nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒04‒29
thirteen papers chosen by
Thomas Andrén

  1. Microsimulation Analysis of Optimal Income Tax Reforms: An Application to New Zealand By John Creedy; Norman Gemmell; Nicolas Hérault; Penny Mok
  2. Micro-founded tax policy effects in a heterogenenous-agent macro-model By Diego d'Andria; Jason DeBacker; Richard Evans; Jonathan Pycroft; Magdalena Zachlod-Jelec
  3. Charity, Status, and Optimal Taxation: Welfarist and Paternalist Approaches By Aronsson, Thomas; Johansson-Stenman, Olof; Wendner, Ronald
  4. Tax Policy for Innovation By Bronwyn H. Hall
  5. Did the 2017 Tax Reform Discriminate against Blue State Voters? By David Altig; Alan J. Auerbach; Patrick C. Higgins; Darryl R. Koehler; Laurence J. Kotlikoff; Michael Leiseca; Ellyn Terry; Yifan Ye
  6. Reducing tax compliance costs through corporate tax base harmonisation in the European Union By Salvador Barrios; Diego d'Andria; Maria Gesualdo
  7. Making Carbon Taxation a Generational Win Win By Laurence J. Kotlikoff; Felix Kubler; Andrey Polbin; Jeffrey D. Sachs; Simon Scheidegger
  8. Practising Subnational Public Finance in an Emerging Economy: Fiscal Marksmanship in Kerala By Shreshtha, Ruzel; Chakraborty, Lekha S
  9. The Determinants of Tax Revenue and Tax Effort in Developed and Developing Countries: Theory and New Evidence 1995-2015 By Marcelo Piancastelli; A.P.Thirlwall
  10. Environmental Effects of Capital Income Taxation - A New Double Dividend? By Ritter, Hendrik; Runkel, Marco; Zimmermann, Karl
  11. Endogenous Public and Private Leadership with Diverging Social and Private Marginal Costs By Haraguchi, Junichi; Matsumura, Toshihiro
  12. The Swedish Fiscal Framework – The Most Successful One in the EU? By Andersson, Fredrik N. G.; Jonung, Lars
  13. Local Government Property Tax Administration and Collaboration with Central Government: Case Studies from Kenya By Wanjiru, Rose; Wanyagathi Maina, Anne; Onsomu, Eldah; Stewart-Wilson, Graeme

  1. By: John Creedy (Victoria Business School, Victoria University of Wellington, Wellington, New Zealand); Norman Gemmell (Victoria Business School, Victoria University of Wellington, Wellington, New Zealand); Nicolas Hérault (Melbourne Institute: Applied Economic & Social Research, The University of Melbourne); Penny Mok (Ministry of Business, Innovation and Employment (MBIE), Wellington, New Zealand)
    Abstract: This paper examines the optimal direction of marginal income tax reform in the context of New Zealand, which recently reduced its top marginal income tax rate to one of the lowest in the OECD. A behavioural microsimulation model is used, in which social welfare functions are defined in terms of either money metric utility or net income. The model allows for labour supply responses to tax changes, in which a high degree of population heterogeneity is represented along with all the details of the highly complex income tax and transfer system. The implications of the results for specific combinations of tax rate or threshold changes, that are both revenue neutral and welfare improving, are explored in detail, recognising the role of distributional value judgements in determining an optimal reform. The potential impact of additional income responses is also examined, using the concept of the elasticity of taxable income. Results suggest, under a wide range of parameter values and assumptions, that raising the highest income tax rate and/or threshold, would be part of an optimal reform package.
    Keywords: Optimal taxation, tax reform, behavioural microsimulation, social welfare function, money metric utility
    JEL: D63 H21 H31 I31 J22
    Date: 2018–05
  2. By: Diego d'Andria (European Commission - JRC); Jason DeBacker (University of South Carolina – Darla Moore School of Business); Richard Evans (University of Chicago - Becker Friedman Institute); Jonathan Pycroft (European Commission - JRC); Magdalena Zachlod-Jelec (European Commission - JRC)
    Abstract: Microsimulation models are increasingly used to calibrate macro models for tax policy analysis. Yet, their potential remains underexploited, especially in order to represent the non-linearity of the tax and social benefit system and interactions between capital and labour incomes which play a key role to understand behavioural effects. Following DeBacker et al. (2018b) we use a microsimulation model to provide the output with which to estimate the parameters of bivariate non-linear tax functions in a macro model. In doing so we make marginal and average tax rates bivariate functions of capital income and labour income. We estimate the parameters of tax functions in order to capture the most important non-linearities of the actual tax schedule, together with interaction effects between labour and capital incomes. To illustrate the methodology, we simulate a reduction in marginal personal income tax rates in Italy with a microsimulation model, translating the microsimulation results into the shock for a dynamic overlapping generations model. Our results show that this policy change affects differently households distinguished by age and ability type.
    Keywords: computable models, general equilibrium, overlapping generations, taxation, microsimulation models
    JEL: H24 H31 D58
    Date: 2019–04
  3. By: Aronsson, Thomas (Department of Economics, Umeå University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, University of Gothenburg); Wendner, Ronald (Institute of Economics, University of Graz)
    Abstract: This paper deals with tax policy responses to charitable giving, defined in terms of voluntary contributions to a public good, to which the government also contributes through public revenue; the set of tax instruments contains general, nonlinear taxes on income and charitable giving. In addition to consumption, leisure and a public good, individuals obtain utility from the warm glow of giving and social status generated by their relative contributions to charity as well as their relative consumption compared with others. We analyze the conditions under which it is optimal to tax or subsidize charitable giving and derive corresponding optimal policy rules. Another aim of the paper is to compare the optimal tax policy and public good provision by a conventional welfarist government with those by two kinds of paternalist governments: The first kind does not respect the consumer preferences for status in terms of relative giving and relative consumption, while the second kind in addition does not respect preferences for warm glow of giving. The optimal policy rules for marginal taxation and public good provision are similar across governments, except for the stronger incentive to tax charitable giving at the margin under the more extensive kind of paternalism. Numerical simulations supplement the theoretical results.
    Keywords: Conspicuous consumption; conspicuous charitable giving; optimal taxation; warm glow
    JEL: D03 D62 H21 H23
    Date: 2019–04–16
  4. By: Bronwyn H. Hall
    Abstract: A large number of countries around the world now provide some kind of tax incentive to encourage firms to undertake innovative activity. This paper presents the policy rationale for these incentives, discusses their design and potential effectiveness, and reviews the empirical evidence on their actual effectiveness. The focus is on the two most important and most studied incentives: R&D tax credits and super deductions, and IP boxes (reduced corporate taxes in income from patents and other intellectual property).
    JEL: H25 O32 O38
    Date: 2019–04
  5. By: David Altig; Alan J. Auerbach; Patrick C. Higgins; Darryl R. Koehler; Laurence J. Kotlikoff; Michael Leiseca; Ellyn Terry; Yifan Ye
    Abstract: The Tax Cut and Jobs Act of 2017 (TCJA) made significant changes to corporate and personal federal income taxation, including limiting the SALT (state and local property, income and sales taxes) deductibility to $10,000. States with high SALT tend to vote Democratic. This paper estimates the differential effect of the TCJA on red- and blue-state taxpayers and investigates the importance of the SALT limitation to this differential. We calculate the effect of permanent implementation of the TCJA on households using The Fiscal Analyzer: a life-cycle, consumption-smoothing program incorporating all major federal and state fiscal policies. We find that the average percentage increase in remaining lifetime spending under the TCJA is 1.6 percent in red states versus 1.3 percent in blue states. Among the richest 10 percent of households, this differential is larger. Rich households in red states enjoyed a 2.0 percent increase compared to a 1.2 percent increase among the rich in blue-state households. This gap is driven almost entirely by the limitation on the SALT deduction. Excluding the SALT limitation from the TCJA results in a spending gain of 2.6 percent for rich red-state households compared to 2.7 percent for rich blue-state households.
    JEL: D31 D72 E62 H20 H22 H71
    Date: 2019–04
  6. By: Salvador Barrios (European Commission - JRC); Diego d'Andria (European Commission - JRC); Maria Gesualdo (European Commission - JRC)
    Abstract: The reform proposal of the European Commission for a Common Consolidated Corporate Tax Base, the so-called CCCTB, is expected to significantly reduce the cost of doing business by lowering tax compliance costs for cross border operations within the European Union. However, to date the scarcity of comparable estimates on tax compliance costs has limited the assessment of such reduction. We exploit recently released and unique survey data designed to provide comparable information on corporate tax compliance costs in order to assess the impact of the CCCTB, using a general equilibrium modelling approach. Our results suggest that the reduction in tax compliance costs implied by the CCCTB would be associated with greater economic efficiency, including increases in both welfare and GDP. Member States resulting with the lowest compliance costs before the reform and having large inward foreign investment stock would benefit more from the CCCTB. Cross-border business operations would also benefit more from the CCCTB compared to domestic ones. The impact of the CCCTB on non-EU countries such as the US and Japan would be limited.
    Keywords: CCCTB, tax compliance costs, European Union
    JEL: H20 H30 C68
    Date: 2019–04
  7. By: Laurence J. Kotlikoff; Felix Kubler; Andrey Polbin; Jeffrey D. Sachs; Simon Scheidegger
    Abstract: Carbon taxation has been studied primarily in social planner or infinitely lived agent models, which trade off the welfare of future and current generations. Such frameworks obscure the potential for carbon taxation to produce a generational win-win. This paper develops a large-scale, dynamic 55-period, OLG model to calculate the carbon tax policy delivering the highest uniform welfare gain to all generations. The OLG framework, with its selfish generations, seems far more natural for studying climate damage. Our model features coal, oil, and gas, each extracted subject to increasing costs, a clean energy sector, technical and demographic change, and Nordhaus (2017)’s temperature/damage functions. Our model’s optimal uniform welfare increasing (UWI) carbon tax starts at $30 tax, rises annually at 1.5 percent and raises the welfare of all current and future generations by 0.73 percent on a consumption-equivalent basis. Sharing efficiency gains evenly requires, however, taxing future generations by as much as 8.1 percent and subsidizing early generations by as much as 1.2 percent of lifetime consumption. Without such redistribution (the Nordhaus “optimum”), the carbon tax constitutes a win-lose policy with current generations experiencing an up to 0.84 percent welfare loss and future generations experiencing an up to 7.54 percent welfare gain. With a six-times larger damage function, the optimal UWI initial carbon tax is $70, again rising annually at 1.5 percent. This policy raises all generations’ welfare by almost 5 percent. However, doing so requires levying taxes on and giving transfers to future and current generations ranging up to 50.1 percent and 10.3 percent of their lifetime consumption. Delaying carbon policy, for 20 years, reduces efficiency gains roughly in half.
    JEL: F0 F20 H0 H2 H3 J20
    Date: 2019–04
  8. By: Shreshtha, Ruzel; Chakraborty, Lekha S
    Abstract: Abstract Our paper analyses the subnational public finance practices in one of the States in India –Kerala- and estimate the fiscal marksmanship. Fiscal marksmanship is the analysis of fiscal forecasting errors. Kerala, though well known for its achievements in human development outcomes, is facing fiscal stress within the rule-based fiscal framework and innovating policy tools to achieve a revenue-led fiscal consolidation. We have examined the Budget Estimates, Revised Estimates and Actuals for the macro-fiscal variables from the Kerala State Budgets, during the period 2011-12 to 2016-17 to analyse the significant deviation between the projections and realizations of the State finances. We found that the magnitude of forecasting errors was relatively significant in case of tax revenue. While partitioning the sources of errors in the budgetary forecasting in Kerala, we found that the random components of the error were larger than the systematic components for all the macro-fiscal variables, except for own revenue, grants and capital expenditure. This has three macro policy implications. One, the volatility in intergovernmental fiscal transfers can affect the stability of finances at subnational level. Two, the State needs to identify innovative policy tools in Additional Resource Mobilisation (ARM) to maintain the human development achievements. Three, within the rule-based fiscal framework, State has to innovate financing strategies for strengthening growth-inducing capital infrastructure formation.
    Keywords: Fiscal marksmanship, fiscal forecasting errors, fiscal rules
    JEL: H3 H68
    Date: 2019–04–16
  9. By: Marcelo Piancastelli; A.P.Thirlwall
    Abstract: This paper measures the tax effort of a sample of fifty-nine developed and developing countries over the period 1995-2015 by comparing a country’s actual tax/GDP ratio with the ratio predicted derived from an international tax function which relates tax revenue to various measures of a country’s taxable capacity such as the level of per capita income; the share of trade in GDP; the productive structure, and the level of financial deepening. The tax function is estimated using cross section data; pooled time series/cross section data, and panel data using a fixed effects estimator. The results are compared and show a range of tax effort from South Africa with the highest effort and Switzerland with the lowest effort. Implications for policy are drawn.
    Keywords: Tax ratios; tax effort
    JEL: H2
    Date: 2019–04
  10. By: Ritter, Hendrik; Runkel, Marco; Zimmermann, Karl
    Abstract: We analyze a n-country, two-period Nash tax competition game to evaluate Sinn’s proposal to use capital income taxation as a means to decelerate fossil fuel ex- traction (Sinn, 2008). The interest and discount rate is determined on a perfectly competitive consumer loan market on which the resource extractor acts as the loan supplier. Our first result is that, with perfectly identical countries, tax rates are inefficiently low in the Nash equilibrium of the tax competition game since the tax distortion and the environmental externality are not taken into account. The sec- ond result is that, in an asymmetric setting with resource-exporting and -importing countries, the tax can turn into a subsidy in the exporting country. Moreover, we show that partial cooperation of the importers is always beneficial to them, but can be harmful to the exporter. Finally, we identify cases where full cooperation is self-enforcing.
    Keywords: Capital taxation,Green paradox,Non-renewable resources
    JEL: H21 H23 Q38 Q54
    Date: 2019
  11. By: Haraguchi, Junichi; Matsumura, Toshihiro
    Abstract: We investigate endogenous timing in a mixed duopoly with price competition and with social marginal cost differing from private marginal costs. We find that any equilibrium timing patterns--Bertrand, Stackelberg with private leadership, Stackelberg with public leadership, and multiple Stackelberg equilibria-- emerge. When the foreign ownership share in a private firm is less than 50%, public leadership more likely emerges than private leadership. Conversely, private leadership can emerge in a unique equilibrium when the foreign ownership share in a private firm is large. These results may explain recent policy changes in public financial institutions in Japan. We also find a nonmonotone relationship between the welfare advantage of public and private leadership and the difference between social and private marginal costs for a private firm. A nonmonotone relationship does not emerge in profit ranking.
    Keywords: public financial institutions, differentiated products, Bertrand, Stackelberg, payoff dominance
    JEL: H42 L13
    Date: 2019–04–20
  12. By: Andersson, Fredrik N. G. (Department of Economics, Lund University); Jonung, Lars (Department of Economics, Lund University)
    Abstract: This paper discusses the history and future of the Swedish fiscal framework. First, we claim that the fiscal framework has contributed to a sharp decline in the debt-to-GDP ratio, from one of the highest to one of the lowest in the European Union. Next, we focus on the future. Despite its success, we argue that the framework is unsustainable. Running large surpluses over the long run is not a steady-state solution. We recommend two changes to the framework. First, that the public pension system is excluded, and second that the Swedish fiscal authorities shift attention from maintaining a budget surplus of 1/3 percent of GDP over the business cycle to sustaining a stable debt-to-GDP ratio of 25 percent of GDP +/- 5 percentage points. A debt anchor at this level will provide sufficient insurance in case of a future major economic crisis judging from recent cross-country evidence. In addition, a debt anchor around 25 percent of GDP would contribute to political stability in time of crises. In a world, where populism and austerity fatigue are rampant, we stress the importance of a fiscal framework allowing successful consumption and tax smoothing in case of major negative shocks to the fiscal space. We conclude with a set of recommendations for the fiscal governance of the EU.
    Keywords: Fiscal policy; fiscal framework; fiscal policy council; financial crisis; debt crisis; consumption smoothing; Sweden; EU
    JEL: E61 E62 E63 G02 H12 H30 N14 O52
    Date: 2019–04–10
  13. By: Wanjiru, Rose; Wanyagathi Maina, Anne; Onsomu, Eldah; Stewart-Wilson, Graeme
    Abstract: Property taxes are an important revenue source for subnational governments. Across sub-Saharan Africa collection of property taxes is made up of several distinct processes, some situated at the national level, and some at the local level. Thus, inter-organisational cooperation and institution-based trust are essential for the successful implementation of property taxation. Because of the common centre-local tensions, there is now widespread acknowledgement that in sub-Saharan Africa property tax systems are not leading to the desired cycles of public investment and local government empowerment (R. W. Bahl and Bird 2013; R. W. Bahl, Martinez-Vazquez, and Youngman 2008; Cirolia and Mizes 2019; Collier 2016). Recent experiences in Kenya, including the adoption of a new constitution in 2010 that radically devolved responsibility to county governments, provides a novel opportunity to examine some of the challenges and opportunities facing property taxation in sub-Saharan Africa. The new constitution decentralised powers and responsibilities from central government to 47 new county governments. The study was conducted in three counties; Kiambu, Laikipia, and Machakos. Although the main source of funding for county governments is fiscal transfers from the national government, property taxes constitute the dominant revenue stream for most counties. County governments have the power to determine their own tax bases, property rates, and tax rates.
    Keywords: Finance, Governance,
    Date: 2019

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