nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒05‒06
twenty papers chosen by
Thomas Andrén

  1. Does progressivity always lead to progress? The impact of local redistribution on tax manipulation By Tommaso Giommoni
  2. The effects of official and unofficial information on tax compliance By Filomena Garcia; Luca David Opromolla; Andrea Vezzulli; Rafael Marques
  3. Optimal Corporate Taxation Under Financial Frictions By Davila, Eduardo; Hebert, Benjamin
  4. A strategic tax mechanism By Stamatopoulos, Giorgos
  5. Tax Bunching at the Kink in the Presence of Low Capacity of Enforcement: Evidence from Uruguay By Bergolo, Marcelo; Burdín, Gabriel; De Rosa, Mauricio; Giaccobasso, Matias; Leites, Martin
  6. Optimal Cooperative Taxation in the Global Economy By Chari, V. V.; Nicolini, Juan Pablo; Teles, Pedro
  7. Death and Taxes: Does Taxation Matter for Firm Survival? By Serhan Cevik; Fedor Miryugin
  8. Charity, Status, and Optimal Taxation: Welfarist and Paternalist Approaches By Aronsson, Thomas; Johansson-Stenman, Olof; Wendner, Ronald
  9. Are the South African fiscal authorities serious about tax base broadening? By Estian Calitz
  10. Aligning profit taxation with value creation By Wolfram F. Richter
  11. Long-Run Tax Incidence in a Human Capital-based Endogenous Growth Model with Labor-Market Frictions By Been-Lon Chen; Hung-Ju Chen; Ping Wang
  12. Property Tax Reform and Land Use: Evidence from Japan By Tomomi Miyazaki; Motohiro Sato
  13. Tax Mechanisms and Gradient Flows By Stefan Steinerberger; Aleh Tsyvinski
  14. Optimal Social Insurance and Rising Labor Market Risk By Krebs, Tom; Scheffel, Martin
  15. Globalization and taxation: theory and evidence By Priyaranjan Jha; Giray Gozgor
  16. Transaction-tax evasion in the housing market By José G. Montalvo; Amedeo Piolatto; Josep Raya
  17. Tax decentralization notwithstanding regional disparities By Antonio Andrés Bellofatto; Martin Besfamille
  18. Living under Fiscal Rules: Fiscal Management Response and Resource Allocation Choices for State of Odisha. By Jena, Pratap Ranjan
  19. State of Public Finance and Fiscal Management in India during 2001-16. By Mukherjee, Sacchidananda
  20. Fragility in modeling consumption tax revenue By Kazuki Hiraga; Kengo Nutahara

  1. By: Tommaso Giommoni
    Abstract: The goal of this paper is to study the effects of introducing income redistribution at the municipal level, with the adoption of local tax progressivity. In particular, we analyse whether this complex fiscal tool modifies the incentives of local politicians to be strategic leading to higher tax manipulation, in the form of political budget cycle. We exploit an Italian reform of the local personal income tax (PIT), which was flat before the intervention, that allows mayors to introduce progressive schemes. First, we make use of the staggered timing of local elections to estimate a Difference-in-Differences model and we find that the reform consistently amplifies political budget cycle of local PIT. In terms of mechanism, progressivity allows mayors to target diverse income groups and to play different strategies: high income rates, indeed, are subject to larger manipulation than the moderate ones. Second, we exploit the fact that income concentration level is a valid predictor for the introduction of progressivity. The main results are confirmed in a Triple-Differences analysis. And finally, we show that manipulation is rewarding from an electoral point of view. These results reveal a negative side of decentralizing income redistribution as it may lead to consistent tax manipulation and large distortions in fiscal policy.
    Keywords: tax progressivity, personal income tax, political budget cycle, tax manipulation, fiscal federalism
    JEL: D72 E62 H71 P16
    Date: 2019
  2. By: Filomena Garcia (Indiana University, & UECE); Luca David Opromolla (Banco de Portugal, CEPR, CESifo, & UECE); Andrea Vezzulli (University of Insubria); Rafael Marques (ISEG-School of Economics and Management)
    Abstract: The administration of tax policy has shifted its focus from enforcement to complementary instruments aimed at creating a social norm of tax compliance. In this paper we provide an analysis of the effects of the dissemination of information regarding the past degree of tax evasion at the social level on the current individual tax compliance behavior. We build an experiment where, for given levels of audit probabilities, fines and tax rates, subjects have to declare their income after receiving either a communication of the official average tax evasion rate or a private message from a group of randomly matched peers about their tax behavior. We use the experimental data to estimate a dynamic econometric model of tax evasion. The econometric model extends the Allingham-Sandmo-Yitzhaki tax evasion model to include self-consistency and endogenous social interactions among taxpayers. We find four main results. First, tax compliance is very persistent. Second, the higher the official past tax evasion rate the higher the degree of persistence: evaders are more likely to evade again, and compliant individuals are more likely to comply again. Third, when all peers communicate to have evaded (complied) in the past, both evaders and compliant individuals are more likely to evade (comply). Fourth, while both treatments, and especially the unofficial information treatment, are associated, in the context of our experiment, with a significantly larger growth in evasion intensity, the aggregate effect depends on the characteristics of the population. In countries with inherently low levels of tax evasion, official information can have beneficial effects by consolidating the behavior of compliant individuals. However, in countries with inherently high levels of tax evasion, official information can have detrimental effects by intensifying the behavior of evaders. In both cases, the impact of official information is magnified in the presence of strong peer effects.
    Keywords: Tax morale, Information, Tax evasion, Experiment, Peer Effects
    JEL: H26 D63 C24 C92 Z13
    Date: 2018–04
  3. By: Davila, Eduardo (Yale University/New York University and NBER); Hebert, Benjamin (Stanford University and NBER)
    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
  4. By: Stamatopoulos, Giorgos
    Abstract: We introduce a novel commodity tax mechanism in oligopolies that improves upon the standard tax policies. The government (i) announces an excise tax rate $\tau$ and (ii) auctions-off a number of tax exemptions. Namely, it invites the firms in a market to acquire the right to be exempted from the excise tax. The highest bidders are exempted paying the government their bids; and all other firms remain subject to $\tau$. Depending on the characteristics of the market, the mechanism we suggest has a number of desirable features. First, it allows the government to collect more revenues than the standard commodity tax policies (this is due to the competition among the firms to acquire the exemptions). Second, for markets where firms have informational advantage over the government, the mechanism allows for information revelation (via the firms' bids in the auction). Third, it impedes collusive activities in the market (as the mechanism creates an artificial asymmetry among the firms, which hinders collusion). Lastly, the mechanism is voluntary, namely the firms participate in the auction only if they wish and hence they are free to choose how to be taxed.
    Keywords: excise tax; tax exemption; auction; asymmetric information; collusion
    JEL: H21 H25 L1
    Date: 2019–05–01
  5. By: Bergolo, Marcelo (IECON, Universidad de la República); Burdín, Gabriel (Leeds University Business School); De Rosa, Mauricio (Universidad de la República, Uruguay); Giaccobasso, Matias (University of California, Los Angeles); Leites, Martin (Universidad de la República, Uruguay)
    Abstract: By using a bunching design on rich administrative tax records from Uruguay's tax agency we explore how individual taxpayers respond to personal income taxation in a context with high sheltering opportunities. We estimate a moderated elasticity of taxable income in the first kink point (0.16) driven by a combination of gross labor income and deductions responses. Taxpayers use personal deductions more intensively close to the kink point and undereport income unilaterally or through employer-employee collusion. Our results suggest that policy efforts should be directed at broadening the tax base and improving the enforcement capacities rather than eroding tax progressivity.
    Keywords: deductions behavior, elasticity of labor income, tax bunching, personal income taxation, misreporting, developing economies
    JEL: H21 H24 H30 J22
    Date: 2019–04
  6. By: Chari, V. V. (Federal Reserve Bank of Minneapolis); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis); Teles, Pedro (Banco de Portugal)
    Abstract: We use the Ramsey and Mirrlees approaches to study how fiscal and trade policy should be set cooperatively when governments must raise revenues with distorting taxes. Free trade and unrestricted capital mobility are optimal. Efficient outcomes can be implemented with taxes only on final consumption goods and labor income. We study alternative tax systems, showing that uniform taxation of household asset returns, and not taxing corporate income yields efficient outcomes. Border adjustments exempting exports from and including imports in the tax base are desirable. Destination and residence based tax systems are desirable compared to origin and source based systems.
    Keywords: Capital income tax; Free trade; Value-added taxes; Border adjustment; Origin- and destination-based taxation; Production efficiency
    JEL: E60 E61 E62
    Date: 2019–04–18
  7. By: Serhan Cevik; Fedor Miryugin
    Abstract: This paper investigates the impact of taxation on firm survival, using hazard models and a large-scale panel dataset on over 4 million nonfinancial firms from 21 countries over the period 1995–2015. We find ample evidence that a lower level of effective marginal tax rate improves firms’ survival chances. This result is not only statistically but also economically important and remains robust when we partition the sample into country subgroups. The effect of taxation on firms’ survival probability is found to exhibit a non-linear pattern and be stronger in developing countries than advanced economies. These findings have important policy implications for the design of corporate tax systems. The challenge is not simply reducing the statutory tax rate, but to level the playing field for all firms by rationalizing differentiated tax treatments across sectors, asset types and sources of financing.
    Date: 2019–04–19
  8. By: Aronsson, Thomas; Johansson-Stenman, Olof; Wendner, Ronald
    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: 2019–04–18
  9. By: Estian Calitz (Emeritus Professor, Department of Economics, Stellenbosch University)
    Abstract: Developing countries are often advised to broaden their tax base. The South African fiscal authorities have at various times claimed to do so, inter alia in order to reduce tax rates. The paper explores whether they have been serious about base broadening. Various conceptual issues are raised in defining base broadening and base erosion. Drawing on budget documentation, tax measures of base broadening and erosion from 1994 to 2018 were tabulated. A selection of the most salient nonquantified measures and all quantified measures are presented. Net budgeted base broadening (2018 prices) of R1.7 billion is reported, in the process of which various tax increases and decreases were also implemented. The need for a much more systematic quantification of all base-broadening and base-erosion tax measures in South Africa is indicated. This should not only occur at the time of announcement but especially to track and report the actual outcome of all such measures in subsequent years.
    Keywords: Tax base broadening, Tax efficiency, Tax base erosion, Tax evasion and avoidance, Tax measures, South African fiscal authorities
    JEL: H20 H21 H26
    Date: 2019
  10. By: Wolfram F. Richter
    Abstract: The OECD seeks to align transfer pricing and profit taxation with value creation but fails to provide a clear definition. This paper argues that value creation requires international cooperation and that the profit tax base should therefore be allocated according to standards commonly considered as fair when distributing the surplus of cooperation. The claim that current rules of international profit taxation are aligned with value creation is rejected. If anything, the OECD’s objective suggests a tax system in which profits are split between the involved jurisdictions. This result triggers the question of possible implementation which is discussed in some detail.
    Keywords: international corporate income taxation, intellectual property, value creation, Shapley value, profit splitting
    JEL: H25 F23 M48
    Date: 2019
  11. By: Been-Lon Chen; Hung-Ju Chen; Ping Wang
    Abstract: In a second-best optimal growth setup with only factor taxes, it is in general optimal to fully replace capital by labor income taxation in the long run. We revisit this important issue by developing a human capital-based endogenous growth model with frictional labor search, allowing each firm to create multiple vacancies and each worker to determine market participation. We find that the conventional efficient bargaining condition is necessary but not sufficient for achieving constrained social optimality. We then conduct tax incidence exercises in balanced growth by calibrating to the U.S. economy with a pre-existing 20% flat tax on capital and labor income. Our quantitative results suggest that, due to a dominant channel via the interactions between vacancy creation and market participation, it is optimal to switch only partially from capital to labor taxation in a benchmark economy where human capital formation depends on both physical and human capital stocks. This main finding is robust even along the transition with time-varying factor tax rates. Moreover, our quantitative analysis under alternative setups suggest that while endogenous human capital and labor market frictions are essential for obtaining a positive optimal capital tax, endogenous leisure, nonlinear human capital accumulation and endogenous growth are not crucial.
    JEL: E62 H22 J24 O41
    Date: 2019–04
  12. By: Tomomi Miyazaki (Graduate School of Economics, Kobe University); Motohiro Sato (Graduate School of Economics, Hitotsubashi University)
    Abstract: It is often said that farmland conservation in urban areas (i.e., cities and inner suburbs) is not desirable because it hinders converting farmland into residential areas, thereby deterring urbanization. If the preferential treatment of property taxes on farmland is rectified, these problems can be solved. In this paper, we study two property tax preferential treatment reforms that took place in Japan during the 1990s. We examine the effects of these reforms by theoretical and empirical investigation. The econometric results are consistent with our theoretic model’s main predictions; the proportion of farmland in the major cities in the three metropolitan areas (Tokyo, Chubu, and Kansai) decreased following the reforms. However, since landlords did not replace all the farmland with housing lots, the problem of obstructed urbanization remains to be solved.
    Keywords: Property tax; Land use in urban area; preferential treatment on farmland; urbanization
    JEL: H22 H71 R52 R58
    Date: 2019–04
  13. By: Stefan Steinerberger; Aleh Tsyvinski
    Abstract: We demonstrate how a static optimal income taxation problem can be analyzed using dynamical methods. Specifically, we show that the taxation problem is intimately connected to the heat equation. Our first result is a new property of the optimal tax which we call the fairness principle. The optimal tax at any income is invariant under a family of properly adjusted Gaussian averages (the heat kernel) of the optimal taxes at other incomes. That is, the optimal tax at a given income is equal to the weighted by the heat kernels average of optimal taxes at other incomes and income densities. Moreover, this averaging happens at every scale tightly linked to each other providing a unified weighting scheme at all income ranges. The fairness principle arises not due to equality considerations but rather it represents an efficient way to smooth the burden of taxes and generated revenues across incomes. Just as nature wants to distribute heat evenly, the optimal way for a government to raise revenues is to distribute the tax burden and raised revenues evenly among individuals. We then construct a gradient flow of taxes -- a dynamic process changing the existing tax system in the direction of the increase in tax revenues -- and show that it takes the form of a heat equation. The fairness principle holds also for the short-term asymptotics of the gradient flow, where the averaging is done over the current taxes. The gradient flow we consider can be viewed as a continuous process of a reform of the nonlinear income tax schedule and thus unifies the variational approach to taxation and optimal taxation. We present several other characteristics of the gradient flow focusing on its smoothing properties.
    Date: 2019–04
  14. By: Krebs, Tom (Federal Reserve Bank of Minneapolis); Scheffel, Martin (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: 2019–02–01
  15. By: Priyaranjan Jha; Giray Gozgor
    Abstract: We construct a theoretical model to capture the compensation and efficiency effects of globalization in a set up where the redistributive tax rate is chosen by the median voter. The model predicts that the two alternative modes of globalization- trade liberalization and financial openness- could potentially have different effects on taxation. We then provide some empirical evidence on the relationship between taxation and the alternative modes of globalization using a large cross-country panel data set. On average, globalization is associated with lower taxation but there is some evidence that in countries with high capital-labor ratio, globalization is associated with increased taxation. We make a distinction between de jure and de facto measures of globalization and find a strong negative relationship between taxation and de jure measures of globalization. The results for de facto measures of globalization are mixed.
    Keywords: trade liberalization, capital market openness, redistributive taxation, median voter
    JEL: F11 F21 H11
    Date: 2019
  16. By: José G. Montalvo (Universitat Pompeu Fabra-ICREA, BGSE); Amedeo Piolatto (Universitat Autònoma de Barcelona, Institut d’Economia de Barcelona (IEB), BGSE, MOVE); Josep Raya (Universitat Pompeu Fabra, ESCSE (Tecnocampus))
    Abstract: We model the behaviour of a buyer trying to evade the real estate transfer tax. We identify over-appraisal as a key, easily-observable element that is inversely related with tax evasion. We conclude that the tax authority could focus auditing efforts on low-appraisal transactions. We include ‘behavioural’ components (shame and stigma) allowing to introduce buyers' (education) and societal (social capital) characteristics that explain individual and idiosyncratic variations. Our empirical analysis confirms the predictions using a unique database, where we directly observe: real payment, value declared to the authority, appraisal, buyers' educational level and local levels of corruption and trust.
    Keywords: Transfer tax, tax evasion, second-hand housing market, overappraisal, Loan-To-Value, corruption, social capital, stigma, shame, education
    JEL: G21 H26 R21
    Date: 2019
  17. By: Antonio Andrés Bellofatto; Martin Besfamille
    Abstract: In assessing the desirability for tax decentralization reforms, a dilemma between efficiency and redistribution emerges. By limiting the ability of the central government to redistribute resources towards regions in financial needs, decentralization curbs incentives for excessive subnational spending and enhances fiscal discipline, but may also widen interregional disparities by triggering tax competition for mobile tax bases. We provide a formal treatment of this trade-off, and shed light on the optimal degree of fiscal decentralization. We find that tax decentralization can be optimal even under Rawlsian social preferences which only weight the welfare of the poorest region in the federation.
    Keywords: fiscal federalism, tax competition, regional disparities
    JEL: H77
    Date: 2019
  18. By: Jena, Pratap Ranjan (National Institute of Public Finance and Policy)
    Abstract: The paper assesses the remarkable success story of State of Odisha in making fiscal correction after adopting the fiscal rules and the policy responses. The degree of correction was one of the highest among the Indian States. The tradeoff between fiscal restraint and the development priorities assumes significance as a relatively economically weak State like Odisha maintained a very low-deficit regime by limiting the public spending for a long time. The paper highlights that while fiscal discipline improves the ability of the Government to prioritize among policy choices and improve operational management, strict imposition of self-restraint and large adjustments may lead to distortions. After a decade of controlled fiscal management, as the State has started opening up by expanding the public spending, the shrinking fiscal space, slow growth of internal revenue, and high dependence on Central funds present new challenges. The paper examines the institutional reforms in this context to address emerging fiscal architecture.
    Keywords: Sub-national fiscal policy ; fiscal federal system ; Fiscal rules ; Budgeting system ; Medium term perspective
    JEL: H61 H72 H77 E61
    Date: 2019–05
  19. By: Mukherjee, Sacchidananda (National Institute of Public Finance and Policy)
    Abstract: During 2001-16, State Finances in India have undergone significant changes in both revenue mobilization and controlling expenditures which helped states to contain deficits (revenue as well as fiscal). Introduction of Value Added Tax (VAT) helped states to augment revenue mobilization whereas adoption of Fiscal Responsibility Budget Management (FRBM) Act helped states in prudential fiscal management. During the period, the improvement in union finances was not as good as state finances. There were two significant shocks to Indian public finances during 2001-16 - firstly, introduction of pay revision for the union as well as majority state government employees, in response to recommendations of the Sixth Central Pay Commission and secondly, global financial crisis (2008-09). States experienced revenue shocks mostly through fall in states' share in central taxes and a mild fall in own tax revenue mobilization during 2008-10. Higher pressure on revenue expenditure due to implementation of the pay commission recommendations (including revision of pensions and payment of arrears) and falling share in central taxes resulted in rise in revenue deficits for states during 2008-10. As a strategy to combat fiscal shocks, different states adopted different measures and some of the measures have inter-temporal implications. The objective of the present paper is to assess the impact of the shocks in Indian public finances and identify challenges for the times to come. Though increasing revenue (`front loading') and reducing expenditure (`back loading') are common responses to any fiscal shock, understanding inter-temporal implications of those responses with specific to changing structure of inter-governmental fiscal transfers could be an interesting exercise.
    Keywords: Indian Public Finance ; Indian State Finances ; Fiscal spillover ; Fiscal Management ; Revenue mobilization ; inter-governmental fiscal relationship ; Revenue Deficit ; Fiscal Deficit
    JEL: H20 H12 H71 H77
    Date: 2019–05
  20. By: Kazuki Hiraga; Kengo Nutahara
    Abstract: This study shows that the shape of the tax revenue curve for consumption tax and its boundedness are sensitive to (i) the functional form of utility and (ii) the use of tax revenue in a neoclassical general equilibrium model. The tax revenue curve for consumption tax cannot be hump-shaped if the utility function is King- Plosser-Rebelo utility with constant labor supply elasticity. Conversely, the curve can be hump-shaped if the utility function is additively separable in consumption and labor supply or if the utility function is Greenwood-Hercowitz-Huffman, both of which are popular in the literature. The use of tax revenue also has significant effects on the tax revenue curve for consumption tax. If the tax revenue is mainly used as a lump-sum transfer to households, Then the tax revenue is likely to be unbounded, whereas it is likely to be bounded and the tax revenue curve is likely to be hump-shaped if the tax revenue is mainly used as government consumption.
    Date: 2019–02

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