nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒06‒24
twelve papers chosen by
Thomas Andrén

  1. Tax evasion as contingent debt By Kotsogiannis, Christos; Mateos-Planas, Xavier
  2. Relative Income Poverty Rates and Poverty Alleviation via Tax/benefit Systems in 49 LIS-Countries, 1967-2016 By Koen Caminada; Jinxian Wang; Kees Goudswaard; Chen Wang
  3. Tax Bunching at the Kink in the Presence of Low Capacity of Enforcement: Evidence From Uruguay By Marcelo Bérgolo; Gabriel Burdín; Mauricio De Rosa; Matías Giaccobasso; Martín Leites
  4. Redistributive Effects of Different Pension Systems When Longevity Varies by Socioeconomic Status By Miguel Sánchez-Romero; Ronald D. Lee; Alexia Prskawetz
  5. Heterogeneous Capital Tax Competition in a Federation with Tax Evasion By Lisa Grazzini; Alessandro Petretto
  6. The Real Estate Transfer Tax and Government Ideology: Evidence from the German States By Manuela Krause; Niklas Potrafke
  7. The Impact of Country-by-Country Reporting on Corporate Tax Avoidance By Felix Hugger
  8. How to Improve Tax Compliance? Evidence from Population-wide Experiments in Belgium By Jan-Emmanuel De Neve; Clement Imbert; Maarten Luts; Johannes Spinnewijn; Teodora Tsankova
  9. How Does Taxation Affect Hours Worked in EU New Member States? By Agustin Velasquez; Svetlana Vtyurina
  10. Fiscal policy and fiscal fragility: Empirical evidence from the OECD By El-Shagi, Makram; von Schweinitz, Gregor
  11. The Dynamic Effects of Tax Audits By Advani, Arun; Elming, William; Shaw, Jonathan
  12. Optimal Positive Capital Taxes at Interior Steady States By Jess Benhabib; Bálint Szőke

  1. By: Kotsogiannis, Christos; Mateos-Planas, Xavier
    Abstract: This paper studies income-tax evasion in a quantitative incomplete-markets setting with heterogeneous agents. A central aspect is that, realistically, evaded taxes are a form of contingent debt. Since evasion becomes part of a portfolio decision, risk and credit considerations play a central part in shaping it. The model calibrated to match estimated average levels of evasion does a good job in producing observed cross-sectional average evasion rates that decline with age and with earnings. The model also delivers implications for how evasion varies in the cross sectional distribution of wealth and tax arrears. Evasion has substantial effects on macroeconomic variables and welfare, and agent heterogeneity and general equilibrium are very important elements in the explanation. The analysis also considers the response of evasion to a flat-tax policy reform. In spite of the direct incentives to evade less under a flat tax rate, the reform causes households to save more, rendering the change in overall evasion modest.
    Keywords: Tax evasion; contingent debt; incomplete markets with heterogeneous agents; portfolio choice; risk sharing; tax progressivity
    JEL: E20 E62 H30
    Date: 2019–01–18
  2. By: Koen Caminada; Jinxian Wang; Kees Goudswaard; Chen Wang
    Abstract: Most welfare states design their tax/benefit system to combat income poverty. Some countries are more effective in poverty alleviation than others. What can explain these variations in outcomes and effectiveness? And has the redistributive power of different social programs changed over time and across countries? This paper analyzes the effectiveness of social transfers and income taxes in alleviating poverty. We focus on 49 LIS-countries for the period 1967-2016. We compare relative income poverty rates at the levels of market incomes and disposable incomes, that is before and after social transfers and income taxes, in order to analyze the effect of tax and transfer policies in reducing income poverty, i.e. to determine the target efficiency of social transfers. We perform several tests with the most recent data. Finally, we perform several partial analyses by disaggregating poverty rates to socioeconomic and demographic conditions in order to investigate to what extent variations at the social program level (such as old age pensions, child benefits) affect the measured effectiveness of the welfare state in alleviating income poverty. We use micro-data from the Luxembourg Income Study (LIS) to examine household market income poverty and disposable income poverty, the antipoverty effect of social transfers and income taxes, and the underlying social programs that drive the changes. LIS data are detailed enough to allow us to measure both overall poverty reduction, and the partial effects of poverty reduction by several taxes or transfers. We elaborate on the work of Caminada et al (2017, 2018 and 2019). LIS data also allow us to decompose the trajectory of the market income poverty to disposable income poverty in several parts (i.e. 9 different benefits and income taxes and social contributions). The Leiden LIS Budget Incidence Fiscal Redistribution Dataset on Relative Income Poverty (LLBIFR Dataset on Relative Income Poverty 2019) allows researchers and public policy analysts to compare antipoverty effects across developed countries and middle income countries over the last five decades. Research may employ these data in addressing several important issues. Changes (in the generosity) of welfare states can be linked to changes in the antipoverty effects. Best-practices among countries can be identified and analyzed in detail. The LLBIFR on Relative Income Poverty 2019 with its detailed data on income taxes and a large number of individual social benefits offers a rich source of information which may be used by scholars and policy analysts to study the effects of different social programs on economic well-being.
    JEL: H53 H55 I32
    Date: 2019–02
  3. By: Marcelo Bérgolo (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Gabriel Burdín (The University of Leeds); Mauricio De Rosa (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Matías Giaccobasso (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Martín Leites (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)
    Abstract: A first-order policy issue in low and middle income countries is how to design optimal tax systems in order to improve the state’s potential of supporting economic development. Although information regarding behavioral responses to taxation is a key input for tax design, the evidence in developing contexts is still scarce. In this paper we contribute to fill this gap by exploring in detail how individual taxpayers respond to personal income taxation in Uruguay. To do this, we rely on rich administrative tax records covering the universe of Uruguayan taxpayers and implement a bunching design. First, we find a moderate implied elasticity of taxable income (0.16) in the first kink point of the tax schedule. Second, we investigate the mechanisms driving these responses extensively. We find that the observed responses are a combination of both gross labor income and deductions responses. In particular, we document a more intensive use of personal deductions for taxpayers close to the kink point, and suggestive evidence of evasion responses through unilateral and employer-employee collusion labor income misreporting. Our results suggest that policy efforts should be directed at broadening the tax base and improving the enforcement capacities of tax authorities rather than eroding tax progressivity.
    Keywords: Personal income taxation, tax bunching, elasticity of labor income, deductions behavior, misreporting, developing economies
    JEL: H21 H24 H30 J22
    Date: 2019–02
  4. By: Miguel Sánchez-Romero; Ronald D. Lee; Alexia Prskawetz
    Abstract: We propose a general analytical framework to model the redistributive features of alternative pension systems when individuals face ex ante differences in mortality. Differences in life expectancy between high and low socioeconomic groups are often large and have widened recently in many countries. Such longevity gaps affect the actuarial fairness and progressivity of public pension systems. However, behavioral responses to longevity and policy complicate analysis of possible reforms. Here we consider how various pension systems would perform in a general equilibrium OLG setting with heterogeneous longevity and ability. We evaluate redistributive effects of three Notional Defined Contribution plans and three Defined Benefit plans, calibrated on the US case. Compared to a benchmark non-redistributive plan that accounts for differences in mortality, US Social Security reduces regressivity from longevity differences, but would require group-specific life tables to achieve progressivity. Moreover, without separate life tables, despite apparent accounting gains, lower income groups would suffer welfare losses and higher income groups would enjoy welfare gains through indirect effects of pension systems on labor supply.
    JEL: H55 J1 J11 J14 J18 J26
    Date: 2019–06
  5. By: Lisa Grazzini; Alessandro Petretto
    Abstract: In a federal country with two regions, consumers can decide not only the region where to invest, but also the type of capital investment. We analyse how such decision is affected by two sources of asymmetry: a first type of capital is taxed at a regional level while a second one is taxed at a federal level, and for the latter a different degree of tax evasion may arise across regions. We show how tax evasion arising at a federal level affects not only the federal tax policy but also the regional tax policies both directly and indirectly because of vertical tax competition. In particular, we show under which conditions a decrease in the level of tax compliance on the second type of capital can lead to a reduction in its federal tax rate, and simultaneously to an increase in the regional tax rate on the other type of capital investment.
    Keywords: Fiscal federalism; Tax Competition, Tax evasion.
    JEL: H2 H41 H71 H77
    Date: 2019
  6. By: Manuela Krause; Niklas Potrafke
    Abstract: Since 2007 the German state governments have been allowed by a constitutional reform to set real estate transfer tax rates. We exploit this reform and investigate whether government ideology predicts the levels and increases in the real estate transfer tax rates. The results show that leftwing and center governments were more active in increasing the real estate transfer tax rates than rightwing governments. Many voters were disenchanted with the policies and platforms of the established German parties. Disenchantment notwithstanding, real estate transfer tax policies show that the established political parties are still prepared to offer polarized policies.
    Keywords: Real estate transfer tax, partisan politics, reform, government ideology, fiscal federalism
    JEL: D72 H20 H71 P16 R38
    Date: 2019
  7. By: Felix Hugger
    Abstract: Within the framework of its BEPS initiative, the OECD introduced a requirement for non-public country-by-country reporting (CbCR) applying to multinational companies with revenues above EUR 750m. The reports provide data on the global activities and financial structure of multinationals at a country level to tax authorities. This paper investigates the effectiveness of this measure against corporate tax avoidance using a difference-in-difference approach. The analysis is based on financial data both at the group and the subsidiary level. By testing several hypotheses, this paper provides limited support for the effectiveness of CbCR. While the effective tax rates of multinational groups with a reporting requirement increase by about 0.8 percentage points as compared to companies in the control group, the growth rate of total tax payments is unaffected. This seems to be due to a reduction of the tax base which is also due to a rise in leverage and resulting tax-deductible interest payments. At the same time, shifting of profits out of high tax jurisdictions is reduced by CbCR, but not at the expense of low tax OECD countries. CbCR therefore seems to primarily reduce profits located in tax haven affiliates of multinational groups. Lastly, there is little evidence for a distribution of profits closer aligned with frequently suggested apportionment factors.
    Keywords: Corporate tax avoidance, multinational firms, country-by-country reporting, profit shifting,
    JEL: H20 H26 F23 K34
    Date: 2019
  8. By: Jan-Emmanuel De Neve; Clement Imbert; Maarten Luts; Johannes Spinnewijn; Teodora Tsankova
    Abstract: We study the impact of deterrence, tax morale, and simplifying information on tax compliance. We ran _ve 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: 2019–05
  9. By: Agustin Velasquez; Svetlana Vtyurina
    Abstract: Hours worked vary widely across countries and over time. In this paper, we investigate the role played by taxation in explaining these differences for EU New Member States. By extending a standard growth model with novel data on consumption and labor taxes, we assess the evolution of trends in hours worked over the 1995-2017 period. We find that the inclusion of tax rates in the model significantly improves the tracking of hours. We also estimate the elasticity of hours (and its different margins) to quantify the deadweight loss introduced by consumption and labor taxes. We find that these taxes explain a large share of labor supply differences across EU New Member States and that the potential gains from policy actions are noteworthy.
    Date: 2019–06–17
  10. By: El-Shagi, Makram; von Schweinitz, Gregor
    Abstract: In this paper, we use local projections to investigate the impact of consolidation shocks on GDP growth, conditional on the fragility of government finances. Based on a database of fiscal plans in OECD countries, we show that spending shocks are less detrimental than tax-based consolidation. In times of fiscal fragility, our results indicate strongly that governments should consolidate through surprise policy changes rather than announcements of consolidation at a later horizon.
    Keywords: fiscal multipliers,fiscal consolidation,local projections
    JEL: E62 H63
    Date: 2019
  11. By: Advani, Arun (University of Warwick); Elming, William (IFS and TARC); Shaw, Jonathan (Financial Conduct Authority)
    Abstract: Understanding causes of and solutions to non-compliance is important for a tax authority. In this paper we study how and why audits affect reported tax in the years after audit – the dynamic effect – for individual income taxpayers. We exploit data from a random audit program covering more than 53,000 income tax self assessment returns in the UK, combined with data on the population of tax filers between 1999 and 2012. We first document that there is substantial non-compliance in this population. One in three filers underreports the tax owed. Third party information on an income source does not predict whether a taxpayer is non-compliant on that income source, though it does predict the extent of underreporting. Using the random nature of the audits, we provide evidence of dynamic effects. Audits raise reported tax liabilities for at least five years after audit, implying an additional yield 1.5 times the direct revenue raised from the audit. The magnitude of the impact falls over time, and this decline is faster for less autocorrelated income sources. Taking an event study approach, we further show that the change in reporting behaviour comes only from those found to have made errors in their tax report. Finally, using an extension of the Allingham-Sandmo (1972) model, we show that these results are best explained by audits providing the tax authority with information, which then constrains taxpayers’ ability to misreport.
    Keywords: tax audits, tax revenue, tax reporting decisions, income tax, self assessment, HMRC JEL Classification: D04, H26, H83
    Date: 2019
  12. By: Jess Benhabib; Bálint Szőke
    Abstract: We generalize recent results of Bassetto and Benhabib (2006) and Straub and Werning (2018) in a model with endogenous labor-leisure choice where all agents are allowed to save and accumulate capital. In particular, using a neoclassical infinite horizon model with standard balanced growth preferences and agents heterogeneous in their initial wealth holdings, we provide a sufficient condition under which optimal redistributive capital taxes can remain at their allowed upper bound forever, even if the resulting equilibrium trajectory converges to a unique steady state with positive and finite consumption, capital, and labor. We first generate some simple parametric examples which satisfy our sufficient condition and for which closed form solutions exist. We then provide an interpretation of our sufficient condition for equilibria induced by general constant returns neo-classical production functions. Using recent evidence on wealth distribution in the United States, we argue that our sufficient condition is empirically plausible.
    JEL: E62 H21 H23
    Date: 2019–05

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