nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒05‒13
twelve papers chosen by
Thomas Andrén

  1. Compliance effects of risk-based tax audits By Knut Løyland; Oddbjørn Raaum; Gaute Torsvik; Arnstein Øvrum
  2. Fiscal redistribution in Brazil: Dynamic microsimulation, 2003–15 By Neri Marcelo; Siqueira Rozane; Nogueira José; Osorio Manuel
  3. The effect of top incomes on inequality in South Africa By Woolard Ingrid; Hundenborn Janina; Jellema Jon
  4. Who Benefits from Tax-Preferred Savings Accounts? By Steeve Marchand
  5. The economic impact and efficiency of state and federal taxes in Australia By Jason Nassios; John Madden; James Giesecke; Janine Dixon; Nhi Tran; Peter Dixon; Maureen Rimmer; Philip Adams; John Freebairn
  6. Taxing Identity: Theory and Evidence from Early Islam By Saleh, Mohamed; Tirole, Jean
  7. Modelling value-added tax (VAT) in South Africa: Assessing the distributional impact of the recent increase in the VAT rate and options for redress through the benefits system By Pirttilä Jukka; Barnes Helen; Wright Gemma; Noble Michael; Masekesa Faith; Gcabo Rebone; Moche Boitumelo; Steyn Wynnona; Moahlodi Boikhutso
  8. Microsimulation analysis of the impact of indirect tax benefits on income distribution and poverty alleviation in Tanzania: An application of TAZMOD By Asiya Maskaeva; Bochkaeva Zanda; Mmasa Joel; Msafiri Mgeni; Iramba Eric
  9. Learning from the ?best?: The impact of tax-benefit systems in Africa By Jara Xavier; Bargain Olivier; Kwenda Prudence; Ntuli Miracle
  10. Promoting education under distortionary taxation: Equality of opportunity versus welfarism By Haaparanta Pertti; Kanbur Ravi; Pirttilä Jukka; Paukkeri Tuuli; Tuomala Matti
  11. Top income adjustments and tax reforms in Ecuador By Jara Xavier; Oliva Nicolás
  12. Tax-benefit microsimulation model in developing countries: A feasibility study for an extension of SOUTHMOD in Indonesia By Muttaqien Arip; Sologon Denisa; O'Donoghue Cathal

  1. By: Knut Løyland; Oddbjørn Raaum; Gaute Torsvik; Arnstein Øvrum
    Abstract: Tax administrations use machine learning to predict risk scores as a basis for selecting individual taxpayers for audit. Audits detect noncompliance immediately, but may also alter future filing behavior. This analysis is the first to estimate compliance effects of audits among high-risk wage earners. We exploit a sharp audit assignment discontinuity in Norway based on individual tax payers risk score. Additional data from a random audit allow us to estimate how the audit effect vary across the risk score distribution. We show that the current risk score audit threshold is set far above the one that maximizes net public revenue.
    Keywords: tax audits, tax revenue, tax reporting decisions, income tax, machine learning, risk profiling
    JEL: D04 H26 H83
    Date: 2019
  2. By: Neri Marcelo; Siqueira Rozane; Nogueira José; Osorio Manuel
    Abstract: This paper assesses causes and consequences of fiscal redistribution in Brazil. The framework proposed allows evaluating in an integrated manner the impacts of government-sponsored actions in inequality and mean income changes on social welfare, addressing both static and dynamic implications.To the best of our knowledge, this is the first microsimulation attempt to gauge actual fiscal policy redistribution changes over time in Brazil. The study develops an empirical methodology that allows consistent comparisons among the years 1995, 2003, 2009, and 2015. We focus on disposable income changes between 2003 and 2015. In this period, the Gini index-based social welfare grew 4.86 per cent per year; that is, higher than the growth rates associated with both initial income (4.36 per cent) and final income (4.47 per cent), but not with gross income (4.91 per cent).The results suggest that official cash transfers accelerated the growth of social welfare while direct and indirect tax changes operated in the opposite direction. The model outcomes allow assessing the role played by specific fiscal instruments among various taxes and cash transfer programmes. The family grant programme was the best-targeted action in the 2003–15 period. Its contribution to the rise of social welfare is 2.7 times the contribution to the rise of mean income. If one compares family grant poverty impacts with the second best targeted cash transfer programme, each monetary unit spent generated a 119.73 per cent higher impact.
    Keywords: Redistribution,Taxes and transfers,Fiscal redistribution,Income inequality
    Date: 2018
  3. By: Woolard Ingrid; Hundenborn Janina; Jellema Jon
    Abstract: South Africa exhibits extreme levels of income inequality and is ranked as one of the most unequal countries in the world. In order to measure these severe levels of inequality, it matters how we account for the different parts of the income distribution.Although the approach has gained international attention, there has not been any attempt at combining tax administration data with household survey data in order to account for incomes at all parts of the distribution and especially from the top of the income distribution in South Africa.This paper uses a novel technique to identify the optimal method of combining tax administration with household survey data. Our results show the dramatic effects of accounting for reporting bias in household surveys by using tax administration data. When combining the two datasets, we find a significant decrease in overall inequality of taxable income in South Africa between 2011 and 2014, the two years under observation. Nonetheless, income inequality in South Africa remains high.For our analysis, we use two waves of the National Income Dynamics Study, a national representative household survey, and compare the information to a sample of almost 1.2 million records on personal income tax for the 2011 tax year and about one million records for the 2014 tax year.
    Keywords: Economic inequality,personal income tax,Income distribution
    Date: 2018
  4. By: Steeve Marchand
    Abstract: Many countries use tax-preferred saving accounts to incentivize individuals to save for retirement. The two main forms of tax-preferred saving accounts – TEE and EET – tax savings at the contribution and withdrawal years respectively. Thus the relative returns of the two savings vehicles depend on the effective marginal tax rates in these two years, which in turn depend on earning dynamics. This paper estimates a model of earning dynamics on a Canadian longitudinal administrative database containing millions of individuals, allowing for substantial heterogeneity in the evolution of income across income groups. The model is then used, together with a tax and credit calculator, to predict how the returns of EET and TEE vary across these groups. The results suggest that TEE accounts yield in general higher returns, especially for low-income groups. Comparing optimal saving choices predicted by the model with observed saving choices in the data suggests that EET are over-chosen, especially in the province of Quebec. These results have important implications for “nudging†policies that are currently being implemented in Quebec, forcing employers to automatically enrol their employees in savings accounts similar to EET. These could yield very low returns for low-income individuals, which are known to be the most sensitive to nudging.
    Keywords: Personal savings; Taxation; Public policy.
    JEL: D14 H24 J18 J26
    Date: 2018
  5. By: Jason Nassios; John Madden; James Giesecke; Janine Dixon; Nhi Tran; Peter Dixon; Maureen Rimmer; Philip Adams; John Freebairn
    Abstract: The Henry Review of Australia's Future Tax System (2009), made several recommendations to promote resilience, fairness, and prosperity via tax reform. Some of the key reforms suggested include a reduction in Australia's federally-imposed corporate income tax rate from 30 to 25 per cent; and the removal of property transfer duties levied by state governments. The review by Henry et al. (2009) utilised a long-run, comparative static computable general equilibrium (CGE) model of the Australian economy to study the tax system. Implicit within this framework is a single layer of government. In reality, Australia's state government levied tax rates differ across the eight states and territories; some, such as state land tax, health insurance and life insurance levies, are applied in a subset of states and territories only. A general lack of interstate coordination is evident in setting, developing and reforming Australian tax policy. In this paper, we present a meticulous and detailed analysis of Australia's state and federal tax system, using a bottom-up multi-regional CGE model of Australia's states and territories, called VURMTAX. The general framework underlying VURMTAX is similar to the Monash multi-regional forecasting (MMRF) model and its successor VURM; see Adams et al. (2015). A state/local government agent therefore operates within each region, with an overarching federal government agent operating across all state and territories. VURMTAX differs from MMRF/VURM in several ways. For example, we include new theory to model the interaction between Australia's corporate and personal tax system via full dividend imputation. This involves the introduction of two types of investment agents: foreign and local investors. In VURMTAX, the tax rate levied on corporate profits accruing to these two classes of investor differ, because only the domestic investor can claim franking credits. We also give careful consideration to industry-specific foreign capital ownership shares. This means the mining sector, for example, has a larger foreign capital ownership share than the economy-wide average in VURMTAX. We also modify the standard Klein-Rubin utility function that governs the consumption choices facing region-specific representative households in MMRF/VURM, to take account of important distortions in consumer choice caused by Australia's tax system. More specifically, we model the impact of housing tenure choice distortions introduced by owner-occupied housing exemptions in state land taxes and personal income tax, using a nested CES framework. The elasticity of substitution between rented and owner-occupied housing is then calibrated based on findings from an appropriately specified discrete choice model of housing tenure choice. We also alter the standard household decision theory to properly account for the impact of property transfer duties on the demand for the bundle of goods typically consumed by households or businesses when moving house or factory/office. We call this bundle of goods moving services. These services include real estate services contracted to sell a house/buy a property, legal services contracted to prepare necessary transfer forms, and public administration services that are demanded to formally update title office documents. We also account for the impact of motor vehicle taxes on transport modal choice by households. As such, when the motor vehicle registration duty is increased in VURMTAX, we allow for direct modal substitution between, e.g, road passenger transport (taxis), and private transport. Among other theoretical developments, we account for the impact of jurisdiction-specific payroll tax thresholds in Australia on the output levels of monopolistically competitive firms, which yields insights into whether a reduction in payroll tax rates or a rise in payroll tax thresholds are more effective means of stimulating a regional economy. We also embed within VURMTAX a detailed equation system to account for Australia's goods and services tax (GST). We apply this new theory to quantify: (i) the relative economic efficiency of unilateral state tax policy reforms in a single Australian state, New South Wales (NSW); (ii) the excess burden of Australia's three main federally-imposed taxes; and (iii) the broader macroeconomic, state and industry impacts of federal tax policy, and unilateral state tax policy, reforms. Our assessment of the relative efficiency of NSW state and Australian federal taxes yields a set of marginal and average excess burdens, which are summarised and discussed. In total, we calculate excess burdens for nineteen major Australian taxes, of which sixteen are levied at the state/local government level. In addition to our study of the allocative efficiency impacts of the various state and federal taxes, detailed long-run (21 years postreform) results are provided and described, to quantify the economic and industry effects of Australian tax policy reforms. With regard to state taxes, we find residential property transfer duties to be the most damaging of the state government levied taxes. More specifically, we derive a marginal excess burden for residential property transfer duties that exceeds 100 cents per dollar of revenue raised. Contrary to many past studies of Australia's tax system, we also derive a negative marginal excess burden for company tax in Australia. We compare and contrast this result to past studies, and elucidate some key differences in parameter assumptions and modelling methodology that drive this result.
    Keywords: Taxation policy CGE modelling Dynamics Excess burden
    JEL: C68 E20 E62 H2
    Date: 2019–04
  6. By: Saleh, Mohamed; Tirole, Jean
    Abstract: A ruler who does not identify with a social group, whether on religious, ethnic, cultural or socioeconomic grounds, is confronted with a trade-off between taking advantage of the out-group population's eagerness to maintain its identity and inducing it to ``comply'' (conversion, quit, exodus or any other way of accommodating the ruler's own identity). This paper first analyzes the ruler's optimal mix of discriminatory and non-discriminatory taxation, both in a static and an evolving environment. The paper then uses novel data sources to test the theory in the context of Egypt's conversion to Islam between 641 and 1200. The evidence is broadly consistent with the theoretical predictions.
    Keywords: identity taxation; Islam; Laffer Curve; Legitimacy; Poll tax
    JEL: D82 H2 N45 Z12
    Date: 2019–04
  7. By: Pirttilä Jukka; Barnes Helen; Wright Gemma; Noble Michael; Masekesa Faith; Gcabo Rebone; Moche Boitumelo; Steyn Wynnona; Moahlodi Boikhutso
    Abstract: Using SAMOD, a tax-benefit microsimulation model for South Africa, this paper examines the joint distributional impact of the increase in the value-added tax (VAT) rate and increases in benefit amounts in 2018. Although poverty and inequality did not increase overall, the poorest still saw a reduction in their purchasing power, as many of those in the lowest decile do not receive any social benefits.The paper then explores the consequences of eliminating zero-rating in VAT and using the generated revenues to finance new social benefits. The results suggest that a policy package of a uniform VAT and an expanded set of social benefits would lead to reduced poverty and inequality in comparison to the current practice of zero rating of some consumption goods in the VAT.The findings demonstrate the superiority of using direct taxes and benefits as opposed to provisions in indirect taxes in achieving redistribution.
    Keywords: microsimulation,Redistribution,value-added tax,Poverty
    Date: 2019
  8. By: Asiya Maskaeva; Bochkaeva Zanda; Mmasa Joel; Msafiri Mgeni; Iramba Eric
    Abstract: This paper analyses the impacts of indirect tax policy reforms on income distribution and poverty in Tanzania by applying a standard static microsimulation model TAZMOD v1.8. The simulations model two indirect tax reforms involving changes to the excise duty and value-added tax rates on alcoholic beverages and tobacco products, and changes to employers’ and employees’ contributions to the National Health Insurance Fund.The results of the first reform find a positive effect on government tax revenue and a neutral effect on income distribution and poverty. The results of the second reform find a positive effect on household income distribution and consumption. The findings show that, despite increasing unequal income distribution, poverty indicators fell.
    Keywords: microsimulation,SOUTHMOD,Tax policy reform,Tax-benefit microsimulation,TAZMOD,Income distribution
    Date: 2019
  9. By: Jara Xavier; Bargain Olivier; Kwenda Prudence; Ntuli Miracle
    Abstract: Redistributive systems in Africa are still in their infancy but are constantly expanding in order to finance increasing public spending. This paper aims at characterizing the redistributive potential of six African countries: Ghana, Zambia, Mozambique, Tanzania, Ethiopia, and South Africa.These countries show contrasted situations in terms of income distribution. We assess the role of tax-benefit systems to explain these differences. Using newly developed tax-benefit microsimulations for all six countries, we produce counterfactual simulations whereby the system of the most (least) redistributive country is applied to the population of all other countries.In this way, we can decompose the total country difference in income distribution between the contribution of tax-benefit policies versus the contribution of other factors (market income distributions, demographics, etc.).This analysis contributes to the recent literature on the redistributive role of socio-fiscal policies in developing countries and highlights the role of microsimulation techniques to characterize how different African countries can learn from each other to improve social protection and reduce inequality.
    Keywords: microsimulation,Tax-benefit microsimulation,tax-benefit policy,Inequality,Poverty
    Date: 2019
  10. By: Haaparanta Pertti; Kanbur Ravi; Pirttilä Jukka; Paukkeri Tuuli; Tuomala Matti
    Abstract: How does the public provision of education and the deployment of distortionary tax and subsidy instruments differ when the government’s objective is conventional welfarist compared to when the objective is the non-welfarist one of equality of opportunity?This paper develops a framework in which the tax and provision rules in the two settings can be easily compared and contrasted. A range of results are derived which help to answer questions such as whether it is the case that progressive taxation is not used at all under opportunities-based objectives. We show that progressive taxation still plays a role in achieving the objective of equal opportunities, and illustrate how its use may differ under the two objectives.We also show how the provision of public education depends on how private education choices respond, especially the differential responses by higher- and lower-income families. These themes reflect concerns in the policy discourse, and our framework provides an entry point into a systematic exploration of a broad range of issues in comparing the consequences of welfarist and equality of opportunity objectives.
    Keywords: Public goods provisions,Income tax,Economic inequality,Educational subsidies,equality of opportunity
    Date: 2019
  11. By: Jara Xavier; Oliva Nicolás
    Abstract: Top income under-coverage in developing countries not only leads to downward biased inequality indicators but might also affect the ex-ante evaluation of progressive tax reforms.We propose a simple adjustment to top incomes for formal employees (e.g. employees affiliated with social security) in survey data from Ecuador based on information from administrative tax records. ECUAMOD, the tax-benefit microsimulation model for Ecuador, is then used to compare income inequality, total tax revenue, and work incentives with and without top income adjustment under the baseline tax-benefit system and for a hypothetical income tax reform.Our study shows that adjusting top incomes in survey data allows us to capture 98 per cent of income tax revenue in our simulations. Moreover, income inequality measured by the Gini coefficient increases by 3 points following the adjustments of top incomes. The evaluation of our progressive tax reform shows that our baseline results with unadjusted top income data capture well the percentage change in tax revenue but underestimate the additional tax revenue amount by 22 per cent.We conclude with a discussion of the challenges to combine survey data and tax records in developing countries.
    Keywords: Survey data,Tax data,Tax reforms,Top incomes
    Date: 2018
  12. By: Muttaqien Arip; Sologon Denisa; O'Donoghue Cathal
    Abstract: This study aims to expand the use of tax-benefit microsimulation tools in Indonesia. In particular, it reviews the feasibility of expanding SOUTHMOD, a tax-benefit microsimulation model being applied in developing countries that was developed based on the European Union tax-benefit microsimulation tool (EUROMOD) framework.First, the study reviews the tax and benefits system in Indonesia, followed by an explanation of possible data set and data requirements for simulation. Two potential sources of data are the fifth round of the Indonesia Family Life Survey and the National Socio-Economic Survey.Despite advantages and disadvantages to each, the results of the feasibility study show that both data sets could support the extension of the microsimulation model. This extension should be adjusted to the conditions of the data. For instance, we can focus on simulating indirect taxes, which are more relevant as they represent one of the core revenue sources in developing countries.
    Keywords: microsimulation,SOUTHMOD,Tax-benefit microsimulation,EUROMOD
    Date: 2018

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