nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒11‒18
nine papers chosen by
Thomas Andrén

  1. Shifting taxes from labour to consumption: the efficiency-equity trade-off By Nicola Curci; Marco Savegnago
  2. Optimal Capital Income Taxes in the infinite horizon model with Progressive Income Taxes By Been-Lon Chen; Chih-Feng Lai
  3. Sustainable fiscal policy and economic growth in South Africa By Philippe Burger; Estian Calitz
  4. Fiscal policy adjustments to budget shocks: Evidence from German municipalities By Christofzik, Désirée I.; Schneider, Benny
  5. Tax Progressivity, Economic Booms, and Trickle-Up Economics By Jackson, Laura E.; Otrok, Christopher; Owyang, Michael T.
  6. Housing taxation: a new database for Europe By Salvador Barrios; Cecile Denis; Viginta Ivaskaite-Tamosiune; Adriana Reut; Estefania Vazquez Torres
  7. Do sugar taxes affect the right consumers ? By SERSE Valerio,
  8. On the Optimality of Differential Asset Taxation By Phelan, Tom
  9. Tax Treaties Worldwide: Estimating Elasticities and Revenue Foregone By Petr Jansky; Jan Laznicka

  1. By: Nicola Curci (Bank of Italy); Marco Savegnago (Bank of Italy)
    Abstract: We assess how a tax shift from labour to consumption affects the Italian tax-benefit system in terms of the efficiency-equity trade-off. We designed three budget-neutral scenarios, where the revenues generated by increasing VAT rates are used to finance some alternative cuts in direct taxes. In all the scenarios, the trade-off is confirmed: efficiency increases but equity decreases. However, the scenario best positioned in the trade-off is the one providing an increase in labour income tax credits: in this case, the increase in efficiency is the highest and the decrease in equity is the lowest. We also account for the distribution of winners and losers following this reform. We show that, even if the losers are mostly concentrated in the lowest part of the equivalent income distribution, the recently introduced minimum income schemes provide these households with a benefit that is much higher than the loss generated by the tax shift.
    Keywords: microsimulation model, redistribution, efficiency, taxation, progressivity
    JEL: H22 H23 H31 C15 C63
    Date: 2019–11
  2. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Chih-Feng Lai (Department of Economics, Soochow University)
    Abstract: In infinitely lived, representative-agent models with linear income taxes, the influential studies by Chamley (1986) and Judd (1985) have shown that the optimal capital tax is zero in the long run. Our paper studies otherwise the same model except for progressive taxes and the results are as follow. First, the long-run optimal capital income tax is positive under progressive income taxes. Second, the welfare gain of tax reforms from current tax rates toward positive optimal income taxes under progressive tax rates is larger than that toward a zero capital income tax under linear income taxes. Our findings lend support to positive capital income taxes under a system of progressive income taxes adopted in developed countries since the late 19th century.
    Keywords: : infinite horizon model, optimal capital income taxation, progressive taxes
    JEL: E1 E6 H2
    Date: 2018–08
  3. By: Philippe Burger (Pro Vice-Chancellor: Poverty: Inequality and Economic Development, University of the Free State); Estian Calitz (Professor Emeritus, Department of Economics, Stellenbosch University)
    Abstract: Following years of fast-rising public debt levels and low economic growth, how can the South African government re-establish fiscal sustainability? To assess the sustainability of South African fiscal policy, we use Markov-Switching VARs to estimate fiscal reaction functions. The fiscal variables considered are the primary balance, total non-interest expenditure, total expenditure and total revenue. The MS-VAR also considers the impact of fiscal policy on economic growth. We subsequently consider what size of primary balance adjustment is required to stabilise the public debt/GDP ratio, followed by an assessment of the various revenue and expenditure adjustment options open to government to achieve the required primary balance adjustment. We find little scope to increase revenue, and that government’s salary bill and goods-and-services budget should carry the load of the adjustment. In addition, state-owned enterprises (SOEs) should be restructured urgently to arrest the fiscal risk SOE debts and guarantees hold for government finances.
    Keywords: Public debt; budget deficit; primary balance; economic growth; government expenditure; tax revenue
    JEL: E62 E63 H62 H63
    Date: 2019
  4. By: Christofzik, Désirée I.; Schneider, Benny
    Abstract: We study the fiscal policy reactions of municipalities in the German state of North Rhine-Westphalia to an unanticipated spending shock. The implementation of a horizontal transfer system led to additional contributions for selected municipalities. Using the quasi-random assignment, we examine whether these contributing municipalities adjust their tax setting behavior, respond by adapting expenditures, or incur debt in the short run. We find a sizable increase of net borrowing. This increase is even higher than the expansion of spending. Municipalities additionally refrain from increasing tax rates. The results point to delayed fiscal adjustments. We conclude that the design and the predictability of transfer systems have significant implications on the behavior of municipalities within decentralized systems.
    Keywords: local public finance,local taxation,public debt,fiscal shocks
    JEL: H71 H72 H77 R50
    Date: 2019
  5. By: Jackson, Laura E. (Bentley University); Otrok, Christopher (University of Missouri ; Federal Reserve Bank of St. Louis); Owyang, Michael T. (Federal Reserve Bank of St. Louis)
    Abstract: We propose a method to decompose changes in the tax structure into a component measuring the level of taxes and a component orthogonal to the level that measures progressivity. While our focus is on the progessivity results, we find that the level shock is similar to standard tax shocks found in the empirical literature in that a rise in the level is contractionary. An increase in tax progressivity sets off an economic boom. Those at the bottom of the income distribution (who are constrained hand-to-mouth consumers) set off a consumption boom that expands the overall economy. Those at the top of the income distribution benefit disproportionately from expansions, and their income gains more than offset the increases in tax from higher marginal rates. The net result is that an increase in progressivity leads to an increase in inequality, not a decrease as conventional wisdom would suggest. We interpret these results as evidence in favor of trickle-up, not trickle-down, economics.
    Keywords: Taxes; Gini coefficient; income and consumption inequality
    JEL: C32 E62
    Date: 2019–11–14
  6. By: Salvador Barrios (European Commission - JRC); Cecile Denis; Viginta Ivaskaite-Tamosiune (European Commission - JRC); Adriana Reut; Estefania Vazquez Torres (European Commission - JRC)
    Abstract: Tax incentives favouring homeownership are widely used in developed economies. Homeownership is often thought to bring a number of positive contributions, from the promotion of households´ saving to enhanced community engagement. However, housing tax incentives are also considered as a major source of distortions for households´ decisions, especially in absence of taxation of in-kind services related to housing consumption (i.e. imputed rents) and in presence of mortgage interest payment deductibility. These distortions can have wide-ranging consequences for investment, consumption and public finances. Housing tax distortions have rarely been analysed from a cross-country perspective over time, however, not least because of the absence of comparable data and the difficulty to gather detailed information on the specific tax treatment of homeownership. In this paper we aim to fill this gap by providing comparable time series on the main features of housing taxation in European countries. Our database includes information on transfer taxes incurred when buying a house, implicit recurrent property taxes owed by households, capital gain taxes, imputed rent taxation and mortgage interest tax reliefs. The data is provided for the period 1995-2017 by the time of writing this paper and will be updated annually and made available at the following website: We use this data to estimate the user cost of owner-occupied housing (UCOH) following the approach proposed by Poterba, (1992) and Poterba and Sinai (2008), which provides a synthetic indicator on the distortions exerted by the tax system on households´ housing investment choices. A number of additional data used to calculate the UCOH indicator, such as maximum loan to value ratio and maximum loan duration, interest rate for long-term government bonds, interest income tax and house price are also provided.
    Keywords: Housing taxation, database, user costs of housing, transfer tax, capital gains tax, mortgage interest tax relief, recurrent property tax, imputed rent taxation
    Date: 2019–10
  7. By: SERSE Valerio, (Université catholique de Louvain, CORE, Belgium)
    Abstract: Sugar taxes are often considered as a possible tool to tackle excessive sugar consumption. This paper estimates a dynamic multinomial Logit model of cola demand on a novel supermarket scanner dataset in order to study preference heterogeneity and state dependence in product choice. The model estimates allow evaluating the effectiveness of taxation in reducing demand for sugary colas across different consumer types. The results show that a sugar tax would be less effective among the targeted population of heavy sugar consumers. This policy, however, would be more effective among low-income households. Tax policy simulations show that a specific tax on sugar should be preferred to an ad-valorem tax on sugary colas on both corrective and equity grounds. This is because ad-valorem taxes can lead low-income households and heavy sugar consumers to substitute from expensive to cheaper sugary brands. Lastly, because households exhibit state dependence in cola choice, sugar taxes would be more effective in reducing sugar consumption in the long-run.
    Keywords: heterogeneity in preferences, state dependence, sugar taxes, discrete choice models
    JEL: D12 H31 I18 Q18
    Date: 2019–09–01
  8. By: Phelan, Tom (Federal Reserve Bank of Cleveland)
    Abstract: How should a utilitarian government balance redistributive concerns with the need to provide incentives for business creation and investment? Should they tax business profits, the (risk-free) savings of owners, or some combination of both? To address this question, this paper presents a model in which the desirability of differential asset taxation emerges endogenously from the presence of agency frictions. 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, the wealth of an agent must depend on the performance of his/her firm, leading to ex-post inequality in all efficient allocations. I show that the efficient stationary distribution of wealth exhibits a thick right (Pareto) tail, with the degree of inequality monotonically increasing in the number of workers per entrepreneur. The efficient allocation is then implemented in a general equilibrium model using history-independent linear taxes on risk-free savings and (reported) 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 preference parameters.
    Keywords: Optimal taxation; moral hazard; optimal contracting; entrepreneurship;
    JEL: D61 D63 E62
    Date: 2019–08–29
  9. By: Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Jan Laznicka (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: Much of the foreign direct investment worldwide is affected by one of more than 3000 bilateral tax treaties. There is an agreement that dividend and interest payments respond to these tax treaties’ provisions, but evidence is scarce as to the magnitude of this response. We aim to fill in this gap for as many countries as possible by estimating the elasticities of dividend and interest income with respect to withholding tax rates, and the associated revenue foregone, exploiting the best available cross-country datasets. We collect information on withholding tax rates from the International Bureau of Fiscal Documentation; this includes information on EU directives, which imply zero withholding rates among all the EU member states and Switzerland, in addition to standard bilateral tax treaties. We combine this detailed information on withholding tax rates with foreign direct investment data from the International Monetary Fund, which we use to approximate bilateral dividend and interest flows; this results in a large panel data set of around 65,000 annual country-pair observations. While also observing heterogeneity in elasticities across countries, we estimate dividend flows to be highly elastic in a cross-country regression: a 1% increase in the applicable withholding tax is associated with a 2.3% - 2.6% decrease in dividend flows. We apply the elasticities to estimate potential tax revenue foregone. We estimate the largest annual revenue foregone for the United States (2.3 - 2.9 billion USD) and Canada (1.4 - 3.2 billion USD), while the investor country behind the largest revenue foregone is the Netherlands (2.9 – 3.3 billion USD). We arrive at somewhat lower and less robust estimates for interest income. Although our headline revenue estimates are, as expected, lower than static estimates that do not reflect elasticities, we nevertheless show that the revenue foregone of tax treaties remain non-negligible for some countries.
    Keywords: foreign direct investment, multinational enterprise, tax treaty, double taxation agreement, elasticity, withholding tax
    JEL: F21 F23 H25 H26 H32
    Date: 2019–11

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