nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒01‒07
thirteen papers chosen by
Thomas Andrén

  2. Tax Evasion and Optimal Corporate Income Tax Rates in a Growing Economy By Takeo Hori; Noritaka Maebayashi; Keiichi Morimoto
  3. Progressive tax reforms in flat tax countries By Salvador Barrios; Viginta Ivaskaite-Tamosiune; Anamaria Maftei; Edlira Narazani; Janos Varga
  4. Social Security and Retirement Timing: Evidence from a National Sample of Teachers By Melinda S. Morrill; John Westall
  5. Collusive Tax Evasion by Employers and Employees: Evidence from a Randomized Field Experiment in Norway By Marie Bjørneby; Annette Alstadsæter; Kjetil Telle
  6. Corporate Social Responsibility and Regulation: Taxing Ethical behaviour By Dina KASSAB
  7. A Dynamic Economy-wide Analysis of Company Tax Cuts in Australia By Janine M. Dixon; Jason Nassios
  8. What Happened to CIT collection? Solving the Rates-Revenues Puzzle By Caiumi, Antonella; Majewski, Ina; Nicodème, Gaëtan
  9. Peer Pressure: The Puzzle of Tax Compliance in the Early Nineteenth-Century Russia By Elena Korchmina
  10. Most people are not economists: Citizen preferences for corporate taxation By Odd-Helge Fjeldstad; Ivar Kolstad; Arne Wiig
  11. Time-varying Consumption Tax, Productive Government Spending, and Aggregate Instability By Mauro Bambi; Alain Venditti
  12. What's gone wrong in the design of PAYG systems? By Riccardo Magnani
  13. Discounting transport infrastructure investments By Asplund, Disa

  1. By: Mieke Dujardin; Freddy Heylen (-)
    Abstract: Raising employment, especially among low skilled workers, stands high on the agenda of policy makers in many OECD countries. They can rely on a huge body of literature that has studied the impact of fiscal policy and wage formation on employment. We contribute to this literature by studying within one coherent framework not only the employment effects of (targeted) changes in tax rates, unemployment benefits and wage setting, but also their effects on inequality and poverty. Our methodological framework is a fourperiod overlapping generations model that portrays two key characteristics: households differ by innate ability and there is an imperfect labor market (union wage floor) for individuals of low ability, causing unemployment. The model explains employment, per capita income and welfare at the aggregate level, as well as for specific ability and age groups. Our main findings are as follows. Unilateral fiscal actions, such as a reduction of labor taxes financed by lower unemployment benefits, can have clear positive effects on employment of (mainly) low ability individuals, but they raise poverty among those who remain unemployed. Achieving higher employment without increasing inequality and poverty, requires combined efforts of fiscal policy makers (labor tax cuts) and unions (wage moderation). Depending on the policy maker’s priority for either employment or lower inequality, a reduction of labor taxes on employers or on employees is preferable. If more progress is to be made in ameliorating inequality and poverty, union wage moderation may be supplemented by a transfer to all individuals below the poverty line, conditional on their active participation on the labor market. All our results assume employability of the unemployed, and are therefore to be seen as long-run effects, which may require complementary policies.
    Keywords: employment of low educated individuals, fiscal policy, heterogeneous ability, welfare inequality, poverty, overlapping generations (OLG)
    JEL: E62 H5 I28 J22 J24
    Date: 2018–12
  2. By: Takeo Hori (Department of Industrial Engineering and Economics, Tokyo Institute of Technology); Noritaka Maebayashi (Faculty of Economics and Business Aminstration, The University of Kitakyushu); Keiichi Morimoto (Department of Economics, Meisei University)
    Abstract: We explore how tax evasion by firms affects the growth- and welfare-maximizing rates of corporate income tax (CIT) in an endogenous growth model with productive public service. We show that the negative effect of CIT on growth is mitigated in the presence of tax evasion. This increases the benefit of raising the CIT rate for public service provision. Thus, in contrast to Barro (1990), the optimal tax rate is higher than the output elasticity of public service. Through numerical exercises, we demonstrate that the role of tax evasion by firms is quantitatively significant.
    Keywords: corporate income tax, tax evasion, growth, welfare
    JEL: H21 H26 O40
    Date: 2018–12
  3. By: Salvador Barrios (European Commission - JRC); Viginta Ivaskaite-Tamosiune (European Commission - JRC); Anamaria Maftei (European Commission - JRC); Edlira Narazani (European Commission - JRC); Janos Varga (European Commission - ECFIN)
    Abstract: Much of the literature on flat tax reforms has highlighted the benefits of introducing flat personal income tax systems in transition economies. The advocated benefits of flat tax systems range from their simplicity, higher compliance and lower distortionary effects on growth and employment. These arguments have often been cited to support policy recommendations favouring the adoption of flat tax systems in Central and Eastern European (CEE) countries in the 1990s and the 2000s. However since income inequality is notoriously high in these countries, the question of introducing some progressivity in the tax system has come to the fore in both policy and academic circles. In this paper, we analyse the fiscal, redistributive and macroeconomic impact of (re-) introducing progressivity in a number of CEE countries with flat tax systems. Combining microsimulation and macro models, we find that a significant reduction in income inequality can be achieved by moving from a flat to a progressive tax system with positive, albeit negligible, macroeconomic and employment impact. The magnitude of these effects depends on country-specificities and tax system characteristics, due in particular to the existence of tax allowances and tax credits.
    Keywords: Flat tax, microsimulation model, DSGE model, inequality progressivity, employment, growth
    JEL: H24 H31 I32 D63
    Date: 2018–12
  4. By: Melinda S. Morrill; John Westall
    Abstract: This study documents an important role for Social Security income in workers' retirement timing. About 40 percent of public school teachers are not covered by Social Security. This provides an opportunity to analyze the causal impact of Social Security on retirement timing by comparing covered and non-covered teachers. Using individual-level data from the American Community Survey, we find robust evidence of higher rates of retirement among covered teachers at Social Security eligibility ages. This pattern is confirmed using an alternative regression model of participation in the teacher labor force. These estimates suggest that, should the federal government mandate full inclusion in Social Security for all public sector workers, the retirement timing patterns of newly covered teachers and other public sector workers would likely change.
    JEL: H55 H75 I28 J26
    Date: 2018–12
  5. By: Marie Bjørneby; Annette Alstadsæter; Kjetil Telle
    Abstract: Third-party reporting and employers’ tax withholding are powerful compliance mechanisms, as long as the employer and employee do not collude to evade. Using data from randomly assigned on-site audits among 2,462 Norwegian firms, we provide evidence of collusive tax evasion. We find that firms assigned to be audited increased their subsequent wage reporting on behalf of their employees by 18 percent relative to firms assigned to the control group. The effect is more pronounced among small firms with few employees. Our results document the limitations of third-party reporting, but also that these limitations can be counteracted by relatively inexpensive on-site audits.
    Keywords: collaborative tax evasion, collusive tax evasion, random audits, undeclared work, third-party reporting
    JEL: E26 H26 H32
    Date: 2018
  6. By: Dina KASSAB (Faculty of Economics and Political Science – Cairo University)
    Abstract: This paper analyzes the impact of Corporate Social Responsibility in a monopoly setup and the implications of government intervention through a consumption tax or subsidy. Assuming that consumers have heterogeneous preferences regarding the CSR content of the private good they purchase and that their degree of altruism is positively related to their income, the paper assesses whether taxing CSR products could be welfare improving, when the tax revenues are recycled in the form of government provision of a public good that either substitutes for or complements the firm's CSR investments. When private and public investments are perfect substitutes, CSR activities should benefit from tax exemptions. However, when they are complements, the CSR products should be taxed when there is a sufficiently large marginal willingness to pay for such activities. Taxing the CSR product can then be viewed as a form of progressive taxation whereby more taxes are levied on wealthier consumers to make the public good available to everyone. Finally, given different objectives of the regulator, the question of whether taxes on CSR goods disfavor the efficient producers or rather the inefficient ones is discussed.
    Keywords: Corporate Social Responsibility, Public Good, Progressive Taxation, Regulation
    JEL: M14 H41 D6 H11 L21
    Date: 2018–12
  7. By: Janine M. Dixon; Jason Nassios
    Abstract: We provide a comprehensive analysis of the economy-wide implications of company tax cuts in Australia. This is achieved using VURMTAX, a bottom-up, multi-regional computable general equilibrium (CGE) model of Australia's states and territories with detailed fiscal accounts. We find that a five percentage point reduction in Australia's legislated rate of company tax stimulates growth in investment, real GDP, and real consumer wages. However, real national income and household consumption both fall when the company tax rate is cut, diminishing economic welfare. As we show, this finding is insensitive to: (i) changes in the timing of the tax cuts, i.e., an overnight cut drives similar long-run impacts to staged reductions, or (ii) whether investors form views on expected rates of return on capital via adaptive or forward-looking expectations. The marginal excess burden (MEB) for company tax is therefore negative. This finding contradicts previous studies, which derive a large, positive MEB for company tax. We identify six differences between modelling assumptions applied herein, and those used in a previous study for Australia (Cao et al. 2015). As we show, these six factors explain 84 per cent of the difference between MEB estimates derived from VURMTAX and Cao et al.
    Keywords: Taxation policy CGE modelling Dynamics Excess burden
    JEL: C68 E62 H21 H25
    Date: 2018–12
  8. By: Caiumi, Antonella; Majewski, Ina; Nicodème, Gaëtan
    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; European Union; Implicit Tax Rate; Incorporation; Tax Reforms
    JEL: E62 H25 O52
    Date: 2018–12
  9. By: Elena Korchmina (New York University Abu Dhabi)
    Abstract: How can developing countries successfully implement income taxes, which are generally desirable but costly to collect? This paper analyses the income tax compliance of elites in a developing country with a low administrative capacity, drawing attention to the role of either voluntary or quasi-voluntary components of tax acquiescence. In 1812, the Russian government introduced the progressive income tax, with the highest tax rate of 10 per cent. After Britain, the Russian Empire became the second country to adopt this levy – under the threat of Napoleonic invasion. Unlike the widely known and deeply investigated British case, the history of Russian income tax suffers from a lack of detailed research. I use a self-compiled unique dataset for estimating the level of tax compliance of the Russian noble elite at the individual level. The dataset is based on the self-reported tax returns of approximately 4,000 Russian aristocrats who had real estate in the Moscow region. Using narrative sources and crosschecking with official bank documents, I reveal not only that the Russian nobility declared reliable income information but also that the share of aristocratic evaders was relatively low (from 30 to 10 per cent). I argue that this surprisingly high level of tax compliance was achieved through a unique mechanism of tax collection involving the channels of social sanctioning and group identity, boosted by the national threat of Napoleonic invasion. This case could be considered as extremely important, insofar as the state could not achieve its fiscal aims due to coercive tools in the hands of bureaucracy but had to rely on subjects’ goodwill.
    Keywords: Russia, income tax, elite, nineteenth-century.
    JEL: H2 N93 N33
    Date: 2018–12
  10. By: Odd-Helge Fjeldstad; Ivar Kolstad; Arne Wiig
    Abstract: On what bases should corporations be taxed? This article presents evidence from a series of discrete choice experiments designed to elicit the tax preferences of ordinary citizens. We find that respondents favour higher taxes on more profitable companies, but not high enough to make taxes progressive. Moreover, respondents prefer higher taxes on more internationally mobile companies, which is at odds with well-known results from optimal tax theory. The experiments were conducted in Tanzania, making this result all the more striking as developing countries are particularly sensitive to location decisions of corporations. We also find that citizens favour lower taxes on companies that have more local employees, and higher taxes on foreign owned companies compared to domestic ones. The latter result is not due to perceived differences in local or foreign employment or other local impacts, suggesting a strong home bias in respondent preferences. Furthermore, we find significant gender differences. Men appear more efficiency oriented in their tax preferences. Both men and women are primarily in favour of companies that offer employment to their own gender, and male respondents focus more on job growth than on job security. The results have important implications for debates on the legitimacy of tax policies.
    Keywords: Corporate taxation, tax preferences, tax legitimacy, optimal taxation
    Date: 2018
  11. By: Mauro Bambi (Department of Economics and Related Studies, University of York); Alain Venditti (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, EDHEC - EDHEC Business School)
    Abstract: In this paper we investigate if government balanced-budget rules together with endogenous taxation may lead to aggregate instability in an endogenous growth framework. After highlighting the differences with the exogenous growth framework, we prove that under counter-cyclical consumption taxes, while there exists a unique balanced growth path, sunspot equilibria based on self-fulfilling expectations occur through a form of global indeterminacy. In addition, we argue that this result is empirically plausible for a large set of OECD countries and that it may also emerge with endogenous income taxes.
    Keywords: endogenous growth,time-varying consumption tax,global indeterminacy,self-fulfilling expectations,sunspot equilibria
    Date: 2018–10
  12. By: Riccardo Magnani (Centre d'Economie de l'Université de Paris Nord (CEPN))
    Abstract: In order to face the population ageing problem, most countries with PAYG systems introduced pension reforms during the last twenty years. However, in many cases these reforms are considered as insufficient to guarantee the pension sustainability; in other cases, the pension sustainability is achieved through the introduction of drastic reforms and, thus, at the expense of a dramatic reduction in the well-being of current and future generations. The objective of this article is to show that the non-sustainability of PAYG systems and, consequently, the necessity to introduce drastic pension reforms, is explained by the fact that in countries with PAYG systems pensions have not been computed according to appropriate rules. In particular, we show that the sustainability of the pension system is guaranteed if (i) pension benefits are computed using actuarial principles, (ii) the implicit rate of return on contributions is the same for each retiree and equal to the average wage bill growth rate, and (iii) pension reserves are remunerated at a risk-free interest rate equal to the average wage bill growth rate. These conditions allow a PAYG system to face any demographic shock, such as an increase in life expectancy and a transitory increase in fertility rates (baby boom) followed by a transitory reduction in fertility rates (baby boost).
    Keywords: Pension economics; Pension finance; Population ageing
    JEL: H55
    Date: 2018–12
  13. By: Asplund, Disa (CTS - Centre for Transport Studies Stockholm (KTH and VTI))
    Abstract: The main aim of the study is to advice the Swedish national guidelines on cost-benefit analysis (CBA) of transport infrastructure investments, ASEK about the appropriate set of discount-rates (currently 3.5% for all investments). To this end, first a literature review with a theoretical focus along with some new perspectives are provided. Second the conclusions are applied to Swedish infrastructure transport CBA, using the current proposition of a new HSR line as a case. Based on empirical research concerning parameter values new discount rates are estimated, and sensitivity analysis performed. The best estimate of the social discount rate in the present study, for land transport infrastructure investment in Sweden, is about 5.1%.
    Keywords: Discount rate; Cost-benefit analysis; Social time preference; Social opportunity cost; Risk
    JEL: D61 G11 H43 H54
    Date: 2018–12–14

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