nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒01‒28
nineteen papers chosen by
Thomas Andrén

  1. Taxes, Wage Capitalization and the Ability of States to Redistribute Income By Giertz, Seth H.; Ramezani, Rasoul
  2. Pouring Oil on Fire: Interest Deductibility and Corporate Debt By Pietro Dallari; Nicolas End; Fedor Miryugin; Alexander F. Tieman; Reza Yousefi
  3. Tax avoidance and accounting conservatism By Bornemann, Tobias
  4. Is an unfunded social security system good or bad for growth? A theoretical analysis of social security systems financed by VAT By Maebayashi, Noritaka
  5. Intellectual Property and Taxation in Digital Platforms By Juan Manuel Sanchez-Cartas
  6. How do tax incentives affect business investment? Evidence from German bonus depreciation By Eichfelder, Sebastian; Schneider, Kerstin
  7. The Economic Effects of a Tax Shift from Direct to Indirect Taxation in France By Francisco de Castro Fernández; Marion Perelle; Romanos Priftis
  8. Certain Effects of Uncertain Taxes By James R. Hines Jr.; Michael Keen
  9. Fuzzy Profit Shifting: A Model for Optimal Tax-induced Transfer Pricing with Fuzzy Arm's Length Parameter By Rathke, Alex A.T.
  10. Investment-Specific Technological Change, Taxation and Inequality in the U.S. By Brinca, Pedro; Oliveira, João; Duarte, João
  11. Retirement Choices by State and Local Public Sector Employees: The Role of Eligibility and Financial Incentives By Leslie E. Papke
  12. The effect of intellectual property boxes on innovative activity & effective tax rates By Bornemann, Tobias; Laplante, Stacie K.; Osswald, Benjamin
  13. Institutions and Customs Duty Evasion By Sébastien Jean; Cristina Mitaritonna; Antoine Vatan
  14. Effect of employment tax incentives: the case of disability quota in Hungary By Judit Kreko
  15. Frontloaded Income Taxation of Old-Age Pensions: For Efficiency and Fairness in a World of International Labor Mobility By Bernd Genser; Robert Holzmann
  16. Assessing Income Tax Perturbations By Vidar Christiansen; Zhiyang Jia; Thor Olav Thoresen
  17. Corporate Income Taxation, Leverage at Entry, and the Growth of Entrepreneurial Companies By Da Rin, Marco; Di Giacomo, M.; Sembenelli, A.
  18. Taxing Families: The Impact of Child-related Transfers on Maternal Labor Supply By Anne Hannusch
  19. Age-Based Property Tax Exemptions By H. Spencer Banzhaf; Ryan Mickey; Carlianne E. Patrick

  1. By: Giertz, Seth H.; Ramezani, Rasoul
    Abstract: Local and state governments attempt to lessen after-tax income inequality via progressive taxation. Migration responses of capital and labor undermine such attempts. Location theory predicts that cross-state migration will continue until the redistributive effects from taxation are fully capitalized into gross wages leaving after-tax wages unchanged. Empirical evidence has not reached a consensus on this issue. At one extreme, Feldstein and Wrobel (1998) report evidence of full tax capitalization for US states. At the other extreme, Leigh (2008) reports very little to no wage capitalization. We revisit this question by creating a pseudo panel from CPS data spanning years 1997 to 2015. Our “best” estimate is that pre-tax wages adjust in response to redistributive state and local taxes, negating roughly 50 percent of effect compared to counterfactual with no behavioral responses.
    Keywords: Fiscal federalism,Redistribution,State taxation,Tax capitalization,Progressivity,Migration
    JEL: H20 H71 H77
    Date: 2018
  2. By: Pietro Dallari; Nicolas End; Fedor Miryugin; Alexander F. Tieman; Reza Yousefi
    Abstract: This paper investigates the role of tax incentives towards debt finance in the buildup of leverage in the nonfinancial corporate (NFC) sector, using a large firm-level dataset. We find that so-called debt bias is a significant driver of leverage, for both small and medium-sized enterprises and larger firms, with its effect accounting for about a quarter of leverage. The strength of this effect differs with firm size, the availability of collateral, income and income volatility, cash flow, and capital intensity. We conclude that leveling the playing field between debt and equity finance through tax policy reform would decrease NFC leverage, reducing economic risks posited by leverage.
    Keywords: Tax incentives;Tax policy;Corporate debt;Corporate income taxes;Leverage, Debt Bias, Corporate Income Tax, SMEs, Micro data, Business Taxes and Subsidies, Incidence, Firm Behavior: Empirical Analysis
    Date: 2018–12–07
  3. By: Bornemann, Tobias
    Abstract: This study analyzes the relation between accounting conservatism, future tax rate cuts and countries' level of book-tax conformity. Firms have an incentive to increase conservatism in financial reporting when a tax rate cut is imminent to shift taxable income into the lower taxed future. Using a panel of firms across 18 countries from 1995 to 2010 I find that conditional conservatism is positively and significantly associated with future tax rate cuts when book-tax conformity is high. This effect is particularly pronounced for firms that concentrate the majority of their operations in the country in which the tax rate is cut. In contrast, there is no significant relation between future tax rate cuts and unconditional conservatism.
    Keywords: accounting conservatism,tax rate cuts,book-tax conformity
    JEL: H21 H25
    Date: 2018
  4. By: Maebayashi, Noritaka
    Abstract: This study investigates (i) how unfunded public pensions financed by VAT, as discussed in Japan, affect economic growth, and (ii) whether payroll tax or VAT is the more growth-friendly tax structure for the finance of public pensions. We examine these issues in overlapping generations (OLG) models with parental altruism and find the following results. A public pension system financed by VAT itself may increase economic growth when bequests are operative. By contrast, when bequests are inoperative, public pensions hinder growth unless agents are sufficiently patient. Finally, public pensions financed by VAT have turned out to be more growth-friendly than those financed by payroll tax when bequests are operative.
    Keywords: Public pensions financed by VAT, Altruism, Education, Bequests, Growth
    JEL: D64 H20 H55 I20 O40
    Date: 2018–12–26
  5. By: Juan Manuel Sanchez-Cartas
    Abstract: I study the impact of competition and taxation on the openness and the intellectual property policies of two-sided digital platforms. I model a market in which two platforms compete for users and developers. First, I find that higher competition shortens the period of exclusivity granted to developers but does not influence the degree of openness of a platform. However, the higher the degree of differentiation in the developers market, the less open the platforms are. Second, I analyze two types of taxes, ad valorem and unit taxes. Ad-valorem taxes have no effect on the length of the exclusivity period. However, they increase the degree of openness of the platform when levied on users. Unit taxes instead limit the degree of openness and increase the period of exclusivity when levied on the developers market. Lastly, I find that multi-homing reduces the exclusivity period, but does not change the qualitative effects of taxation. My findings suggest that the new digital tax proposed by the European Commission, that should come into force in 2020, may reduce openness and innovation levels in the European Union.
    Keywords: Two-sided markets, Digital Platforms, Taxation, Intellectual Property, Openness
    JEL: H22 L13 L51 L86 O34
    Date: 2019
  6. By: Eichfelder, Sebastian; Schneider, Kerstin
    Abstract: We analyse how tax incentives in the form of accelerated depreciations ("bonus depreciation") affect business investment. By exploiting exogenous variation in tax regulation of a regional bonus depreciation program in the former East Germany, we identify and quantify the impact from bonus depreciation on building and equipment investments at the extensive and intensive margins in the German manufacturing industry. We observe a stronger response for building investments and from large firms. There is only weak evidence of subsidy shopping but stronger evidence of investment shifting to years with more generous bonus depreciation regulations.
    Keywords: bonus depreciation,tax incentive,business taxation,heterogeneity
    JEL: G11 H25 H32 M41
    Date: 2018
  7. By: Francisco de Castro Fernández; Marion Perelle; Romanos Priftis
    Abstract: This paper uses the European Commission's DSGE model QUEST to investigate the impact of alternative tax reforms shifting the tax burden away from labour or corporates, making the French tax system more growth friendly. These experiments consist in raising VAT and, simultaneously reducing either social security contributions borne by employers or corporate income taxes. These tax reforms overall entail positive and permanent effects on GDP and price competitiveness. Scenarios that imply cuts in social contributions borne by employers bring about more positive effects on employment, the trade balance and the general government deficit. By contrast, while lowering corporate taxes also gives rise to a positive GDP response, external price competitiveness and private investment, they negatively affect employment, the trade balance and the general government deficit.
    JEL: H30 E62 H20 H22
    Date: 2018–03
  8. By: James R. Hines Jr.; Michael Keen
    Abstract: This paper explores the implications of tax rate uncertainty, identifying circumstances in which revenue-neutral tax rate variability increases profitability, economic activity, and the efficiency of resource allocation. Furthermore, with heterogeneous taxpayers, tax rate variability is shown to perform an efficiency-enhancing screening function, imposing heavier expected tax burdens on less responsive taxpayers. And while efficient tax uncertainty enables governments to reduce average costs of taxation, it necessarily increases the marginal cost of taxation over some ranges of expected revenue, so may reduce efficient levels of government spending.
    JEL: H21 H22
    Date: 2018–12
  9. By: Rathke, Alex A.T.
    Abstract: This paper proposes a model of optimal tax-induced transfer pricing with a fuzzy arm's length parameter. Fuzzy numbers provide a suitable structure for modelling the ambiguity that is intrinsic to the arm's length parameter. For the usual conditions regarding the anti-shifting mechanisms, the optimal transfer price becomes a maximising a-cut of the fuzzy arm's length parameter. Nonetheless, we show that it is profitable for firms to choose any maximising transfer price if the probability of tax audit is sufficiently low, even if the chosen price is considered a completely non-arm's length price by tax authorities. In this case, we derive the necessary and sufficient conditions to prevent this extreme shifting strategy.
    Keywords: fuzzy profit shifting,transfer pricing,tax evasion,tax enforcement,tax penalty
    JEL: F23 H26 K34
    Date: 2019
  10. By: Brinca, Pedro; Oliveira, João; Duarte, João
    Abstract: Since 1980 the U.S. economy has experienced a large increase in income inequality. To explain this phenomenon we develop a life-cycle, overlapping generations model with uninsurable labor market risk, a detailed tax system and investment-specific technological change (ISTC). We calibrate our model to match key characteristics of the U.S. economy and study how ISTC, shifts in taxation, government debt and employment have contributed to the rise in income inequality. We find that these structural changes can account for close to one third of the observed increase in the post-tax income Gini. The main mechanisms in play are the rise in the wage premium of non-routine workers, resulting from capital-non-routine complementarity, as well as a reduction of the progressivity of the labor income tax schedule, which increases post-tax inequality. We show that ISTC alone accounts for roughly 15% of the change observed in post-tax income Gini, while the reduction in progressivity accounts for 16%.
    Keywords: Income Inequality, Taxation, Automation
    JEL: E21 H21 J31
    Date: 2019
  11. By: Leslie E. Papke
    Abstract: I analyze the effects of state public pension parameters on the retirement of public employees. Using a panel data set of public sector workers from 12 waves of the Health and Retirement Study, I model the probability of retirement as a function of pension wealth at early and normal retirement eligibility and Social Security coverage in the public sector job. I find that becoming eligible for early retirement, or receiving an early-out offer, significantly increases the probability of retiring. I do not find any effect of retirement wealth levels; instead the findings are consistent with the literature on default options in defined contribution plans. These findings suggest that state legislative action to affect retirement decisions and reduce future pension costs may be most effective operating through plan eligibility rules and early-out incentives.
    JEL: H72 H75 J26 J45 J82
    Date: 2019–01
  12. By: Bornemann, Tobias; Laplante, Stacie K.; Osswald, Benjamin
    Abstract: We investigate whether the adoption of an intellectual property box increases innovative activity and what type of firms benefit. We examine the adoption of the intellectual property box in Belgium because it allows us to cleanly identify the impact on innovative activity and effective tax rates. Our results indicate an overall increase in innovative activity as proxied by patent grants, the efficiency with which firms apply for and receive patents, and employment. We also provide evidence that, while firms with patents on average enjoy lower effective tax rates, the greatest financial benefits accrue to multinational firms without income shifting opportunities, followed by domestic firms. Multinational firms with income shifting opportunities do not significantly benefit from the intellectual property box.
    Keywords: IP boxes,tax incentive,tax avoidance,income shifting
    JEL: H21 H25
    Date: 2018
  13. By: Sébastien Jean; Cristina Mitaritonna; Antoine Vatan
    Abstract: Tariff receipts are important for many countries but their collection is often problematic. To analyze why and to what extent this occurs we first model customs duty evasion as an interaction between customs officers considered to be corruptible law enforcers, and importing firms. In this context, higher tariffs generally lead to greater customs duty evasion but their marginal impact is decreasing, and may turn negative above a given threshold if customs officers adapt their inspection effort endogenously. While transparency (the probability of effective control) always limits evasion, we show that ease of enforcement (e.g. ease of establishing the shipment`s true value) matters only if customs officers do not collude with importers. Our empirical analysis spans 55 importing countries over the period 2001-2010 and confirms our predictions. This lends support to the assumptions of endogenous inspection effort and widespread collusion. World Trade Organization membership is found also to limit the extent of duty evasion.
    Keywords: Tax Evasion;Customs Duty;Institutions;International Trade
    JEL: J13 H26 K42
    Date: 2018–12
  14. By: Judit Kreko
    Abstract: This paper evaluates the effect of the Hungarian disability quota - levy system on disabled employment and firm behavior, and also aims to shed light on factors influencing the effectiveness of employment tax incentives. According to the quota rule, firms above a certain size threshold have to employ at least five percent disabled employees or pay a levy in case of non-compliance. The special feature of the Hungarian quota system is the uniquely high levy, which is accompanied by poor labor market integration of the disabled. The estimation exploits two significant policy changes: the drastic raise of the levy in 2010 and the increase of the firm size threshold from 20 to 25 employees in 2012. The policy effect on disabled employment is estimated on firm level data with regression discontinuity design. The baseline RDD results are adjusted to account for the potential bias arising from non-random firm selection, as many firms adjust their size to avoid the quota. The estimated disabled employment effect is high in international comparison, however, almost three-quarter of the quota is not fulfilled. I find evidence that the ratio of disabled population influences the disabled employment effect of the quota. This suggests that low effective labor supply and high (perceived) non-wage costs of hiring disabled are factors behind low quota fulfillment.
    Date: 2019–01–11
  15. By: Bernd Genser; Robert Holzmann
    Abstract: Strong evidence shows that the existing pattern of cross-border pension taxation in OECD countries and beyond is extremely diverse and inconsistent, generating a double fairness dilemma for individuals and countries alike. This paper argues that this dilemma cannot be solved within the current network of double-taxation treaties. Instead, it proposes a new approach for the taxation of old-age pensions in a world of high and increasing cross-border mobility of workers and pensioners. The paper demonstrates that a coordinated move to frontloaded pension taxation and exclusive source taxation would pave the way for an international pension tax order that eliminates the double fairness dilemma. An additional innovative element of frontloaded pension taxation is presented: the decoupling of individual tax assessment and tax payment, which may help curb political opposition against frontloaded pension taxation and smooth transitional effects after its introduction.
    Keywords: pension taxation, international taxation, international migration, double taxation convention
    JEL: H24 H55 H87 F22
    Date: 2018
  16. By: Vidar Christiansen; Zhiyang Jia; Thor Olav Thoresen
    Abstract: Taking a piecemeal tax reform approach to tax analysis in the spirit of Feldstein (1976), we establish a framework for assessing perturbations of the income tax schedule. It decomposes a reform into a change in tax level and a structural reform part. Focussing on the latter, the analysis singles out four effects: A social efficiency effect measured as the change in tax revenue due to behavioural changes, distributional impact due to mechanical effects, total distributional effects, and overall welfare effects conditional on inequality aversion. When applying our approach to changes in the piecewise linear income tax in Norway during 2016-2018, we identify the cut-off value for the inequality aversion for which the reform is just welfare preserving. For lower inequality aversion the decision makers have accepted a reform which enhances social efficiency at the expense of redistribution in favour of the better-off households.
    Keywords: income tax, tax reform, tax perturbation
    JEL: H21
    Date: 2018
  17. By: Da Rin, Marco (Tilburg University, Center For Economic Research); Di Giacomo, M.; Sembenelli, A.
    Abstract: We study whether corporate income taxation affects the long-term growth of newly incorporated companies through its effect on their choice of leverage at entry. We first document the distribution of initial leverage, which is persistent over several years. We then find that a decrease in corporate income taxation leads to a sizeable decrease in leverage at entry. This effect on initial conditions has long-term effects: an inverted-U relationship exists between leverage at entry and long-term corporate growth, conditional on survival. These effects are economically sizeable, and stronger in countries with better creditor rights and more transparent financial transactions.
    Keywords: Corporate income taxation; capital structure; entrepreneurial finance; corporate growth
    JEL: G32 H25 L25 L26
    Date: 2018
  18. By: Anne Hannusch
    Abstract: Childbirth causes persistent gender differences in labor force participation and the difference in employment rates of married women with and without pre-school children varies substantially across countries. To what extent can child-related transfers account for this differential? To answer this question, I develop a life-cycle model of joint labor supply, in which female human capital evolves endogenously and a fraction of households has access to informal childcare. I calibrate the model to the US and Denmark, two countries in which the gap in employment rates of women with and without pre-school children differs in sign and magnitude: the gap is 13.2% in the US and -3.7% in Denmark. After taking the labor income tax treatment of married couples and variation in childcare fees into account, I find that child-related transfers are key to explaining the positive gap in the US and the negative gap in Denmark. I show that this mechanism is quantitatively important to account for variation in the maternal participation gap across other European countries as well.
    Keywords: Maternal Labor Supply, Two-earner Households, Family Transfers, Taxation
    JEL: E62 H31 J12 J22
    Date: 2019–01
  19. By: H. Spencer Banzhaf; Ryan Mickey; Carlianne E. Patrick
    Abstract: Many local jurisdictions offer property tax exemptions or similar concessions to older citizens. Such exemptions represent substantial intergenerational transfers and may have important implications for local public finances. The consequences of age-based property tax exemptions depend upon the extent to which they influence households' location decisions, housing tenure decisions, and housing consumption. We provide the first evidence on (long-term) changes in household composition and housing consumption attributable to local, age-based property tax exemptions. We construct a unique database of local property tax exemptions in Georgia covering 100 years of county, school district, and selected city property tax laws. We use these data to estimate the effect of age-based property tax exemptions on the number of older home-owners from 1970-2010 attributable to the exemption. Using a "quadruple-difference" estimation strategy, we find a significant increase in older homeowners attributable to the combined effect of age-based property tax exemptions on location decisions and housing tenure. We also find evidence that age-based property tax exemptions increase housing consumption among older households. Finally, we estimate a sorting model to estimate the equilibrium effects of different tax policies.
    JEL: H7 R2
    Date: 2019–01

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