nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒02‒04
eighteen papers chosen by
Thomas Andrén

  1. Salience of Inherited Wealth and the Support for Inheritance Taxation By Bastani, Spencer; Waldenström, Daniel
  2. Time-inconsistent Output Subsidy/Tax Policies in Free-entry Mixed Markets By Chen, Jiaqi; Lee, Sang-Ho; Muminov, Timur
  3. Revenue Implications of Destination-Based Cash-Flow Taxation By Shafik Hebous; Alexander Klemm; Saila Stausholm
  4. Top Income Tax Evasion and Redistribution Preferences: Evidence from the Panama Papers By Laila Ait Bihi Ouali
  5. Corporate Social Responsibility and Tax Avoidance By Laszlo Goerke
  6. The Budget and Economic Outlook: 2018 to 2028 By Congressional Budget Office
  7. Using distance functions to derive optimal progressive earnings tax and commodity tax structures By John Burbidge
  8. Marginal Federal Tax Rates on Labor Income: 1962 to 2028 By Congressional Budget Office
  9. Informal Taxation in Sierra Leone: Magnitudes, Perceptions and Implications By van den Boogaard, Vanessa; Prichard, Wilson; Jibao, Samuel
  10. The challenge of moving to a Common Consolidated Corporate Tax Base in the EU By Hentze, Tobias
  11. CBO's Long-Term Social Security Projections: Changes Since 2017 and Comparisons With the Social Security Trustees' Projections By Congressional Budget Office
  12. Impact of the German real estate transfer: Tax on the commercial real estate market By Frenzel Baudisch, Coletta; Dresselhaus, Carolin
  13. The dynamics of health care and growth: A model with physician in dual practice By Baris Alpaslan; King Yoong Lim; Yan Song
  14. Do Tax Cuts Produce More Einsteins? The Impacts of Financial Incentives vs. Exposure to Innovation on the Supply of Inventors By Alexander M. Bell; Raj Chetty; Xavier Jaravel; Neviana Petkova; John Van Reenen
  15. How Taxes Affect the Incentive to Invest in New Intangible Assets By Congressional Budget Office
  16. Subsidizing labor hoarding in recessions: the employment and welfare effects of short time work By Giupponi, Giulia; Landais, Camille
  17. Tax transition in developing countries: Do VAT and excises really work? By Adandohoin, Kodjo
  18. Federal Subsidies for Health Insurance Coverage for People Under Age 65: 2018 to 2028 By Congressional Budget Office

  1. By: Bastani, Spencer (Department of Economics and Statistics, Linnaeus University); Waldenström, Daniel (Paris School of Economics)
    Abstract: We study how attitudes to inheritance taxation are influenced by information about the role of inherited wealth in society. Using a randomized experiment in a register-linked Swedish survey, we find that informing individuals about the large aggregate importance of inherited wealth and its link to inequality of opportunity significantly increases the support for inheritance taxation. The effect is almost uniform across socio-economic groups and survives a battery of robustness tests. Changes in the perceived economic importance of inherited wealth and altered views on whether luck matters most for economic success appear to be the main driving factors behind the treatment effect. Our findings suggest that the low salience of inherited wealth could be one explanation behind the relatively marginalized role of inheritance taxation in developed economies.
    Keywords: Capital taxation; Tax attitudes; Equality of opportunity; Randomized experiment
    JEL: D31 H20 H31
    Date: 2019–01–24
  2. By: Chen, Jiaqi; Lee, Sang-Ho; Muminov, Timur
    Abstract: This paper considers time-inconsistent output subsidy/tax policies in free-entry mixed markets and compares committed and non-committed regimes under different competition modes. In a committed regime where the subsidy is determined before the private firms enter the market, the optimal rate is zero in either Cournot game or Stackelberg game when the public firm is a follower, while it is negative in Stackelberg game with public leadership. However, in the non-committed regime where the subsidy is not determined before entry, the optimal rate is always positive. Finally, we show that private leadership is the best for social welfare regardless of the timing of output subsidy/tax policies.
    Keywords: Free-entry mixed market, Committed policy, Non-committed policy, Output subsidy
    JEL: H20 H42 L13
    Date: 2019–01–14
  3. By: Shafik Hebous; Alexander Klemm; Saila Stausholm
    Abstract: We estimate the revenue implications of a Destination Based Cash Flow Tax (DBCFT) for 80 countries. On a global average, DBCFT revenues under unchanged tax rates would remain similar to the existing corporate income tax (CIT) revenue, but with sizable redistribution of revenue across countries. Countries are more likely to gain revenue if they have trade deficits, are not reliant on the resource sector, and/or—perhaps surprisingly—are developing economies. DBCFT revenues tend to be more volatile than CIT revenues. Moreover, we consider the revenue losses resulting from spillovers in case of unilateral implementation of a DBCFT. Results suggest that these spillover effects are sizeable if the adopting country is large and globally integrated. These spillovers generate strong revenue-based incentives for many—but not all—other countries to follow the DBCFT adoption.
    Keywords: tax revenue, destination-based cash flow tax, border adjustment tax
    JEL: H25 H87
    Date: 2019
  4. By: Laila Ait Bihi Ouali (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)
    Abstract: This paper provides empirical evidence that, after fiscal scandals, individuals substantially revise their views on redistribution. I exploit as a quasi-natural experiment the 2016 Panama Papers scandal which revealed top-income tax evasion behaviour simultaneously worldwide. The empirical investigation relies on two original sources of data: a longitudinal dataset on United Kingdom households and a survey conducted in twenty-two European countries. Using a difference-in-differences strategy, I find an increase in pro-redistribution statements post-scandal ranging between 2% and 3.3%. Responses are heterogeneous on income levels and on political affiliations, with larger responses from right-wing individuals. The change in redistribution preferences is moderately translated into votes: I find an increase in voting intentions for the left and negative for the right-wing parties. Complementary estimations at the European-level indicate that pro-redistribution responses increase with media coverage and shock intensity (i.e., number of individuals involved).
    Keywords: Panama Papers,tax evasion,tax avoidance,redistribution,tax morale,inequality,mass media
    Date: 2019–01
  5. By: Laszlo Goerke (Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University)
    Abstract: We theoretically analyse the relationship between Corporate Social Responsibility (CSR) and tax avoidance of an oligopolistic firm. The firm maximises a weighted sum of profits and a CSR objective which depends on output and the firm's contribution to public good provision, i.e. tax payments. Making one CSR element more important induces the firm to adhere less to the other and to reduce tax avoidance. Hence, simultaneously a substitutive and a complementary relationship between CSR and tax avoidance can be observed. Therefore, employing composite indicators of CSR prevents an empirical identification of this linkage. Moreover, if tax avoidance declines, CSR activities will increase. Consequently, the overall link between CSR and tax avoidance is theoretically ambiguous.
    Keywords: Corporate Social Responsibility, Public Good, Oligopoly, Output, Tax Avoidance
    JEL: H26 L13 L31 M14
    Date: 2018–09
  6. By: Congressional Budget Office
    Abstract: If current laws governing taxes and spending generally remained unchanged, the federal budget deficit would grow substantially over the next few years, CBO projects, with accumulating deficits driving debt held by the public to nearly 100 percent of GDP by 2028. That amount would be far greater than the debt in any year since just after World War II. In CBO’s projections, real GDP growth is relatively strong this year and next, as recent changes in fiscal policy add to existing momentum.
    JEL: H20 H60 H61 H62 H63 H68
    Date: 2018–04–09
  7. By: John Burbidge (Department of Economics, University of Waterloo)
    Abstract: Much of the research program in optimal taxation rests on the Atkinson-Stiglitz theorem (1976) | in the presence of optimal nonlinear earnings taxation, if leisure is weakly separable from goods, there is no role for differential commodity taxation. The nonlinear earnings tax in the theorem is one where, conditional on reported earnings, the government can choose tax paid and the marginal tax rate (mtr). The relationship between the average tax rate (atr) and mtr is unrestricted. Most governments operate progressive nonlinear tax systems in which, for each person paying taxes, mtr is not less than atr. I build on Deaton's work on distance functions and taxation to show that the AS theorem fails in the presence of optimal progressive earnings taxation. Conditional on mtr atr, the search for optimal earnings tax structures cannot be undertaken without simultaneously studying optimal commodity taxation whether or not leisure is weakly separable from goods. The formal theory in the paper assumes two types. I also discuss a nite-type example of an optimal progressive earnings, and commodity, tax structure and present numerical examples with four types.
    JEL: H21
    Date: 2018–11–12
  8. By: Congressional Budget Office
    Abstract: The marginal federal tax rate on labor income is the percentage of additional income an individual earns that is paid in payroll taxes and federal income taxes. For payroll taxes, CBO estimates that the economywide marginal rate on labor income grew rapidly between the early 1960s and the early 1980s and has remained fairly stable thereafter. The rate on individual income taxes has fluctuated greatly over the past five decades. Marginal tax rates vary widely among families.
    JEL: H20 H24
    Date: 2019–01–24
  9. By: van den Boogaard, Vanessa; Prichard, Wilson; Jibao, Samuel
    Abstract: In low-income countries, citizens often pay ‘taxes’ that differ substantially from what is required by statute. These non-statutory taxes are central to financing both local public goods and maintaining informal governance institutions. This study captures the incidence of informal taxation and taxpayer perspectives on these payments. We find, first, that informal taxes are a prevalent reality within areas of weak formal statehood in Sierra Leone, with households paying an equal number of informal and formal taxes. Second, we find positive taxpayer perceptions of the fairness of informal taxes relative to formal taxes, despite informal taxes being regressive in their distribution. We explain this by the fact that taxpayers are more likely to trust the actor levying these payments and are more likely to believe that they will be used to deliver benefits to the community.
    Keywords: Finance, Governance,
    Date: 2018
  10. By: Hentze, Tobias
    Abstract: The introduction of a Common Consolidated Corporate Tax Base (CCCTB) in the European Union (EU) would substantially change the rules of the game in international taxation. According to the proposal by the European Commission (EC), the profits of a Multinational Enterprise (MNE) would no longer be assessed by using the arm's length principles and (hypothetical) market prices, but split based on a formulary apportionment. This implies that an allocation key consisting of sales volume, number of employees and capital invested would be applied to distribute the taxable profits of an MNE. From an economic perspective, the principle of taxing profits at source would be thereby abolished. However, due to the current difficulty for taxpayers and tax authorities to agree on adequate transfer prices, a radical change as proposed by the EC might be reasonable. Hence, the EC proposal for the CCCTB is a promising goal as it could lower the red tape burden for MNE as well as tax authorities. Furthermore, the adjustment of the debt bias and the encouragement of R&D as additional items of the EC proposal could stimulate economic growth. A main obstacle for the implementation of a CCCTB would be the expected shifts in tax revenue which make a political agreement at the EU level very difficult. The application of a CCCTB would substantially redistribute corporate profits among the EU member states as a simulation by the German Economic Institute (IW) shows. Especially, Ireland, Luxembourg and Malta would receive significantly less tax revenue since sales volume, number of employees and capital invested are relatively small in these countries. France and Italy, in contrast, would be on the winning side. Germany would also benefit even though to a rather low degree. A main reason for this result is that the strongly exporting German corporations today pay a large proportion of their corporate taxes in Germany. With the application of the CCCTB, parts of the taxable profits would be allocated to foreign countries. From a systematic point of view, the CCCTB is only convincing if there is a global commitment. A simulation of the tax revenue effects for the G20 countries when applying a CCCTB shows that the shift would also be drastic. The EU member states - even the big ones - would have to accept lower taxable corporate profits. Instead, the United States could increase the corporate tax base mainly because of the high consumption level. China and India would benefit due to the large number of employees. Thus, whether a country ranks among the winners or losers in terms of tax revenue depends foremost on the peer group.
    JEL: H25 H26
    Date: 2019
  11. By: Congressional Budget Office
    Abstract: Each year, CBO updates its projections of the Social Security system’s finances. Compared with projections made in June 2017, the agency’s latest projections indicate a slight improvement in the financial outlook for Social Security. The projected 75-year actuarial balance remains at −1.5 percent of gross domestic product (that is, a deficit of 1.5 percent). As a percentage of taxable payroll, the projected actuarial balance has improved slightly from −4.5 percent to −4.4 percent. CBO also compares its projections with those of the Social Security Trustees.
    JEL: H55 H60 H68 J26
    Date: 2018–12–03
  12. By: Frenzel Baudisch, Coletta; Dresselhaus, Carolin
    Abstract: The tax burden of real estate transactions in Germany increased considerably since the constitutional reform in 2006. We examine the impact of the real estate transfer tax (RETT) on transactions and (net-of-tax) prices of commercial buildings and vacant commercial lots by means of a fixed-effects panel regression. The empirical analysis shows an association of a rise of the RETT by 1% with a decrease of office transactions by up to 0.41% and reduced prices by up to 0.22%. On the market for other commercial properties, transactions and prices decline by 0.17% and 0.19% respectively following a RETT increase. The negative price effects on the commercial real estate market tentatively indicate tax incidence with the seller. In the case of vacant commercial lots, a RETT increase seems to induce an increase of average prices by 0.36%, denoting tax incidence with the buyer. We find no significant effect on transactions of vacant lots in the data. In addition, we analyze possible neighborhood effects among the states. The empirical evidence for these effects implies that with an average of a 1% RETT increase in the bordering states of one state, the prices for other commercial properties and for vacant lots rise by 0.51% and 0.71% respectively. Hence, the border effect seems to surpass the direct price effect and suggests spatial structural changes in the investment behavior.
    Keywords: real estate transfer tax,commercial real estate market,share deal,panel regression
    JEL: H20 H22 H77 R33
    Date: 2018
  13. By: Baris Alpaslan; King Yoong Lim; Yan Song
    Abstract: We present a growth model with micro-foundations of a mixed health care system and physician dual-practice, to analyze for welfare-optimal government financing strategy for a mixed health system in developing countries. Calibrating the model for Indonesia, we find that a government subsidy to private health care is both growth- and welfare-enhancing, whereas it is more effective for the government to invest in health infrastructure instead of a public-sector “rewarding” policy in raising government physicians’ wage if its goal is to improve physician effort in public practice. Indeed, for the “rewarding” policy, a dynamic trade-off in growth is found, which is not previously documented in the literature. We also find the model to produce two regimes with different welfare-optimal health financing (a “normal” regime and a low public-sector congestion regime). In the former, welfare-optimal health financing strategy appears to be promoting private health subsidy at the expense of public-sector physician wages. In the latter, the opposite is welfare-optimal.
    Keywords: Dual Practice, Economic Growth, Health Care Financing, Welfare
    JEL: H51 I11 I15 O41
    Date: 2019–01
  14. By: Alexander M. Bell; Raj Chetty; Xavier Jaravel; Neviana Petkova; John Van Reenen
    Abstract: Many countries provide financial incentives to spur innovation, ranging from tax incentives to research and development grants. In this paper, we study how such financial incentives affect individuals' decisions to pursue careers in innovation. We first present empirical evidence on inventors' career trajectories and income distributions using de-identified data on 1.2 million inventors from patent records linked to tax records in the U.S. We find that the private returns to innovation are extremely skewed – with the top 1% of inventors collecting more than 22% of total inventors' income – and are highly correlated with their social impact, as measured by citations. Inventors tend to have their most impactful innovations around age 40 and their incomes rise rapidly just before they have high-impact patents. We then build a stylized model of inventor career choice that matches these facts as well as recent evidence that childhood exposure to innovation plays a critical role in determining whether individuals become inventors. The model predicts that financial incentives, such as top income tax reductions, have limited potential to increase aggregate innovation because they only affect individuals who are exposed to innovation and have no impact on the decisions of star inventors, who matter most for aggregate innovation. Importantly, these results hold regardless of whether the private returns to innovation are known at the time of career choice. In contrast, increasing exposure to innovation (e.g., through mentorship programs) could have substantial impacts on innovation by drawing individuals who produce high-impact inventions into the innovation pipeline. Although we do not present direct evidence supporting these model-based predictions, our results call for a more careful assessment of the impacts of financial incentives and a greater focus on alternative policies to increase the supply of inventors.
    JEL: H0 J0 O3
    Date: 2019–01
  15. By: Congressional Budget Office
    Abstract: In this report, CBO extends its analysis of the tax burden on income from investments to include investments in intangible assets, whose value is not derived from physical attributes—for example, software, chemical formulas arising from research and development, and literary works.
    JEL: H25
    Date: 2018–11–15
  16. By: Giupponi, Giulia; Landais, Camille
    Abstract: The Great Recession has seen a revival of interest in policies encouraging labor hoarding by firms. Short time work (STW) policies, which consist in offering subsidies for hours reductions to workers in firms experiencing temporary shocks, are the most emblematic of these policies, and have been used aggressively during the recession. Yet, very little is known about their employment and welfare consequences. This paper leverages unique administrative social security data from Italy and quasiexperimental variation in STW policy rules to offer compelling evidence of the effects of STW on firms' and workers' outcomes, and on reallocation in the labor market. Our results show large and significant negative effects of STW treatment on hours, but large and positive effects on headcount employment. Results also show that employment effects disappear when the program stops, and that STW offers no long term insurance to workers. Finally, we identify the presence of significant negative reallocation effects of STW on employment growth of untreated firms in the same local labor market. We develop a simple conceptual framework to rationalize this empirical evidence, from which we derive a general formula for the optimal STW subsidy that clarifies the welfare trade-offs of STW policies. Calibrating the model to our empirical evidence, we conduct counterfactual policy analysis and show that STW stabilized employment during the Great Recession in Italy, and brought (small) positive welfare gains.
    Keywords: short-time work; employment; reallocation; social insurance; optimal policy
    JEL: H20 J20 J65
    Date: 2018–12
  17. By: Adandohoin, Kodjo
    Abstract: This paper investigates the role of Value Added Tax (VAT) and excises as first wave tax transition tools in developing countries. Focusing on a sample of 96 developing countries over the period 1985-2013, we investigate whether the adoption of VAT enable developing countries to increase the likelihood of succeeding tax transition. Results indicate that having a VAT, allow developing countries to increase the probability of succeeding tax transition by near 10%. We further investigate the extent to which VAT and excises offset trade tax revenue losses of trade liberalization in these countries. Our estimates reveal that VAT is offsetting by 67% trade tax revenue losses in developing countries with an U relationship, while this effect holds for excises duties with an U inverted relationship. The study also points out heterogeneities (while VAT tax transition effect is robust to African and Asian countries, it seems not for Latin American countries), as well as asymmetries (the revenue collection of VAT and excises didn’t increase the period over which developing countries face an increase in trade tax). Overall, the study concludes that, first wave tax transition even strengthened by these instruments, seems not irreversible. It suggests to take with more close attention VAT and excises as performant first wave tax transition tools in developing countries.
    Keywords: Tax transition, VAT, Excises, Developing countries.
    JEL: H20
    Date: 2018–10–19
  18. By: Congressional Budget Office
    Abstract: CBO and the staff of the Joint Committee on Taxation project that the federal subsidies, taxes, and penalties associated with health insurance coverage for people under age 65 will result in a net subsidy from the federal government of $685 billion, or 3.4 percent of GDP, in 2018. For the 2019–2028 period, the projected net subsidy is $9.3 trillion. This document updates the preliminary projections of subsidies for insurance purchased through the marketplaces as well as revenues related to health insurance coverage that were published in the Budget and Economic Outlook last month.
    JEL: H30 I13 I18
    Date: 2018–05–23

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