nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒10‒21
fourteen papers chosen by
Thomas Andrén

  1. Subsidy Targeting with Market Power By Maria Polyakova; Stephen P. Ryan
  2. Behavioral Responses to Wealth Taxes: Evidence from Switzerland By Brülhart, Marius; Gruber, Jonathan; Krapf, Matthias; Schmidheiny, Kurt
  3. Personal income distribution and progressive taxation in a neo-Kaleckian model: Insights from the Italian case By Barbieri Góes, Maria Cristina
  4. Taxation and the Superrich By Scheuer, Florian; Slemrod, Joel
  5. Measuring the distributional impact of taxation and public spending: The practice of fiscal incidence analysis By Nora Lustig
  6. Tax Policy and Lumpy Investment Behavior: Evidence from China's VAT Reform By Zhao Chen; Xian Jiang; Zhikuo Liu; Juan Carlos Suárez Serrato; Daniel Xu
  7. Missing Miles: Evasion Responses to Car Taxes By Harju, Jarkko; Kosonen, Tuomas; Slemrod, Joel
  8. Pareto-Improving Reforms of Tax Deductions By Sebastian Koehne; Dominik Sachs
  9. Can European banks' country-by-country reports reveal profit shifting? An analysis of the information content of EU banks' disclosures By Dutt, Verena K.; Nicolay, Katharina; Vay, Heiko; Voget, Johannes
  10. Determinants of tax revenue performance in the Southern African Development Community (SADC) By Michael Ade; Jannie Rossouw; Tendai Gwatidzo
  11. The Economics of the Digital Services Tax By Wolfram F. Richter
  12. Dynamics of the Market for Corporate Tax-Avoidance Advice By Kai A. Konrad
  13. Measuring tax complexity across countries: A survey study on MNCs By Hoppe, Thomas; Schanz, Deborah; Sturm, Susann; Sureth, Caren
  14. Tax Compliance in the Rental Housing Market: Evidence from a Field Experiment By Eerola, Essi; Kosonen, Tuomas; Kotakorpi, Kaisa; Lyytikäinen, Teemu; Tuimala, Jarno

  1. By: Maria Polyakova; Stephen P. Ryan
    Abstract: In-kind public transfers are commonly targeted based on observable characteristics of potential recipients. This paper argues that when the subsidized good is provided by imperfectly-competitive firms, targeting can give rise to a “demographic externality,” creating unintended redistribution of surplus and distorting efficiency. We illustrate this mechanism empirically in the context of means-tested subsidies for privately-provided health insurance plans under the Affordable Care Act (ACA). Using a structural model of supply and demand, we show that market power increases the welfare loss from subsidy targeting, vis-a-vis income-invariant subsidies, by 33 percent.
    JEL: H0 H2 H20 H21 H22 H23 H31 H41 H5 H51 I1 I10 I11 I13 I18 I38 L0
    Date: 2019–10
  2. By: Brülhart, Marius; Gruber, Jonathan; Krapf, Matthias; Schmidheiny, Kurt
    Abstract: We study how reported wealth responds to changes in wealth tax rates. Exploiting rich intra-national variation in Switzerland, the country with the highest revenue share of annual wealth taxation in the OECD, we find that a 1 percentage point drop in the wealth tax rate raises reported wealth by at least 43% after 6 years. Administrative tax records of two cantons with quasi-randomly assigned differential tax reforms suggest that 24% of the effect arise from taxpayer mobility and 20% from house price capitalization. Savings responses appear unable to explain more than a small fraction of the remainder, suggesting sizable evasion responses in this setting with no third-party reporting of financial wealth.
    Keywords: Behavioral Responses; Switzerland; tax evasion; taxpayer mobility; Wealth Taxation
    JEL: H24 H31 H73
    Date: 2019–10
  3. By: Barbieri Góes, Maria Cristina
    Abstract: This paper develops a stylized short-run neo-Kaleckian model incorporating personal income inequality and income taxes based on You and Dutt (1996). The main goal is to investigate how changes in income taxes and personal income distribution affect output growth. The theoretical discussion of the stylized model is then empirically assessed, using data for Italy retrieved from the Survey of Household Income and Wealth published by the Bank of Italy. The empirical analysis confirms both the heterogeneity of the propensities to consume of Italian households and the dominance of absolute income effects in the Italian consumer behavior that assures the negative trade-off between inequality and aggregate demand. More specifically, it is shown that, overall, Italians are still income constrained, not allowing for a compensation of the demand-depressing effects of raising inequality via debt and wealth-based consumption. Likewise, it is argued that decreasing personal income inequality via progressive income tax reforms would have positive effects on aggregate demand, utilization, and growth.
    Keywords: Income inequality,Personal Income Distribution,Income Taxes,Kaleckian model
    JEL: D11 D12 D31 E12 E21 H24
    Date: 2019
  4. By: Scheuer, Florian; Slemrod, Joel
    Abstract: This paper addresses the modern optimal tax progressivity literature, which clarifies the key role of the behavioral response to taxation and accounts for the incomes of the superrich being qualitatively different than others. Some may be "superstars," for whom small differences in talent are magnified into much larger earnings differences, while others may work in winner-take-all markets, such that their effort to climb the ladder of success reduces the returns to others. We stress that pivotal tax-rate elasticities are not structural parameters, and will be smaller the broader and less plastic is the tax base and the more effective is the enforcement of tax evasion. For this reason, normative analysis of tax rates should be accompanied by attention to the tax base, with special attention to capital gains, which comprise a large fraction of the taxable income of the superrich.
    Keywords: Plasticity of Taxable Income; Superrich; Superstars; Tax Systems; Wealth Taxes; Winner-Take-All Markets
    JEL: E6 H2 I3 J3 J6
    Date: 2019–08
  5. By: Nora Lustig (Tulane University, USA)
    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
  6. By: Zhao Chen; Xian Jiang; Zhikuo Liu; Juan Carlos Suárez Serrato; Daniel Xu
    Abstract: A universal fact of firm-level data is that investment is lumpy: firms either replace a considerable fraction of their existing capital (spike) or do not invest at all (inaction). This paper incorporates the lumpy nature of investment into the study of how tax policy affects investment behavior. We show that tax policy can directly impact the lumpiness of investment and that the effectiveness of tax incentives in stimulating investment depends crucially on interactions with investment frictions. We illustrate these results by studying one of the largest tax incentives for investment in recent history: China's 2009 VAT reform. Using administrative tax data and a difference-in-differences design, we document that the reform increased investment by 36% and that this effect is driven by additional investment spikes. We then simulate the fiscal cost of stimulating investment through different tax policies using a dynamic investment model that is consistent with the reduced-form effects of the reform. Policies that directly reduce the likelihood of firm inaction (e.g., investment tax credits) are more effective at stimulating investment than policies that only reduce the tax cost of investment (e.g., corporate income tax cuts).
    JEL: E22 H25
    Date: 2019–10
  7. By: Harju, Jarkko; Kosonen, Tuomas; Slemrod, Joel
    Abstract: We study a tax evasion response to car taxes in Finland, where used car importers overstate the mileage to reduce tax liability. First, we develop a tax evasion measure by comparing reported mileage upon import with subsequent information from vehicle inspections, and find that a decline in mileage — "missing miles" — occurs frequently. Second, we analyze a tax rate increase, and observe a reduction in the number of imported used cars, but only among non-evaders. Finally, we analyze an RCT informing some potential importers about a program of inspections that uncover true odometer readings, and the results suggest that thirdparty reporting reduces evasion.
    Keywords: car tax, tax evasion, enforcement measures, Social security, taxation and inequality, H21, H23, H26, C93,
    Date: 2019
  8. By: Sebastian Koehne; Dominik Sachs
    Abstract: We analyze Pareto-efficient tax deduction rules for work-related expenses. Pareto efficiency dictates a strict rule for marginal deductions along the income distribution. An immediate implication is a recipe for designing Pareto-improving reforms. We apply our theory and simulate a Pareto-improving reform that introduces deductions for non-care household services (housekeeping, gardening, laundry) in the United States. The reform combines marginal deduction rates for household services between 55% and 85% with a slight increase in marginal tax rates.
    Keywords: optimal taxation, tax deduction, Pareto-improving tax reform
    JEL: D82 H21
    Date: 2019
  9. By: Dutt, Verena K.; Nicolay, Katharina; Vay, Heiko; Voget, Johannes
    Abstract: We create a novel database of hand-collected information from the country-by-country reports (CbCRs) of more than 100 multinational bank groups headquartered in the EU for 2014-2016. We compare this new dataset with information from Orbis and Bank Focus to assess in how far the new disclosure obligation increased transparency on banks' tax avoidance behavior. Our descriptive analysis shows that CbCRs uncover a large fraction of worldwide profits and real activities in terms of employees of EU bank groups, especially in tax havens. We also document a striking disconnect between reported profits and real activity, noting considerable heterogeneity between different tax havens and bank groups from different headquarter countries. Regression analysis based on CbCR data and Bank Focus data leads us to expect a tax semi-elasticity of banks' reported profits of about -4.6. In this regard, CbCRs are indicative of a more pronounced tax sensitivity than conventional databases suggest. However, the lack of important economic variables (total assets and staff cost) impedes an exact estimation of banks' profit shifting based on CbCR data alone and with standard methods. These insights are especially relevant in the context of the ongoing political discussions whether to introduce a public CbCR for all large multinational firms in the EU.
    Keywords: Tax Avoidance,Profit Shifting,Country-by-Country Reporting,Public Disclosure,Tax Transparency,Financial Institutions,Database
    JEL: H25 H26 G21 G28
    Date: 2019
  10. By: Michael Ade; Jannie Rossouw; Tendai Gwatidzo
    Abstract: This paper investigates the determinants of tax revenue performance in all 15 Southern African Development Community countries during 1990-2010, using panel data. The investigation makes use of two estimation techniques in testing for country specificity. These are the least squares dummy variables fixed effects and the feasible generalised least squares by Park (1967) and Kmenta (1986). The extreme-bound analysis technique is also used in delineating the various causal relationships (including a sensitivity analysis). Prior to the estimation process, the study tested and controlled for applicable errors in the panel such as endogeneity, serial correlation, cross-sectional dependence of the error term, group-wise heteroscedasticity and contemporaneous correlation. The process addressed some major critique of panel data estimations involving large and small economies in a regional grouping like the SADC. The paper also introduces a value added tax harmonisation variable (and additionally made use of the corporate income tax harmonisation variables) through a tax policy harmonisation measure in investigating the impact of foreign direct investment and taxation on tax revenue collected. The results generally highlight the robust role of taxation (tax rates and tax policy harmonisation variables) (alongside other important determinants) in improving tax revenue in the region, providing empirical support for extant anecdotal evidence. The final empirical findings also confirm the importance of FDI inflows towards tax revenue collected in the SADC and the existence of reverse causality (that is, a causal relationship between FDI and taxation or vice versa). Policy considerations include the need for SADC countries to carry out extensive pro-regional (coordinated) tax reforms, create a regional tax forum and promote initiatives aimed at improving FDI and ultimately tax revenue (as per existing regional protocols).
    Keywords: SADC and Tax Revenue Collected, Tax Policy Harmonisation, Panel data, CSD, Sensitivity analysis
    JEL: E60 F15 H11 H20 H71
    Date: 2018–08
  11. By: Wolfram F. Richter
    Abstract: The use of digital services is largely non-rival. This paper argues that vanishing marginal costs of supply change policy incentives. Small countries are incentivized to tax the import of digital services. In fact, various countries have already moved towards expanded source taxation of online business activities. If such practice spreads, the quality of digital services will be negatively affected. This paper argues that countries exporting digital services have reason to respond by promoting an international tax regime in which the profit earned on remote supplies of digital business services is split between the countries involved.
    Keywords: digital services, remote supply, import tax, alleviating double taxation, profit splitting
    JEL: H25 M48
    Date: 2019
  12. By: Kai A. Konrad
    Abstract: This paper addresses the current debate about mandatory disclosure rules for aggressive tax-planning models as a means to shorten regulatory delay. It focuses on the dynamic interaction of innovation and imitation of aggressive tax-planning products and governmental tax regulation and highlights the importance of the length of regulatory lag in comparison to the time it takes the tax-consulting industry to imitate newly innovated tax-avoidance products. It reveals synergies between highly innovative tax-consulting firms and the governmental tax legislator/regulator. It suggests that innovative tax-consulting firms may benefit from governmental regulation and may actively try to inform and influence the regulator to shorten but not eliminate the regulatory delay.
    Keywords: corporate taxation, tax planning, mandatory disclosure rules, tax consultants, innovation, imitation, tax avoidance, anti-tax-avoidance regulation
    JEL: H26 M48
    Date: 2018–05
  13. By: Hoppe, Thomas; Schanz, Deborah; Sturm, Susann; Sureth, Caren
    Abstract: Despite prior literature emphasizing the increasing role of tax complexity, there is still no comprehensive tax complexity measure. This paper fills this gap and introduces the Tax Complexity Index (TCI), which consists of a tax code subindex and a tax framework subindex. The indices are designed to capture the multidimensional nature of tax complexity from an MNC's perspective and extend previous measures that have so far only focused on selected countries or facets of tax complexity. Based on a survey of highly experienced tax consultants of the largest international tax services networks, the indices are calculated for 100 countries for the year 2016. Our findings indicate that the level of tax complexity varies considerably across countries. From a global perspective, tax complexity is strongly affected by the complexity of transfer pricing regulations in the tax code and by the complexity of tax audits in the tax framework. While we identify countries that turn out to be complex in both their tax code and tax framework, we also observe that many countries differ in their rankings on tax code and tax framework complexity, i.e., they either have a high tax code complexity and a low tax framework complexity or vice versa. When analyzing the associations between tax complexity and other country characteristics, we identify different correlation patterns. For example, we find that tax (framework) complexity is negatively associated with countries' governance, suggesting that strongly governed countries tend to have less complex tax frameworks. In contrast, we find a positive association between tax (code) complexity and the statutory tax rate, indicating that high-tax countries tend to have more complex tax codes. However, none of the observed associations is very strong. We conclude that tax complexity represents a distinct country characteristic and propose to use the TCI and its subindices as new proxies for MNCs' varying exposures to tax complexity in the assessment of country-specific corporate decisions.
    Keywords: tax complexity,tax index,tax system,multinational corporations,tax consultants
    JEL: H20 H25 C83 O57
    Date: 2019
  14. By: Eerola, Essi; Kosonen, Tuomas; Kotakorpi, Kaisa; Lyytikäinen, Teemu; Tuimala, Jarno
    Abstract: We study rental income tax compliance using a large-scale randomized fild experiment and register data with third-party information on the ownership of apartments. We analyze the responses of potential landlords to treatment letters notifying them of stricter tax enforcement, or providing simplifying information on filing practices for the rental income tax. We find that both types of letters caused an increase in the propensity to report rental income, with letters notifying landlords of the use of third-party information in tax enforcement having the strongest effect. Our research design also allows us to analyze different types of spillover effects in tax enforcement. We find an indication of positive reporting spillovers within the household, but do not find clear evidence of spillovers between landlords in local rental markets.
    Keywords: tax compliance, field experiment, rental market, Social security, taxation and inequality, H26, H31,
    Date: 2019

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