nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒03‒25
thirteen papers chosen by
Thomas Andrén

  1. Progressive tax reforms in flat tax countries By Barrios, Salvador; Ivaškaitė-Tamošiūnė, Viginta; Maftei, Anamaria; Narazani, Edlira; Varga, Janos
  2. Quality Infrastructure Investment: Ways to Increase the Rate of Return for Infrastructure Investments By Yoshino, Naoyuki; Hendriyetty, Nella; Lakhia, Saloni
  3. Taxation and Self-Employment By Zsofia Barany
  4. The Political Economy of the Taxation of Individuals in North Cyprus By Amin Sokhanvar; Glenn P. Jenkins; Hasan Ulas Altiok
  5. Has the Canadian Public Debt Been Too High? A Quantitative Assessment By Marco Cozzi
  6. Nash Equilibrium in Tax and Public Investment Competition By Sharma, Ajay; Pal, Rupayan
  7. Wage Incidence of a Large Corporate Tax Credit: Contrasting Employee - and Firm - Level Evidence By Clément Carbonnier; Clément Malgouyres; Loriane Py; Camille Urvoy
  8. Taxation and the future of work: How tax systems influence choice of employment form By Anna Milanez; Barbara Bratta
  9. The Tax Paradox and Weak Tax Neutrality By Ramón E. López; Pablo Gutiérrez C.; Eugenio Figueroa
  10. Laboratory Federalism with Public Funds Sharing By Ana B.Ania; Andreas Wagener
  11. Does Mandating Social Insurance Affect Entrepreneurial Activity? By Youssef Benzarti; Jarkko Harju; Tuomas Matikka
  12. The Impact of the CCTB on the Effective Tax Burden of Corporations: results from the Tax Analyzer Model By ZEW
  13. Improving Subnational Government Development Finance in Emerging and Developing Economies: Toward a Strategic Approach By Smoke, Paul

  1. By: Barrios, Salvador; Ivaškaitė-Tamošiūnė, Viginta; Maftei, Anamaria; Narazani, Edlira; Varga, Janos
    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 creditsÂ
    Date: 2019–03–07
  2. By: Yoshino, Naoyuki (Asian Development Bank Institute); Hendriyetty, Nella (Asian Development Bank Institute); Lakhia, Saloni (Asian Development Bank Institute)
    Abstract: Private–public partnerships in infrastructure have been advocated for many years. Investors currently receive a low rate of return on infrastructure investment. This is because the main sources of revenue from infrastructure investment are user charges. For example, user charges for a water supply cannot be increased since water is a necessary good for everyone. However, a water supply can help to develop regions. For example, new apartments can be constructed, and new businesses can be created in the region where the water is supplied. From this, property tax, corporate income tax, and income tax revenues will rise. In the past, these increased tax revenues have gone to the government rather than being returned to infrastructure investors. If these increased tax revenues were to be returned to investors, the rate of return would rise significantly. Hometown investment trust funds can also provide financing for start-up businesses along with the new infrastructure investments. Land acquisition creates huge difficulties for completing infrastructure investment. Land trusts will solve the issue of owners not wanting to sell their land by giving them the option to keep it and instead lease the land to infrastructure companies and receive long-term rent income, for example for 99 years. In this way, land trusts will smoothen the use of land and transfer the usage rights to infrastructure companies.
    Keywords: infrastructure; public–private partnerships; tax revenue; rate of return; land trusts
    JEL: H54 H71 O18
    Date: 2019–03–15
  3. By: Zsofia Barany (Département d'économie)
    Abstract: In this paper I study the relation between self-employment and the tax rates on wages and on self-employment income. Using variation in the statutory tax rates across countries, industries, and occupations, I find that while the share of self-employed is strongly positively correlated with the tax rate on wage income, it is weakly negatively correlated with the tax rate on self-employed income. The asymmetry between the effects of the tax rates suggests that those who choose self-employment partly do so in order to evade taxes. This extensive margin of adjustment – between employment and self-employment – should be taken into account when considering the effects of tax rates on labor income, on taxable income and on welfare.
    Keywords: Tax-rates; Self-employment; Tax evasion
    Date: 2018–05
  4. By: Amin Sokhanvar (Department of Economics, Eastern Mediterranean University, North Cyprus); Glenn P. Jenkins (Department of Economics, Queen's University, Kingston, Canada and Eastern Mediterranean University, North Cyprus); Hasan Ulas Altiok (Department of Banking and Finance,Eastern Mediterranean University, North Cyprus)
    Abstract: The objective of this study is to undertake a diagnostic of the personal direct tax system and the charges that are levied for the funding of the social security and the provident fund in North Cyprus. This analysis was conducted using a data base that included 100% of the individual tax payers. Particular attention was given to the assessment of the marginal tax rates on labor income and how they might affect fiscal compliance. It was found that the design of the tax system and its interaction with the systems of social security and provident fund contributions have created a powerful set of incentives for non-compliance. Top income earning employees in the private sector face a very high combined marginal fiscal burden. As a consequence, massive tax avoidance takes place so that most private employees pay no marginal income tax, social security or provident fund contributions on income above the minimum wage. In addition, the private self-employed allocate their wage incomes so as to minimize the total burden of social security, provident fund contributions plus individual and corporate income tax payments of their businesses. These very high marginal rates at levels of income that are low (by developed country standards) have created informal administrative measures to alleviate the fiscal burden on individuals. The end result however, is neither equitable nor economically neutral.
    Keywords: Pensions funds, personal income tax, tax incidence, tax compliance, fiscal equity
    JEL: H24 H26
    Date: 2019–01
  5. By: Marco Cozzi (Department of Economics, University of Victoria)
    Abstract: This paper provides a quantitative analysis on whether the historically sizable public debt that the Canadian governments have accumulated might be close to its welfare maximizing level. As the public provision of liquidity to borrowing constrained individuals coupled with an increased supply of safe assets can be welfare improving, I consider a two-region model with an integrated asset market and incomplete insurancemarkets. The home country features a rich life-cycle setup, where the income dynamics rely on state of the art estimates obtained from previous studies using income tax returns. The main features are ex-ante labor earnings heterogeneity, both in levels and in growth rates, together with persistent and permanent shocks. When the public expenditure is assumed to be wasteful, I find that the optimal quantity of public debt for Canada is negative, meaning that the government should be a net saver. When the government, with a portion of its expenditure and consistent with the Canadian experience, finances valuable public goods the long-run public debt is still found to be inefficiently large, but closer to the welfare maximizing level.
    Keywords: Public debt, Incomplete markets, Welfare
    Date: 2019–03–15
  6. By: Sharma, Ajay; Pal, Rupayan
    Abstract: We analyze Nash equilibrium in fiscal competition with tax and public investment between symmetric regions. We show that given the opposite strategic nature of tax (strategic complement) and public investment (strategic substitute), there is possibility of multiple equilibria. We find that if strategic substitute effect dominates strategic complement effect, then both regions have first mover advantage in a timing game and simultaneous move Nash equilibrium (early, early) emerges; otherwise sequential move equilibria-(early, late) and (late, early) emerges. Also, sequential move Nash equilibria are Pareto improving than simultaneous move outcome. Lastly, race-to-the-bottom in taxes is restricted in sequential move equilibria.
    Keywords: Capital taxation; Public investment; Tax competition; Joint strategic substitutes; Joint strategic complements
    JEL: F21 H25 H41 H73 R5
    Date: 2019–03–12
  7. By: Clément Carbonnier (Université de Cergy Pontoise); Clément Malgouyres (Banque de France); Loriane Py (Banque de France); Camille Urvoy (Département d'économie)
    Abstract: The present paper sheds new light on the incidence of firm taxation by exploiting the design of a large-scale corporate income tax credit in France. The tax credit is proportional to the wage bill of workers paid below a hourly wage threshold, which induces a discontinuity in mandatory levies at the employee level. We use discontinuities at the employee level in order to estimate firm-level incidence. This turns out to be the relevant level for the effects of the policy, which would be undetectable with an estimation focused on the employee level impact of the shock. Relying on exhaustive matched employer-employee data, we find a discrepancy between the absence of incidence at the employee level and a substantial incidence on wages at the firm level, around 50%. We find more over that the policy in question has stark (anti)-redistributive effects. The tax cut is targeting the lowest part of wage earners, but the benefits accrue to other employees inside the firm, who earn substantially higher wages on average.
    Keywords: tax credit; incidence; rent sharing
    Date: 2019–03
  8. By: Anna Milanez; Barbara Bratta
    Abstract: Recent policy discussion has highlighted the variety of ways in which the world of work is changing. One development prevalent in some countries has been an increase certain forms of non-standard work. Is this beneficial, representing increased flexibility in the workforce, or detrimental, representing a deterioration in job quality driven by automation, globalisation and the market power of large employers? These changes also raise crucial issues for tax systems. Differences in tax treatment across employment forms may create tax arbitrage opportunities. This paper investigates the potential for such opportunities for eight countries. It models the labour income taxation, inclusive of social contributions, of standard employees and then of self-employed workers (with applicable tax rules detailed in the paper’s annex). The aim is to understand whether countries’ tax systems treat different employment forms differently, before approaching the broader question of whether differential treatment has merit when evaluated against tax design principles.
    Keywords: future of work, gig economy, gig work, labour tax, labour taxation, non-standard work, self-employment, tax, taxation
    JEL: H2 H24 J2 J21 J08
    Date: 2019–03–21
  9. By: Ramón E. López; Pablo Gutiérrez C.; Eugenio Figueroa
    Abstract: We introduce the concept of weak tax neutrality which establishes that the relationship between the tax rate and the user cost of capital may be non-monotonic. We show that most existing corporate tax systems allow for weak neutrality. That is, given the tax allowances permitted by these systems, it is possible that neutrality may arise for at least one positive corporate tax rate. Moreover, we show the practical relevance of weak neutrality in realistic situations where there are several asset types and heterogeneous levels of firms’ debt ratios.
    Date: 2019–03
  10. By: Ana B.Ania; Andreas Wagener
    Abstract: The theory of laboratory federalism hypothesizes that, in a decentralized multi-jurisdictional system, policies follow an evolutionary learning process with innova-tion and imitation. This paper studies the role of public funds sharing in such a setting. As a guiding framework we consider a model of decentralized, rich-to-poor redistribution with labor mobility. Uncorrected learning dynamics here lead to a drastic erosion of the welfare state. Suitably designed public funds sharing can correct this failure and may even restore e?ciency. Surprisingly, the necessary properties of the sharing scheme for e?ciency in the learning model are the same as those that make decentralized Nash play e?cient (and vice versa).Public funds sharing, thus, is a powerful corrective device in ?scally decentralizedsettings for a variety of behavioral modes of government interaction.
    JEL: C73 H75 H77
    Date: 2019–02
  11. By: Youssef Benzarti; Jarkko Harju; Tuomas Matikka
    Abstract: This paper estimates the effect of relaxing the social insurance mandate on entrepreneurial activity. We use a unique discontinuity in Finland that allows certain entrepreneurs not to pay social insurance contributions on their income. Using rich administrative data, we find that relaxing the social insurance mandate leads entrepreneurs to significantly reduce their contributions, which they channel instead into their firms. While young firms use this windfall to increase business activity, older ones use it to improve their net lending position by purchasing stocks. Our results imply that the social insurance mandate is binding and its efficiency cost is heterogeneous.
    JEL: H25 H32 H55
    Date: 2019–03
  12. By: ZEW
    Abstract: The aim of this study is to evaluate the impact of the introduction of the CCTB draft Council Directive from October 2016 on the effective corporate tax burdens in the 28 EU Member States and to assess the relative importance of single elements of the harmonised tax base. Furthermore, the impact of the CCTB introduction is estimated for R&D corporations and the tax effects of the 2016 CCTB draft Council Directive and the original draft Council Directive as of 2011 are compared.
    Keywords: Corporate Tax, Effective Tax Rates, Tax harmonisation, European Union
    JEL: H25 H87
    Date: 2019–03
  13. By: Smoke, Paul (Asian Development Bank Institute)
    Abstract: Considerable attention has been given to enhancing subnational development finance in response to the 2008 global financial crisis and recent global development agendas, including the Sustainable Development Goals, Financing for Development, and Habitat III/New Urban Agenda. Much work on this topic is fragmented, focusing on specific elements of development finance: fiscal transfers, capital market access, public-sector lending agencies, or public–private partnerships. Most countries, however, have a range of subnational governments with varying needs and capacities that require different and evolving mixes of development finance mechanisms. Enabling greater subnational borrowing is often desirable but requires adoption of other reform policies to improve the fiscal capacity and creditworthiness of subnational governments over time. We review the rationale and potential for improving subnational development finance, outline the overall landscape of institutional arrangements available for this purpose, and consider broad challenges involved. Based on a review of global practice and experience in selected Asian developing countries with a range of special entities and innovations to enhance subnational investment, we propose a more integrated, strategic approach to building subnational development finance.
    Keywords: subnational government finance; intergovernmental transfers; subnational government debt; subnational government financial intermediaries; Asia
    JEL: H70 H71 H72 H74 H77
    Date: 2019–02–11

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