nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒10‒07
eighteen papers chosen by
Thomas Andrén

  1. Use It or Lose It: Efficiency Gains from Wealth Taxation By Fatih Guvenen; Gueorgui Kambourov; Burhan Kuruscu; Sergio Ocampo; Daphne Chen
  2. Measuring the Distributional Impact of Taxation and Public Spending: The Practice of Fiscal Incidence Analysis By Nora Lustig
  3. Optimal Taxation and Discrete Choice By Laurence Ales; Christopher Sleet
  4. Taxes on Unhealthy Food and Externalities in the Parental Choice of Children's Diet By Zarko Kalamov; Marco Runkel
  5. Labor Taxes, Productivity and Tax Competition By Satyajit Chatterjee; Amartya Lahiri
  6. Effects of tax-benefit policies on the income distribution and work incentives in Estonia By Alari Paulus; Caroline Klein
  7. Social Investment, Employment Outcomes and Policy and Institutional Complementarities: A Comparative Analysis across 26 OECD countries By Bakker, Vincent; Van Vliet, Olaf
  8. Taxing capital and labor when both factors are imperfectly mobile internationally By Hippolyte d'Albis; Agnès Bénassy-Quéré
  9. Charitable Constributions by Businesses: A Tax Policy Perspective By Tomer Blumkin; Yoram Margalioth; Efraim Sadka; Adi Sharoni
  10. Homeownership Investment and Tax Neutrality. A joint assessment of income and property taxes in Europe By Francesco Figari; Gerlinde Verbist; Francesca Zantomio
  11. When Income Effects are Large: Labor Supply Responses and the Value of Welfare Transfers By Giulia Giupponi
  12. Taxes and Turnout By Felix Bierbrauer; Aleh Tsyvinski; Nicolas WERQUIN
  13. Unemployment Dynamics and Unemployment Insurance Extensions under Rational Expectations By Similan Rujiwattanapong
  14. Understanding Different Approaches to Benefit-Based Taxation By Robert Scherf; Matthew Weinzierl
  15. Modelling the health impact of food taxes and subsidies with price elasticities: the case for additional scaling of food consumption using the total food expenditure elasticity By Tony Blakely; Nhung Nghiem; Murat Genc; Anja Mizdrak; Linda Cobiac; Cliona Ni Mhurchu; Boyd Swinburn; Peter Scarborough; Christine Cleghorn
  16. The Distributional Consequences of Rent Seeking By Angelos Angelopoulos; Konstantinos Angelopoulos; Spyridon Lazarakis; Apostolis Philippopoulos
  17. Charity as Income Redistribution: A Model with Optimal Taxation, Status, and Social Stigma By Aronsson, Thomas; Johansson-Stenman, Olof; Wendner, Ronald
  18. How to Design Tax Policy in Fragile States By Mario Mansour; Jean-Luc Schneider

  1. By: Fatih Guvenen; Gueorgui Kambourov; Burhan Kuruscu; Sergio Ocampo; 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.
    Keywords: Wealth taxation, Capital income tax, Rate of return heterogeneity, Power law models, Wealth inequality
    JEL: E21 E22 E62 H21
    Date: 2019–09–25
  2. By: Nora Lustig (Stone Center for Latin American Studies, Department of Economics, Tulane University, Commitment to Equity Institute (CEQI))
    Abstract: Taxation and public spending are key policy levers the state has in its power to change the distribution of income. One of the most commonly used methods to measure the distributional impact of a country’s taxes and public spending is fiscal incidence analysis. Rooted in the field of Public Finance, fiscal incidence analysis is the method utilized to allocate taxes and public spending to households so that one can compare incomes before taxes and transfers with incomes after them. Standard fiscal incidence analysis just looks at what is paid and what is received without assessing the behavioral responses that taxes and public spending may trigger on individuals or households. This is often referred to as the “accounting approach.” Although the theory is quite straightforward, its application can be fraught with complications. The salient ones are discussed here. While ignoring behavioral responses and general equilibrium effects is a limitation of the accounting approach, the effects calculated with this method are considered a reasonable approximation of the short-run welfare impact. Fiscal incidence analysis, however, can be designed to include behavioral responses as well as general equilibrium and inter-temporal effects. This article focuses on the implementation of fiscal incidence analysis using the accounting approach.
    Keywords: Fiscal incidence, taxation, social spending, transfers, pensions, progressivity, distributional effects, inequality, poverty, marginal contribution, effectiveness, valuing in-kind transfers.
    JEL: D31 H22 I32 I38
    Date: 2019–09
  3. By: Laurence Ales (Carnegie Mellon University); Christopher Sleet (Carnegie Mellon University)
    Abstract: In this paper we derive optimal tax equations for discrete choice economies with smooth underlying shock distributions and potentially unstructured choice sets. This approach expands the set of applications for which optimal tax equations are available, permits rich substitution patterns between choices, unifies existing results on income and commodity taxation and links optimal tax analysis to the large literature on estimating discrete choice models. The optimal tax equations that emerge highlight the role of semi-elasticities of choice probabilities to tax perturbations in shaping optimal taxes and, in particular, the implied willingness of agents to substitute from high to low taxed choices as a force dampening tax rates. We apply our approach to locational and hours choice settings.
    Date: 2019
  4. By: Zarko Kalamov; Marco Runkel
    Abstract: This paper addresses the question whether taxes on unhealthy food are suitable for internalizing intergenerational externalities inflicted by parents when they decide on their children’s diet. Within an OLG model with an imperfectly altruistic parent, the optimal steady state tax rate on unhealthy food is strictly positive. However, it is only second best since it not only reduces food consumption of the child but also distorts the parent's food consumption. Surprisingly, the optimal tax may under- or overinternalize the marginal damage.
    Keywords: obesity, fat tax, altruism
    JEL: D11 D62 H21 I12
    Date: 2019
  5. By: Satyajit Chatterjee (Federal Reserve Bank of Philadelphia); Amartya Lahiri (University of British Columbia)
    Abstract: Why are taxes higher in Europe than in the US? We propose that it stems from lesser competition across jurisdictions within Europe. We embed self-interested governments and tax competition into a standard neoclassical growth model with public goods. While greater jurisdictional competition reduces taxes it also reduces societal investment in public capital and thus often ends up reducing total factor productivity. We show that despite this deleterious effect on the level of productive public capital, tax competition ends up raising per capita output and welfare. We show evidence to support both our baseline assumption of lesser mobility in Europe relative to the US as well as for our predictions on productivity differences between the two.
    Date: 2019
  6. By: Alari Paulus; Caroline Klein
    Abstract: The paper studies the impact of tax-benefit policies on the distribution of household incomes and work incentives in Estonia. It makes use of microsimulation modelling approach and applies the EU tax-benefit model EUROMOD to quantify the first-order effects of policy changes in 2016-2018 and of a range of alternative policy scenarios aimed at increasing the adequacy of social benefits. According to the simulations, 2016-2017 policies increased household incomes relative to inflation and were both poverty and inequality reducing. Alternative policy scenarios indicate that, among the considered options, increasing the generosity of the subsistence benefit and relaxing its means test by halving the withdrawal rate (currently at 100%), would have the highest first-order impact for a given fiscal cost. However, these measures would also weaken work incentives, which points to a conventional equity-efficiency trade-off. Other simulations demonstrate some scope for improving work incentives at low and middle-income levels together with modest reductions in poverty and inequality.This Working Paper relates to the 2017 OECD Economic Survey of Estonia( nia-economic-snapshot/)
    Keywords: Estonia, income distribution, tax-benefit policies, work incentives
    JEL: D31 H23 I38
    Date: 2019–10–04
  7. By: Bakker, Vincent; Van Vliet, Olaf
    Abstract: Social investment has become a widely debated topic in the comparative welfare state literature. To date, there are, however, only a couple of systematic comparative empirical analyses that focus on the employment outcomes associated with social investment. This study contributes to the social investment literature by empirically analysing the extent to which variation in employment outcomes across 26 OECD countries over the period 1990-2010 can be explained by effort on five social investment policies using time-series cross-sectional analyses. Apart from focusing on employment rates, we additionally explore associations with qualitative aspects of the employment outcomes relying on novel indicators. The analyses account for theoretically relevant confounding variables that were omitted in existing studies, notably labour market institutions. We find robust evidence for a positive association between effort on active labour market policies and employment rates. For other policies we obtain mixed results, dependent on the employment outcome being studied. Subsequently, we explore the role of policy and institutional complementarities in the assessment of the employment effects of social investment policies. We show how social investment policies interact and how their effect is moderated by effort on other policies. Additionally, our analysis shows that the complementarity of social investment policies varies across welfare state regimes. Finally, explorative analyses suggest that there are positive synergies between more and better jobs, which could in part be attributable to effort on social investment.
    Keywords: Employment, job quality, social investment, policy complementarity, institutional complementarity, diminishing marginal returns, comparative welfare state analysis, social expenditure, social policy
    JEL: H53 I38 J21
    Date: 2019–09
  8. By: Hippolyte d'Albis (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Agnès Bénassy-Quéré (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)
    Abstract: We revisit the standard theoretical model of tax competition to consider imperfect mobility of both capital and labor. We show that the mobility of one factor a_ects the taxation of both factors, and that the race-to-the-bottom narrative (with burden shifting) applies essentially to capital exporting countries. We test our predictions for a panel of 28 OECD countries over 1997-2014. We _nd capital taxation to be less sensitive to capital mobility in net capital importing countries than for net capital exporters. Various robustness checks support this conclusion. Qantitatively, though, rising capital mobility contributes much less than population ageing to the decline of capital tax rates over the period studied.
    Keywords: tax competition,globalization,imperfect factor mobility
    Date: 2019–09
  9. By: Tomer Blumkin; Yoram Margalioth; Efraim Sadka; Adi Sharoni
    Abstract: Empirical evidence suggests that charitable contributions to public goods by businesses may be driven not only by the familiar warm-glow of giving motive but also as a means for businesses to signal high product quality. Building on this finding, we present an analytical framework that demonstrates that the optimal degree of subsidization should decrease with the extent to which the signal is informative, and may even turn into a tax when the signal is sufficiently strong. Finally, we compare the current practice in the US, a charitable contribution deduction provided by Section 170 of the US Tax Code, with the design suggested by our normative analysis.
    Keywords: public goods, Pigouvian taxation, warm glow, signaling
    JEL: H20 H40 K30
    Date: 2019
  10. By: Francesco Figari (Department of Economics, University of Insubria; ISER, University of Essex; CeRP Collegio Carlo Alberto and Dondena Bocconi University); Gerlinde Verbist (Centre for Social Policy Herman Deleeck, University of Antwerp); Francesca Zantomio (Department of Economics, University Of Venice Cà Foscari)
    Abstract: Western countries’ income tax system exempts 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.
    Keywords: Homeownership investment, tax neutrality, income tax, property tax, distributional effect, Europe, microsimulation
    JEL: D31 H23 I31 I32
    Date: 2019
  11. By: Giulia Giupponi
    Abstract: I estimate the long-run income effect of welfare transfers on individual labor supply. Using Italian administrative data on the universe of survivor insurance recipients, I implement a regression discontinuity design around a change in survivor insurance generosity based on the spouse's death date. I find that survivors fully offset the benefit loss with increases in earnings. Labor force participation and program substitution are the main margins of adjustment. I consider potential explanations for the large income effect. Evidence suggests that the value of additional income in the widowhood state is large, driving large participation responses to survivor benefit cuts.
    Keywords: income effect, labor supply, valuation of welfare transfers
    JEL: H55 I38 J22
    Date: 2019–10
  12. By: Felix Bierbrauer (University of Cologne); Aleh Tsyvinski (Yale University); Nicolas WERQUIN (Toulouse School of Economics)
    Abstract: We develop a model of political competition with endogenous turnout and endogenous platforms. Parties face a trade-off between maximizing their base and getting their supporters out to vote. We study the implications of this framework for non-linear income taxation. In equilibrium, both parties propose the same tax policy. This equilibrium policy is a weighted combination of two terms, one reflecting the parties' payoff from mobilizing their own supporters, one reflecting the payoff from demobilizing the supporters of the other party. The key determinant of the equilibrium policy is the distribution of the voters' party attachments rather than their propensity to swing vote. Our analysis also provides a novel explanation for why even left-leaning parties may not propose high taxes on the rich.
    Date: 2019
  13. By: Similan Rujiwattanapong (Aarhus University)
    Abstract: This paper investigates the impact of partially endogenous unemployment insurance (UI) extensions on the dynamics of unemployment and its duration structure in the US. Using a search and matching model with endogenous separations, variable job search intensity, on-the-job search and worker heterogeneity, I allow for the maximum UI duration to depend on unemployment and for UI benefits to depend on observable employment characteristics. The model can account for a large fraction of the observed rise in the long-term unemployment and realistic dynamics of the unemployment duration distribution during the Great Recession. Eliminating all UI extensions during the Great Recession could potentially lower the unemployment rate by 0.9-3.4 percentage points via both the responses of job search and vacancy posting incentives. Disregarding rational expectations about the timing of UI extensions implies an overestimation of unemployment by up to 2 percentage points. Once the heterogeneity in UI status and benefit level is accounted for, unobserved heterogeneity of workers does not account for much of the incidence of long-term unemployment.
    Date: 2019
  14. By: Robert Scherf; Matthew Weinzierl
    Abstract: The normative principle of benefit-based taxation has exerted substantial influence on many areas of public finance, but it has been largely set aside in the modern theoretical approach to optimal income taxation, where welfarist objectives dominate. A prerequisite for that gap to close is the clarification of what benefit-based income taxation would mean, specifically in a first-best setting. This paper seeks to provide clear, accessible descriptions and novel graphical representations of four major approaches to first-best benefit-based taxation, explain how these approaches relate to each other, and apply them within the Classical Benefit-Based framework for optimal income taxation of Smith (1776).
    JEL: H2 H41
    Date: 2019–09
  15. By: Tony Blakely; Nhung Nghiem; Murat Genc; Anja Mizdrak; Linda Cobiac; Cliona Ni Mhurchu; Boyd Swinburn; Peter Scarborough; Christine Cleghorn
    Abstract: Background Food taxes and subsidies are one intervention to address poor diets. Price elasticity (PE) matrices are commonly used to model the change in food purchasing. Usually a PE matrix is generated in one setting then applied to another setting with differing starting consumption and prices of foods. This violates econometric assumptions resulting in likely misestimation of total food consumption. We illustrate rescaling all consumption after applying a PE matrix using a total food expenditure elasticity (TFEe, the expenditure elasticity for all food combined given the policy induced change in the total price of food). We use case studies of NZ$2 per 100g saturated fat (SAFA) tax, NZ$0.4 per 100g sugar tax, and a 20% fruit and vegetable (F&V) subsidy. Methods We estimated changes in food purchasing using a NZ PE matrix applied conventionally, then with TFEe adjustment. Impacts were quantified for total food expenditure and health adjusted life years (HALYs) for the total NZ population alive in 2011 over the rest of their lifetime using a multistate lifetable model. Results Two NZ studies gave TFEes of 0.68 and 0.83, with international estimates ranging from 0.46 to 0.90. Without TFEe adjustment, total food expenditure decreased with the tax policies and increased with the F&V subsidy, implausible directions of shift given economic theory. After TFEe adjustment, HALY gains reduced by a third to a half for the two taxes and reversed from an apparent health loss to a health gain for the F&V subsidy. With TFEe adjustment, HALY gains (in 1000s) were 1,805 (95% uncertainty interval 1,337 to 2,340) for the SAFA tax, 1,671 (1,220 to 2,269) for the sugar tax, and 953 (453 to 1,308) for the F&V subsidy. Conclusions If PE matrices are applied in settings beyond where they were derived, additional scaling is likely required. We suggest that the TFEe is a useful scalar.
    Date: 2019–09
  16. By: Angelos Angelopoulos; Konstantinos Angelopoulos; Spyridon Lazarakis; Apostolis Philippopoulos
    Abstract: Rent seeking leads to a misallocation of resources that worsens economic outcomes and reduces aggregate welfare. We conduct a quantitative examination of the distributional effects of rent extraction via the financial sector. Rent seeking introduces a possibility for insurance against idiosyncratic earnings risk that is more valuable for poorer households that are lacking in means of self insurance. However, it also creates a wedge that discourages savings, thus reducing self insurance via asset accumulation. When the model is calibrated to US data, the distorting effects dominate, implying welfare losses for all households, and an increase in wealth inequality. Nevertheless, welfare losses are bigger for households with higher initial wealth. Therefore, a policy reform to reduce rent seeking via the financial sector, despite being Pareto improving, will benefit predominantly wealthier households.
    Keywords: conditional welfare changes, wealth distribution, rent seeking
    JEL: E02 D31 H10
    Date: 2019
  17. By: Aronsson, Thomas (Department of Economics, Umeå School of Business, Economics and Statistics, Umeå University, Sweden); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University); Wendner, Ronald (Department of Economics, School of Business, Economics and Social Sciences, University of Graz, Austria)
    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
  18. By: Mario Mansour; Jean-Luc Schneider
    Abstract: The purpose of this note is to provide a framework for improving tax policy design in fragile and conflict-affected states, which face political and institutional constraints. This note begins with an overview of experiences in revenue mobilization in fragile states, including relative to other country groups—in particular, nonfragile states and formerly fragile states; that is, countries that exited fragility during the period under study. A discussion follows of how the principles of tax policy design should be applied in fragile states, particularly the relative importance of the revenue objective vis-à-vis other objectives, such as equity and efficiency. The two sections that follow provide guidance on tax policy design in the emergency and consolidation phases, respectively, and discuss how governments can use tax policy to transition from one phase to another, eventually overcoming fragility. The note concludes with key lessons and a set of guiding principles for tax reform in fragile states.
    Keywords: Tax policy;Revenue mobilization;Efficiency of public spending;Equity and social spending;Tax policy;Revenue mobilization;Efficiency of public spending;Equity and social spending
    Date: 2019–09–20

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.