nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒09‒23
fifteen papers chosen by
Thomas Andrén

  1. The Demand for Status and Optimal Capital Taxation By Li, Fanghui; Wang, Gaowang
  2. Don't Tax Capital---Optimal Ramsey Taxation in Heterogeneous Agent Economies with Quasi-Linear Preferences By YiLi Chien; Yi Wen
  3. Multiple equilibria in Lucas (1990)'s optimal capital taxation model with endogenous learning By Li, Fanghui; Wang, Gaowang
  4. Consumption Taxes and Corporate Investment By Martin Jacob; Roni Michaely; Maximilian A. Müller
  5. Tax Policies in the European Union: 2018 Survey By European Commission
  6. Income Taxation and the Equilibrium Allocation of Labor By Jesper Bagger; Kazuhiko Sumiya; Mads Hejlesen; Rune Majlund Vejlin
  7. Health Risk, Insurance and Optimal Progressive Income Taxation By Juergen Jung; Chung Tran
  8. Tax audits as scarecrows. Evidence from a large-scale field experiment By Marcelo Bérgolo; Rodrigo Ceni; Guillermo Cruces; Matías Giaccobasso; Ricardo Pérez-Truglia
  10. Homeownership Investment and Tax Neutrality: a joint assessment of income and property taxes in Europe By Figari, Francesco; Verbist, Gerlinde; Zantomio, Francesca
  11. Multi-part Tariffs and Differentiated Commodity Taxation By Anna D’Annunzio; Mohammed Mardan; Antonio Russo
  12. Intergenerational Conflict Over Consumption Tax Hike: Evidence from Japan By Ryosuke Okazawa; Katsuya Takii
  13. Tax reduction for full-employment and debt dynamics: A Keynesian analysis by mathematics and simulation By Tanaka, Yasuhito
  14. Meeting fiscal challenges in Japan’s rapidly ageing society By Randall S. Jones; Haruki Seitani
  15. Tax Evasion and Missing Imports: Evidence From Transaction-Level Data By Mengistu, Andualem T.; Molla, Kiflu G.; Mascagni, Giulia

  1. By: Li, Fanghui; Wang, Gaowang
    Abstract: The paper examines the famous Chamley-Judd zero capital tax theorem in model economies where agents care about their social status. We show that the limiting capital income tax is not zero in general and its sign depends only on the utility specifications. Our conclusion is robust to several important extensions: the model with multiple physical capitals, the model with both human and physical capitals, and the one with heterogeneous agents.
    Keywords: Demand for Status; Capital Income Tax; Human Capital; Heterogeneous Agents
    JEL: H21 H24
    Date: 2019–09–18
  2. By: YiLi Chien (Federal Reserve Bank of St. Louis); Yi Wen (Federal Reserve Bank of St. Louis)
    Abstract: We build a tractable infinite-horizon Aiyagari-type model with quasi-linear preferences to address a set of long-standing issues in the optimal Ramsey taxation literature. The tractability of our model enables us to analytically establish several strong and novel results: (i) The optimal capital tax is exclusively zero in a Ramsey steady state regardless of the modified golden rule and government debt limits. (ii) Along the transition path toward a Ramsey steady state, optimal capital tax depends positively on the elasticity of intertemporal substitution. (iii) When a Ramsey steady state (featuring a non-binding government debt limit) does not exist but is erroneously assumed to exist, the modified golden rule always "holds" and the implied "optimal" long-run capital tax is strictly positive, reminiscent of the result obtained by Aiyagari (1995). (iv) Whether the modified golden rule holds depends critically on the government's capacity to issue debts, but has no bearing on the planner's long-run capital tax scheme. (v) The optimal debt-to-GDP ratio in the absence of a binding debt limit, however, is determined by a positive wedge times the modified-golden-rule saving rate; the wedge is decreasing in the strength of the individual self-insurance position and approaches zero when the idiosyncratic risk vanishes or markets are complete. The key insight behind our results is the Ramsey planner's ultimate concern for self-insurance. Since taxing capital in the steady state permanently hinders individuals' self-insurance positions, the Ramsey planner prefers (i) taxing capital only in the short run and (ii) issuing debt rather than imposing a steady-state capital tax to correct the capital-overaccumulation problem under precautionary saving motives. Thus, in sharp contrast to Aiyagari's argument, permanent capital taxation is not the optimal tool to achieve aggregate allocative efficiency despite overaccumulation of capital, and the modified golden rule can fail to hold in a Ramsey equilibrium whenever the government encounters a debt-limit.
    Date: 2019
  3. By: Li, Fanghui; Wang, Gaowang
    Abstract: In the paper we solve the general case of the Lucas (1990) optimal capital taxation model with endogenous growth driven by endogenous learning. We prove Lucas (1990)'s conjecture on zero limiting capital tax and display the possibility of multiple equilibria (i.e., multiple BGPs) in the model.
    Keywords: Multiple Equilibria; Capital Income Tax; Endogenous Growth; Endogenous Learning
    JEL: E62 H21
    Date: 2019–09–10
  4. By: Martin Jacob (WHU - Otto Beisheim School of Management); Roni Michaely (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute); Maximilian A. Müller (WHU - Otto Beisheim School of Management)
    Abstract: While consumers nominally pay the consumption tax, theoretical and empirical evidence is mixed on whether corporations partly shoulder this burden, thereby, affecting corporate investment. Using a quasi-natural experiment, we show that consumption taxes decrease investment. Firms facing more elastic demand decrease investment more strongly because they bear more of the consumption tax. We corroborate the validity of our findings using 86 consumption tax changes in a cross-country panel. We document two mechanisms underlying the investment response: reduced firms’ profitability and lower aggregate consumption. Importantly, the magnitude of the investment response to consumption taxes is similar to that of corporate taxes.
    Keywords: Consumption Tax, Investment, Tax Policy
    JEL: G31 H24 H25
    Date: 2019–08
  5. By: European Commission
    Abstract: This report aims to improve the transparency of the European Semester process by publishing in a clear and accessible format the main indicators used to examine Member States' tax policies, alongside information on recent tax reforms. It also sets out some reform options and examples to act as inspiration for Member States looking to improve the fairness and efficiency of their tax systems.
    Keywords: European Union, taxation
    JEL: H23 H24 H25 H27 H71
    Date: 2018–12
  6. By: Jesper Bagger (Royal Holloway, University of London); Kazuhiko Sumiya (Royal Holloway, University of London); Mads Hejlesen (Aarhus University); Rune Majlund Vejlin (Aarhus University)
    Abstract: We study the impact of labor income taxation on workers' job search behavior and the implications it has for the equilibrium allocation of labor in a complete markets equilibrium on-the-job search model with two-sided heterogeneity, endogenous job search effort and hiring intensity, equilibrium wage formation, and firm entry and exit. By appropriating part of the gain from finding a better paid job, income taxation reduces the return to job search effort, and distorts workers' job search effort, which, in turn, distorts the equilibrium allocation of labor. The model is estimated on Danish matched employer-employee data, and is used to evaluate a series of tax reforms in Denmark in the 1990s and 2000s. We find that these income tax reforms increased aggregate productivity by 2.2% through improved labor allocation, provide a novel structural decomposition of the elasticity of taxable labor income, and to identify a Pareto optimal income tax reform.
    Date: 2019
  7. By: Juergen Jung (Towson University); Chung Tran (Australian National University)
    Abstract: We study the optimal progressivity of personal income taxes in an environment where individuals are exposed to idiosyncratic shocks to health and labor productivity over the lifecycle. Our analysis is based on a large-scale overlapping generations general equilibrium model that is calibrated to the US economy. Our results indicate that the presence of health risk and health insurance has a strong effect on the amount of redistribution and social in- surance provided by progressive income taxes. In an environment with a non-universal health insurance system, such as the US system, the optimal income tax system is highly progressive in order to provide a sufficient level of redistribution to unhealthy low income individuals. The total welfare gain from optimizing the progressivity level is 5.6 percent in compensating lifetime consumption. More inclusive health insurance systems, such as Medicare for all, lead to large decreases in the optimal level of tax progressivity. When health expenditure risk is eliminated, the optimal income tax code becomes more similar to the findings of previous studies that used models without health risk. Our findings highlight the quantitative importance of accounting for the interdependence of health insurance and income taxes when designing optimal income tax policies.
    Date: 2019
  8. By: Marcelo Bérgolo (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economí­a); Rodrigo Ceni (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economí­a); Guillermo Cruces (Universidad Nacional de La Plata (Argentina). Facultad de Ciencias Económicas. Centro de Estudios Distributivos, Laborales y Sociales.); Matías Giaccobasso (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economí­a); Ricardo Pérez-Truglia (Universidad de California en Los Angeles (EEUU))
    Abstract: The canonical model of Allingham and Sandmo (1972) predicts that firms evade taxes by optimally trading off between the costs and benefits of evasion. However, there is no direct evidence that firms react to audits in this way. We conducted a large-scale field experiment in collaboration with Uruguay’s tax authority to address this question. We sent letters to 20,440 small- and medium-sized firms that collectively paid more than 200 million dollars in taxes per year. Our letters provided exogenous yet nondeceptive signals about key inputs for their evasion decisions, such as audit probabilities and penalty rates. We measured the effect of these signals on their subsequent perceptions about the auditing process, based on survey data, as well as on the actual taxes paid, based on administrative data. We find that providing information about audits had a significant effect on tax compliance but in a manner that was inconsistent with Allingham and Sandmo (1972). Our findings are consistent with an alternative model, risk-as-feelings, in which messages about audits generate fear and induce probability neglect. According to this model, audits may deter tax evasion in the same way that scarecrows frighten off birds.
    Keywords: tax, evasion, audits, penalties, frictions
    JEL: C93 H26 K34 K42 Z13
    Date: 2019–06
  9. By: Sarah Clifford; Panos Mavrokonstantis
    Abstract: We study behavioural responses to a widely-used tax enforcement policy that combines ele¬ments of self- and third-party reporting. Taxpayers self-report to the tax authority but must file documentation issued by a third-party to corroborate their claims. Exploiting salary-dependent cutoffs governing documentation requirements when claiming deductions for charitable contribu¬tions in Cyprus, we estimate that deductions increase by £0.7 when taxpayers can claim £1 more without documentation. Second, using a reform that retroactively shifted a threshold activating documentation requirements, we estimate that at least 64% of the response is purely a reporting adjustment. Finally, reporting thresholds affect the responsiveness to tax subsidies.
    Keywords: Tax enforcement, Tax compliance, Charitable giving, Tax design
    Date: 2019–08–14
  10. By: Figari, Francesco; Verbist, Gerlinde; Zantomio, Francesca
    Abstract: Western countries’ income tax systems exempt the return from investing in owner-occupied housing. Returns from other investments are instead taxed, thus distorting households’ portfolio choices, although it is argued that housing property taxation might act as a counterbalance. Based on data drawn from the Statistics of Income and Living Conditions and the UK Family Resources Survey, and building on tax-benefit model EUROMOD, we provide novel evidence on the interplay of income and property taxation in budgetary, efficiency and equity terms in eight European countries. Results reveal that, even accounting for recurrent housing property taxation, a sizeable ‘homeownership bias’ i.e. a lighter average and marginal taxation for homeownership investment, is embedded in current tax systems, and displays heterogeneous distributional profiles across different countries. Housing property taxation represents only a partial correction towards neutrality.
    Date: 2019–09–16
  11. By: Anna D’Annunzio (TBS Business School and CSEF); Mohammed Mardan (Norwegian School of Economics, CESifo and NoCeT); Antonio Russo (ETH Zürich)
    Abstract: We study commodity taxation in markets where firms, such as Internet Service Providers, energy suppliers and payment card platforms, adopt multi-part tariffs. We show that ad valorem taxes can correct underprovision and hence increase welfare, provided the government applies differentiated tax rates to the usage and access parts of the tariff. We obtain this result in different settings, including vertically interlinked markets, markets where firms adopt menus of tariffs to screen consumers and where they compete with multi-part tariffs. Our results suggest that exempting these markets from taxation may be inefficient.
    Keywords: Commodity taxation, multi-part tariffs, price discrimination
    JEL: D42 D61 H21
    Date: 2019–09–13
  12. By: Ryosuke Okazawa (Graduate School of Economics, Osaka City University); Katsuya Takii (Osaka School of International Public Policy, Osaka University)
    Abstract: This paper analyzes the determinants of voter preferences on consumption tax hike using an opinion survey of Japanese citizens. We find robust evidence that the older voter is more likely to support consumption tax hike. We also find that the most of inter-generational difference toward consumption tax policy is explained by the gap between citizens under sixty and over sixty. We investigate how individual economic environment changes in 60 years old as a result of mandatory retirement system and pension system and find that the hours of work do not change but their degree of dependence on the pension in household income increases at the age of 60. Utilizing these facts, we conjecture that individuals may realize the importance of consumption tax in order to save the value of their assets.
    Keywords: Consumption Tax, Fiscal Consolidation, Pension, RDD
    JEL: E6 H2 H31 H63
    Date: 2019–09
  13. By: Tanaka, Yasuhito
    Abstract: We examine the effects of a fiscal policy by tax reduction which realizes full-employment from a state of under-employment or with deflationary GDP gap. We show that the larger the growth rate of real GDP by tax reduction is, the smaller the debt-to-GDP ratio at the time when full-employment is realized is, and an aggressive fiscal policy by tax reduction for full-employment can reduce the debt-to-GDP ratio. Therefore, full-employment can be realized with smaller debt-to-GDP ratio than before the tax reduction policy. However, for this result we need that the marginal propensity to consume is considerably large.
    Keywords: tax reduction, full-employment, debt-to-GDP ratio, continuous and discrete time debt dynamics
    JEL: E62
    Date: 2019–09–06
  14. By: Randall S. Jones; Haruki Seitani
    Abstract: Japan’s gross government debt of 226% of GDP in 2018 is the highest ever recorded in the OECD area, and places the economy at risk. The government now aims to achieve a primary surplus by FY 2025. Additional fiscal consolidation, based on a detailed plan covering specific spending cuts and tax increases, is necessary to put the government debt ratio on a downward trend in the face of rapid population ageing. This is a very difficult task and a stronger fiscal framework would help keep policy on track to achieve fiscal targets. Controlling social spending requires making better use of healthcare resources, in p art by reducing overinvestment in hospitals and increasing the use of generic drugs. Another priority is ensuring the sustainability of local government spending, in part by reducing costs through the joint provision of local public services and infrastructure across jurisdictions and the development of compact cities in the context of depopulation in many parts of Japan. Increased revenue should come primarily from hikes in the consumption tax rate, which is among the lowest in the OECD. In addition, disincentives to employment in the tax and benefit system should be removed, as sustained economic growth is crucial to ensure fiscal sustainability.This Working Paper relates to the 2019 OECD Economic Survey of Japan ( mic-snapshot/)
    Keywords: Abenomics, compact cities, consumption tax, EITC, fiscal consolidation, fiscal policy, fiscal sustainability, healthcare, independent fiscal councils, inequality, local governments, long-term care, pensions, poverty, public debt, social security, unidentified landowners
    JEL: H2 H5 H7 I18
    Date: 2019–09–18
  15. By: Mengistu, Andualem T.; Molla, Kiflu G.; Mascagni, Giulia
    Abstract: It is well documented in the literature that developing countries raise less tax revenue as a share of their economy than their developed counterparts. Part of this gap can be explained by the relatively higher tax evasion in the former. Recent literature shows that increasing the availability of information reduces evasion, by increasing the probability of detection. However, there is little evidence to show how tax evasion responds to changes in tax rates. Using highly disaggregated trade data, we show that there is more tax evasion when tax rates increase. However, this relationship only holds when we use the de facto effective tax rate, rather than the de jure effective tax rate. We also find that evasion takes place through under-reporting of the value of imports, as well as mislabelling highly-taxed products as similar lower-taxed products. Finally, we show that when trade costs are ignored, the level of evasion is underestimated; the degree of underestimation in the elasticity estimate depends on the way the trade cost is included in the estimation.
    Keywords: Economic Development, Finance, Governance,
    Date: 2019

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