nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒09‒30
eleven papers chosen by
Thomas Andrén

  1. Capital Taxes and Redistribution: The Role of Management Time and Tax Deductible Investment By Juan Carlos Conesa; Begoña Dominguez
  2. Use It or Lose It: Efficiency Gains from Wealth Taxation By Fatih Guvenen; Gueorgui Kambourov; Burhanettin Kuruscu; Sergio Ocampo-Diaz; Daphne Chen
  3. Do Corporate Tax Cuts Increase Income Inequality By Suresh Nallareddy; Ethan Rouen; Juan Carlos Suárez Serrato
  4. Tax and Spending Shocks in the Open Economy: Are the Deficits Twins? By Mathias Klein; Ludger Linnemann
  5. Optimal Fiscal Consolidation in a Currency Union By Dejanir Silva
  6. Tax havens, a huge cost for public and social activities By Jacques Fontanel
  7. Efficient wealth inequality and differential asset taxation with dynamic agency By Thomas Phelan
  8. Liquidity Effects of Unemployment Insurance Benefit Extensions: Evidence from Consumer Credit Data By Rene Chalom; Benjamin Pugsley; Fatih Karahan; Kurt Mitman
  9. On the Provision of Unemployment Insurance when Workers are Ex-ante Heterogeneous By Avihai Lifschitz; Ofer Setty; Yaniv Yedid-Levi
  10. Charity as Income Redistribution: A Model with Optimal Taxation, Status, and Social Stigma By Aronsson, Thomas; Johansson-Stenman, Olof; Wendner, Ronald
  11. Early Childhood Investment and Income Taxation By Musab Kurnaz; Mehmet Soytas

  1. By: Juan Carlos Conesa (Stony Brook University); Begoña Dominguez (University of Queensland)
    Abstract: Should capital income be taxed for redistributional purposes? Judd (1985) suggests that it should not. He finds that the optimal capital tax is zero at steady state from the point of view of any agent. This paper re-examines this question in an infinitely-lived worker-capitalist model, in which capitalists devote management time to build capital. Two forms of capital taxation are considered: one for which investment is not tax deductible (corporate tax) and a second one for which investment is fully and immediately tax deductible (dividend tax). Our main results are as follows. The optimal corporate tax is zero at steady state from the point of view of any agent. However, the optimal dividend tax is in general not zero at steady state and depends on preference parameters, life-time wealth and the point of view (Pareto weights) of the benevolent policymaker. For Pareto weights that lead to Pareto-improving reforms, we find that labor tax rates should be eliminated while dividend tax rates should be increased to around 36 per cent at steady state.
    Date: 2019
  2. By: Fatih Guvenen; Gueorgui Kambourov; Burhanettin Kuruscu; Sergio Ocampo-Diaz; Daphne Chen
    Abstract: How does wealth taxation differ from capital income taxation? When the return on investment is equal across individuals, a well-known result is that the two tax systems are equivalent. Motivated by recent empirical evidence documenting persistent heterogeneity in rates of return across individuals, we revisit this question. With such heterogeneity, the two tax systems have opposite implications for both efficiency and inequality. Under capital income taxation, entrepreneurs who are more productive, and therefore generate more income, pay higher taxes. Under wealth taxation, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the tax base, shifts the tax burden toward unproductive entrepreneurs, and raises the savings rate of productive ones. This reallocation increases aggregate productivity and output. In the simulated model parameterized to match the US data, replacing the capital income tax with a wealth tax in a revenue-neutral fashion delivers a significantly higher average lifetime utility to a newborn (about 7.5% in consumption-equivalent terms). Turning to optimal taxation, the optimal wealth tax (OWT) in a stationary equilibrium is positive and yields even larger welfare gains. In contrast, the optimal capital income tax (OCIT) is negative—a subsidy—and large, and it delivers lower welfare gains than the wealth tax. Furthermore, the subsidy policy increases consumption inequality, whereas the wealth tax reduces it slightly. We also consider an extension that models the transition path and find that individuals who are alive at the time of the policy change, on average, would incur large welfare losses if the new policy is OCIT but would experience large welfare gains if the new policy is an OWT. We conclude that wealth taxation has the potential to raise productivity while simultaneously reducing consumption inequality.
    JEL: D31 D60 E21 E22 E23 E24 E62 H21 H25 H3 K34
    Date: 2019–09
  3. By: Suresh Nallareddy; Ethan Rouen; Juan Carlos Suárez Serrato
    Abstract: We study the effects of corporate taxes on income inequality. Using state corporate taxes as a setting, we provide evidence that corporate tax cuts lead to increases in income inequality. This result is robust across regression, matching, and synthetic controls approaches, and to controlling for a host of potential confounders. We use Statistics of Income data from the IRS to explore mechanisms behind this result. We find tax cuts lead to higher income for both top and bottom earners, but the gains to capital income for top earners exceed the gains to total income for bottom earners. This result suggests that, while all earners appear to benefit from a corporate tax cut, the relation between tax cuts and inequality is positive, in part, because high income individuals shift their compensation to reduce taxes.
    Keywords: inequality, corporate tax cuts
    JEL: H25 H71 D63
    Date: 2019
  4. By: Mathias Klein; Ludger Linnemann
    Abstract: We present evidence on the open economy consequences of US fiscal policy shocks identified through proxy-instrumental variables. Tax shocks and government spending shocks that raise the government budget deficit lead to persistent current account deficits. In particular, the negative response of the current account to exogenous tax reductions through a surge in the demand for imports is among the strongest and most precisely estimated effects. Moreover, we find that the reduction of the current account is amplified when the tax reduction is due to lower personal income taxes and when the government increases its consumption expenditures. Historically, a much larger share of current account dynamics has been due to tax shocks than to government spending shocks.
    Keywords: Tax policy, government spending, proxy-vector autoregressions, current account, twin deficits
    JEL: E32 E62 F41
    Date: 2019
  5. By: Dejanir Silva (UIUC)
    Abstract: This paper studies, in the context of a New Keynesian open-economy model, the optimal response of fiscal policy to a risk premium shock for a country in a currency union. First, I show that the planner should not use government spending to stimulate the economy. Instead of distorting the provision of public goods, it is optimal to use simple tax instruments, as consumption, sales, and payroll tax, to achieve stabilization goals. Second, it is optimal to front-load taxes, i.e., the overall level of taxes increase in response to a positive risk premium shock, and it declines over time. The composition of taxes is also time-varying. Consumption tax is increasing, while either VAT or payroll taxes decline over time after an initial increase. Under downward nominal wage rigidities, it is optimal to implement a form of fiscal appreciation, a decline in the VAT accompained by an increase in the payroll tax. Government debt is smaller under the optimal policy than under a passive fiscal policy where the government does not react to the shock. Under some circumstances, it may be optimal to stabilize the government debt at its pre-shock level. Therefore, under the optimal policy, there is no necessary trade off between stabilization policy and fiscal consolidation.
    Date: 2019
  6. By: Jacques Fontanel (CESICE - Centre d'études sur la sécurité internationale et les coopérations européennes - UPMF - Université Pierre Mendès France - Grenoble 2 - UGA - Université Grenoble Alpes)
    Abstract: Economic globalization has favored the rise of tax havens and offshore centers, which allow powerful economic actors to escape at the new tax levies necessary to reduce public debt. At the same time, criminal activities benefit from money laundering. Money laundering circuits were so opaque that very few banks knew whether or not they had dirty or terrorist money in their books. It thus favored the policies of "beggar-thy-neighbor" with impunity for countries. There is no consensual definition of tax havens, judicial, financial and judicial. The term tax haven is often used to define all "non-cooperative territories", with resources of unknown origin. Since 2014, the United States has enacted a Foreign Account Tax Compliance Act (FATCA), which requires financial institutions around the world to disclose the transactions of US nationals. Tax havens still cultivate the secret, they protect all their operations, and they distract most activities to make more complex reading from outside. Capitalism has become difficult to control, politicians no longer control the economic situation, and worst solutions are possible because greed and foolishness of men have no limit.
    Keywords: Tax havens,money laundering,“beggar-thy-neighbor”,public budget,inequalities,public debt,GDP,banking activities,FATCA
    Date: 2019–09–11
  7. By: Thomas Phelan (Federal Reserve Bank of Cleveland)
    Abstract: This paper characterizes a class of stationary constrained-efficient allocations and optimal taxes in an economy with endogenous firm formation and dynamic moral hazard. I consider an environment in which entrepreneurs hire workers and rent capital to produce output subject to privately-observed shocks and have the ability to both divert capital to private consumption and abscond with a fraction of assets. To provide incentives to invest, high realizations of output must be accompanied by high future consumption, leading to ex-post inequality in the efficient allocation. I show that the distributions of consumption and wealth associated with the stationary efficient allocation exhibit thick right (Pareto) tails, with the degree of inequality monotonically increasing in the number of workers per entrepreneur. This constrained-efficient allocation is then implemented in a general equilibrium model using linear taxes on labour income, risk-free savings and business profits. The tax on entrepreneurs’ savings may be positive or negative, while the tax on business profits depends solely upon the degree of private information and is independent of all technological and demographic parameters.
    Date: 2019
  8. By: Rene Chalom (Federal Reserve Bank of New York); Benjamin Pugsley (University of Notre Dame); Fatih Karahan (Federal Reserve Bank of New York); Kurt Mitman (Stockholm University)
    Abstract: Recipients of unemployment insurance benefits may allocate payouts towards consumption, savings, or servicing outstanding debt. This paper examines the effects that unemployment benefits have on mortgage, automobile loan, and credit card debt delinquency, exploiting the variation across states in the magnitude of unemployment benefit extensions that were provided in response to the Great Recession. We find that additional unemployment benefits reduced mortgage debt delinquency in locations that avoided large home price declines in the aftermath of the recession. Accordingly, we conclude that the stimulus effects of unemployment insurance may be muted to the extent that benefit payments are used to satisfy housing debt obligations.
    Date: 2019
  9. By: Avihai Lifschitz (Tel Aviv University); Ofer Setty (Tel Aviv University); Yaniv Yedid-Levi (Interdisciplinary Center (IDC) Herzliya)
    Abstract: Labor market outcomes demonstrate considerable variation between and within skill groups. We construct a general equilibrium model with incomplete markets and exogenous differences that matches these facts. We study the role of exogenous heterogeneity in choosing the optimal re- placement rate and the maximum benefit for an unemployment insurance (UI) system. The optimal average replacement rate is 54%, compared to 10% in a model without the features of exogenous heterogeneity. The relatively generous choice in our model is due to the redistributive role of UI – a manifestation of two elements. First, workers who are unemployed more often receive positive net transfers from the UI system because they draw resources more frequently. Second, the existence of a cap makes UI benefits progressive. Our main result holds even in the presence of a generous progressive taxation system.
    Date: 2019
  10. By: Aronsson, Thomas; Johansson-Stenman, Olof; Wendner, Ronald
    Abstract: In light of the increasing inequality in many countries, this paper analyzes redistributive charitable giving from the rich to the poor in a model of optimal nonlinear income taxation. Our framework integrates (i) public and private redistribution, (ii) the warm glow of giving and stigma of receiving charitable donations, and (iii) status concerns emanating from social comparisons with respect to charitable donations and private consumption. Whether charity should be taxed or supported largely depends on the relative strengths of the warm glow of giving and the stigma of receiving charity, respectively, and on the positional externalities caused by charitable donations. In addition, imposing stigma on the mimicker (which relaxes the self-selection constraint) strengthens the case for subsidizing charity. We also consider a case where the government is unable to target the charitable giving through a direct tax instrument, and we examine how the optimal marginal income tax structure should be adjusted in response to charitable giving. Numerical simulations demonstrate that the quantitative effects of the aforementioned mechanisms can be substantial.
    Keywords: Conspicuous consumption, conspicuous charitable giving, social status, optimal income taxation, warm glow, stigma
    JEL: D03 D62 H21 H23
    Date: 2019–09–24
  11. By: Musab Kurnaz (University of North Carolina at Charlotte); Mehmet Soytas (Ozyegin University)
    Abstract: We study the impact of the income taxation on parental investment for children and its consequence on intergenerational income correlation. We estimate a life-cycle dynastic model of households and conduct counterfactual analysis to observe the effects of various tax regimes. Comparing to a no tax environment, we find that the flat taxes reduce the correlation only by one percentage points. The reduction is, however, much significant (seven percentage points) if the taxes are progressive, the average tax rate is increasing in income. The increase in income mobility is due to the increase in the fertility rate (quantity) and the decrease in the educational outcome of children (quality). We also show that when the taxes are flat within same size households but provide child benefits, which is an important component of the US income taxation, the intergenerational income correlation is four percentage points less compared to the correlation under the flat tax regime. This reduction occurs because parents with lower education invest more time in children’s human capital comparing to a flat tax regime which increases their children’s educational outcome and increases income mobility.
    Date: 2019

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