nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒12‒24
nineteen papers chosen by
Thomas Andrén

  1. Flexible Retirement and Optimal Taxation By Ndiaye, Abdoulaye
  2. The concept of tax gaps - Corporate Income Tax Gap Estimation Methodologies By FISCALIS Tax Gap Project Group
  3. Taxation and Market Power in the Legal Marijuana Industry By Hollenbeck, Brett; Uetake, Kosuke
  4. Where has the money gone?: The case of Value Added Tax revenue performance in Indonesia By Iswahyudi, Heru
  5. Gender, Social Value Orientation, and Tax Compliance By John D'Attoma; Clara Volintiru; Antoine Malezieux
  6. Optimal Capital Taxation Revisited By Chari, V. V.; Nicolini, Juan Pablo; Teles, Pedro
  7. Capital gains taxation and funding for start-ups By Edwards, Alexander; Todtenhaupt, Maximilian
  8. Richer or more Numerous or both? The Role of Population and Economic Growth for Top Income Shares By Carla Krolage; Andreas Peichl; Daniel Waldenström
  9. A Destination-Based Allowance for Corporate Equity By Shafik Hebous; Alexander Klemm
  10. Tax policies for inclusive growth in a changing world By Pierce O’Reilly
  11. The Elasticity of Taxable Income: A Meta-Regression Analysis By Neisser, Carina
  12. Personal Income Tax Progressivity: Trends and Implications By Claudia Gerber; Alexander D Klemm; Li Liu; Victor Mylonas
  13. Empirical Studies on Effect of Property Tax on Capital Investment (Japanese) By KOBAYASHI Yohei; SATO Motohiro; SUZUKI Masaaki
  14. Spending Multipliers with Distortionary Taxes: Does the Level of Public Debt Matter? By Rym Aloui; Aurélien Eyquem
  15. The Relationship between Privatization and Corporate Taxation Policies By Liu, Yi; Matsumura, Toshihiro; Zeng, Chenhang
  16. Progressive taxation and (in)stability in an exogenous growth model with non-market ("home") production By Aleksandar Vasilev
  17. Increasing taxes after a financial crisis: Not a bad idea after all ... By Koulovatianos, Christos; Mavridis, Dimitris
  18. The Effect of Economic Conditions on the Disability Insurance Program: Evidence from the Great Recession By Nicole Maestas; Kathleen J. Mullen; Alexander Strand
  19. Two Hundred Years of Health and Medical Care: The Importance of Medical Care for Life Expectancy Gains By Maryaline Catillon; David Cutler; Thomas Getzen

  1. By: Ndiaye, Abdoulaye (Federal Reserve Bank of Chicago)
    Abstract: This paper studies optimal insurance against private idiosyncratic shocks in a life-cycle model with intensive labor supply and endogenous retirement. In this environment, the optimal labor tax is hump-shaped in age: insurance benefits of taxation push for increasing-in-age taxes while rising labor supply elasticities and optimal late retirement of highly productive workers push for lowering taxes for old workers. In calibrated numerical simulations, the optimum achieves sizable welfare gains that age-dependent taxes do not deliver under the status quo US Social Security. Nevertheless, an optimal combination of age-dependent linear taxes with increasing-in-age retirement benefits generates welfare gains close to optimal.
    Keywords: Retirement; Optimal Taxation; Social Security; Continuous- Time; Optimal Stopping
    JEL: H21 H55 J26
    Date: 2017–11–03
  2. By: FISCALIS Tax Gap Project Group
    Abstract: The corporate income tax gap (CIT Gap) is the gap between corporate tax revenues as they “should be” collected and as they “are” collected. The gap is an indication of potential CIT revenue losses. This report defines the CIT gap as encompassing both non-deliberate actions by taxpayers (such as errors or omissions) and deliberate actions (such as fraud, evasion and avoidance) that lead to shortfall in revenues. This report reflects the objective of the Tax Gap Project Group (TGPG) to map and share expertise and good practices. The two main approaches to estimating the tax gap – the top-down and bottom-up methods – have both advantages and disadvantages. The choice of the estimation method depends heavily on the availability of data, resources and purposes of the estimate.
    Keywords: corporate taxation, tax gap, european union, tax avoidance
    JEL: H25 H26 H83
    Date: 2018–11
  3. By: Hollenbeck, Brett; Uetake, Kosuke
    Abstract: In 2012 the state of Washington created a legal framework for production and retail sales of marijuana. Nine other U.S. states and Canada have followed. These states hope to generate tax revenue for their state budgets while limiting harms associated with marijuana consumption. We use a unique administrative dataset containing all transactions in the history of the industry in Washington to evaluate the effectiveness of different tax and regulatory policies under consideration by policymakers and study the role of imperfect competition in determining these results. We examine 3 main research questions. First, how effective is Washington’s excise tax at raising revenue? With the nation’s highest tax rate on marijuana, is Washington maximizing revenue or potentially overtaxing, leading to reduced legal sales and lower tax revenue. Second, what is the incidence of taxes in this industry? Finally, most states have restricted entry, resulting in firms with substantial market power. What is the role of imperfect competition in studying these basic questions on tax policy? We combine structural methods and a reduced form sufficient statistic approach to show a number of results. First, Washington’s 37% excise tax is still on the upward sloping portion of the Laffer curve and state revenue could be substantially higher with a higher tax rate. The amount of revenue generated by a tax increase is significantly larger due to retailer market power than it would be under perfect competition. In addition, these taxes are primarily borne by consumers and not by firms, and there is a large social cost associated with each dollar raised.
    Keywords: tax incidence, marijuana, pass-through, imperfect competition, regulation
    JEL: D22 H21 H22 L13 L51 L81
    Date: 2018–11–12
  4. By: Iswahyudi, Heru
    Abstract: Since its introduction in 1983, Value Added Tax (VAT) has played an increasingly important role as one of the major sources of revenue for the Indonesian government. In the last two and a half decades, however, there is declining trend in its collection performance as a percentage of Gross Domestic Product. This study aims to explore the determinants of this declining trend in VAT revenue using macroeconomic data. These determinants are decomposed into three broad categories: tax expenditure policy, taxpayers’ noncompliance, and the share of aggregate consumption in the economy. It finds that the performance of VAT collection could mainly be explained by tax expenditure policies and the extent of noncompliance with tax laws. It is proposed that avenues of approach for reform could be directed toward reducing the scope of VAT exemptions, establishing a systematic approach in data collection and analysis to closely monitor trends and changes in taxpayers’ behavior, simplifying the tax system by setting a single rate that is imposed on a single type of consumption tax, and improving audit effectiveness by building trust between tax authority and taxpayers.
    Keywords: Indonesia, Value Added Tax, Tax Expenditure, Tax Revenue, Tax Noncompliance
    JEL: H2 H20 H25 H26 H6
    Date: 2018–11–06
  5. By: John D'Attoma; Clara Volintiru; Antoine Malezieux
    Abstract: This paper brings an important empirical contribution to the academic literature by examining whether gender differences in tax compliance are due to higher prosociality among women. We conducted a large cross-national tax compliance experiment carried out in Italy, U.K., U.S., Sweden, and Romania, and assessed tax compliance as reported income as a percentage of total earned income in the experiment. We uncover that women declare a significantly higher percentage of their income than men in all five countries. While some scholars have argued that differences in honesty between men and women is actually being mediated by the fact that women are more prosocial than men, we find that women are not more prosocial than men in all countries. Furthermore, though overall women tend to be more prosocial on average than men, SVO has no mediation effect between gender and tax compliance. We conclude then that although differences in prosociality between men and women seem to be context dependent, differences in tax compliance are indeed much more consistent.
    Keywords: behavioral economics, tax compliance, gender
    JEL: A10 C90 C92 D64 H26 H30 H41
    Date: 2018
  6. By: Chari, V. V. (Federal Reserve Bank of Minneapolis); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis); Teles, Pedro (Banco de Portugal)
    Abstract: We revisit the question of how capital should be taxed. We allow for a rich set of tax instruments that consists of taxes widely used in practice, including consumption, dividend, capital, and labor income taxes. We restrict policies to respect promises that the government has made in the previous period regarding the current value of wealth. We show that capital should not be taxed if households have preferences that are standard in the macroeconomics literature. We show that Ramsey outcomes that must respect such promises are time consistent. We show that the presumption in the literature that capital should be taxed for some length of time arises because the tax system is restricted.
    Keywords: Capital income tax; Time consistency; Production efficiency
    JEL: E60 E61 E62
    Date: 2018–09–28
  7. By: Edwards, Alexander; Todtenhaupt, Maximilian
    Abstract: We examine how capital gains taxes affect investment in start-up (i.e., pre-IPO) firms. Using data on capital raised by start-up firms in individual funding rounds, we estimate the effect of the SBJA of 2010, which implemented a full exemption from federal capital gains tax on the sale of qualified shares. Because of higher expected after-tax returns (lower future capital gains taxes), we hypothesize and find evidence consistent with this capital gains tax reduction increasing the amount of investment in start-up firms per funding round by about 12%. We also provide evidence that this effect is concentrated in start-up firms that are likely to be more financially sophisticated.
    Keywords: Capital Gains Taxes,Start-ups,Tax Capitalization
    JEL: M13 G24 H25
    Date: 2018
  8. By: Carla Krolage; Andreas Peichl; Daniel Waldenström
    Abstract: When measuring income inequality over long periods of time, accounting for population and productivity growth is important. This paper presents three alternative measures of top income shares that more explicitly account for population and income growth than the standard measure. We apply these measures to long-term income data from the United States and find that the U-shaped inequality trend over the past century holds up, but with important qualifications. Using measures that allow top groups to change not only in relative income but also in group size suggest more accentuated top income share growth since 1980 than when keeping top groups fixed. For earlier historical periods, our analysis shows that choice of income deflator (CPI or GDP) matters greatly. Using distributional national accounts data does not change these results. Altogether, our study's findings suggest that one may want to use several complementary top share measures when assessing long-term income inequality trends.
    Keywords: income distribution, inequality, top incomes, growth, measurement
    JEL: D31 D63 H31 N32
    Date: 2018
  9. By: Shafik Hebous; Alexander Klemm
    Abstract: Following renewed academic and policy interest in the destination-based principle for taxing profits—particularly through a destination-based cash flow tax (DBCFT)—this paper studies other forms of efficient destination-based taxes. Specifically, it analyzes the Destination-Based Allowance for Corporate Equity (DBACE) and Allowance for Corporate Capital (DBACC). It describes adjustments that are required to turn an origin into a destination-based versions of these taxes. These include adjustments to capital and equity, which are additional to the border adjustments needed under a DBCFT. The paper finds that the DBACC and DBACE reduce profit shifting and tax competition, but cannot fully eliminate them, with the DBACE more sensitive than the DBACC. Overall, given the potential major political cost of switching from an origin to a destination-based tax system, we conclude that advantages of the DBCFT are likely to outweigh the transitional advantages of the DBACE/DBACC.
    Keywords: destination-based taxation, ACE, ACC
    JEL: H21 H25
    Date: 2018
  10. By: Pierce O’Reilly
    Abstract: This paper, Tax policies for inclusive growth in a changing world, has been prepared in support of Argentina’s G20 Presidency. While this paper is focused on taxation policy, it forms part of a broader contribution that the OECD has made in support of Argentina’s G20 presidency.Against a backdrop of increased inequality and persistently low productivity growth, this paper considers the challenges and opportunities confronting policy makers in a rapidly changing world as a result of globalisation, technological change and the changing world of work. The paper focusses on:• The impact of the tax system on the market distribution of income, by supporting employment, skills investments, and labour market formality.• How shifting tax mixes towards growth-friendly taxes can be combined with measures to improve progressivity, particularly through base-broadening and through removing inefficient and regressive tax expenditures.• Ways in which personal income taxes and social transfers can foster inclusive growth by raising the efficiency and equity of labour and capital income tax systems.• How tax policy can foster business dynamism and productivity, including through support for investment and innovation, and can raise efficiency by continuing to combat BEPS.• How tax capacity can be raised, and how tax administration can be strengthened, including through international co-operationThe paper provides tax policy advice and recommendations to support governments in their pursuit of tax and transfer policies conducive to inclusive growth, while supporting innovation and increased productivity growth; preserving the revenue-raising capacity of the tax system; and ensuring the sustainability of public spending.
    Keywords: inclusive Growth, taxation
    JEL: H2 H24 D31
    Date: 2018–12–18
  11. By: Neisser, Carina (ZEW Mannheim)
    Abstract: The elasticities of taxable and broad income are key parameters in tax policy analysis. To examine the large variation in estimates found in the literature, I conduct a comprehensive meta-regression analysis using information from 51 studies containing 1,448 estimates. 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. Selective reporting bias is prevalent in the literature and the direction of reporting bias depends on whether or not deductions are included in the tax base.
    Keywords: elasticity of taxable income, income tax, behavioural response, meta-regression, analysis
    JEL: C81 H24 H26
    Date: 2018–11
  12. By: Claudia Gerber; Alexander D Klemm; Li Liu; Victor Mylonas
    Abstract: This paper discusses how the structure of the tax system affects its progressivity. It suggests a measure of progressive capacity of tax systems, based on the Kakwani index, but independent of pre-tax income distributions. Using this and other progressivity measures, the paper (i) documents a decline in progressivity over the last decades and (ii) examines the relationship between progressivity and economic growth. Regressions do not reveal a significant impact of progressivity on growth, suggesting that efficiency costs of progressivity may be small—at least for degrees of progressivity observed in the sample.
    Keywords: Progressive taxation;Personal income taxes;Tax systems;Income inequality;Economic growth;Progressivity; Growth; Personal Income Tax; Tax Wedge; Inequality, Progressivity, Growth, Personal Income Tax, Tax Wedge, Inequality, Household
    Date: 2018–11–20
  13. By: KOBAYASHI Yohei; SATO Motohiro; SUZUKI Masaaki
    Abstract: Property tax has been identified as a case of a "good" local tax in the literature. Such argument however presumes that property tax is levied solely on land. In practice, property tax applies to housing and depreciable assets such as machinery and buildings, which implies a feature of capital tax. It is known that capital tax distorts capital investment. The present paper analyzes the effects of property tax on capital investment. To be concrete, we use panel data of manufacture census such as Census of Manufacture and Economic Census for Business Activity, and examine how property tax on depreciable assets in Japan affects capital investments by small and medium enterprises. It is established that property tax negatively affects their investment and such adverse effects are exacerbated among enterprises with liquidity constraints.
    Date: 2018–11
  14. By: Rym Aloui (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Aurélien Eyquem (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France ; Institut Universitaire de France)
    Abstract: We investigate the link between the size of government indebtedness and the effectiveness of government spending shocks in normal times and at the Zero Lower Bound (ZLB). We develop a New Keynesian model with capital, distortionary taxes and public debt in which the ZLB constraint on the nominal interest rate may be binding. In normal times, high steady-state levels of government debt to GDP lead to reduced output multipliers. After a negative capital quality shock that pushes the economy at the ZLB however, high steadystate debt levels produce larger output multipliers. Our results rely on the fact that fiscal policy becomes self-financing at the ZLB, and that distortionary taxes rise (respectively fall) after a spending shock at the steady state (resp. ZLB). Our results have non-trivial consequences on the design of optimized spending policies in the event of large economic downturns.
    Keywords: Zero Lower Bound, Fiscal Policy, Distortionary Taxes, Public Debt
    JEL: E62 E32
    Date: 2018
  15. By: Liu, Yi; Matsumura, Toshihiro; Zeng, Chenhang
    Abstract: This paper investigate how the corporate (profit) tax rate affects the optimal degree of privatization in a mixed duopoly, while introducing a minimum profit constraint for the private firm. Firstly, we show that the profit tax rate directly affects the behavior of the partially privatized firm and affects the behavior of the private firm through strategic interaction. In addition, we investigate the relationship between the optimal privatization policy and corporate tax policy, and find that the optimal degree of privatization increases with the corporate tax rate, regardless of whether the constraint is binding. The optimal degree of privatization decreases (increases) with the foreign ownership share in the private firm if the constraint is ineffective (effective). This result suggests that a minimum profit constraint can be crucial in the optimal privatization policy.
    Keywords: profit tax, minimum profit constraint, foreign ownership, optimal public ownership
    JEL: D43 H44 L33
    Date: 2018–08
  16. By: Aleksandar Vasilev
    Abstract: We show that in a exogenous growth model with non-market (”home”) sector calibrated to Bulgarian data under the progressive taxation regime (1993-2007), the economy exhibits equilibrium indeterminacy due to the presence of non-market production. These results are in line with the findings in Benhabib and Farmer (1994, 1996) and Farmer (1999). Also, the findings in this paper are in contrast to Guo and Lansing (1988) who argue that progressive taxation works as an automatic stabilizer. Under the flat tax regime (2008-16), the economy calibrated to Bulgarian data displays saddle-path stability. The decrease in the average effective tax rate addresses the indeterminacy issue and eliminates the ”stable focus” dynamics.
    Keywords: Progressive taxation; Non-market Sector; Home Production; Equilibrium (In)determinacy.
    JEL: H22 D51 D91 O41
    Date: 2018–12–13
  17. By: Koulovatianos, Christos; Mavridis, Dimitris
    Abstract: Based on OECD evidence, equity/housing-price busts and credit crunches are followed by substantial increases in public consumption. These increases in unproductive public spending lead to increases in distortionary marginal taxes, a policy in sharp contrast with presumably optimal Keynesian fiscal stimulus after a crisis. Here we claim that this seemingly adverse policy selection is optimal under rational learning about the frequency of rare capital-value busts. Bayesian updating after a bust implies massive belief jumps toward pessimism, with investors and policymakers believing that busts will be arriving more frequently in the future. Lowering taxes would be as if trying to kick a sick horse in order to stand up and run, since pessimistic markets would be unwilling to invest enough under any temporarily generous tax regime.
    Keywords: Bayesian learning,controlled diffusions and jump processes,learning about jumps,Gamma distribution,rational learning
    JEL: H30 D83 C11 D90 E21 D81 C61
    Date: 2018
  18. By: Nicole Maestas; Kathleen J. Mullen; Alexander Strand
    Abstract: We examine the effect of cyclical job displacement during the Great Recession on the Social Security Disability Insurance (SSDI) program. Exploiting variation in the severity and timing of the recession across states, we estimate the effect of unemployment on SSDI applications and awards. We find the Great Recession induced nearly one million SSDI applications that otherwise would not have been filed, of which 41.8 percent were awarded benefits, resulting in over 400,000 new beneficiaries who made up 8.9 percent of all SSDI entrants between 2008-2012. More than one-half of the recession-induced awards were made on appeal. The induced applicants had less severe impairments than the average applicant. Only 9 percent had the most severe, automatically-qualifying impairments, 33 percent had functional impairments and no transferable skills, and the rest were denied for having insufficiently severe impairments and/or transferable skills. Our estimates imply the Great Recession increased claims processing costs by $2.960 billion during 2008-2012, and SSDI benefit obligations by $55.730 billion in present value, or $97.365 billion including both SSDI and Medicare benefits.
    JEL: H51 H53 H55 J14
    Date: 2018–12
  19. By: Maryaline Catillon; David Cutler; Thomas Getzen
    Abstract: Using two hundred years of national and Massachusetts data on medical care and health, we examine how central medical care is to life expectancy gains. While common theories about medical care cost growth stress growing demand, our analysis highlights the importance of supply side factors, including the major public investments in research, workforce training and hospital construction that fueled a surge in spending over the 1955-1975 span. There is a stronger case that personal medicine affected health in the second half of the twentieth century than in the preceding 150 years. Finally, we consider whether medical care productivity decreases over time, and find that spending increased faster than life expectancy, although the ratio stabilized in the past two decades.
    JEL: H51 I15 I18 J1 N3 O1
    Date: 2018–12

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