nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒07‒29
fifteen papers chosen by
Thomas Andrén

  1. Attracting Investments Using Tax Incentives in Uganda: The Effective Tax By Lakuma, Corti Paul
  2. Optimal taxation with directed search and moral hazard By Tomoyuki Nakajima
  3. The elasticity of taxable income in Spain: 1999-2014 By Miguel Almunia; David López-Rodríguez
  4. Political Economy of Taxation, Debt Ceilings, and Growth By Uchida, Yuki; Ono, Tetsuo
  5. Fiscal sustainability vs. fiscal stability: tax and debt under entitlement spending By Floriana Cerniglia - Enzo Dia - Andrew Hughes Hallett
  6. The Spanish personal income tax: facts and parametric estimates By Esteban García-Miralles; Nezih Guner; Roberto Ramos
  7. The Digital Services Tax as a Tax on Location-Specific Rent By Wei Cui; Nigar Hashimzade
  8. Should unemployment insurance be centralized in a state union? By Fenge, Robert; Friese, Max
  9. Tax avoidance - are banks any different? By Gawehn, Vanessa; Müller, Jens
  10. Taming Tax Competition with a European Corporate Income Tax By Fabien Candau; Jacques Le Cacheux
  11. Fiscal rules and budget forecast errors of Italian Municipalities By Matteo Picchio; Raffaella Santolini
  12. Reform of the Personal Income Tax in Spain: Effects on internal mobility of the unemployed By González-Chapela, Jorge; Ortega-Lapiedra, Raquel
  13. Sales Taxation, Spatial Agglomeration, and the Internet By David R. Agrawal; David E. Wildasin
  14. Asia and the Pacific: Shaping future tax policies in a digital era By Zhenqian Huang; Lena Kaiser
  15. Taxation and Supplier Networks: Evidence from India By Gadenne, Lucie; Nandi, Tushar K.; Rathelot, Roland

  1. By: Lakuma, Corti Paul
    Abstract: Uganda operates a wide array of tax incentives schemes to attract investments like other countries in East Africa. However, due to significant amount of revenue foregone due to such schemes, Uganda has embarked on the process of rationalizing its overall incentive regime. This study examines the tax burden of various tax incentives schemes operational in Uganda by estimating the effective marginal tax rates (EMTR) and effective average tax rates (EATR). We find sectoral variations in effective average tax rates due to a selective tax holiday and preferential income tax. Overall, tax holidays and preferential income tax rates lower the effective tax burden to a single digit percent and encourage individual tax avoidance strategies. We find that the surge inflation registered during 2010/11 had an adverse effect on effective tax rates. Furthermore, our results confirm in previous findings that tax holidays effectively reduce EATR and favour high-profit short-lived (less than 5 years) investment projects raising doubts about their overall rationale.
    Keywords: Financial Economics, Political Economy, Production Economics
    Date: 2019–03–30
  2. By: Tomoyuki Nakajima
    Abstract: I consider an optimal taxation problem in a directed search model with moral hazard. I show how a constrained efficient allocation can be achieved as an equilibrium allocation with unemployment benefits, income taxes, and subsidies for job creation. In particular, optimal income taxes are lump sum when the social welfare function is utilitarian, but they take the form of nonlinear income taxes when it is non-utilitarian. Furthermore, the income tax function has a simple form, with a clear relationship with the social welfare function, which makes a sharp contrast with the formula obtained in the standard Mirrleesian taxation literature.
    Date: 2019–07
  3. By: Miguel Almunia (CUNEF); David López-Rodríguez (Banco de España)
    Abstract: We study how taxable income responds to changes in marginal tax rates, using as a main source of identifying variation three large reforms to the Spanish personal income tax implemented in the period 1999-2014. The most reliable estimates of the elasticity of taxable income (ETI) with respect to the net-of-tax rate for this period are between 0.45 and 0.64. The ETI is about three times larger for selfemployed taxpayers than for employees, and larger for business income than for labor and capital income. The elasticity of broad income (EBI) is smaller, between 0.10 and 0.24, while the elasticity of some tax deductions such as the one for private pension contributions exceeds one. Our estimates are similar across a variety of estimation methods and sample restrictions, and also robust to potential biases created by mean reversion and heterogeneous income trends.
    Keywords: elasticity of taxable income, ETI, personal income tax, mean reversion, tax deductions, Spain
    JEL: H24 H31 D63
    Date: 2019–07
  4. By: Uchida, Yuki; Ono, Tetsuo
    Abstract: This study presents voting on policies including public education, taxes, and public debt in an overlapping-generations model with physical and human capital accumulation and analyzes the effects of a debt ceiling on the government's policy formation and its impact on growth and welfare. The debt ceiling induces the government to shift the tax burdens from the older to younger generations and increase public education spending, resulting in a higher growth rate. However, it creates a trade-off between generations in terms of welfare. Alternatively, the debt ceiling is measured from the viewpoint of a benevolent planner; lowering the debt ceiling makes it possible for the government to approach the planner's allocation in an aging society.
    Keywords: Debt ceiling; Probabilistic voting, Public debt, Economic growth, Overlapping generations
    JEL: D70 E24 H63
    Date: 2019–07–15
  5. By: Floriana Cerniglia - Enzo Dia - Andrew Hughes Hallett
    Abstract: Economists have traditionally used a rule that restricts primary deficits to less than a threshold determined by the interest-growth rate differential and existing debt in order to judge fiscal sustainability. This rule derives from a single period application of the government’s budget constraint. It is not forward looking. It does not allow for the predictable dynamics of spending liabilities, such as entitlement spending, and assumes immediate and infinitely elastic tax or spending adjustments that are unlikely to be feasible in practice. To address this issue, we derive the equivalent dynamic rule: the primary surplus needs to match any expected discounted increases in public spending, the net interest on existing debt, and terms reflecting the cost of extending debt relative to changing taxes. We find strong and robust empirical evidence supporting the model and we calibrate our model to analyze the impact of shocks to future sustainability (as opposed to current stability, a crucial distinctio n) in different countries.
    Keywords: Sustainable public debt, primary deficit rules, fiscal space
    JEL: E62 H53 H63 I38
    Date: 2018
  6. By: Esteban García-Miralles (University of Copenhagen); Nezih Guner (CEMFI); Roberto Ramos (Banco de España)
    Abstract: In this paper, we use administrative data on tax returns to characterize the distributions of before and after-tax income, tax liabilities, and tax credits in Spain for individuals and households. We use the most recent available data, 2015 for individuals and 2013 for households, but also discuss how the income distribution and taxes have changed since 2002. We also estimate effective tax functions that capture the underlying heterogeneity of the data in a parsimonious way. These parametric functions can be used to calculate after-tax incomes in surveys where this information is not directly available, and can also be used in quantitative work in macroeconomics and public finance.
    Keywords: personal income tax, tax functions, income distribution
    JEL: E62 H24 H31
    Date: 2019–07
  7. By: Wei Cui; Nigar Hashimzade
    Abstract: In 2018, the European Council and the UK and Spanish governments each proposed to introduce a Digital Services Tax (DST), to be levied on the revenue of large digital platforms from advertising, online intermediation, and/or the transmission of data. We offer a rationalization of the DST as a tax on location-specific rent (LSR). That is, just as many countries already levy royalties on rent from extracting natural resources, one can think of the DST as levied on rent earned by digital platforms from particular locations. We provide stylized illustrations of how platform rent can be assigned to specific locations, even when users from multiple jurisdictions participate. We then elaborate the analogy between the DST and resource royalties, and analyze the DST’s incidence and effect on consumer welfare using a simple model. Finally, we argue that the DST suggests useful directions for redesigning international taxation in the age of labor-replacing AI technology.
    Keywords: digital services tax, international taxation, location-specific rent, digital platforms
    JEL: H25 K34 M37 M48
    Date: 2019
  8. By: Fenge, Robert; Friese, Max
    Abstract: Our study compares the efficiency of centralized and decentralized unemployment insurance programs in a state union. We use a model of two countries with collective bargaining for regional gross wages. The labor force and the firms are partially mobile across the member states of the state union, which gives rise to distortive migration incentives. If unemployment insurance is organized centrally, trade unions negotiate inefficiently high wages due to a vertical fiscal externality. The central government generally cannot provide the second-best unemployment insurance as long as migration is costly. In contrast, decentralized unemployment insurance in the member states is second-best irrespective of the degree of mobility and regional asymmetries. Furthermore, efficiency depends on the federal context. If the wage bargaining process on the labor markets is decentralized, then decisions about unemployment insurance made at the state level are superior to centralized public insurance. For the efficiency of a centralized unemployment insurance, it matters whether decisions in related institutions like cooperative wage bargaining are also centralized.
    Keywords: unemployment insurance,imperfect labor markets,federal state union,centralization,migration,vertical fiscal externality
    JEL: F22 H77 J65
    Date: 2019
  9. By: Gawehn, Vanessa; Müller, Jens
    Abstract: While the public has noticed the need for the detection of potential tax loopholes and demand further improvement in the taxation of banks, there is scarce empirical evidence of whether banks' degree of tax avoidance actually differs from that of non-banks. We try to close this gap by investigating U.S. banks' tax avoidance behavior for a sample period from 2004 to 2016. To anchor banks' tax avoidance, we use annual Cash ETRs and GAAP ETRs and compare them to the tax avoidance behavior of non-banks. As there are various channels of tax avoidance, we account for differences in several areas such as corporate fundamentals, the degree of multinationality and regulatory scrutiny. We provide cautious evidence that banks have significantly larger Cash ETRs than non-banks. Via the use of quantile regression we find evidence that the assocation between banks and ETRs is not constant over the whole tax avoidance distribution, but shows a positive association for lower parts of the tax avoidance distribution and a negative association for higher parts. In line with recent research, we provide some evidence that the difference in Cash ETRs between banks and non-banks is more pronounced for worse-capitalized, than for better-capitalized banks.
    Date: 2019
  10. By: Fabien Candau (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour); Jacques Le Cacheux (OFCE - OFCE - Sciences Po)
    Abstract: This article proposes an original review of the literature on tax competition, and provides new evidence concerning different types of footloose capital: the intensity of strategic interactions is three time stronger for financial assets than for less mobile capital (e.g. industrial buildings). We also present tax optimization techniques used by MultiNational Firms (MNFs) and document some case studies regarding the foregone tax revenue due to evasion. Amounts saved by firms are comparable to the annual contributions to the EU budget by countries like the UK, Ireland, the Netherlands or Luxembourg. We estimate that the total revenue losses for the EU governments due to corporate tax avoidance amount to almost 100 billion ¿. After this description of the failure of the current system of taxation, this article analyzes alternative schemes such as the Common Consolidated Corporate Tax Base (CCCTB) and concludes with the outlook of a European corporate income as a genuine own resource for the EU budget.
    Date: 2018
  11. By: Matteo Picchio (Dipartimento di Scienze Economiche e Sociali - Universita' Politecnica delle Marche); Raffaella Santolini (Dipartimento di Scienze Economiche e Sociali - Universita' Politecnica delle Marche)
    Abstract: We study the impact of the domestic stability pact on the budget forecast errors of Italian municipalities. The identification of the causal effect exploits a quasi-natural experiment generated by the removal in 2001 of the fiscal restraints on budget decisions for municipalities with less than 5,000 inhabitants and by stricter budgetary restrictions and severe penalties for noncompliers in 2002. We find that relaxing fiscal rules had a sizeable impact on budget forecast errors, especially in 2002. Revenue (expenditure) forecast errors for municipalities below 5,000 inhabitants became indeed 26% (22%) larger than in the past.
    Keywords: budget forecast errors, sub-central fiscal rules, Italian municipalities, quasi-natural experiment, differencein-discontinuities design.
    JEL: E62 H68 H72
    Date: 2019–07
  12. By: González-Chapela, Jorge; Ortega-Lapiedra, Raquel
    Abstract: This paper examines whether, and to what extent, the internal mobility of the unemployed in Spain was affected by a reform of the personal income tax that introduced a mobility incentive targeted at this group. The reform introduced a distinct change in the incentives to move for work for unemployed workers living in certain regions of Spain. The reform’s effectiveness is assessed by means of a difference-in-differences econometric approach, combined with nationally representative administrative data. Results suggest that the reform led, at most, to relatively few new migration flows, and account for the existence of differential migration trends between the regions that adopted the reform and those that did not.
    Keywords: Personal income tax, mobility, unemployed, Spain
    JEL: H24 J61 R23
    Date: 2019–07–23
  13. By: David R. Agrawal; David E. Wildasin
    Abstract: Technological innovations facilitating e-commerce have well-documented effects on consumer behavior and firm organization in the retail sector, but the effects of these new transaction technologies on fiscal systems remain unknown. By extending models of commodity tax competition to include urban spatial structure (agglomeration) and online commerce, one can analyze strategic tax-policy interactions among neighboring localities. Consumers buy different types of commodities, sold either by traditional or by online vendors. When the cost of online shopping falls, we show that equilibrium tax rates and revenues increase in small jurisdictions and decrease in large jurisdictions with retail shopping centers. Policy commentators warn that e-commerce erodes tax revenue - true enough for some localities - but, more accurately, changing transaction costs can generate entirely new commercial and fiscal equilibria that ultimately “redistribute” tax revenues from localities with concentrations of traditional vendors toward other, typically smaller, localities.
    Keywords: sales tax, retail shopping, agglomeration, e-commerce, fiscal competition
    JEL: H25 H71 H73 L81 R50
    Date: 2019
  14. By: Zhenqian Huang (Macroeconomic Policy and Financing for Development Division, United Nations Economic and Social Commission for Asia and the Pacific); Lena Kaiser (Macroeconomic Policy and Financing for Development Division, United Nations Economic and Social Commission for Asia and the Pacific)
    Abstract: Technological advancements bring both opportunities and challenges for taxation policy. Although they improve revenue raising and efficiency of spending, to fully harness such benefits requires concerted national and international efforts. Asian and Pacific economies are at the forefront in reforming taxation policies in a digital era to counter under- or double-taxation.
    Date: 2019–07
  15. By: Gadenne, Lucie (University of Warwick); Nandi, Tushar K. (CTRPFP, Center for Studies in Social Sciences, Calcutta); Rathelot, Roland (University of Warwick)
    Abstract: Do tax systems distort firm-to-firm trade? This paper considers the effect of tax policy on supplier networks in a large developing economy, the state of West Bengal in India. Using administrative panel data on firms, including transaction data for 4.8 million supplier-client pairs, we first document substantial segmentation of supply chains between firms paying Value-Added Taxes (VAT) and non-VAT-paying firms. We then develop a model of firms’ sourcing and tax decisions within supply chains to understand the mechanisms through which tax policy interacts with supply networks. The model predicts partial segmentation in equilibrium because of both supply-chain distortions (taxes affect how much firms trade with each other) and strategic complementarities in firms’ tax choices. Finally, we test the model’s predictions using variations over time within-firm and within supplier-client pairs. We find that the tax system distorts firms’ sourcing decisions, and suggestive evidence of strategic complementarities in firms’ tax choices within supplier networks.
    Keywords: JEL Classification:
    Date: 2019

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