nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒02‒18
fifteen papers chosen by
Thomas Andrén

  1. Who Understands The French Income Tax? Bunching Where Tax Liabilities Start By R. LARDEUX
  2. VAT Treatment of the Financial Services: Implications for the Real Economy By Fatih Yilmaz; Ýsmail Baydur
  3. Tax Evasion as Contingent Debt By Christos Kotsogiannis; Xavier Mateos-Planas
  4. Inequality, Bipolarization, and Tax Progressivity By Oriol Carbonell-Nicolau; Humberto Llavador
  5. A Fistful of Dollars? Foreign Sales Platforms and Profit Shifting in Tax Havens By Sébastien Laffitte; Farid Toubal
  6. Optimal Corporate Taxation Under Financial Frictions By Eduardo Dávila; Benjamin M. Hébert
  7. Why the Norwegian Shareholder Income Tax is Neutral By Södersten, Jan
  8. Salience of Inherited Wealth and the Support for Inheritance Taxation By Spencer Bastani; Daniel Waldenström
  9. The return to work and how it is taxed: a dynamic perspective By Mike Brewer; Monica Costa Dias; Jonathan Shaw
  10. Expected Effects of the US Tax Reform on Other Countries: Global and Local Survey Evidence By Dorine Boumans; Clemens Fuest; Carlo Krolage; Klaus Wohlrabe
  11. Tax Elasticity Estimates for Capital Stocks By Fatih Yilmaz; Jean-Francois Wen
  12. Taxes, Incorporation, and Productivity By Robert J. Barro; Brian Wheaton
  13. Tax Policy and Local Labor Market Behavior By Daniel G. Garrett; Eric C. Ohrn; Juan Carlos Suárez Serrato
  14. European Banks and Tax Havens: Evidence from Country-by-Country Reporting By Petr Jansky
  15. Municipal Merger and Debt Issuance in South African Municipality By Tsuyoshi Goto; Sandra Sekgetle; Takashi Kuramoto

  1. By: R. LARDEUX (Insee)
    Abstract: Lack of tax transparency may strongly impact taxpayers' behavior. This paper disentangles responses to incentives from attention to taxes at the level where French income tax liabilities start. When reporting their earnings, tax filers may be confused between two potential thresholds: the true Tax Collection Threshold (TCT), a notch, and a wrong Taxation Threshold (TT), which is a kink. Using a comprehensive dataset on individual income tax returns from 2008 to 2015, I highlight significant bunching in the taxable income distribution at both thresholds. Within a model of tax misperception, I estimate that taxpayers are far from paying full attention to the income tax system, yet display strong reactions to the marginal tax rate they perceive. This framework can account for behavioral responses to a rise in the virtual marginal tax rate at the wrong threshold and may prove useful to detect policies improving attention to taxes. Contrasting hard-copy and online tax filers, the misperception model reveals a better understanding of the tax system by the latter.
    Keywords: Income tax, bunching, attention, misperception, Internet
    JEL: D83 H24 H31 K34
    Date: 2018
  2. By: Fatih Yilmaz; Ýsmail Baydur
    Abstract: Financial institutions are exempt from the Value-Added Tax in most countries. We develop a general equilibrium model with endogenous firm entry and a banking sector to accommodate three key distortions related to exempt treatment: (i) self-supply bias in the banking sector, (ii) under-taxation of payment services, and (iii) input distortions in the business sector and tax cascading. We calibrate our model to the average of Germany, France and the U.K data. Our results show that repealing exempt treatment always increases tax revenues. However, welfare gains occur only at low VAT rates due to the hump-shaped VAT Laffer curve.
    Keywords: VAT, Financial services, Exempt treatment, Laffer curve, Heterogeneous firms
    JEL: G20 H21 H24 H25 H30
    Date: 2018
  3. By: Christos Kotsogiannis (Tax Administration Research Centre (TARC); University of Exeter); Xavier Mateos-Planas (Centre for Macroeconomics (CFM); Queen Mary University of London)
    Abstract: This paper studies income-tax evasion in a quantitative incomplete-markets setting with heterogeneous agents. A central aspect is that, realistically, evaded taxes are a form of contingent debt. Since evasion becomes part of a portfolio decision, risk and credit considerations play a central part in shaping it. The model calibrated to match estimated average levels of evasion does a good job in producing observed cross-sectional average evasion rates that decline with age and with earnings. The model also delivers implications for how evasion varies in the cross sectional distribution of wealth and tax arrears. Evasion has substantial effects on macroeconomic variables and welfare, and agent heterogeneity and general equilibrium are very important elements in the explanation. The analysis also considers the response of evasion to a flat-tax policy reform. In spite of the direct incentives to evade less under a flat tax rate, the reform causes households to save more, rendering the change in overall evasion modest.
    Keywords: Tax evasion, Contingent debt, Incomplete markets with heterogeneous agents, Portfolio choice, Risk sharing, Tax progressivity
    JEL: E2 E62 H3
    Date: 2019–01
  4. By: Oriol Carbonell-Nicolau; Humberto Llavador
    Abstract: The steady rise in income and wealth inequality in the last four decades, together with the evolution of a vanishing middle class, has raised concerns about potentially pernicious effects of these trends on social stability and economic growth. This paper evaluates the possibility of designing tax systems aimed at reducing income inequality and bipolarization. Using two fundamentally different metrics, the relative Lorenz preorder popularized by Atkinson (1970) to measure inequality, and the relative bipolarization preorder put forth in Chakravarty (2009, 2015) to measure bipolarization, we provide a unified foundation of tax progressivity whereby, roughly, taxes are progressive if and only if they are inequality reducing if and only if they are bipolarization reducing. The details of this characterization vary depending on whether or not labor supply is responsive to taxation.
    Keywords: shrinking middle class, Progressive Taxation, income bipolarization, Income inequality, incentive effects of taxation
    JEL: D63 D71
    Date: 2019–02
  5. By: Sébastien Laffitte; Farid Toubal
    Abstract: Using public macro-level data on activities of multinationals, we document that U.S. firms geographically disconnect sales and production to avoid paying corporate taxes. We revisit both theoretically and empirically the location determinants of foreign platforms and show that market access motives are far less relevant when considering tax havens. We characterize these countries and shed light on the attractiveness of different tax havens for specific sectors of activity. Our quantification shows that profit shifting by foreign sales platforms in tax havens amounts to about $80bn in 2013. Our findings contribute to the recent policy debate on the reform of international taxation.
    Keywords: International Taxation;Tax avoidance;Foreign platforms;Tax havens;Profit shifting; Firms' organization
    JEL: F23 H26 H73
    Date: 2019–01
  6. By: Eduardo Dávila; Benjamin M. Hébert
    Abstract: We study optimal corporate taxation when firms are financially constrained. We describe a corporate taxation principle: taxes should be levied on unconstrained firms, which value resources inside the firm less than constrained firms. Under complete information, this principle completely characterizes optimal corporate tax policy. With incomplete information, the government can use payout policy to elicit whether a firm is constrained, and tax accordingly. In our static model, optimal corporate taxation can be implemented by a corporate dividend tax, and in our dynamic model, the optimal sequence of mechanisms can also be implemented by a corporate dividend tax.
    JEL: G38 H21 H25
    Date: 2019–01
  7. By: Södersten, Jan (Department of Economics)
    Abstract: This note extends the work by Sørensen (2005) and others by demonstrating why the Norwegian Shareholder Income Tax may be neutral between the two sources of equity funds, i.e. new share issues and retained earnings, despite the fact that the retention of earnings to finance new investment does not add to the tax benefits. The analysis crucially relies on the assumption that the deduction for the imputed rate of return is capitalized into the market prices of corporate shares. Absent capitalization, the shareholder tax is rather likely to leave the distortions caused by the double taxation of corporate source income unaffected.
    Keywords: Corporate and shareholder taxation; tax neutrality; cost of capital
    JEL: H24 H25 H32
    Date: 2019–01–29
  8. By: Spencer Bastani; Daniel Waldenström
    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
  9. By: Mike Brewer (Institute for Fiscal Studies and University of Essex); Monica Costa Dias (Institute for Fiscal Studies and Institute for Fiscal Studies); Jonathan Shaw (Institute for Fiscal Studies and Financial Conduct Authority)
    Abstract: This paper provides an empirical account of the dynamic return to work, and how this is affected by taxes and benefits. In doing so we bring the insights from the literature on dynamic labour supply to the issue of estimating the financial return to work and how it is taxed, where the past literature has focused on the current period return. We do this with two new summary measures: the forward-looking replacement rate (FLRR), which measures the dynamic return to working at all, and the forward-looking participation tax rate (FLPTR), which measures the impact of personal taxes and transfers on the dynamic return to work, and implement these using simulated data from a sophisticated, structural dynamic model of education and labour supply. We find that the dynamic return to work is much higher than a static measure would imply: at the start of working life, the expected FLRR and static RR differ by at least 5 percentage points for more than two thirds of women, and by over 10 percentage points for over a third of women. These results are driven by returns to experience. In contrast, we find a dynamic perspective makes relatively little difference to the extent to which personal taxes and transfers reduce the return to work, with the expected FLPTR and static PTR differing little for most women in our data. This mainly reflects the fact that that the UK tax and benefit system tends to treat the future returns to working today similarly to how it treats the current-period return.
    Keywords: labour supply, work incentives, replacement rate, participation tax rate, forwardlooking, lifecycle, taxes, human capital
    JEL: H21 H24 I38 J22 J24
    Date: 2018–10–31
  10. By: Dorine Boumans; Clemens Fuest; Carlo Krolage; Klaus Wohlrabe
    Abstract: The Tax Cuts and Jobs Act constitutes the largest change to the US tax system since the 1980s and thoroughly alters the way in which multinational companies are taxed. Cur-rent assessments on the reform’s international impact vary widely. This article sheds light on the tax reform’s expected effects on other countries. We first use representative German business survey data to analyse the impact of the reform on German firms. Many firms with substantial US revenues or production capacities in the US intend to expand US investment in response to the reform, in particular large firms and manufacturing companies. The effects on investment in Germany are ambiguous: While some firms substitute between investment locations, others expand in both countries. We subsequently extend our analysis to the global level using worldwide survey data. The results suggest a negative impact on tax revenues and investment in countries with close economic ties to the US.
    Keywords: US tax reform, corporate tax, firm responses, survey, Germany
    JEL: H25 H32 H71 E62
    Date: 2019
  11. By: Fatih Yilmaz; Jean-Francois Wen
    Abstract: We use panel cointegration techniques to estimate the long-run user cost elasticity of capital (UCE) in a small open economy. The estimates exploit three sources of variation in Canadian tax policy: across provinces, industries, and years. The UCE is estimated to be between -1.1 and -1.3 for machinery and equipment. We also provide semi-elasticities of capital with respect to marginal effective tax rates (METR). Our construction of the user costs makes use of a detailed data set on federal and provincial tax policy variables.
    Keywords: Capital taxation, User cost of capital elasticy, Marginal effective tax rate
    JEL: H25 H32
    Date: 2019
  12. By: Robert J. Barro; Brian Wheaton
    Abstract: U.S. businesses can choose to be C-corporations or pass-through entities in the forms of S-corporations, partnerships (notably LLCs), and sole proprietorships. C-corporate status conveys benefits from perpetual legal identity, limited liability, potential for public trading of shares, and ability to retain earnings. However, legal changes have enhanced pass-through alternatives, for example, through the invention of the S-corporation in 1958 and the improved legal status of LLCs at the end of the 1980s. C-corporate form is subject to a time varying tax wedge, which offsets the productivity benefits. In a theoretical framework, firms’ productivities associated with C-corporate and pass-through status are distributed as bivariate log-normal. The tax wedge then determines the fraction of firms that opt for C-corporate status, the level of economy-wide output (productivity), the share of total output generated by C-corporations, and the sensitivity of this share to the tax wedge. This framework underlies the empirical analysis of C-corporate shares of business economic activity. Long-difference regressions for 1968-2013 show that a higher tax wedge reduces the C-corporate share of net capital stocks, equity (book value), gross assets, and positive net income, as well as the corporate share of gross investment. The C-corporate shares also exhibit downward trends, likely reflecting underlying legal changes. We infer from the quantitative findings that the downward movement in the tax wedge since 1968 has expanded economy-wide productivity by about 4%.
    JEL: H20 H30 L10 E60
    Date: 2019
  13. By: Daniel G. Garrett; Eric C. Ohrn; Juan Carlos Suárez Serrato
    Abstract: Since 2002, the US government has encouraged business investment using accelerated depreciation policies that significantly reduce investment costs. We provide the first in-depth analysis of this stimulus on employment and earnings. Our local labor markets approach exploits cross-industry differences in policy generosity interacted with county-level variation in industry concentration. Places that experience larger decreases in investment costs see a level increase in employment that implies a $53,000 cost-per-job. We find no positive effects on average earnings. In contrast, we document a persistent growth in capital. These results imply a capital-labor substitution elasticity that grows over time and can exceed unity.
    JEL: E62 H25 H32 J23 J38
    Date: 2019–02
  14. By: Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: Banks in the European Union recently started publicly reporting data on profit, number of employees, turnover and tax on a country-by-country basis. I introduce the largest, hand-collected data set of its kind, which covers almost 50 banks for up to 5 years between 2013 and 2017. I identify the main locations of European bank's profits, which include the largest European economies as well as tax havens. I focus on answering the question of how geographically aligned these profits are with economic activity. I find that some of the tax havens have maintained high shares of profits in contrast with their much lower shares of employees. These results indicate that banks are likely shifting their profits to tax havens, but for the profit shifting to be directly observed, regulators will need to ask banks to publish even better data.
    Keywords: country-by-country reporting; banks; tax havens; profit shifting; financial transparency; European Union
    JEL: F21 F23 G21 G28 H25 H87
    Date: 2018–12
  15. By: Tsuyoshi Goto (Research Fellow of Japan Society for the Promotion of Science PhD. Student, Graduate School of Economics, Osaka University); Sandra Sekgetle (Senior Economist, the National Treasury of South Africa); Takashi Kuramoto (Associate Professor, Hirao School of Management, Konan University)
    Abstract: Employing South African data and Difference-In-Difference (DID) method, this paper investigates whether the free-ride behaviour was taken by municipalities which faced their mergers before the municipal demarcation changes are executed. With several developed countries' data, many research show that there are opportunistic free-ride behaviours of municipalities such as over-issuance of debt before their mergers since the burden of them will be shared by newly constructed municipalities. In spite of these fruits of research, few solution is suggested in the literature. Considering this, we focus on the South African municipal mergers, where the upper government of municipalities implemented the policy for pre-merged municipalities to suspend new contracts involving the borrowing contract before the mergers. As a result of DID analysis, we show that South African municipalities did decrease the amount of borrowings before their mergers. This result is an opposite result considering the previous empirical researches and means that the proper policy for municipal mergers can prevent the fiscal common pool problem caused by free-ride behavior. In addition, this paper shed the light to utilize the data of developing countries and is the first paper to show there were reductions of borrowings before municipal mergers.
    Keywords: Municipal merger, Common pool problem, Free ride
    JEL: H72 H77 H83
    Date: 2019–02

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