nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒03‒04
thirteen papers chosen by
Thomas Andrén

  1. Don’t Tax Capital — Optimal Ramsey Taxation in Heterogeneous Agent Economies with Quasi-Linear Preferences By Chien, YiLi; Wen, Yi
  2. Market Power and Income Taxation By Louis Kaplow
  3. Addressing Social Security’s Solvency While Promoting High Labor Force Participation By John Laitner
  4. Are Sufficient Statistics Necessary? Nonparametric Measurement of Deadweight Loss from Unemployment Insurance By Lee, David S.; Leung, Pauline; O'Leary, Christopher J.; Pei, Zhuan; Quach, Simon
  5. On the Principles of Commodity Taxation under Interregional Externalities By Fabio Antoniou; Panos Hatzipanayotou; Michael S. Michael; Nikos Tsakiris
  6. Tax Evasion on a Social Network By Duccio Gamannossi degl’Innocenti; Matthew D. Rablen
  7. Optimal Capital Taxation in an Economy with Innovation-Driven Growth By Chen, Ping-ho; Chu, Angus C.; Chu, Hsun; Lai, Ching-Chong
  8. Optimal Social Insurance and Rising Labor Market Risk By Tom Krebs; Martin Scheffel
  9. Voluntary Disclosure Schemes for Offshore Tax Evasion By Matthew Gould; Matthew D. Rablen
  10. Soda tax incidence and design under monopoly By Lozachmeur, Jean-Marie; Cremer, Helmuth; Goulão, Catarina
  11. Norms, Enforcement, and Tax Evasion By Timothy Besley; Anders Jensen; Torsten Persson
  12. Prior Experience, Trust, IS Success Model: A Study on the Use of Tax e-Filing in Indonesia By Christine Tjen; Vitria Indriani; Panggah Tri Wicaksono
  13. Household Responses to Transfers and Liquidity: Evidence from Social Security’s Survivors Benefits By Itzik Fadlon; Shanthi P. Ramnath; Patricia K. Tong

  1. By: Chien, YiLi (Federal Reserve Bank of St. Louis); Wen, Yi (Federal Reserve Bank of St. Louis)
    Abstract: We build a tractable infinite-horizon Aiyagari-type model with quasi-linear preferences to address a set of long-standing issues in the optimal Ramsey taxation literature. The tractability of our model enables us to analytically prove the existence of Ramsey steady states and establish several strong and novel results: (i) Depending on the government’s capacity to issue debts, there can exist different types of Ramsey steady state and their existence depends critically on model parameter values. (ii) The optimal capital tax is exclusively zero in a Ramsey steady state regardless of the modified golden rule and government debt limits. (iii) Along the transition path toward a Ramsey steady state, optimal capital tax depends positively on the elasticity of intertemporal substitution. (iv) When a Ramsey steady state (featuring a non-binding government debt limit) does not exist but is erroneously assumed to exist, the modified golden rule always “holds” and the implied “optimal” long-run capital tax is strictly positive, reminiscent of the result obtained by Aiyagari (1995). (v) Whether the modified golden rule holds depends critically on the government’s capacity to issue debts, but has no bearing on the planner’s long-run capital tax scheme. (vi) The optimal debt-to-GDP ratio in the absence of a binding debt limit, however, is determined by a positive wedge times the modified-golden-rule saving rate; the wedge is decreasing in the strength of the individual self-insurance position and approaches zero when the idiosyncratic risk vanishes or markets are complete. The key insight behind our results is the Ramsey planner’s ultimate concern for self-insurance. Since taxing capital in the steady state permanently hinders individuals’ self-insurance positions, the Ramsey planner prefers (i) issuing debt rather than imposing a steady-state capital tax to correct the capital-overaccumulation problem under precautionary saving motives, and (ii) taxing capital only in the short run regardless of its debt positions. Thus, in sharp contrast to Aiyagari’s argument, permanent capital taxation is not the optimal tool to achieve aggregate allocative efficiency despite overaccumulation of capital, and the modified golden rule can fail to hold in a Ramsey equilibrium whenever the government encounters a debt-limit.
    Keywords: Optimal Capital Taxation; Ramsey Problem; Incomplete Markets
    JEL: E13 E62 H21 H30
    Date: 2019–02–22
  2. By: Louis Kaplow
    Abstract: Does significant market power or the presence of large rents affect optimal income taxation, calling for greater redistribution due to tainted gains? Or perhaps less because of an additional wedge that distorts labor effort? Do concerns about inequality have implications for antitrust, regulation, trade, and other policies that influence market power, which contributes to inequality? This article addresses these questions in a model with heterogeneous abilities and hence a concern for distribution, markups, multiple sectors, ownership that is a function of income, allowance for any share of profits to be recoveries of investments (including rent-seeking efforts), endogenous labor supply, and a nonlinear income tax. In this model, proportional markups with no profit dissipation have no effect on the economy, and a policy that reduces a nonproportional markup raises (lowers) welfare when it is higher (lower) than a weighted average of other markups. With proportional (partial or full) profit dissipation, proportional markups are equivalent to a downward shift of the distribution of abilities, and the welfare effect of correcting nonproportional markups associated with nonproportional profit dissipation now depends also on the degree of dissipation and how that is affected by the policy. In all cases, optimal policies maximize consumer plus producer surplus, without regard to a policy’s distributive effects on consumers and profits or how markups and income taxation distort labor effort.
    JEL: D42 D61 H21 H23 K21 L12 L40
    Date: 2019–02
  3. By: John Laitner (University of Michigan)
    Abstract: A number of proposals and options to address OASI trust-fund solvency have been suggested in recent years. The present work attempts to examine solvency-promoting reforms from the standpoint of economic efficiency — that is, from the perspective of their effect on household and societal well-being. Ultimately, we argue that solvency and efficiency should be joint considerations for policy. We first set up a structural model of household consumption/saving and retirement choices. We estimate the model’s parameters using Consumer Expenditure Survey and Health and Retirement Study data. Then we simulate policy changes. Using the 2017 Social Security Trustee’s Report, we examine policy changes that could prevent trust fund depletion for 75 years or more. In the simulations, payroll tax increases or Social Security benefit reductions sufficient to ensure solvency have modest effects on household labor supply, though they lower lifetime consumption and utility. Earlier work considered age-targeted payroll tax changes that could promote longer careers. Here, we examine possible changes to the Social Security benefit formula — specifically the AIME formula — that could encourage delayed retirement more straightforwardly. We show that incentivizing an extra one to two years of work on average might be possible. That would generate substantial new tax revenues, from both payroll and income taxes. Although sacrificed leisure would lead to household utility reductions, they are relatively small — comparable to the best alternatives. Comparing the results with simpler tax and benefit changes, we suggest that promoting longer careers could enlarge the set of policy options in a useful way.
    Date: 2018–10
  4. By: Lee, David S. (Princeton University); Leung, Pauline (Cornell University); O'Leary, Christopher J. (Upjohn Institute for Employment Research); Pei, Zhuan (Cornell University); Quach, Simon (Princeton University)
    Abstract: Central to the welfare analysis of income transfer programs is the deadweight loss associated with possible reforms. To aid analytical tractability, its measurement typically requires specifying a simplified model of behavior. We employ a complementary "decomposition" approach that compares the behavioral and mechanical components of a policy's total impact on the government budget to study the deadweight loss of two unemployment insurance policies. Experimental and quasi-experimental estimates using state administrative data show that increasing the weekly benefit is more efficient (with a fiscal externality of 53 cents per dollar of mechanical transferred income) than reducing the program's implicit earnings tax.
    Keywords: behavioral and mechanical effects, decomposition, sufficient statistics, optimal unemployment insurance, partial unemployment insurance, unemployment insurance, regression kink design, deadweight loss, fiscal externality
    JEL: C14 C20 C31 H2 H23 J64 J65 J68
    Date: 2019–02
  5. By: Fabio Antoniou; Panos Hatzipanayotou; Michael S. Michael; Nikos Tsakiris
    Abstract: We examine the efficiency of decentralized commodity taxation where consumption tax revenue finances public sector activities related to interregional externalities. We consider two cases; tax revenue finances (i) public pollution abatement in the presence of consumption generated transboundary pollution, and (ii) the provision of an interregional public consumption good, in the absence of pollution. The key result of our study is that in either case, non-cooperative equilibrium origin-based consumption taxes are efficient, while destination-based taxes are not. When consumption tax revenue is lump-sum distributed, neither type of consumption taxes is efficient.
    Keywords: Commodity taxation, Origin principle, Destination principle, Interregional externalities, Efficiency, Public goods
    JEL: H21 H23 H41
    Date: 2019–02
  6. By: Duccio Gamannossi degl’Innocenti (University of Exeter, UK); Matthew D. Rablen (University of Sheffield, UK)
    Abstract: We relate tax evasion behavior to a substantial literature on social comparison in judgements. Taxpayers engage in tax evasion as a means to boost their expected consumption relative to others in their social network. The unique Nash equilibrium of the model relates optimal evasion to a (Bonacich) measure of network centrality: more central taxpayers evade more. Given that tax authorities are now investing heavily in big-data tools that aim to construct social networks, we investigate the value of acquiring network information. We do this using networks that allow for celebrity taxpayers, whose consumption is widely seen, and who are systematically of higher wealth. We show that there are pronounced returns to the initial acquisition of network information, albeit targeting audits with highly incomplete knowledge of social networks may be counterproductive.
    Keywords: Tax Evasion; Social Networks; Network centrality; Optimal Auditing; Social Comparison; Relative Consumption
    JEL: H26 D85 K42
    Date: 2019–02
  7. By: Chen, Ping-ho; Chu, Angus C.; Chu, Hsun; Lai, Ching-Chong
    Abstract: This paper examines whether the Chamley-Judd result of a zero optimal capital tax rate is valid in an innovation-driven growth model. We examine how the optimal capital tax rate varies with externalities associated with R&D and innovation. Our results show that the optimal capital tax rate is higher when (i) the "stepping on toes effect" is smaller, (ii) the "standing on shoulders effect" is stronger, or (iii) the extent of creative destruction is greater. By calibrating our model to the US economy, we find that the optimal capital tax rate is positive, at a rate of around 11.9 percent. We also find that a positive optimal capital tax rate is more likely to be the case when there is underinvestment in R&D.
    Keywords: Optimal capital taxation; R&D externalities; innovation
    JEL: E62 O31 O41
    Date: 2019–02
  8. By: Tom Krebs (Universitat Mannheim); Martin Scheffel (Karlsruhe Institute of Technology)
    Abstract: This paper analyzes the optimal response of the social insurance system to a rise in labor market risk. To this end, we develop a tractable macroeconomic model with risk-free physical capital, risky human capital (labor market risk) and unobservable effort choice affecting the distribution of human capital shocks (moral hazard). We show that constrained optimal allocations are simple in the sense that they can be found by solving a static social planner problem. We further show that constrained optimal allocations are the equilibrium allocations of a market economy in which the government uses taxes and transfers that are linear in household wealth/income. We use the tractability result to show that an increase in labor market (human capital) risk increases social welfare if the government adjusts the tax-and-transfer system optimally. Finally, we provide a quantitative analysis of the secular rise in job displacement risk in the US and find that the welfare cost of not adjusting the social insurance system optimally can be substantial.
    Keywords: labor market risk, social insurance, moral hazard
    JEL: E21 H21 J24
    Date: 2019–02
  9. By: Matthew Gould (Brunel University, UK); Matthew D. Rablen (University of Sheffield, UK)
    Abstract: Tax authorities worldwide are implementing voluntary disclosure schemes to recover tax on offshore investments. The US and UK, in particular, have implemented such schemes in response to bulk acquisitions of information on o¤shore holdings, recent examples of which are the Paradise and Panama papers. Schemes oter affected investors the opportunity to make a voluntary disclosure, with reduced ne rates for truthful disclosure. Might such incentives, once anticipated by investors, simply encourage evasion in the rst place? We characterize the investor/tax authority game with and without a scheme, allowing for the possibility that some o¤shore investment has legitimate economic motives. We show that a scheme increases net expected tax revenue, decreases illegal o¤shore investment, increases onshore investment, but could either increase or decrease legal o¤shore investment. The optimal disclosure scheme o¤ers maximal incentives for truthful disclosure by imposing the minimum allowable rate of ne.
    Keywords: voluntary disclosure; offshore tax evasion; tax amnesty; third party information
    JEL: H26 D85
    Date: 2019–02
  10. By: Lozachmeur, Jean-Marie; Cremer, Helmuth; Goulão, Catarina
    Abstract: We consider an unhealthy good, such as a sugar-sweetened beverage, the health damages of which are misperceived by consumers. The sugar content is endogenous. We rst study the solution under \pseudo" perfect competition. In that case a simple Pigouvian tax levied per unit of output but proportional to the sugar content is sucient to achieve a rst best solution. Then we consider a monopoly. Market power aects both output and sugar content, possibly in opposite directions, and these eects have to be balanced against Pigouvian considerations. We show that, nevertheless, a tax per unit of output achieves an ecient solution, but it must be an ane function of the sugar content; taxing \grams of sugar" is no longer sucient. Interestingly, both the total tax as well as its sugar component can be positive as well as negative.
    Keywords: sin tax; tax incidence; misperception; monopoly
    JEL: H22 I12 D42
    Date: 2019–02
  11. By: Timothy Besley; Anders Jensen; Torsten Persson
    Abstract: This paper studies individual and social motives in tax evasion. We build a simple dynamic model that incorporates these motives and their interaction. The social motives underpin the role of norms and is the source of the dynamics that we study. Our empirical analysis exploits the adoption in 1990 of a poll tax to fund local government in the UK, which led to widespread evasion. The evidence is consistent with the model's main predictions on the dynamics of evasion.
    JEL: H26 H3
    Date: 2019–02
  12. By: Christine Tjen (Faculty of Economics and Business Universitas Indonesia); Vitria Indriani (Faculty of Economics and Business Universitas Indonesia); Panggah Tri Wicaksono (Faculty of Economics and Business Universitas Indonesia)
    Abstract: The purpose of this paper was to explore the perception of online tax ?ling in Indonesia using prior experience, trust, and IS (Information System) Success Model. The paper examined how the IS quality will be in?uenced by attributes such as prior experience on of?ine tax ?ling, trust in government, trust in technology, and trust in e-Filing website. Following this, the in?uence of IS quality on perceived usefulness and user satisfaction will be explored. To end the model, the paper was intended to answer question on whether the last two dimensions (perceived usefulness and user satisfaction) will have an effect on perceived net bene?t. This paper used primary data generated by distributing online questionnaire and able to get the total of 1.095 respondents, 993 of which are actively using online tax-?ling (e-?ling) and valid. The data were analyzed by the Structured Equation Model (SEM). The results suggested that trust in government and trust in technology positively affect the trust in e-Filing website, which subsequently in?uence all three IS quality dimensions. Information quality, system quality and service quality was found to be consistently and signi?cantly in?uence the perceived usefulness and user satisfaction. It was evident that tax payers in Indonesia placed the robustness and the safety features of the online system as the most important attributes that will in?uence the usefulness and satisfaction of online tax ?ling.
    Keywords: e-?ling — online tax return — IS quality — trust
    JEL: H20
    Date: 2018
  13. By: Itzik Fadlon; Shanthi P. Ramnath; Patricia K. Tong
    Abstract: We use administrative tax data that cover the U.S. population to identify the causal effects of Social Security’s survivors benefit receipt on American families’ behavior and financial well-being. We analyze over a quarter of a million widowed households in which the husband died between 2002-2007, and we exploit a sharp age discontinuity in benefit eligibility to study the responses of financially vulnerable households to government transfers. We first study how households respond to unanticipated benefit receipt in the immediate periods following a large financial shock to investigate the protective role of transfers. We find significant impacts of the program on newly-widowed families’ net income and labor supply behavior, which points to considerable allocative inefficiencies in the life insurance market and to a high valuation of survivors benefits in protecting Americans against mortality shocks. Second, to investigate the particular role of liquidity and benefit timing, we then study how already-widowed women’s labor supply responds to anticipated survivors benefit receipt. We find considerable responses to cash-on-hand via benefit availability that underscore allocative inefficiencies in the credit market and the value of liquidity itself provided by government transfers. These responses and their heterogeneity highlight mechanisms that underlie the labor supply behavior of older vulnerable households, and they point to liquidity constraints, rather than myopia or benefit-schedule misperceptions, as the likely operative channel. Our results have implications for survivors benefits in the U.S., and, more generally, for retirement behavior and response mechanisms to transfers among older vulnerable populations.
    JEL: D1 D61 G22 H0 H55 I1 I38 J2
    Date: 2019–02

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