously shift income between countries using transfer prices. Standard pass through arguments no longer apply because of the income shifting behavior of multinationals. Over or under- pass through will affect domestic consumer prices charged by multinational firms and will distort the decision of international businesses to outsource intermediate goods or to produce them in a foreign subsidiary. The welfare of the adopting country can decrease both with the adoption of destination-based taxes and the adoption of cash ow taxes. For a country with sufficiently large export markets that can optimally adjust its corporate tax rate on domestic earnings, unilaterally adopting cash ow taxation with full destination-based rate adjustments will reduce welfare.
    Keywords: border adjustments, destination-based taxes, source-based taxes, cash flow taxes, income taxes, transfer pricing, unilateral tax reform
    JEL: F23 H21 H25 H26
    Date: 2018
  5. By: Carina Neisser (ZEW Mannheim)
    Abstract: The elasticities of taxable (ETI) and broad income (EBI) are key parameters in optimal tax and welfare analysis. To examine the large variation in estimates found in the literature, I conduct a comprehensive meta-regression analysis of elasticities that measure behavioral responses to income taxation using information from 51 different studies containing 1,420 estimates. I find that heterogeneity in reported estimates is driven by regression techniques, sample restrictions and variations across countries and time. Moreover, I provide descriptive evidence of the correlation between contextual factors and the magnitude of an elasticity estimate. Overall, the study confirms the fact that the ETI itself is endogenous to the underlying tax system. I also document that selective reporting bias is prevalent in the literature. The direction of reporting bias depends on whether or not deductions are included in the tax base.
    Keywords: Elasticity of taxable income, income tax, behavioral response, meta-regression analysis
    JEL: C81 H24 H26
    Date: 2017
  6. By: Robert Hagemann
    Abstract: Against a backdrop of the widening income distribution in most countries, OECD governments need to formulate policies that support sustainable and inclusive economic growth. Tax policies play a crucial role in this endeavour. Both tax theory and mounting empirical evidence suggest that many countries could achieve both higher and more broadly shared income growth. Many countries, however, seem hesitant to fundamentally restructure their tax systems to achieve higher and more inclusive growth. This reluctance begs a key question: Why forego tax policy reforms that hold the obvious promise of win-win outcomes of both higher and more inclusive growth? To offer some concrete answers to this question, this paper reports the findings of a synthesis of cross-country empirical work on the ranking (in terms of efficiency and distributional impact) of major tax instruments on the one hand, and, on the other, country-specific tax policy assessments reported in several dozen OECD Economic Surveys since 2008. The paper identifies a wide range of factors, some common to many countries and some country-specific, that prevent governments from adopting tax structures more favourable to inclusive growth. These include political economy forces, legal obstacles, administrative constraints, and intergovernmental fiscal arrangements.
    Keywords: inclusive growth, public finance, Tax policy
    JEL: H2 H3 I3
    Date: 2018–12–17
  7. By: Egger, Peter; Erhardt, Katharina; Keuschnigg, Christian
    Abstract: This paper introduces a stylized theoretical framework to identify five different firm types depending on their financial situation and their ownership structure. Based on these firm types, the model explains the heterogeneous tax sensitivity of firm-level investments. Guided by the theoretical model, we empirically identify these partly latent firm types using a threshold estimation approach. The empirical analysis uses a large firm database for 17 countries allowing for a quantification of the regime-specific investment responses to taxation. We find important differences in the tax sensitivity of investment across firm-types for dividend as well as for corporate taxation. The impact of corporate taxation is up to 70% higher for entrepreneurial firms than for managerial firms. In contrast, dividend taxation has a comparable negative effect for cash-constrained managerial firms and entrepreneurial firms but no significant impact on their unconstrained counterparts.
    Keywords: Access to capital; corporate tax; Firm Heterogeneity; Manager-shareholder conflicts; Personal taxes
    JEL: D22 G32 H25 L21
    Date: 2018–11
  8. By: Arnaud Chevalier; Benjamin Elsner; Andreas Lichter; Nico Pestel
    Abstract: This paper studies the impact of immigration on public policy setting. As a natural experiment, we exploit the sudden arrival of eight million forced migrants in West Germany after World War II. These migrants were on average poorer than the West German population, but unlike most international migrants they had full voting rights and were eligible for social welfare. Using panel data for West German cities and applying difference-in-differences and an instrumental variables approach, we show that local governments responded to this migration shock with selective and persistent tax raises as well as shifts in spending. In response to the inflow, farm and business owners were taxed more while residential property and wage bill taxes were left unchanged. Moreover, high-inflow cities significantly raised welfare spending while reducing spending on infrastructure and housing. Election data suggest that these policy changes were partly driven by the political influence of the immigrants: in high-inflow regions, the major parties were more likely to nominate immigrants as candidates, and a pro-immigrant party received high vote shares. We further document that this episode of mass immigration had lasting effects on people’s preferences for redistribution. In areas with larger inflows in the 1940s, people have substantially higher demand for redistribution more than 50 years later.
    Keywords: Migration; Taxation; Spending; Welfare state
    JEL: J61 H25
    Date: 2018–08
  9. By: David R. Agrawal (University of Kentucky & CESifo); Dirk Foremny (Universitat de Barcelona & Institut d’Economia de Barcelona (IEB))
    Abstract: A recent Spanish tax reform granted regions the authority to set income tax rates, resulting in substantial tax differentials. We use individual-level information from Social Security records over a period of one decade. Conditional on moving, taxes have a significant effect on location choice. A one percent increase in the net of tax rate for a region relative to others increases the probability of moving to that region by 1.7 percentage points. Focusing on the stock of top-taxpayers, we estimate an elasticity of the number of top taxpayers with respect to net-of-tax rates of 0.85. Using this elasticity, a theoretical model implies that the mechanical increase in tax revenue due to higher tax rates is larger than the loss in tax revenue from the out-flow of migration.
    Keywords: Migration, Taxes, Mobility, Rich, Fiscal Decentralization
    JEL: H24 H31 H73 J61 R23
    Date: 2018
  10. By: Robin Boadway (Queen’s University); Pierre Pestieau (University of Liège)
    Abstract: We explore the case for and against an annual wealth tax as part of the overall tax mix. Few countries now use wealth taxes, and those that do adopt narrow tax bases. Taxes on inheritances or bequest are more common, but they generate limited revenue and apply to relatively few taxpayer. In principle, annual wealth taxes are roughly equivalent to capital income taxes on the assets to which they apply, although there are some assets for which wealth taxes might be simpler to implement than capital income taxes. Annual wealth taxes are distinct in purpose from inheritance taxes which are useful adjuncts to income taxes even if capital income is exempt. We recount the persuasive arguments for taxing capital income, albeit at different rates than for other income, and for taxing inheritances regardless of whether capital income is taxed. We argue that if the desire to tax asset income and wealth transfers is appropriately addressed by capital income and inheritance taxation, the additional need for an annual wealth tax is minimal and its benefits do not outweigh its administrative costs.
    Keywords: Wealth tax, capital income tax, inheritance tax
    Date: 2018
  11. By: Tess Penne (Herman Deleeck Centre for Social Policy – University of Antwerp); Tine Hufkens (European Commission – JRC); Tim Goedeme (Herman Deleeck Centre for Social Policy – University of Antwerp); Berenice M L Storms (Herman Deleeck Centre for Social Policy – University of Antwerp)
    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 taxes and 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. The indicator allows cross-country comparison on the role of taxes and social benefits in the EU. 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.
    Keywords: welfare state generosity, cost of children, in-kind benefits, reference budgets, hypothetical household simulations
    Date: 2018–12
  12. By: Boris Cournède; Jean-Marc Fournier; Peter Hoeller
    Abstract: Tax and spending reforms offer numerous opportunities to promote inclusive growth. There is potential for so-called win-win reforms that simultaneously boost economic output and enhance income equality. Other changes in the structure of public finances will produce benefits only along a single dimension, while some involve trade-offs between average income gains and adverse distributional effects. Empirical analyses of the experience of OECD countries provide evidence about which tax and spending reforms influence prosperity and income distribution -- and by how much.
    Keywords: Corporate income tax, Panel data econometrics, Public finance, Public investment, Public spending, Structural reform, Value added tax
    JEL: C23 H1 H2 H5
    Date: 2018–12–17
  13. By: Nicodeme Gaetan; Caiumi Antonella; Majewski Ina
    Abstract: Despite sharp reductions in corporate income tax (CIT) rates worldwide, CIT revenues have not fallen dramatically in the last two decades. This paper investigates the recent developments in CIT in the European Union, by taking a closer look at the potential driving forces behind this puzzle. Using a unique dataset of national sectoral accounts, we decompose the CIT revenue to GDP ratio for the EU and find that while the decrease in the statutory rates has driven down tax collection, the effect was more than offset by a broadening of the taxable base and a slight increase in the size of the corporate sector. However, this result holds for the period 1995-2015 but not for the last decade where base broadening has not been able to match further cuts in rates.
    Keywords: Corporate Tax, Implicit Tax Rate, Tax Reforms, Incorporation, European Union
    JEL: E62 H25 O52
    Date: 2018–12
  14. By: Thomas Aronsson; Luca Micheletto
    Abstract: his paper integrates efficiency wage setting in the theory of optimal redistributive income taxation. In doing so, we use a model with two skill-types, where efficiency wage setting characterizes the labor market faced by the low-skilled, whereas the high-skilled face a conventional, competitive labor market. There are two types of jobs in this economy; a low-demanding job which can be carried out by everybody, and a high-demanding job which can only be carried out by the high-skilled, meaning that a potential mimicker may either adopt a conventional income-replication strategy or a job-replication strategy. In this framework, we show that the marginal income tax implemented for the high-skilled is negative under plausible assumptions. The marginal income tax facing the low-skilled can be either positive or negative in general, even if employment-related motives for policy intervention typically contribute to an increase in this marginal tax. An increase in the unemployment benefit contributes to relax the binding self-selection constraint (irrespective of the strategy adopted by a potential mimicker), which makes this instrument particularly useful from the perspective of redistribution.
    Keywords: Nonlinear income taxation, unemployment benefits, efficiency wages, redistribution
    Date: 2017–10
  15. By: James Banks; Carl Emmerson
    Abstract: We describe the history of state pension policy in the UK since 1948 and calculate summary measures of the generosity of the system over time and the degree to which the it created implicit taxes on, or subsidies to, work at older ages. The time series of these measures, calculated separately for ’example-type’ individuals of different birth cohorts, education and sexes, are then related to the time-series of employment rates at older ages for the equivalent types of individual. The generosity of the system rose over the period as whole but has fallen in recent years, and in contrast to many countries there were generally never large implicit taxes on work arising from the state pension system. What implicit subsidies there were in the years immediately before the State Pension Age have been gradually eliminated and the system is now broadly neutral with regard to work incentives. Exploiting variation in pension wealth and work incentives across different cohort-education-sex groups, created by the timing and phasing of pension reforms, we show that both pension wealth and the implicit work disincentives in the pension system are correlated with employment outcomes for men, with the expected negative sign.
    JEL: H55 J26 J32
    Date: 2018–11
  16. By: Armenak Antinyan (International Academy of Business and Economics, Tianjin University of Finance and Economics); Luca Corazzini (Department of Economics, University of Venice \"Ca’ Foscari\"); Filippo Pavesi (Department of Economics (University of Verona))
    Abstract: Whistleblowing is a powerful tool that the tax authorities of various countries use to curb tax evasion. Nonetheless, the determinants shaping one’s positive attitude toward whistleblowing on tax evaders are rather understudied. We investigate the relationship between trust in the government and the attitude toward whistleblowing on tax evaders. We use data from two survey experiments conducted in Italy and the US, as well as from a unique national household survey administered in the Republic of Armenia. Our findings indicate that the level of trust in the government positively influences individuals’ attitude toward whistleblowing, with this effect being robust across countries and data sources.
    Keywords: Government Trust, Whistleblowing, Tax Evasion
    JEL: H26 G28
    Date: 2018–12
  17. By: JIA, BIJIE
    Abstract: This paper revisits mixed findings of the expansionary fiscal spending effect in the U.S. An array of standard Vector-Autoregressive (VAR) models have been implemented to capture inconsistent effects of the fiscal expansion across studies. Findings in this paper consistently reveal that, first, government expenditures often generate less positive influence than government purchases; second, leaving aside the state and local government spending, federal government purchases alone have a very limited influence on the economy; third, 2007 recession significantly weakened the effectiveness of fiscal expansionary policy thereafter. Following these findings, this paper questions the validity of using government purchases alone to conclude the comprehensive effect of fiscal expansion.
    Keywords: E21; E32; E62; H30; H50.
    JEL: E21 E32 E62 H30 H50
    Date: 2017–05
  18. By: Saint-Paul, Gilles
    Abstract: Economists recommend to partly redistribute gains to losers from a structural reform, which in many cases may be required for making the reform politically viable. However, taxation is distortionary. Then, it is unclear that compensatory transfers can support a Pareto-improving reform. This paper provides sufficient conditions for this to occur, despite tax distortions. I consider an economy where workers have sector-specific skills and some sectors are regulated by a price floor. Transfers have to be financed by proportional taxation on firm's revenues or, equivalently, labor income. Labor supply is elastic to net post-tax real wages, and hence reduced by taxation. In a setting where preferences are isolelastic, deregulation is implementable in a Pareto-improving way through compensatory lump-sum transfers, despite that these are financed by distortionary taxes. In a more general setting, there always exist Pareto-improving reforms but they may involve tightening regulation for some goods. I provide sufficient conditions for deregulation, i.e. a general reduction in price floors, to be Pareto-improving. They imply that demand cross-price elasticities should not be too large and that the reform should not be too unbalanced. Finally, I consider counter-examples where some people earn rents associated with informational or institutional frictions. In such situations, Pareto improvements are unlikely. If losers have veto power, the reform may only be supported by a minority of people. Broadening reform scope is especially useful to raise its political support when its impact is uneven across consumers.
    Keywords: compensatory transfers; deregulation; Pareto optimality; price controls; rent seeking; Structural reform; taxation
    JEL: E64 H21 P11
    Date: 2018–12

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