nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒05‒27
sixteen papers chosen by
Thomas Andrén

  1. The Rise and Decline of Private Foundations as Controlling Owners of Swedish Listed Firms: The Role of Tax Incentives By Henrekson, Magnus; Johansson, Dan; Stenkula, Mikael
  2. Simulating U.S. Business Cash Flow Taxation in a 17-Region Global Model By Seth G. Benzell; Laurence J. Kotlikoff; Guillermo Lagarda; Yifan Ye
  3. Should We Tax Sugar-Sweetened Beverages? An Overview of Theory and Evidence By Hunt Allcott; Benjamin Lockwood; Dmitry Taubinsky
  4. Public good provision financed by nonlinear income tax under reduction of envy By Takuya Obara; Shuichi Tsugawa
  5. Efficient taxation of fuel and road use By Geir H. M. Bjertnæs
  6. The Political Economy of the Taxation of Individuals in North Cyprus By Amin Sokhanvar; Hasan Ulas Altiok; Glenn P. Jenkins
  7. Regressive Sin Taxes, With an Application to the Optimal Soda Tax By Hunt Allcott; Benjamin Lockwood; Dmitry Taubinsky
  8. Introduction of a standard tax deduction for taxpayers with low incomes By Gorlin, Yuriy (Горлин, Юрий); Grishina, Elena (Гришина, Елена); Galieva, Nadezhda (Галиева, Надежда); Kartseva, Marina (Карцева, Марина); Fedorov, Vitaliy (Федоров, Виталий)
  9. The Optimal Turnover Threshold and Tax Rate for SMEs By Feng Wei; Jean-François Wen
  10. Tax pass-through in the European beer market By Aria Ardolan; Sebastian G. Kessing
  11. How to Improve Tax Compliance? Evidence from Population-wide Experiments in Belgium By De Neve, Jan-Emmanuel; Imbert, Clement; Spinnewijn, Johannes; Tsankova, Teodora; Luts, Maarten
  12. The Motives to Borrow By Fatás, Antonio; Ghosh, Atish; Panizza, Ugo; Presbitero, Andrea
  13. The Value Added Tax and Growth: Design Matters By Santiago Acosta Ormaechea; Atsuyoshi Morozumi
  14. Making Carbon Taxation A Generational Win Win By Laurence J. Kotlikoff; Felix Kubler; Andrey Polbin; Jeffrey D. Sachs; Simon Scheidegger
  15. Macroeconomic effects of capital tax rate changes By Saroj Bhattarai; Jae Won Lee; Woong Yong Park; Choongryul Yang
  16. Targeting Disability Insurance Applications with Screening By Mathilde Godard; Pierre Koning; Maarten Lindeboom

  1. By: Henrekson, Magnus (Research Institute of Industrial Economics (IFN)); Johansson, Dan (Örebro University School of Business); Stenkula, Mikael (Research Institute of Industrial Economics (IFN))
    Abstract: Private foundations became a vehicle for the corporate control of large listed firms in Sweden during the post-war era, but in the 1990s, they were replaced by wealthy individuals who either directly own controlling blocks or who own them through holding companies. We study potential explanations for this change and pro­pose two taxation-related candidates: shifts in the relative effective taxation across owner types and the dismantling of the inheritance taxation that prevented the genera­tional transfer of the ownership of large controlling blocks. Our analysis exploits newly computed marginal effective capital income tax rates across capital owners, accounting for all relevant factors, including rules governing tax exemptions. We show that the 1990–91 tax reform, abolition of the wealth tax for controlling owners in 1997, 2003 tax exemption of dividends and capital gains on listed stock for holding companies with a voting or equity share of at least 10 percent, and abolition of the inheritance and gift taxes in 2004 reversed the rules of the game. Recently, control has largely been wielded through direct ownership, and the role of foundations is rapidly declining. These find­ings point to the importance of tax incentives for the use of foundations as the control vehicles of listed firms.
    Keywords: Corporate governance; Entrepreneurship; Family firms; Foundations; Owner-level taxation
    JEL: H20 K34 L26 N44
    Date: 2019–05–20
  2. By: Seth G. Benzell (Boston University and MIT Initiative on the Digital Economy); Laurence J. Kotlikoff (Boston University, The Gaidar Institute for Economic Policy, and NBER); Guillermo Lagarda (Boston University and Inter-American Development Bank); Yifan Ye (Boston University)
    Abstract: This paper uses the Global Gaidar Model to simulate replacing a territorial corporate income tax with a wealth tax imposed in the form of a destination-based Business Cash Flow Tax. According to the model, the reform produces, over a decade, increases in the capital stock, GDP, and pre-tax wages for high- and low-skilled workers of 20.5 percent, 6.8 percent, 6.3 and 7.5 percent, respectively. Young workers benefit greatly from the change, and welfare loss for retirees is limited. The initially revenue neutral tax reform raises enough additional revenue over time to permit a reduction in personal income tax rates.
    Keywords: Corporate Tax Reform, House Tax Plan, Economic Growth, Business Cash Flow Tax, Computable General Equilibrium, wealth taxation
    JEL: F43 H20 H60
    Date: 2018–11
  3. By: Hunt Allcott; Benjamin Lockwood; Dmitry Taubinsky
    Abstract: Taxes on sugar-sweetened beverages are growing in popularity and have generated an active public debate. Are they a good idea? If so, how high should they be? Are such taxes regressive? People in the U.S. and some other countries consume remarkable quantities of sugar-sweetened beverages, and the evidence suggests that this generates significant health costs. Building on recent work by Allcott, Lockwood, and Taubinsky (Forthcoming) and others, we review the basic economic principles that determine the socially optimal SSB tax. The optimal tax depends on (1) externalities: uninternalized health system costs from diseases caused by sugary drink consumption; (2) internalities: costs consumers impose on themselves by consuming too many sugary drinks due to poor nutrition knowledge or lack of self-control; and (3) regressivity: how much the financial burden and the internality benefits from the tax fall on the poor. We summarize the empirical evidence about the key parameters affect how large the tax should be. In the theoretical framework of Allcott, Lockwood, and Taubinsky (Forthcoming), our calculations imply that sugar-sweetened beverage taxes are welfare enhancing, and indeed that the optimal nationwide SSB tax rate may be higher than the one cent per ounce rate most commonly used in U.S. cities. Using our theoretical framework, we end by deriving seven concrete implications for optimal SSB tax structure.
    JEL: D00 D6 D9 H0
    Date: 2019–05
  4. By: Takuya Obara; Shuichi Tsugawa
    Abstract: We examine optimal taxation and public good provision by a government that considers reduction of envy as a constraint. We adopt the extended envy-freeness proposed by Diamantaras and Thomson (1990), called λ-equitability. We derive the modified Samuelson rule under an optimal nonlinear income tax and show, using a constant elasticity of substitution utility function, that the direction of distorting the original Samuelson rule to relax the λ envy-free constraint is crucially determined by the elasticity of substitution. Furthermore, we numerically show that the optimal level of provision increases (decreases) in the degree of envy-freeness when the original Samuelson rule is upwardly (downwardly) distorted.
    Date: 2019–02
  5. By: Geir H. M. Bjertnæs (Statistics Norway)
    Abstract: This study calculates efficient taxes on fuel and road use designed to combat driving related externalities. The study shows that the efficient road user charge on fuel is below the marginal mileage-related damage to prevent tax avoidance due to an excessive economic driving-style. The current US tax rate on gasoline is way below the efficient tax rate while the current UK rate is slightly above the efficient rate in this case. The efficient tax on fuels exceeds the marginal damage of CO2- emissions to promote an economic driving-style when the tax is combined with a GPS-based tax on road use. The efficient GPS-based tax rate on road use is reduced below the marginal damage of mileage-related externalities in this case.
    Keywords: Transportation; optimal taxation; environmental taxation; global warming
    JEL: H2 H21 H23 Q58 R48
    Date: 2019–04
  6. By: Amin Sokhanvar (Department of Economics, Eastern Mediterranean University, North Cyprus); Hasan Ulas Altiok (Department of Banking and Finance,Eastern Mediterranean University, North Cyprus); Glenn P. Jenkins (Department of Economics, Queen's University, Kingston, Canada and Eastern Mediterranean University, North Cyprus)
    Abstract: The objective of this study is to undertake a diagnostic of the system of personal direct taxation and charges levied to fund social security and the provident fund in Northern Cyprus, using a database of all individual taxpayers. Particular attention was given to the assessment of marginal tax rates on labor income and their possible effect on fiscal compliance. It was found that the tax system itself, and its interaction with the social security and provident fund systems, has created a powerful set of incentives for non-compliance. Top-income earning private-sector employees face a very high combined marginal fiscal burden. This has resulted in massive tax avoidance, such that most private employees pay no marginal income tax or social security/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 payments and provident fund contributions, and individual and corporate income tax dues. Very high marginal tax rates at low (by developed-country standards) levels of income 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
  7. By: Hunt Allcott; Benjamin Lockwood; Dmitry Taubinsky
    Abstract: A common objection to “sin taxes”—corrective taxes on goods that are thought to be overconsumed, such as cigarettes, alcohol, and sugary drinks—is that they often fall disproportionately on low-income consumers. This paper studies the interaction between corrective and redistributive motives in a general optimal taxation framework and delivers empirically implementable sufficient statistics formulas for the optimal commodity tax. The optimal sin tax is increasing in the price elasticity of demand, increasing in the degree to which lower-income consumers are more biased or more elastic to the tax, decreasing in the extent to which consumption is concentrated among the poor, and decreasing in income effects, because income effects imply that commodity taxes create labor supply distortions. Contrary to common intuitions, stronger preferences for redistribution can increase the optimal sin tax, if lower-income consumers are more responsive to taxes or are more biased. As an application, we estimate the optimal nationwide tax on sugar-sweetened beverages in our model, using Nielsen Homescan data and a specially designed survey measuring nutrition knowledge and self-control. Holding federal income tax rates constant, we find an optimal federal sugar-sweetened beverage tax of 1 to 2.1 cents per ounce in our model, although optimal city-level taxes could be as much as 60% lower due to cross-border shopping.
    JEL: D9 H0 I1
    Date: 2019–05
  8. By: Gorlin, Yuriy (Горлин, Юрий) (The Russian Presidential Academy of National Economy and Public Administration); Grishina, Elena (Гришина, Елена) (The Russian Presidential Academy of National Economy and Public Administration); Galieva, Nadezhda (Галиева, Надежда) (The Russian Presidential Academy of National Economy and Public Administration); Kartseva, Marina (Карцева, Марина) (The Russian Presidential Academy of National Economy and Public Administration); Fedorov, Vitaliy (Федоров, Виталий) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: One of the most common tools in most countries aimed at reducing income inequality is the tax policy instruments, including the standard tax deduction (non-taxable minimum), which to some extent can contribute to the reduction of poverty. A standard tax deduction, increasing disposable income, to some extent can contribute to poverty reduction.There is currently no such deduction in the Russian Federation. The work substantiates the expediency of introducing in Russia a standard tax deduction on personal income tax for low-income workers. This work analyzes various options for the provision of tax deduction, gives an estimate of falling budget revenues in the whole of the Russian Federation and for individual subjects of the Russian Federation. The possible ways to compensate for the reduction of tax revenues are considered.
    Date: 2019–04
  9. By: Feng Wei; Jean-François Wen
    Abstract: Presumptive income taxes in the form of a tax on turnover for SMEs are pervasive as a way to reduce the costs of compliance and administration. We analyze a model where entrepreneurs allocate labor to the formal and informal sectors. Formal sector income is subjected either to a corporate income tax or a tax on turnover, depending on whether their turnover exceeds a threshold. We characterize the private sector equilibrium for any given configuration of tax policy parameters (corporate income tax rate, turnover tax rate, and threshold). Given private behavior, social welfare is optimized. We interpret the first-order conditions for welfare maximization to identify the key margins and then simulate a calibrated version of the model.
    Date: 2019–05–07
  10. By: Aria Ardolan; Sebastian G. Kessing
    Abstract: We study the pass-through of indirect taxes on beer prices in the European Union (EU). Exploiting the variation of value added tax rates, beer excise tax rates, and beer prices in a panel of monthly data from 1996 to 2016 of all current 28 EU member states, we estimate the tax pass-through of specific beer excise taxes and ad valorem value added taxes (VAT). VAT is under-shifted at a rate of approximately 70%. Specific excise taxes are almost fully shifted to prices in the EU, but, in contrast to the empirical findings for the US, there is no evidence of over-shifting. The difference between the two tax pass-through rates points towards the importance of imperfect competition in the European beer market. Excise tax increases are passed through faster and at a higher rate than excise tax decreases.
    Keywords: tax incidence, pass-through, VAT, excise taxes, EU, beer
    JEL: H22 H23
    Date: 2019
  11. By: De Neve, Jan-Emmanuel (University of Oxford); Imbert, Clement (University of Warwick); Spinnewijn, Johannes (London School of Economics); Tsankova, Teodora (University of Warwick); Luts, Maarten (FPS Finance)
    Abstract: We study the impact of deterrence, tax morale, and simplifying information on tax compliance. We ran five experiments spanning the tax process which varied the communication of the tax administration with all income taxpayers in Belgium. A consistent picture emerges across experiments: (i) simplifying communication increases compliance, (ii) deterrence messages have an additional positive effect, (iii) invoking tax morale is not effective. Even tax morale messages that improve knowledge and appreciation of public services do not raise compliance. In fact, heterogeneity analysis with causal forests shows that tax morale treatments backfire for most taxpayers. In contrast, simplification has large positive effects on compliance, which diminish over time due to follow-up enforcement. A discontinuity in enforcement intensity, combined with the experimental variation, allows us to compare simplification with standard enforcement measures. Simplification is far more cost-effective, allowing for substantial savings on enforcement costs, and also improves compliance in the next tax cycle
    Keywords: Tax Compliance ; Field Experiments ; Simplification ; Enforcement
    JEL: C93 D91 H20
    Date: 2019
  12. By: Fatás, Antonio; Ghosh, Atish; Panizza, Ugo; Presbitero, Andrea
    Abstract: Governments issue debt for good and bad reasons. While the good reasons-intertemporal tax-smoothing, fiscal stimulus, and asset management-can explain some of the increases in public debt in recent years, they cannot account for all of the observed changes. Bad reasons for borrowing are driven by political failures associated with intergenerational transfers, strategic manipulation, and common pool problems. These political failures are a major cause of overborrowing. Budgetary institutions and fiscal rules can play a role in mitigating governments' tendencies to overborrow. While it is difficult to establish a clear causal link from high public debt to low output growth, it is likely that some countries pay a price-in terms of lower growth and greater output volatility-for excessive debt accumulation.
    Keywords: Fiscal policy; political economy; public debt
    JEL: E62 H62 H63 P16
    Date: 2019–05
  13. By: Santiago Acosta Ormaechea; Atsuyoshi Morozumi
    Abstract: Does the design of a tax matter for growth? Assembling a novel dataset for 30 OECD countries over the 1970-2016 period, this paper examines whether the value added tax (VAT) may have different effects on long-run growth depending on whether it is raised through the standard rate or through C-efficiency (a measure of the departure of the VAT from a perfectly enforced tax levied at a single rate on all consumption). Our key findings are twofold. First, for a given total tax revenue, a rise in the VAT, financed by a fall in income taxes, promotes growth only when the VAT is raised through C-efficiency. Second, for a given VAT revenue, a rise in Cefficiency, offset by a fall in the standard rate, also promotes growth. The implication is thus that in OECD countries broadening the VAT base through fewer reduced rates and exemptions is more conducive to higher long-run growth than a rise in the standard rate.
    Date: 2019–05–07
  14. By: Laurence J. Kotlikoff (Boston University and NBER); Felix Kubler (University of Zurich and Swiss Financial Institute); Andrey Polbin (The Russian Presidential Academy of National Economy and Public Administration and The Gaidar Institute for Economic Policy); Jeffrey D. Sachs (Columbia University and NBER); Simon Scheidegger (University of Lausanne)
    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 largescale, 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
  15. By: Saroj Bhattarai; Jae Won Lee; Woong Yong Park; Choongryul Yang
    Abstract: We study aggregate, distributional, and welfare effects of a permanent reduction in the capital tax rate in a dynamic equilibrium model with capital-skill complementarity. Such a tax reform leads to expansionary long-run aggregate effects, but is coupled with an increase in the skill premium. Moreover, the expansionary long-run aggregate effects are smaller when distortionary labor or consumption tax rates have to increase to finance the capital tax rate cut. An extension to a model with heterogeneous households shows that consumption inequality increases in the long-run. We study transition dynamics and show that short-run effects depend critically on the monetary policy response: whether the central bank allows inflation to directly facilitate government debt stabilization and how inertially it raises interest rates. Finally, we contrast the long-term aggregate welfare gains with short-term losses, as well as in the model with heterogeneous households, show that welfare gains for the skilled go together with welfare losses for the unskilled.
    Keywords: capital tax rate, permanent change in the tax rate, capital-skill complementarity, skill premium, inequality, transition dynamics, monetary policy response
    JEL: E62 E63 E52 E58 E31
    Date: 2019
  16. By: Mathilde Godard (University of Lyon); Pierre Koning (Vrije Universiteit Amsterdam); Maarten Lindeboom (Vrije Universiteit Amsterdam)
    Abstract: We examine the targeting effects of increased scrutiny in the screening of Disability Insurance (DI) applications using exogenous variation in screening induced by a policy reform. The reform raised DI application costs and revealed more information about the true disability status of applicants at the point of the award decision. We use administrative data on DI claims and awards and merge these with other administrative data on hospitalization, mortality and labor market outcomes. Regression Discontinuity in Time (RDiT) regressions show substantial declines in DI application rates and changes in the composition of the pool of applicants. We find that the health of those who are not discouraged from applying is worse than those who are. This suggests that the pool of applicants becomes more deserving. At the same time, compared with those who did not apply under the old system of more lax screening, those who are discouraged from applying are in worse health, have substantially lower earnings and are more often unemployed. This indicates that there are spillovers of the DI reform to other social insurance programs. As we do not find additional screening effects on health at the point of the award decision, we conclude that changes in the health condition of the pool of awarded applicants are fully driven by self-screening of (potential) applicants.
    Keywords: Disability Insurance, Screening, Composition effects, Targeting efficiency
    JEL: H2 I3
    Date: 2019–05–17

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