nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒10‒14
eighteen papers chosen by
Thomas Andrén

  1. Secular Trends in Wealth and Heterogeneous Capital: Land is Back... and Should Be Taxed By Odran Bonnet; Guillaume Chapelle; Alain Trannoy; Etienne Wasmer
  2. Behavioral Responses to State Income Taxation of High Earners: Evidence from California By Joshua Rauh; Ryan J. Shyu
  3. Tax Administration vs. Tax Rates: Evidence from Corporate Taxation in Indonesia By Rema Hanna; Benjamin A. Olken
  4. Tax law and the transfer of start-up losses: A European overview and categorization By Bührle, Anna Theresa; Spengel, Christoph
  6. The effects of penalty information on tax compliance: evidence from a New Zealand field experiment By Norman Gemmell; Marisa Ratto
  7. Tax Avoidance in Buenos Aires: The Case of Ingresos Brutos By Carolina Ines Pan
  8. Organization of Knowledge and Taxation By Marek Kapicka; Ctirad Slavik
  9. Tax Factors of Foreign Direct Investments from the USA to the EU By Veronika Síbrtová; Jana Tepperová; Jan Pavel
  10. Spatial dependence of per capita property tax income in South Africa By Kabeya Clement Mulamba; Fiona Tergenna
  11. The impact of international tax information exchange agreements on the use of tax amnesty: evidence from Norway By Andersson, Jonas; Schroyen, Fred; Torsvik, Gaute
  12. Loss-Offset Provisions in the Corporate Tax Code and Misallocation of Capital By Baris Kaymak
  13. A Psychometric Investigation of the Personality Traits Underlying Individual Tax Morale By Nicolas Jacquemet; Stéphane Luchini; Antoine Malezieux; Jason Shogren
  14. Profit shifting and the effect of stricter transfer pricing regulation on tax revenue By Bakke, Julia Tropina; Hopland, Arnt Ove; Møen, Jarle
  15. VAT Notches, Voluntary Registration, and Bunching: Theory and UK Evidence By Almunia, Miguel; Liu, Li; Lockwood, Ben; Tam, Eddy H.F.
  16. Intergenerational Income Mobility and Income Taxation By Kurnaz, Musab; Soytas, Mehmet A.
  17. Challenges of the evaluation system in Mexico By MARIA GUADALUPE LUGO-SANCHEZ
  18. Wage Inequality and Optimal Tax By Yena Park

  1. By: Odran Bonnet (Sciences Po); Guillaume Chapelle (Sciences Po); Alain Trannoy (Aix-Marseille School of Economics (CNRS / AMU / EHESS)); Etienne Wasmer (Département d'économie)
    Abstract: The increase in wealth-to-income ratios in the second half of XXth century has recently received much attention. We decompose the trend in physical capital and housing, further decomposed into structures and land. In four out of five major countries analyzed, the positive trend in capital-income ratio arises from housing and specifically from its land component. We therefore revisit the question of wealth inequality and taxation in adopting a Georgist perspective (from Henry George, 1879) subsequently endorsed by prominent economists. We introduce land and housing structures in Judd’s optimal taxation framework. We show that an optimal taxation implies a property tax on land and no tax on capital. When the range of property taxes is politically constrained, taxing the product of housing rents is not optimal, even with additional taxes on "imputed rents". Rent taxes are however less distortive than a capital tax. The distortion depends on the share of housing structures and how they react to the tax on rents. However, a tax on rents complemented by a subsidy on structures investments in rental housing units does almost as well as a land tax. As a side result, we find that Judd’s result of no second best capital taxation extends to a larger range of parameters at the steady-state.
    Keywords: Capital; Wealth; Housing; Land; Optimal Tax; First Best; Second Best
    JEL: D91 O11 R14
    Date: 2019–10
  2. By: Joshua Rauh; Ryan J. Shyu
    Abstract: Drawing on the universe of California income tax filings and the variation imposed by a 2012 tax increase of up to 3 percentage points for high-income households, we present new findings about the effects of personal income taxation on household location choice and pre-tax income. First, over and above baseline rates of taxpayer departure from California, an additional 0.8% of the California residential tax filing base whose 2012 income would have been in the new top tax bracket moved out from full-year residency of California in 2013, mostly to states with zero income tax. Second, to identify the impact of the California tax policy shift on the pre-tax earnings of high-income California residents, we use as a control group high-earning out-of-state taxpayers who persistently file as California non-residents. Using a differences-in-differences strategy paired with propensity score matching, we estimate an intensive margin elasticity of 2013 income with respect to the marginal net-of-tax rate of 2.5 to 3.3. Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform.
    JEL: H24 H31 H71 H73 J22 J61 R23
    Date: 2019–10
  3. By: Rema Hanna (Center for International Development at Harvard University); Benjamin A. Olken
    Abstract: Developing countries collect a far lower share of GDP in taxes than richer countries. This paper asks whether changes in tax administration and tax rates can nevertheless raise substantial additional revenue – and if so, which approach is most effective. We study corporate taxation in Indonesia, where the government implemented two reforms that differentially affected firms. First, we show that increasing tax administration intensity by moving the top firms in each region into “Medium-Sized Taxpayer Offices,” with much higher staff-to-taxpayer ratios, more than doubled tax revenue from affected firms over six years, with increasing impacts over time. Second, using non-linear changes to the corporate income tax schedule, we estimate an elasticity of taxable income of 0.59, which implies that the revenue-maximizing rate is almost double the current rate. The increased revenue from improvements in tax administration is equivalent to raising the marginal corporate tax rate on affected firms by about 23 percentage points. We suggest one reason improved tax administration was so effective was that it flattened the relationship between firm size and enforcement, removing the additional “enforcement tax” on large firms. On net, our results suggest that improving tax administration can have significant returns for developing country governments.
    Keywords: Tax Administration
    JEL: H25 H26 O23
    Date: 2019–10
  4. By: Bührle, Anna Theresa; Spengel, Christoph
    Abstract: Most of the European Member States employ anti-loss trafficking rules. They aim to prevent the acquisition of mere corporate shells with high tax loss carryforwards for the tax asset to be utilized in profitable companies. However, other corporations can unintentionally be affected by the anti-abuse regulations if there is a change in ownership or activity. The transfer restrictions have been argued to impair start-up financing, as investors are faced with the risk of losing accumulated loss carryforwards in the corporation upon the entering of new or the capital increase of existing investors. This study provides an overview over the design and development of loss transfer restrictions in the EU28 over a time period of 19 years (2000-2018). Different aspects of the regulations are analyzed against the background of their impact on start-ups. Finally, the rules are categorized with respect to their strictness. Over time, more countries introduced restrictions. At the same time, the regulations became more lenient, offering start-ups more opportunities to maintain their loss carryforwards and, therefore, decreasing the risk for investors.
    Keywords: tax loss carryforward,loss trafficking,loss transfer,entrepreneurship,start-ups
    JEL: M13 H25 H32 L52
    Date: 2019
  5. By: Daunfeldt, Sven-Olov (Institute of Retail Economics (Handelns Forskningsinstitut)); Gidehag, Anton (Institute of Retail Economics (Handelns Forskningsinstitut)); Rudholm, Niklas (Institute of Retail Economics (Handelns Forskningsinstitut))
    Abstract: One way for policymakers to reduce labor costs and stimulate the recruitment of marginalized groups of labor in a highly unionized economy is to lower payroll taxes. However, the efficiency of this policy instrument has been questioned, and previous evaluations have mostly found small employment effects for such reforms. We investigate the effects of a payroll tax cut in Sweden that decreased firms’ labor costs in relation to the number of young employees that they had employed when the reform was implemented in 2007. We find that most firms received small labor cost savings as a result of the reform, but those that received larger cost savings increased their number of employees significantly more than firms that received no, or minor, labor cost savings. Our findings also suggest that the payroll tax cut increased the total wages paid to incumbent workers, but the wage effect was too small to offset the positive extensive-margin employment effect of the reform. In total, we find that the Swedish payroll tax reform created 18,100 jobs over the period 2006-2008; most of these jobs were within the targeted group of young employees.
    Keywords: Payroll tax reform; labor demand; employment; wages
    JEL: H25 H32 J23 J32 L20
    Date: 2019–10–08
  6. By: Norman Gemmell (School of Social and Cultural Studies, Victoria University, Wellington - School of Social and Cultural Studies, Victoria University, Wellington); Marisa Ratto (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)
    Abstract: The ‘standard' Allingham-Sandmo-Yitzhaki (ASY) model of tax evasion predicts effects oncompliance which depend on the perceived probability of detection, tax rate and penalty forevasion. Compliance effects of detection probabilities and tax rates have been extensively testedempirically, but penalty effects are rarely tested explicitly. This paper examines the effects of latepayment penalties on tax compliance based on an experiment involving New Zealand goods andservice tax (GST) ‘late payers'. Firstly, based on an ASY-type model of tax late payments in whichthe probability of enforcement, rather than detection, is central, we develop a number of testablehypotheses. Secondly, based on a field experiment involving a specific compliance intervention, weexamine how taxpayers respond when given different penalty information. The experiment alsoallows us to consider differences between taxpayers' stated intentions to comply and subsequentlyobserved compliance. Results suggest that differences in penalty information given to taxpayersand reductions in penalty rates both affect taxpayers stated intentions to comply (pay overdue taxand penalties) as predicted. However, subsequently observed responses generally appearunresponsive to penalties. Nevertheless, various individual taxpayer characteristics are identifiablethat affect both compliance intentions and actual behaviour.
    Keywords: Tax evasion,late payment penalties,tax experiment,goods and service tax
    Date: 2019–10–01
  7. By: Carolina Ines Pan (Center for International Development at Harvard University)
    Abstract: This study presents evidence of tax avoidance in Buenos Aires, Argentina. I exploit a break in the tax scheme of the most controversial tax, Ingresos Brutos (gross income), between the city and the greater area, which are otherwise identical law and regulation-wise for the studied population. When possible, workers would rather travel longer distances to their jobs than face the tax burden. Given that this type of avoidance is costly, results suggest that Ingresos Brutos might be acting as a binding constraint to growth for businesses.
    Keywords: Taxes, Tax Avoidance, Gross Income, Binding Constraints
    JEL: H2 K2
    Date: 2019–09
  8. By: Marek Kapicka (UCSB); Ctirad Slavik (CERGE-EI)
    Abstract: This paper studies how income taxation interacts with the organization of knowledge and production, and ultimately the distribution of wages in the economy. A more progressive tax system reduces the time that managers allocate to work. This makes the organization of production less efficient and reduces wages at both tails of the distribution, which increases lower tail wage inequality and decreases upper tail wage inequality. The optimal tax system is significantly less progressive than the current one in the United States, because a less progressive tax system also generates a less unequal wage distribution.
    Date: 2019
  9. By: Veronika Síbrtová (University of Economics, Prague); Jana Tepperová (University of Economics, Prague); Jan Pavel (University of Econmics, Prague)
    Abstract: The main aim of the paper is to analyze which factors have an impact on the allocation of US FDIs in the EU countries. We use multivariable regression and OECD and Eurostat data, including also indicators of tax systems promoting and/or enabling the structures of aggressive tax planning. The results suggest that US FDIs are more widely placed in large and developed countries. Based on the analysis of the tax factors, the allocation of US FDIs in the EU are influenced by the effective corporate tax rate and the existence of the patent box regime or other preferential tax treatment of income from IP rights. Our control model of the relationship between the indicators of the tax system and the effective corporate tax rate shows that the effective corporate tax rate is influenced by the statutory corporate tax rate and three aggressive tax planning indicators other than the preferential tax treatment of income from IP rights.
    Keywords: FDI, Base Erosion, Profit Shifting, Tax Factors, Aggressive Tax Planning
    JEL: H25
    Date: 2019–10
  10. By: Kabeya Clement Mulamba; Fiona Tergenna
    Abstract: We investigate spatial dependence of per capita property tax income among South African municipalities. One original contribution of our study is the use of per capita property tax income, rather than the property tax rate, as the outcome variable. Per capita property tax income is indicative of tax burden on residents. In addition, whilst most studies focus on advanced countries that have had institutionalised fiscal decentralisation for many decades, this paper focuses on South Africa, which is a developing country and implemented fiscal decentralisation only 18 years ago. Using Bayesian spatial econometric approach, we establish the presence of spatial dependence.
    Keywords: Municipalities, per capita property tax income, spatial, Spatial dependence, South Africa
    JEL: H70 H77 C31
    Date: 2019–10
  11. By: Andersson, Jonas (Dept. of Business and Management Science, Norwegian School of Economics); Schroyen, Fred (Dept. of Economics, Norwegian School of Economics); Torsvik, Gaute (Dept. of Economics, University of Oslo)
    Abstract: In this paper we develop a model for tax amnesty applications in a multi-period setting. One key insight from the model is that applying for amnesty becomes more attractive at the moment when stricter enforcement is announced, even if the implementation of the policy is in the distant future. We use our model to make sense of how international tax information exchange agreements affects voluntary disclosure of wealth and income previously hidden in tax havens. Our data is from Norway. In accordance with the dynamic amnesty model we observe a strong announcement effect of a tax information exchange agreement between Norway and Switzerland and Luxembourg, the two most important tax havens for Norwegian tax evaders. However, the effect levels off very quickly, much faster than our model predicts. We think this is because the initial announcement of the tax agreement exaggerated the risk the agreement imposed to those who had hidden taxable income and wealth in Switzerland. We also estimate and find significant effects of the press releases the Norwegian Tax Authority issues to inform taxpayers about new international tax agreements and the amnesty, or voluntary disclosure, option that exists in the Norwegian tax code.
    Keywords: Tax Evasion; Tax Amnesty; Tax Information Exchange Agreement
    JEL: C22 C23 H26 H27 K34
    Date: 2019–10–04
  12. By: Baris Kaymak (University of Montreal)
    Abstract: The corporate tax code allows corporations to write off operating losses against past or future tax obligations, resulting in effective tax rates that are firm-specific and dependent on the history of the firm's performance. Since losses are partly an indication of a drop in productivity, which is generally persistent over time, firms with higher expected productivity face, on average, higher marginal taxes on their investment. In this paper, we analyze the distortionary effects of loss-offset provisions on investment and assess the associated aggregate output losses implied by the misallocation of capital. We find that replacing the corporate income tax with a revenue-neutral value-added tax which eliminates the firm-level differences in effective tax rates leads to a 13.9 percent increase in aggregate output.
    Date: 2019
  13. By: Nicolas Jacquemet (PSE - Paris School of Economics); Stéphane Luchini (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Antoine Malezieux; Jason Shogren (UW - University of Wyoming)
    Abstract: Why do people pay taxes? Rational choice theory has fallen short in answering this question. Another explanation, called "tax morale", has been promoted. Tax morale captures the behavioral idea that non-monetary preferences (like norm-submission, moral emotions and moral judgments) might be better determinants of tax compliance than monetary trade-offs. Herein we report on two lab experiments designed to assess whether norm-submission, moral emotions (e.g. affective empathy, cognitive empathy, propensity to feel guilt and shame) or moral judgments (e.g. ethics principles, integrity, and moralization of everyday life) can help explain compliance behavior. Although we find statistically significant correlations of tax compliance behavior with empathy and shame, the economic significance of these correlations are low–—more than 80% of the variability in compliance remains unexplained. These results suggest that tax authorities should focus on the institutional context, rather than individual preference characteristics, to handle tax evasion.
    Keywords: tax evasion,tax morale,morality,personality traits,psychometrics
    Date: 2019–06–26
  14. By: Bakke, Julia Tropina (Dept. of Business and Management Science, Norwegian School of Economics); Hopland, Arnt Ove (Dept. of Business and Management Science, Norwegian School of Economics); Møen, Jarle (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: Using a 20-year-long, population-wide panel with detailed firm and group level data from Norway, we study the profitability change in companies that shift from being domestic to being multinational as well as companies that shift from being multinational to being domestic. Profitability falls when domestic companies become multinational and increases when multinational companies become domestic. The average change in profitability is about 24 %, all else equal. We attribute our findings to the profit shifting opportunities that are available for multinational companies, and we display several patterns in the data that are consistent with this interpretation. We find that the extent of profit shifting decreases after the introduction of stricter transfer pricing regulations, and an increase in transfer pricing audits, starting in 2007/2008. Our best estimate of the total corporate tax revenue lost due to profit shifting is about 6 % in the last year of the sample, 2012. We estimate that the revenue loss would have been twice as large in absence of the new regulatory framework.
    Keywords: Multinational companies; profit shifting; BEPS; Transfer pricing; Tax gap
    JEL: F23 H25 H26
    Date: 2019–10–03
  15. By: Almunia, Miguel; Liu, Li; Lockwood, Ben; Tam, Eddy H.F.
    Abstract: Using administrative tax records for UK businesses, we document both bunching in annual turnover below the VAT registration threshold and persistent voluntary registration by almost half of the firms below the threshold. We develop a conceptual framework that can simultaneously explain these two apparently conflicting facts. The framework also predicts that higher intermediate input shares, lower product-market competition and a lower share of business to consumer (B2C) sales lead to voluntary registration. The predictions are exactly the opposite for bunching. We test the theory using linked VAT and corporation tax records from 2004-2014, finding empirical support for these predictions.
    Keywords: bunching; UK; Value-Added Tax (VAT); Voluntary registration
    JEL: H21 H25 H32
    Date: 2019–09
  16. By: Kurnaz, Musab; Soytas, Mehmet A.
    Abstract: We study the impact of income taxation on intergenerational income correlation. We estimate a life cycle dynastic model and conduct counterfactual analysis to observe the effects of various tax regimes. Compared to a no tax environment, a flat tax regime reduces the correlation only by one percentage points. If the flat tax regime provides child benefits, the correlation additionally declines by four percentage points. Finally, if the taxes are progressive, the reduction, which is due to the increase in the fertility rate (quantity) and the decrease in the educational outcome of children (quality), is highly significant (seven percentage points).
    Keywords: Dynastic Models,Discrete Choice,Fertility,Income Taxation
    JEL: C13 J13 J22 J62
    Date: 2019
  17. By: MARIA GUADALUPE LUGO-SANCHEZ (University Center for Economic and Administrative Sciences, University of Guadalajara)
    Abstract: Evaluation has an important role in society, because it provides affirmations of value, merit, progress, accreditation, responsibility, and when necessary, has the power to finish social programs that do not work, or, on the contrary, expand programs that do. Although the practice of evaluation is old, it is considered that the discipline is in a young stage, as the first efforts to formally develop evaluation theory go back to the decade of the 40s. In Latin America, the institutionalization of evaluation took place at the end of the 20th century, although the process accelerated during the first years of the 21st century. The growing interest was a result of the need to evaluate the social programs that had been instated with the purpose of alleviating the consequences of the economic crisis that the Latin American countries were going through. This gradual process of progress in social programs in Mexico has given rise to the creation of institutions responsible for formalizing the evaluation processes in the country. Despite the above, the desired maturity in terms of evaluation has not been achieved. The purpose of this document is to review the challenges of the current evaluation system in Mexico.
    Keywords: Evaluation of Fiscal Policies, Social Programs, Evaluation Theory
    JEL: H30 H43 H53
    Date: 2019–10
  18. By: Yena Park (University of Rochester)
    Abstract: How should redistributive governments change tax schedule in response to increase in wage inequality? This paper investigate the impact of widening dispersion in wage inequality on optimal tax policy, especially focusing on the adjustment of the wage compression channel (Stiglitz (1982)). The response of tax policy depends on the source of the increasing wage inequality. If the wage inequality is mostly explained by the residual inequality, which is generated by the increasing dispersion in unobserved ability, the return to unobserved skill can be decreasing. Thus, increasing wage inequality caused by widening dispersion in unobserved ability makes wage compression channel when setting optimal tax, which will make the tax schedule relatively less regressive.
    Date: 2019

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