nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒12‒02
fifteen papers chosen by
Thomas Andrén

  1. Consumption Insurance Against Wage Risk: Family Labor Supply and Optimal Progressive Income Taxation By Chunzan Wu; Dirk Krueger
  2. The Optimal Taxation of Business Owners By Phelan, Tom
  3. Does One Medicare Fit All? The Economics of Uniform Health Insurance Benefits By Mark Shepard; Katherine Baicker; Jonathan S. Skinner
  4. A Distorting Mirror: Major Media Coverage of Americans` Tax Policy Preferences By Daniel Chomsky
  5. Does Tax-Benefit Linkage Matter for the Incidence of Social Security Contributions? By Antoine Bozio; Thomas Breda; Julien Grenet
  6. Forward-looking effective tax rates in the banking sector By Ernesto Zangari; Elena Pisano
  7. Corruption and tax morale in Africa By Boly, Amadou; Konte, Maty; Shimeles, Abebe
  8. Behavioral Optimal Taxation: The Case of Aspirations By Weber, Matthias
  9. The Welfare Magnet Hypothesis: Evidence From an Immigrant Welfare Scheme in Denmark By Ole Agersnap; Amalie Sofie Jensen; Henrik Kleven
  10. Taxes and Turnout By Bierbrauer, Felix; Tsyvinski, Aleh; Werquin, Nicolas
  11. The future of work and its implications for social protection and the welfare state By Gassmann, Franziska; Martorano, Bruno
  12. Political Economy of Cross-Border Income Shifting: A Protection Racket Approach By Maxim Ananyev
  13. Online Appendix to "Capital Taxes and Redistribution: The Role of Management Time and Tax Deductible Investment" By Juan Carlos Conesa; Begona Dominguez
  14. Who'll stop lying under oath? Empirical evidence from Tax Evasion Games By Nicolas Jacquemet; Stephane Luchini; Antoine Malezieux; Jason Shogren
  15. Local taxation on households: an analysis at municipal level By Laura Conti; Daniela Mele; Vanni Mengotto; Eugenia Panicara; Roberto Rassu; Valentina Romano

  1. By: Chunzan Wu; Dirk Krueger
    Abstract: We show that a calibrated life-cycle two-earner household model with endogenous labor supply can rationalize the extent of consumption insurance against shocks to male and female wages, as estimated empirically by Blundell, Pistaferri and Saporta-Eksten (2016) in U.S. data. In the model, 35% of male and 18% of female permanent wage shocks pass through to consumption, compared to the empirical estimates of 32% and 19%. Most of the consumption insurance against permanent male wage shocks is provided through the presence and labor supply response of the female earner. Abstracting from this private intra-household income insurance mechanism strongly biases upward the welfare losses from idiosyncratic wage risk as well as the desired extent of public insurance through progressive income taxation. Relative to the standard one-earner life cycle model, the optimal degree of tax progressivity is significantly lower and the welfare gains from implementing the optimal system are cut roughly in half.
    JEL: E21 H21 H31
    Date: 2019–11
  2. By: Phelan, Tom (Federal Reserve Bank of Cleveland)
    Abstract: Business owners in the United States are disproportionately represented among the very wealthy and are exposed to substantial idiosyncratic risk. Further, recent evidence indicates business income primarily reflects returns to the human (rather than financial) capital of the owner. Motivated by these facts, this paper characterizes the optimal taxation of income and wealth in an environment where business income depends jointly on innate ability, luck, and the accumulated past effort exerted by the owner. I show that in (constrained) efficient allocations, more productive entrepreneurs typically bear more risk and that the associated stationary distributions of income, wealth, and firm size exhibit the thick right (Pareto) tails observed in the data. Finally, when owners may save in a risk-free bond and trade shares of their business, I show that the optimal linear taxes in this environment call for double taxation of firm profits, at both the firm and the personal income level, and for a tax/subsidy on wealth that may assume either sign.
    Keywords: Optimal taxation; moral hazard; optimal contracting; human capital;
    JEL: D61 D63 E62
    Date: 2019–11–19
  3. By: Mark Shepard; Katherine Baicker; Jonathan S. Skinner
    Abstract: There is increasing interest in expanding Medicare health insurance coverage in the U.S., but it is not clear whether the current program is the right foundation on which to build. Traditional Medicare covers a uniform set of benefits for all income groups and provides more generous access to providers and new treatments than public programs in other developed countries. We develop an economic framework to assess the efficiency and equity tradeoffs involved with reforming this generous, uniform structure. We argue that three major shifts make a uniform design less efficient today than when Medicare began in 1965. First, rising income inequality makes it more difficult to design a single plan that serves the needs of both higher- and lower-income people. Second, the dramatic expansion of expensive medical technology means that a generous program increasingly crowds out other public programs valued by the poor and middle class. Finally, as medical spending rises, the tax-financing of the system creates mounting economic costs and increasingly untenable policy constraints. These forces motivate reforms that shift towards a more basic public benefit that individuals can “top-up” with private spending. If combined with an increase in other progressive transfers, such a reform could improve efficiency and reduce public spending while benefiting low income populations.
    JEL: H4 H51 I13
    Date: 2019–11
  4. By: Daniel Chomsky (University of Texas Rio Grande Valley)
    Abstract: Over the last four decades, Americans have consistently told pollsters that they favor higher taxes on business and the wealthy, even as tax policy has moved sharply in the other direction. Political scientists and political commentators regularly assume that elected officials respond to the preferences of citizens, despite recent findings that the correlations between public preferences and policy outcomes disappear when accounting for the preferences of the wealthy. This paper quantitatively assesses the failure of democratic responsiveness on this issue. It examines coverage of American’s tax policy preferences in two major national newspapers, the New York Times and USA Today. Both newspapers exhibit nearly identical behavior: they privilege elite sources, ignore the voices of ordinary citizens, and misrepresent public preferences. They also highlight expressions of public opposition to taxes and suppress evidence of persistent public support for higher taxes on business and the wealthy.
    Keywords: Tax Policy, Democratic Theory, Mass Media, Public Opinion, New York Times, USA Today
    JEL: D72 H20 H30 L82 M38 P16 Z1
    Date: 2018–04
  5. By: Antoine Bozio (PSE - Paris School of Economics, 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); Thomas Breda (PSE - Paris School of Economics, 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); Julien Grenet (PSE - Paris School of Economics, 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)
    Abstract: We study the earnings responses to three large increases in employer Social Security contributions (SSCs) in France. We find evidence of full pass-through to workers in the case of a strong and salient relationship between contributions and expected benefits. By contrast, we find limited pass-through of employer SSCs to wages for reforms that increased SSCs with no tax-benefit linkage. Together with a meta-analysis of the literature, we interpret these results as evidence that tax-benefit linkage and its salience matter for incidence, a claim long made by the literature but not backed by direct empirical evidence to date.
    Keywords: Tax- Benefit Linkage,Social Security Contributions,Tax Incidence,Payroll Tax
    Date: 2019–07
  6. By: Ernesto Zangari (Bank of Italy); Elena Pisano (Bank of Italy)
    Abstract: The paper extends to the banking sector the Boadway-Bruce-Mintz framework used to compute marginal and average effective tax rates for non-financial firms. The model focuses on loans and considers the interactions between taxation, accounting, company law and regulation for the Italian banking sector, following the Nordic view of corporate taxation. It allows to disentangle the tax components of loan price, namely tax rates, deductibility of the cost of equity under partial and full ACE systems, taxes on net worth, and limits to the deductibility of interests and loan loss provisions (LLPs), also highlighting the role played by deferred tax assets. The effective tax rates on loans indicate, among other things, that the ACE introduced in 2011 has been effective in reducing the debt bias, and that until 2015 the deductibility limits on LLPs could have generated several distortions, discriminating between borrowers, economic sectors and geographical areas, inducing a pro-cyclical increase in the cost of credit during downturns, and providing disincentives to the timely setting aside of sufficient provisions for non-performing loans.
    Keywords: taxation, banks, effective tax rates, EMTR, EATR, allowance for corporate equity, Basel III, loan loss provisions, deferred tax assets.
    JEL: H25 G21
    Date: 2019–10
  7. By: Boly, Amadou (African Development Bank); Konte, Maty (UNU-MERIT); Shimeles, Abebe (African Development Bank)
    Abstract: This paper analyses the effect of the quality of governance (proxied by perceived corruption) on attitude towards paying tax. Using the Afrobarometer surveys from 36 African countries over the period 2011-2015, we find that low perception of corruption of different levels of the Executive branch (President Office, Government Officials or Tax Authorities) has a significant and positive impact on tax morale. To account for possible reverse causality between a citizen's perception of governance quality and attitude towards tax payment, we also propose an IV approach, using the ethnicity of the country's leader as instrument for perceived level of corruption. The IV results confirm that an individual's positive perception of governance has a positive impact on its willingness to pay tax.
    Keywords: Corruption, Taxation, Governance, Africa
    JEL: D73 H71 O23 O55
    Date: 2019–10–31
  8. By: Weber, Matthias
    Abstract: I provide a simple two-period model comparing lump-sum taxes with proportional labor taxes. The difference to the classical optimal taxation literature is that I introduce a behavioral twist according to which people’s aspirations change from one period to another as suggested by empirical evidence. It turns out that the policy implication from this model can differ significantly from the one assuming full rationality. In the behavioral model, a lump-sum tax is much less attractive. This paper does not aim at providing a full-fledged quantitative model, it should rather be seen as a cautionary tale about the robustness of classical optimal taxation results when deviating from full rationality.
    Date: 2019–02–17
  9. By: Ole Agersnap; Amalie Sofie Jensen; Henrik Kleven
    Abstract: We study the effects of welfare generosity on international migration using a series of large changes in welfare benefits for immigrants in Denmark. The first change, implemented in 2002, lowered benefits for immigrants from outside the EU by about 50%, with no changes for natives or immigrants from inside the EU. The policy was later repealed and re-introduced. The differential treatment of immigrants from inside and outside the EU, and of different types of non-EU immigrants, allows for a quasi-experimental research design. We find sizeable effects: the benefit reduction reduced the net flow of immigrants by about 5,000 people per year, or 3.7 percent of the stock of treated immigrants, and the subsequent repeal of the policy reversed the effect almost exactly. Our study provides some of the first causal evidence on the widely debated “welfare magnet” hypothesis. While there are many non-welfare factors that matter for migration decisions, our evidence implies that, conditional on moving, the generosity of the welfare system is important for destination choices.
    JEL: H20 H31 J61
    Date: 2019–11
  10. By: Bierbrauer, Felix; Tsyvinski, Aleh; Werquin, Nicolas
    Abstract: We develop a model of political competition with endogenous platform choices of parties and endogenous turnout. A main finding is that a party that is leading in the polls has an incentive to cater primarily to the core voters of the opposing party. A party that is lagging behind, by contrast, has an incentive to cater to its own base. We analyze the implications for redistributive taxation and characterize the political weights that competing parties assign to voters with different incomes. Finally, we relate the comparative statics predictions of our model to the asymmetric demobilization strategy in the German elections in the era of Merkel.
    Keywords: Political competition, Income Taxation, Turnout.
    JEL: D72 D82 H21
    Date: 2019–11
  11. By: Gassmann, Franziska (UNU-MERIT and SBE, Maastricht University); Martorano, Bruno (UNU-MERIT and SBE, Maastricht University)
    Abstract: During the twentieth century, welfare states were instrumental in confining economic and social inequalities in Europe. Stepping into the twenty-first century, labour market risks have transformed. The unprecedented technological transformation has changed the way we work. The trend towards new forms of employment is no longer a marginal phenomenon. People switch between jobs, type of employment or (temporarily) leave the labour force. Across OECD countries, 16% of workers are self-employed and another 13% are on temporary employment contracts (OECD, 2018b). Employment became more precarious and labour market relations much more diverse. This raises the question how societies can take on the opportunities, challenges and risks that the rapid technological development may bring. The changing nature of work along with other challenges, such as demographic ageing, changes in family structures, globalisation of trade, or migration necessitates adaptations to the welfare state in order for it to continue functioning effectively and efficiently. This paper reviews the challenges for universal social protection in a rapidly changing world of work and discusses policy options for social protection systems that protect and stimulate human development. We first review current trends and predictions as to how the future of work might look like. New types of jobs and forms of employment are already on the rise, which has effects for individual workers and society. We then discuss the implications for social protection and the welfare state. The changing nature of risks associated with new forms of employment may require a redesign of current social protection systems. The discussion provides possible solutions and country examples on changes in social protection systems and financing strategies, including reforms of current social insurance schemes, social assistance programmes and active labour market policies.
    Keywords: non-standard employment, social protection, welfare states, Europe
    JEL: H55 I38 J21 O15
    Date: 2019–10–09
  12. By: Maxim Ananyev (Melbourne Institute: Applied Economic & Social Research, The University of Melbourne)
    Abstract: Multinational firms often shift their incomes to low-tax jurisdictions, thus robbing host states of tax revenue. I offer a new theory to explain why some firms do this while others do not. I argue that firms that are more vulnerable to government expropriation are, counterintuitively, less likely to shift income offshore, since complying fully with tax law gives the government a greater stake in their survival. Analyzing a registry-based panel data on multinational firms, their tax burdens, and a cross-sectional information of the firms’ connections to tax havens, l find that, other things equal, firms with more concentrated fixed assets are less likely to use havens. These results challenge existing theories of the political economy of development. Whereas the “Pillars of Prosperity” theory suggests that successful states simultaneously develop protection of property rights and fiscal capacity, my results show that perfect property rights protection can actually undermine the state’s ability to tax. In a world of frictionless international capital flows, some level of expropriation risk may be necessary to prevent a fiscal crisis due to evasion.
    Keywords: Tax evasion and avoidance, political economy
    JEL: H26 P16
    Date: 2019–11
  13. By: Juan Carlos Conesa (Stony Brook University); Begona Dominguez (University of Queensland)
    Abstract: Online appendix for the Review of Economic Dynamics article
    Date: 2019
  14. By: Nicolas Jacquemet (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Stephane Luchini (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales); Antoine Malezieux (BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique); Jason Shogren (UW - University of Wyoming)
    Date: 2019–06–19
  15. By: Laura Conti (Bank of Italy); Daniela Mele (Bank of Italy); Vanni Mengotto (Bank of Italy); Eugenia Panicara (Bank of Italy); Roberto Rassu (Bank of Italy); Valentina Romano (Bank of Italy)
    Abstract: This paper provides an analysis of the local taxation on households in Italian provincial capitals between 2012 and 2015, the period immediately before a ceiling was imposed on the main local rates, relating it to a set of indicators available at the same geographical level. We provide information on regional, provincial and municipal duties imposed on a representative household, whose characteristics (regarding income, number and age of members, real estate holdings and consumption) remain unchanged throughout the country. The results show that taxation is higher for households living in the South, in regions under ordinary statutes (RSO) compared with those under special statutes (RSS), and in larger cities. Moreover, there is evidence of heavier taxation in places where local governments are (or have been) in financial distress or appear to be less efficient. In these areas, local taxation on households rose at a higher rate during the period covered by the analysis.
    Keywords: taxation on households, local taxation
    JEL: H31 H71
    Date: 2019–10

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