nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒06‒17
twelve papers chosen by
Thomas Andrén

  1. Behavioural responses to the (re)introduction of wealth taxes. Evidence from Spain By José María Durán-Cabré; Alejandro Esteller-Moré; Mariona Mas-Montserrat
  2. Generational Conflict and Education Politics: Implications for Growth and Welfare By Yuki Uchida; Tetsuo Ono
  3. The costs of taxation in the presence of inequality By Åsmund Sunde Valseth; Katinka Holtsmark; Bjart Holtsmark
  4. Corporate tax and location choice for multinational firms By Lawless, Martina; McCoy, Daire; Morgenroth, Edgar L. W.; O’Toole, Conor M.
  5. "Back-Loaded" Tax Subsidies for Saving, Asset Location and Crowd-Out: Evidence from Tax-Free Savings Accounts By Adam M. Lavecchia
  6. Tax Policy for Innovation By Bronwyn H Hall
  7. Optimal Redistributive Taxation in Credit Markets with Adverse Selection By Anastasios Dosis
  8. Sovereign Default and Imperfect Tax Enforcement By Francesco Pappadà; Yanos Zylberberg
  9. Will the Polish pension system go bankrupt? By Jakub Sawulski; Iga Magda; Piotr Lewandowski
  10. Old age or dependence. Which social insurance? By Yukihiro Nishimura; Pierre Pestieau
  11. Affordable Housing and City Welfare By Favilukis, Jack; Mabille, Pierre; van Nieuwerburgh, Stijn
  12. Tax Reforms and Fiscal Shock Smoothing By David Amaglobeli; Laura Jaramillo; Pooja Karnane; Aleksandra Zdzienicka

  1. By: José María Durán-Cabré (Universitat de Barcelona, Institut d’Economia de Barcelona (IEB)); Alejandro Esteller-Moré (Universitat de Barcelona, Institut d’Economia de Barcelona (IEB)); Mariona Mas-Montserrat (Universitat de Barcelona, Institut d’Economia de Barcelona (IEB))
    Abstract: In the throes of economic crisis, the Spanish government decided to reintroduce the Wealth Tax, appealing to redistributive motives and its need for greater revenues. This paper studies how individuals reacted to the reintroduction of this tax by drawing on the universe of wealth tax returns submitted to the Catalan Tax Agency between 2011 and 2015. Thus, we exploit the variation in treatment exposure to analyse taxpayers' responses, in terms not only of wealth accumulation, but also of the potential avoidance strategies adopted. Indeed, our results reflect avoidance rather than real responses. They show that while facing higher wealth taxes did not have a negative effect on taxpayers' savings, it did encourage them to change their asset and income composition to take advantage of wealth tax exemptions (mostly business-related) and the existence of a limit on wealth tax liability. This translates into an elasticity of taxable wealth with respect to the net-of-tax rate of return of 0.64, or, put differently, a 0.1 percentage point increase in the average wealth tax rate leads to a reduction in taxable wealth of 3.24% over 4 years. Overall, these avoidance responses are quite marked in terms of tax revenues: they represent a 4-year accumulated revenue loss of 2.6 times the 2011 estimated wealth tax revenues. The existence of such responses mostly related to the design of the wealth tax has relevant policy implications not only in terms of revenues but also insofar as it undermines the tax's redistributive role.
    Keywords: Spanish wealth tax, behavioural responses to taxation, elasticity of taxable wealth, tax avoidance and evasion
    JEL: H24 H26
    Date: 2019
  2. By: Yuki Uchida (Faculty of Economics, Seikei University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This study considers the politics of public education and its impact on economicgrowth and welfare across generations. We employ probabilistic voting to demon-strate the generational con ict regarding taxes and spending and show that agingresults in a tax burden shift from the retired to the working generation, reductionin public education spending, and ultimately in slowing down economic growth.We subsequently consider a legal constraint that aims to boost education spend-ing: a spending oor for education. This constraint stimulates economic growthbut creates a trade-off between current and future generations' welfare. Finally, thequantitative implications of our results are explored by calibrating the model to theJapanese economy.
    Keywords: Public education, Economic growth, Capital income tax, Proba- bilistic voting
    JEL: D70 E24 H52
    Date: 2018–02
  3. By: Åsmund Sunde Valseth; Katinka Holtsmark; Bjart Holtsmark (Statistics Norway)
    Abstract: This paper provides a new and improved measure of the marginal cost of public funds (MCF). It is based on a benchmark tax which is distributionally neutral and non-distortive. This is in contrast to the MCF-measure used in the previous literature, that has used the regressive uniform lump-sum tax as the benchmark. Our proposed MCF-measure more precisely accounts for the distributional aspects of public funding (the tax scheme) and makes a clear distinction between this and the distributional aspects of the public good considered. Compared to the previous literature, we find a higher MCF both in the case of a uniform lump-sum tax and in the case of distortive taxes. Due to its regressive distributional consequences, we find that the MCF of a uniform lump-sum tax is always greater than one when not combined with distortive taxes. Moreover, we find that the MCF could be greater than one also with an optimal combination of a uniform lump-sum tax and distortive taxes.
    Keywords: Marginal cost of public funds; lump-sum taxes; public goods
    JEL: H20 H40 H50
    Date: 2019–06
  4. By: Lawless, Martina; McCoy, Daire; Morgenroth, Edgar L. W.; O’Toole, Conor M.
    Abstract: This paper examines the effects of corporate tax on these location decisions of newly established multinational subsidiaries across 26 European countries over an eight year period. We contribute to the existing literature by examining the effects of a non-linear response of firm location decisions to changes in the tax rate. We also show that there are large variations in the sensitivity to tax rates across sectors and firm size groups. In particular, financial sector firms are more than twice as sensitive to changes in corporation tax rates relative to other sectors. Our baseline result is a finding that a one percent increase in the statutory or policy rate of corporation tax would lead to a reduction in the conditional location probability of 0.68 percent. Using the effective average tax rate (EATR), the marginal effect implies a reduction in the location probability of 1.15 percent following a 1 percent increase in the tax rate. Although overall tax has the expected negative effect on location probability, the marginal effect of an increase is lower at higher rates of tax.
    Keywords: corporate tax; location choice; multinational firms; FDI
    JEL: C25 F23 H25
    Date: 2018–01–01
  5. By: Adam M. Lavecchia
    Abstract: This paper presents estimates of the causal effect of Canadian Tax-Free Savings Accounts (TFSAs) balances on household saving and portfolio asset location choices. Contributions to TFSAs are not tax-deductible but capital income earned in the account accrues tax-free and withdrawals are not taxed. Using a difference-in-differences research design that exploits the sharp change in a family’s cumulative TFSA contribution room that arises when a family member turns 18 years old, I find that a 10 percent increase in TFSA balances reduces taxable financial asset holdings by 2.5 percent with no statistically significant effect on holdings in traditional tax-deferred accounts. I also find that the crowd-out in taxable asset holdings is driven by families reducing the share of their taxable financial assets held in fixed income securities
    Keywords: Tax-preferred savings accounts; back-loaded versus front-loaded subsidies; Tax-Free Savings Accounts; crowd-out
    JEL: D14 H31
    Date: 2019–06
  6. 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).
    Keywords: R&D tax credit, patent box, super deduction, IP box, tax subsidy, innovation
    JEL: H25 O32 O38
    Date: 2019–06
  7. By: Anastasios Dosis (ESSEC Business School - Essec Business School)
    Abstract: I study optimal redistributive taxation in credit markets with adverse selection. Under symmetric information, the tax system is non-distortionary and unambiguously benefits high-risk types at the expense of low-risk types. Under asymmetric information, a range of taxes exists that creates Pareto improvements relative to the (zero-tax) market allocation by increasing aggregate investment. For sufficiently high taxes, an increase in the safe interest rate can be accompanied by an increase in investment.
    Keywords: Credit market,Adverse selection,Taxation,Redistribution,Welfare
    Date: 2019–04–30
  8. By: Francesco Pappadà; Yanos Zylberberg
    Abstract: We show that tax compliance is volatile and markedly responds to fiscal policy. To explore the consequence of this novel stylized fact, we build a model of sovereign debt with limited commitment and imperfect tax enforcement. Fiscal policy persistently affects the size of the informal economy, which impact future fiscal revenues and thus default risk. This mechanism captures a key empirical regularity of economies with imperfect tax enforcement: the low sensitivity of debt price to fiscal consolidations. The interaction of imperfect tax enforcement and limited commitment strongly constrains the dynamics of optimal fiscal policy. During default crises, high tax distortions force the government towards extreme fiscal policies, notably including costly austerity spells.
    Keywords: Sovereign Default, Imperfect Tax Enforcement, Fiscal Policy.
    JEL: E02 E32 E62 F41 H20
    Date: 2019
  9. By: Jakub Sawulski; Iga Magda; Piotr Lewandowski
    Abstract: How will the rapid ageing of the population affect pension expenditure in Poland? Jakub Sawulski, Iga Magda and Piotr Lewandowski show that pension expenditure will remain at a level similar to now until 2060. The most important factor preventing an increase in pension expenditure will be a drop in the level of pension benefits. The average replacement rate (the ratio between a person’s first pension and their last salary) will fall by more than double in Poland, which will be the largest fall among all EU countries.
    Keywords: pension system, pensions, public finance
    JEL: H50 H55
    Date: 2019–05
  10. By: Yukihiro Nishimura (Graduate School of Economics, Osaka University); Pierre Pestieau (CREPP, Universite de Li`ege, CORE)
    Abstract: We consider a society where individuals differ according to their productivity and their risk of mortality and dependency. We show that ac-cording to the most reasonable estimates of correlations among these threecharacteristics, if one had to choose between a public pension system anda long-term care social insurance, the latter should be chosen by a utili-tarian social planner. With a Rawlsian planner, the balance between thetwo schemes does depend on the comparison between the probabilities ofthe worst off individual and the probabilities of the rest of society.
    Keywords: long term care, pension, mortality risk, optimal taxation,liquidity constraints
    JEL: H2 H5
    Date: 2019–04
  11. By: Favilukis, Jack; Mabille, Pierre; van Nieuwerburgh, Stijn
    Abstract: Housing affordability is the main policy challenge for many large cities in the world. Zoning changes, rent control, housing vouchers, and tax credits are the main levers employed by policy makers. But how effective are they at combatting the affordability crisis? We build a new framework to evaluate the effect of these policies on the well-being of its citizens. It endogenizes house prices, rents, construction, labor supply, output, income and wealth inequality, as well as the location decisions of households. Its main novel features are risk, risk aversion, and incomplete risk-sharing. We calibrate the model to the New York MSA, incorporating current zoning and affordable housing policies. Housing affordability policies carry substantial insurance value but cause misallocation in labor and housing markets. Housing affordability policies that enhance access to this insurance especially for the neediest households create large net welfare gains.
    Keywords: affordable housing; Development; Dynamic spatial equilibrium; Gentrification; House Prices; housing vouchers; Rent Control; Tax credits; Zoning
    JEL: G11 G12 H41 H70 J61 R10 R20 R30 R40 R51
    Date: 2019–05
  12. By: David Amaglobeli; Laura Jaramillo; Pooja Karnane; Aleksandra Zdzienicka
    Abstract: This paper examines the role of tax policy reforms in enhancing fiscal shock smoothing in a panel of 13 OECD economies during the period 1980-2017. The results suggest that tax reforms, in particular those that broaden the tax base, significantly enhance the ability of fiscal policy to mitigate the impact of growth shocks on disposable income. We find that the magnitude of shock smoothing increases from an average of 2 percent to 3-3½ percent following the reform. The effects are considerably higher for tax base than tax rate changes, and also higher for indirect tax than direct tax changes. The effects are symmetric—that is, the increase in shock smoothing following a reform expanding the tax base (rate) is similar to the decline in shock smoothing after a reform narrowing the tax base (rate). Tax elasticity, collection efficiency, and the progressivity of the tax system are important channels through which tax reforms affect fiscal stabilization.
    Date: 2019–05–23

This nep-pbe issue is ©2019 by Thomas Andrén. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.