nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒11‒25
eighteen papers chosen by
Thomas Andrén

  1. Optimal Taxation with Private Insurance By Yena Park; Yongsung Chang
  2. Work incentives at the extensive and intensive margin in Europe: the role of taxes, benefits and population characteristics By Jara Tamayo, Holguer Xavier; Gasior, Katrin; Makovec, Mattia
  3. The fiscal and equity impact of social tax expenditures in the EU By Barrios, Salvador; Coda Moscarola, Flavia; Figari, Francesco; Gandullia, Luca; Riscado, Sara
  4. Corporate Taxation, Tax Administration and Financial Development By Mohammed Mardan
  5. Does a Wealth Tax Discriminate against Domestic Investors? By Bjerksund, Petter; Schjelderup, Guttorm
  6. National Pension Policy and Globalization: A New Approach to Strive for Efficient Portability and Equitable Taxation By Bernd Genser; Robert Holzmann
  7. Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium By Sachs, Dominik; Tsyvinski, Aleh; Werquin, Nicolas
  8. The tax elasticity of formal work in African countries By Pirttilä Jukka; McKay Andy; Schimanski Caroline
  9. Who Pays for Municipal Governments? Pursuing the User Pay Model By Tedds, Lindsay M.
  10. The Big Shakeup: Making Sense of the OECD Digital Tax Proposals By Jeffrey Trossman; Jeffrey Shafer
  11. The contribution of proportional taxes and tax-free cash benefits to income redistribution over the period 2005-2018: Evidence from Italy By Boscolo, Stefano
  12. Tax Prices and Charitable Giving: Projected Changes in Donations Under the 2017 TCJA By Jonathan Meer; Benjamin A. Priday
  13. Global inequalities in taxing rights: An early evaluation of the OECD tax reform proposals By Cobham, Alex; Faccio, Tommaso; FitzGerald, Valpy
  14. Investment Responses to Tax Policy Under Uncertainty By Irem Guceri; Maciej Albinowski
  15. Non-tax Revenue for Funding Municipal Governments: Take-up, Constraints, and Emerging Opportunities By Tedds, Lindsay M.
  16. The Tax Treatment of Non-Renewable Resource Exploration Expenditures in Canada: A Historical Review and a Way Forward By Tedds, Lindsay M.
  17. Digitalization to Improve Tax Compliance: Evidence from VAT e-Invoicing in Peru By Matthieu Bellon; Jillie Chang; Era Dabla-Norris; Salma Khalid; Frederico Lima; Enrique Rojas; Pilar Villena
  18. The Pigovian tax on capital-intensive industries By Maruyama, Yuuki

  1. By: Yena Park; Yongsung Chang
    Abstract: We derive a fully nonlinear optimal income tax schedule in the presence of private insurance. As in the standard taxation literature without private insurance (e.g., Saez (2001)), the optimal tax formula can still be expressed in terms of sufficient statistics. With private insurance, however, the formula involves additional terms that reflect how the private market interacts with public insurance. For example, in our benchmark model-Huggett (1993)-the optimal tax formula should also consider pecuniary externalities as well as changes in the asset holdings of households. According to our analysis, the difference in optimal tax rates (with and without a private insurance market) can be as large as 11 percentage points.
    Keywords: Optimal Taxation; Private Insurance; Pecuniary Externalities; Variational Approach
    JEL: E62 H21 D52
    Date: 2018–11
  2. By: Jara Tamayo, Holguer Xavier; Gasior, Katrin; Makovec, Mattia
    Abstract: Tax and benefit systems play an important role in determining work incentives at both, the extensive and the intensive margin of labour supply. The aim of this paper is to provide a comprehensive comparative analysis of work incentives in the EU. Our analysis makes use of microsimulation techniques and representative household surveys from all 28 EU countries to compare the distribution of short- and long-term participation tax rates and marginal effective tax rates across population subgroups. We focus on people currently in work and characterise the population facing low work incentives in each country. Our results highlight the large variation in the distribution of work incentives across EU countries, explained not only by differences in the design of tax-benefit systems, but also by the characteristics of the labour force across countries. Unemployment insurance benefits contribute substantially to short-term participation tax rates and explain on average 20 percentage point difference between work incentives of short- vs. long-term unemployment. Our analysis further highlights the need to use microdata to study differences across countries in terms of the population subgroups facing low incentives to work with the aim to inform the policy debate on potential reforms to make work pay.
    Date: 2019–11–17
  3. By: Barrios, Salvador; Coda Moscarola, Flavia; Figari, Francesco; Gandullia, Luca; Riscado, Sara
    Abstract: Tax expenditures are preferential tax treatments granted to specific individuals or categories of households which aim at achieving social and economic goals. They are widely used by EU Member States. However, their fiscal and equity impacts are not always clear and their effectiveness and efficiency as a policy instrument need to be carefully evaluated, especially in the present context of constrained public finances. This paper quantifies the fiscal and equity effects of social tax expenditures related to housing, education and health in 27 European countries making use of EUROMOD, the EU-wide microsimulation model. We find a variety of effects, in terms of sign and magnitude, across Member States, and within these, among types of households. Overall our findings suggest that the impact of tax expenditure on tax revenues and on income inequalities can be sizeable. The redistributive impact of removing tax expenditures can go both directions, either on the progressive or regressive side, depending on the country and the tax expenditure considered.
    Date: 2019–11–18
  4. By: Mohammed Mardan
    Abstract: This paper analyzes corporate tax-related policies and the difference between them in developed and developing countries. I show that the relationship between financial development and corporate income tax rates as well as the tax administrations’ effectiveness follows a U-shaped pattern, a discrepancy to the observation that developing countries usually have the weakest administrative structures. However, this observation can be explained under the premise that the tax administration’s effectiveness is determined at a later stage, and not simultaneously with the corporate tax rate. Moreover, I show that, under this premise, fighting tax havens increases tax revenues in developed countries, but decreases them in developing countries. Instead, if policies are simultaneously considered, the fight against tax havens will also benefit developing countries.
    Keywords: developing countries, profit shifting, tax administration, tax competition, tax haven
    JEL: H25 O23 F23
    Date: 2019
  5. By: Bjerksund, Petter (Dept. of Business and Management Science, Norwegian School of Economics); Schjelderup, Guttorm (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: This paper studies the impact of a capital-income tax and a wealth tax on investor behavior in an efficient capital market under various assumptions regarding uncertainty and time horizons. We show that investors who face capital taxes have a lower discount rate, but that their willingness to pay for a company’s stock is not affected by these taxes. In a second step, we show that if a company owner increases her required rate of return from the company because of capital taxes, she will harm the company’s market value and thus her own wealth.
    Keywords: Capital-income tax; wealth tax; investor behavior
    JEL: G10 G12 H20 H25
    Date: 2019–11–21
  6. By: Bernd Genser (University of Konstanz (retired), Konstanz, Germany); Robert Holzmann (Austrian National Bank (governor) and Austrian Academy of Sciences, Vienna, Austria)
    Abstract: As part of globalization, individuals increasingly spend part of their working or retirement life abroad and want to keep or move their acquired rights, accumulated retirement assets, or benefits in payment freely across borders. This raises the issue of the portability and taxation of cross-border pensions in accumulation and disbursement. This paper addresses both portability and taxation issues from the angle of which type of pension scheme – defined benefits (DB) or defined contributions (DC) – and which regime of cross border pension taxation is more aligned with globalization in establishing individual fairness, fiscal fairness, and bureaucratic efficiency. The paper summarizes the limited literature on portability and taxation of cross-border pensions and concludes that the current taxation approach is unsustainable in a global setting. We present a proposal to move from deferred toward front-loaded taxation of pensions and point at the gains in fairness for individuals and states and some other attractive features of this regime change with respect to taxation and portability.
    Keywords: portability of pensions, pension taxation, international taxation, international migration, model tax convention
    JEL: H55 H24 H87 F22
    Date: 2019–11–13
  7. By: Sachs, Dominik; Tsyvinski, Aleh; Werquin, Nicolas
    Abstract: We study the incidence of nonlinear labor income taxes in an economy with a continuum of endogenous wages. We derive in closed form the effects of reforming nonlinearly an arbitrary tax system, by showing that this problem can be formalized as an integral equation. Our tax incidence formulas are valid both when the underlying assignment of skills to tasks is fixed or endogenous. We show qualitatively and quantitatively that contrary to conventional wisdom, if the tax system is initially suboptimal and progressive, the general-equilibrium trickle-down forces may raise the benefits of increasing the marginal tax rates on high incomes. We finally derive a parsimonious characterization of optimal taxes.
    Date: 2019–11
  8. By: Pirttilä Jukka; McKay Andy; Schimanski Caroline
    Abstract: A key policy problem in most developing countries is the size of the informal sectorÂÂ and its persistence over time. In need to increase their tax revenues, policy makers face a trade-offÂÂ between decreasing tax rates (making formalizing potentially more attractive) and alternativelyÂÂ raising tax rates (potentially slowing down the formalization of the economy if people preferÂÂ informal employment or self-employment). Evidence on formal versus informal wages and jobÂÂ characteristics in different sectors and the impact of tax changes on the extent of informality inÂÂ developing countries is, however, very limited.This paper estimates the tax responsiveness of theÂÂ extensive margin of formality, that is the propensity to be a formal rather than informal worker,ÂÂ for four sub-Saharan African countries. Using repeated cross-sections of household data andÂÂ applying grouping estimator techniques, this paper does not find robust effects of taxes on theÂÂ extent of formal work, although in a pooled sample taxes appear to lower the share of formalÂÂ workers in some specifications.
    Keywords: Labour supply,Sub-Saharan Africa,Taxation,Developing countries,Informality
    Date: 2019
  9. By: Tedds, Lindsay M.
    Abstract: It is undeniable that the goods, services, and privileges that municipalities provide are vital for Canadians’ well-being and that municipalities are facing increasing pressure to provide more infrastructure and services to more Canadians at a higher level of service. In order to provide this infrastructure and these services, however, municipalities have to increasingly find a way to pay for them. The key challenge then becomes, how do cities pay for these services and infrastructure? How do cities raise enough revenue to deliver these high-quality public services that will attract and retain businesses and residents in a way that does not undermine their competitive advantage and that is fair, accountable, equitable, and within their authorities? As it turns out the answer to this question is “wherever possible, charge.” That is, where possible, the direct users should pay the cost of providing municipal services. The rest of this chapter will outline what are the two main funding choices, property taxes and user levies, for Canadian municipalities and why. If the choices for municipalities for its own source revenues are between property taxes and user levies, what are these instruments? If the choice then is between user levies and property taxes, what has been the take up of these revenue instruments by municipalities in Canada and what might be driving these decisions? Finally, which revenue tool is preferred and why, using the principles tax fairness, tax accountability, and tax equality? In essence, it boils down to establishing a strong link between expenditures and revenues, leading to a preference for user levies.
    Keywords: Municipal Public Finance, User Fees, Regulatory Charges, Proprietary Charges, Municipal Revenue, Benefits Received, Tax Fairness
    JEL: H21 H27 H71 H77
    Date: 2019–10
  10. By: Jeffrey Trossman (Blake, Cassels & Graydon LLP); Jeffrey Shafer (Blake, Cassels & Graydon LLP)
    Keywords: Fiscal and Tax Policy; Business and Capital Taxation
    JEL: H25
    Date: 2019–11
  11. By: Boscolo, Stefano
    Abstract: Over the last two decades a growing interest in understanding what determines the redistributive role of tax-benefit systems has emerged worldwide. In the case of Italy, previous analyses were mainly focused on quantifying the contribution of marginal tax rates, deductions and tax credits to the redistributive capacity of personal income tax (PIT), while neglecting the effect on income redistribution of proportional taxes and income sources exempt from taxation such as tax-free cash benefits. This paper aims to fill this gap by applying two alternative Gini-based decomposition methodologies (Onrubia et al., 2014; Urban, 2014) to the redistributive effects of the Italian tax-benefit system over the period 2005-2018. The contribution of each tax-benefit instrument is quantified for several scenarios which diverge from each other in that they are representative of different degrees of extension of the tax-benefit system under examination.
    Date: 2019–11–14
  12. By: Jonathan Meer; Benjamin A. Priday
    Abstract: We estimate the tax price elasticity of charitable giving using newly-available data from the Panel Study of Income Dynamics spanning 2001-2017. We find that households that always itemize are less sensitive to changes in the tax treatment of donations than house-holds that switch itemizing status. We apply these results to the provisions of the Tax Cut and Jobs Act of 2017, taking into account the marginal propensity to donate from the increase in disposable income expected for most households, and predict significant reductions in charitable giving.
    JEL: D64 H24 H41
    Date: 2019–11
  13. By: Cobham, Alex; Faccio, Tommaso; FitzGerald, Valpy
    Abstract: The current OECD process to reform the international rules governing corporate tax, aimed to achieve a consensus solution by 2020, has finally recognised the need to introduce elements of formulary apportionment to allocate the profits of multinationals and is framed explicitly in terms of redistributing taxing rights between countries. In this paper we provide the first public evaluation of the redistribution of taxing rights associated with the leading proposals of the OECD, IMF and the Independent Commission for the Reform of International Corporate Taxation (ICRICT). The first key finding is that that reallocation of taxing rights towards “market jurisdictions”, as it is currently understood, is likely to be of little benefit to non-OECD countries. Indeed, the proposal is likely to reduce revenues for a range of lower-income countries. Second, all of the proposals deliver a much broader distribution of benefits if some element of taxing rights is apportioned according to the location of multinationals’ employment, and not only of sales.
    Date: 2019–10–03
  14. By: Irem Guceri; Maciej Albinowski
    Abstract: How does economic uncertainty affect the impact of tax policy? We exploit a natural experiment in which two very similar investment subsidies were implemented in the same country, two years apart: once during a period of economic stability, and once during a period of very high uncertainty. Exploiting sharp discontinuities in eligibility and using rich administrative data, we find that firms exposed to high uncertainty decide to “wait and see” before investing, despite generous incentives. Firms that are sheltered from uncertainty still respond strongly to policy. This implies that periods of stability offer an important policy opportunity to encourage investment.
    Keywords: investment, uncertainty, tax policy
    JEL: H25 C21
    Date: 2019
  15. By: Tedds, Lindsay M.
    Abstract: What are user levies? How do they differ from a tax? When are user levies an appropriate or preferred policy instrument? What are the trends in user levies across Canada? What are the implications for municipal activities and budgets? How can user levies be used by municipal governments in relation to emerging pressures? This chapters will document the increasing reliance on user levies by municipal governments in Canada compared to the provincial and federal governments and show that this increasing reliance is generally consistent across Canada. It will outline reasons for the increasing reliance. The paper will clarify the legal definitions and limitations on user levies in Canada and what this mean for the design and implementation of these levies. Finally, the paper will explore both existing and emerging opportunities for the employment of user levies using case studies and present areas of potential concern along with suggestions for improvement.
    Keywords: Municipal Revenues, Non-tax revenues, user fees, regulatory charges, proprietary charges, user levies
    JEL: H27 H71 H77
    Date: 2018–07
  16. By: Tedds, Lindsay M.
    Abstract: The Canadian Income Tax Act recognizes three main types of expenses incurred in Canada by firms principally engaged in mineral, metal, petroleum, and natural gas. These are Canadian Exploration Expenses (CEEs), Canadian Development Expenses (CDEs), and Canadian Oil and Gas Property Expenses (COPGE). The Income Tax Act permits these expenses to be deductible from income for tax purposes to varying degrees of generosity. CEEs are 100% deductible from income while CDEs and CPOGEs are generally deductible at a declining balance rate of 30% or 10% per year respectively., Canada’s new federal government has proposed to change the deductibility of CEEs, a change that potentially has wide-reaching implications for Canada’s energy and resources sector. In particular, the government has committed to phasing out subsidies for the fossil fuel industry, the first step of which is to only allow the use of the CEE deduction for unsuccessful exploration. The Liberal proposal raises important considerations about the tax treatment of exploration expenses. First, what is the background of and justification for the current tax treatment of these expenses? Second, in what way could the CEE expense be considered a subsidy? Third, what are some of the real implications of the proposal? To analyze this issue, I first lay out the history regarding the tax deductibility of resource expenses in Canada, detailing how the existing tax treatment can be considered preferential. The preferential tax treatment for exploration and development expenses then laid the ground work for the flow-through share regime, which flows the deduction through to investor’s in exchange for equity investment. The second section details the history of the flow-through share regime, showing how the FTS regime is not only based on a tax preference but also is itself preferential tax treatment. The third section lays out the justifications for the tax preferences for both exploration and development expenses and the FTS regime. The paper then addresses the evidence for the justifications for the preferential tax treatments. Finally, the paper considers the outstanding questions from the Liberal proposal as well as the implications the proposal has. Poignantly, the proposal as it stands will lead to the demise of the FTS regime and the implications of this will need to be addressed by the government if it proceeds with its proposal. The paper ends with some concluding remarks.
    Keywords: Canadian Exploration Expenses, Canadian Development Expenses, Flow-through shares, tax deductibility, non-renewable resources expenses
    JEL: H23 H24 H25 Q38
    Date: 2017–12–17
  17. By: Matthieu Bellon; Jillie Chang; Era Dabla-Norris; Salma Khalid; Frederico Lima; Enrique Rojas; Pilar Villena
    Abstract: This paper examines the impact of e-invoicing on firm tax compliance and performance using administrative tax data and quasi-experimental variation in the rollout of VAT electronic invoicing in Peru. We find that e-invoicing increases reported firm sales, purchases and value-added by over 5 percent in the first year after adoption. The impact is concentrated among smaller firms and sectors with higher rates of non-compliance, suggesting that e-invoicing enhances compliance by lowering compliance costs and strengthening deterrence. The reform’s positive effects on tax collection are hindered by shortcomings in the VAT refund mechanism in Peru, suggesting that digital tools such as e-invoicing should be complemented by other reforms to improve revenue mobilization.
    Date: 2019–11–01
  18. By: Maruyama, Yuuki
    Abstract: Government intervention in the market and industrial policy tend not to be considered good. However, as can be seen from the Cobb-Douglas production function, capital has the effect of increasing the marginal productivity of labor, and the effect is greater in industries with high labor share (labor-intensive industries). For this reason, if a Pigovian tax is imposed on capital-intensive industries, much capital will move to labor-intensive industries and workers' wages will increase. In this paper, I use a two-sector model to analyze the optimal Pigovian tax rate that will maximize the income of workers. It shows that the optimal Pigovian tax rate is higher in countries with higher productivity in labor-intensive industries and have more population and less capital.
    Date: 2019–10–19

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