nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒01‒06
thirteen papers chosen by
Thomas Andrén

  1. Which way the pendulum swings? Equity and efficiency of 26 years of tax-benefit reforms in Belgium By André Decoster; Sergio Perelman; Dieter Vandelannoote; Toon Vanheukelom; Gerlinde Verbist
  2. Tax and spending shocks in the open economy: are the deficits twins? By Klein, Mathias; Linnemann, Ludger
  3. The Determination of Public Debt under both Aggregate and Idiosyncratic Uncertainty By YiLi Chien; Yi Wen
  4. How to improve tax compliance? Evidence from population-wide experiments in Belgium By De Neve, Jan-Emmanuel; Imbert, Clement; Spinnewijn, Johannes; Tsankova, Teodora; Luts, Maarten
  5. On Bunching and Identi?cation of the Taxable Income Elasticity By Soren Blomquist; Anil Kumar; Che-Yuan Liang
  6. Compliance effects of risk-based tax audits By Torsvik, Gaute; Raaum, Oddbjørn; Løyland, Knut; Øvrum, Arnstein
  7. Limitation of holding structures for intra-EU dividends: A blow to tax avoidance? By Maarten van 't Riet; Arjan Lejour
  8. Why do the poor vote for low tax rates? A (real-effort task) experiment on income redistribution. By Natalia Jimenez; Elena Molis-Bañales; Angel Solano-Garcia
  9. Social Security Expansion and Neighborhood Cohesion: Evidence from Community-Living Older Adults in China By Bradley, Elizabeth; Chen, Xi; Tang, Gaojie
  10. Progressive taxation and (in)stability in an exogenous growth model with Epstein-Zin recursive preferences By Aleksandar Vasilev
  11. Nudging for tax compliance: A meta-analysis By Antinyan, Armenak; Asatryan, Zareh
  12. Long-run Effects of a Change in Institutions: Evidence on Tax Compliance By Antonio Acconcia; Marcello D'Amato; Riccardo Martina; Marisa Ratto
  13. Employment Structure and the Rise of the Modern Tax System By Anders Jensen

  1. By: André Decoster; Sergio Perelman; Dieter Vandelannoote; Toon Vanheukelom; Gerlinde Verbist
    Abstract: Belgium has seen major changes in its tax-benefit system over the past twenty-six years. These changes have, largely, co-determined the evolution of disposable incomes of Belgian households on the one hand, and work incentives on the other. In this paper we assess changes in tax-benefit policies over the full course of 1992-2018 along three dimensions: equity, efficiency and budgetary impact. We construct counterfactual distributions of disposable incomes under alternative tax benefit systems by means of the arithmetic microsimulation model EUROMOD. We summarize distributional effects of changes in the tax benefit system by measuring the impact on inequality of pre tax and transfer income, and the impact on work incentives by aggregating the marginal tax rates at the intensive and extensive margin into the marginal cost of public funds. We find that most changes in the tax-benefit system have been pro-poor and that the redistributive power has -depending on the chosen benchmark- either been increased, or remained stable. Two reductions of personal income taxes eroded the redistributive power of the tax benefit system. Work incentives deteriorated under the tax hikes of the fiscal consolidation period in the nineties. The improvement of work incentives was considerable thanks to the introduction of an earned income tax credit, and the lowering of personal income taxes and social security contributions, but came at a large budgetary cost. Finally, the size of some of the effects crucially depends on the choice of the `no policy change' counterfactual: either indexation with inflation or indexation with nominal wage growth.
    Date: 2018–12–10
  2. By: Klein, Mathias (Research Department, Central Bank of Sweden); Linnemann, Ludger (TU Dortmund University)
    Abstract: We present evidence on the open economy consequences of US fiscal policy shocks identified through proxy-instrumental variables. Tax shocks and government spending shocks that raise the government budget deficit lead to persistent current account deficits. In particular, the negative response of the current account to exogenous tax reductions through a surge in the demand for imports is among the strongest and most precisely estimated effects. Moreover, we find that the reduction of the current account is amplified when the tax reduction is due to lower personal income taxes and when the government increases its consumption expenditures. Historically, a much larger share of current account dynamics has been due to tax shocks than to government spending shocks.
    Keywords: Tax policy; government spending; proxy-vector autoregressions; current account; twin deficits
    JEL: E32 E62 F41
    Date: 2019–08–01
  3. By: YiLi Chien; Yi Wen
    Abstract: We analyze the Ramsey planner's decisions to finance stochastic public expenditures under incomplete insurance markets for idiosyncratic risk. We show analytically that whenever the market interest rate lies below the time discount rate, the Ramsey planner has a dominant incentive to increase debt to meet the private sector's demand for full self-insurance regardless of the relative size of aggregate shocks---suggesting a departure from tax smoothing. However, if a full self-insurance Ramsey allocation is infeasible in the absence of a government debt limit, an interior or bounded Ramsey equilibrium does not exist. The strong incentives for the Ramsey planner to smooth both individual consumption (via increasing public debt) and aggregate consumption (via tax smoothing) imply that (i) the long-run Ramsey equilibrium is characterized by full self-insurance and constant taxes if state-contingent bonds are available and (ii) when state-contingent bonds are not available, the government's attempt to balance the competing incentives between tax smoothing and individual consumption smoothing---even at the cost of extra tax distortion---implies a bounded stochastic unit root component in optimal taxes and in the bond supply. In all cases considered in this paper, a sufficiently high average level of public debt (financed by distortionary taxation) to support full self-insurance is desirable and welfare improving. Therefore, adding a liquidity premium into the value of government bonds via incomplete financial markets can bring the theory of public finance into closer conformity with realty.
    Keywords: Optimal Public Debt; Tax Smoothing; Ramsey Problem; Incomplete Markets
    JEL: E13 E62 H21 H30
    Date: 2019–12–05
  4. By: De Neve, Jan-Emmanuel; Imbert, Clement; Spinnewijn, Johannes; Tsankova, Teodora; Luts, Maarten
    Abstract: We study the impact of deterrence, tax morale, and simplifying information on tax compliance. We ran _ve experiments spanning the tax process which varied the communication of the tax administration with all income taxpayers in Belgium. A consistent picture emerges across experiments: (i) simplifying communication increases compliance, (ii) deterrence messages have an additional positive effect, (iii) invoking tax morale is not effective. Even tax morale messages that improve knowledge and appreciation of public services do not raise compliance. In fact, heterogeneity analysis with causal forests shows that tax morale treatments backfire for most taxpayers. In contrast, simplification has large positive effects on compliance, which diminish over time due to follow-up enforcement. A discontinuity in enforcement intensity, combined with the experimental variation, allows us to compare simplification with standard enforcement measures. Simplification is far more cost-effective, allowing for substantial savings on enforcement costs, and also improves compliance in the next tax cycle.
    Keywords: tax compliance; field experiements; simplification; enforcement
    JEL: C93 D91 H21
    Date: 2019–05
  5. By: Soren Blomquist (Institute for Fiscal Studies); Anil Kumar (Institute for Fiscal Studies); Che-Yuan Liang (Institute for Fiscal Studies)
    Abstract: The taxable income elasticity is a key parameter for predicting the e?ect of tax reform or designing an income tax. Bunching at kinks and notches in a single budget set have been used to estimate the taxable income elasticity. We show that when the heterogeneity distribution is unrestricted the amount of bunching at a kink or a notch is not informative about the size of the taxable income elasticity, and neither is the entire distribution of taxable income for a convex budget set. Kinks do provide information about the size of the elasticity when a priori restrictions are placed on the heterogeneity distribution. They can identify the elasticity when the heterogeneity distribution is speci?ed across the kink and provide bounds under restrictions on the heterogeneity distribution. We also show that variation in budget sets can identify the taxable income elasticity when the distribution of preferences is unrestricted and stable across budget sets. For nonparametric utility with general heterogeneity we show that kinks only provide elasticity information about individuals at the kink and we give bounds analogous to those for isoelastic utility. Identi?cation becomes more di?cult with optimization errors We show in examples how results are a?ected by optimization errors.
    Date: 2019–10–21
  6. By: Torsvik, Gaute; Raaum, Oddbjørn; Løyland, Knut; Øvrum, Arnstein
    Abstract: Tax administrations use machine learning to predict risk scores as a basis for selecting individual taxpayers for audit. Audits detect noncompliance immediately, but may also alter future filing behavior. This analysis is the first to estimate compliance effects of audits among high-risk wage earners. We exploit a sharp audit assignment discontinuity in Norway based on individual tax payers risk score. Additional data from a random audit allow us to estimate how the audit effect vary across the risk score distribution. We show that the current risk score audit threshold is set far above the one that maximizes net public revenue.
    Date: 2019–04–12
  7. By: Maarten van 't Riet (CPB Netherlands Bureau for Economic Policy Analysis); Arjan Lejour (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: This article analyses the recent rulings from the European Court of Justice in two Danish cases and examines their possible impact on international tax avoidance. These rulings regard limitations of tax benefits related to cross-border dividends and interest payments resulting from the interposition of holding companies in the EU. We conclude that from a legal perspective, the rulings demonstrate the alignment of international tax policies to combat tax avoidance between the EU and the OECD. This article analyses the recent rulings from the European Court of Justice in two Danish cases and examines their possible impact on international tax avoidance. These rulings regard limitations of tax benefits related to cross-border dividends and interest payments resulting from the interposition of holding companies in the EU. We conclude that from a legal perspective, the rulings demonstrate the alignment of international tax policies to combat tax avoidance between the EU and the OECD.
    JEL: H25 H26 H32 F23
    Date: 2019–12
  8. By: Natalia Jimenez (Department of Economics, Universidad Pablo de Olavide & Middlesex University); Elena Molis-Bañales (Departamento de Teoria e Historia Economica, University of Granada & Globe); Angel Solano-Garcia (Departamento de Teoria e Historia Economica, University of Granada & Globe)
    Abstract: The main purpose of this paper is to shed some light on the voting behavior of low-income voters over income redistribution. To this end, we test a model based on Meltzer and Richard’s (1981) framework through a lab experiment in which individuals vote over two exogenous tax rates and their pre-tax income is determined according to their performance in a real-effort task. We classify individuals into high-skilled and low-skilled participants according to their performance in a tournament at the beginning of the experiment. We find that a large proportion of low-skilled workers vote for the lowest tax rate (the one that gives them the lowest payoff), especially when the alternative tax rate is very high. However, this proportion is significantly reduced in treatments in which the subjects are given extra information about how the tax operates in redistributing income. This result suggests that the lack of information about the role of taxes in income redistribution may be an important factor in explaining the counter-intuitive voting behavior of low-income voters over income redistribution. We also find that both the prospect of upward mobility and the belief in the negative effect of taxes on productivity make low-income voters support low tax rates, especially when the alternative tax rate is very high.
    Keywords: income inequality, income redistribution, voting, taxation, real-effort task.
    JEL: C92 D72 H30 J41
    Date: 2019–12
  9. By: Bradley, Elizabeth (Vassar College); Chen, Xi (Yale University); Tang, Gaojie (Jinan University)
    Abstract: Grants and services provided by the government may crowd out informal arrangements, thus weakening informal caring relations and networks. In this paper, we examine the impact of social security expansion on neighborhood cohesion of elders using China's New Rural Pension Scheme (NRPS), one of the largest existing pension program in the world. Since its launch in 2009, more than 400 million Chinese have enrolled in NRPS. We use two waves of China Health and Retirement Longitudinal Study (CHARLS) to examine the effect of pension receipt on two dimensions of neighborhood cohesion among older adults, i.e. participation in collective recreational activities (e.g., socializing and organizational activities) and altruistic activities (e.g., helping those in need in the community), and the frequencies of these activities. Employing an instrumental variable approach, our empirical strategy addresses the endogeneity of pension receipt via exploiting geographic variation in pension program roll-out. We find evidence that receiving pension only slightly reduces collective recreational activities while significantly crowding out altruistic activities in the communities.
    Keywords: neighborhood cohesion, pension, crowd out, diversity
    JEL: H55 I38 O22
    Date: 2019–12
  10. By: Aleksandar Vasilev
    Abstract: We show that in an exogenous growth model with Epstein-Zin (1989, 1991) recursive preferences calibrated to Bulgarian data under the progressive taxation regime (1993- 2007), the economy exhibits equilibrium indeterminacy. These results are in line with the findings in Benhabib and Farmer (1994, 1996) and Farmer (1999). Also, the findings in this paper are in contrast to Guo and Lansing (1988) who argue that progressive taxation works as an automatic stabilizer. In contrast, under the flat tax regime (2008- 16), the same economy calibrated to Bulgarian data now displays saddle-path stability. The decrease in the average effective tax rate addresses the indeterminacy issue and eliminates the ”sink” dynamics.
    Keywords: Progressive taxation; Epstein-Zin preferences; Equilibrium (In)determinacy; Bulgaria.
    JEL: H22 J46 D51 D91 O41
    Date: 2019–10–05
  11. By: Antinyan, Armenak; Asatryan, Zareh
    Abstract: Taxpayer nudges - behavioral interventions that aim to increase tax compliance without changing the underlying economic incentives of taxpayers - are used increasingly by governments because of their potential cost-effectiveness in raising tax revenue. We collect about a thousand treatment effect estimates from over 40 randomized controlled trials, and in a meta-analytical framework show that non-deterrence nudges - interventions pointing to elements of individual tax morale - are on average ineffective in curbing tax evasion, while deterrence nudges - interventions emphasizing traditional determinants of compliance such as audit probabilities and penalty rates - are potent catalysts of compliance. These effects are, however, fairly small in magnitude. Deterrence nudges increase the probability of compliance by only 1.5-2.5 percentage points more than non-deterrence nudges, while the effects are likely to be bound to the short-run, and are somewhat inflated by selective reporting of results.
    Keywords: Tax compliance,Randomized control trials,Nudging,Meta-analysis
    JEL: C93 D91 H26
    Date: 2019
  12. By: Antonio Acconcia (Università di Napoli Federico II and CSEF); Marcello D'Amato (Università di Salerno, CELPE and CSEF); Riccardo Martina (Università di Napoli Federico II and CSEF); Marisa Ratto (Universitè Paris-Dauphine)
    Abstract: The unification of Italy in 1861 determined that all institutions of the pre-unitary states were replaced by those of the new-born Kingdom of Italy, thus implying common rules for agents formerly obeying to different ones. Moreover, a major tax reform was also set in that determined differential increments of the tax burden across provinces. We investigate the potential implications of these events for tax compliance. By comparing a province-level measure of tax evasion just after the reform with a corresponding recent one, we show a strong process of convergence in compliance. Non-negligible spatial differences in tax evasion, however, still persist nowadays. Further empirical evidence suggests that such differences can be at least in part traced back to the tax reform.
    Keywords: tax evasion dynamics, decentralization, local enforcement externality, learning.
    JEL: D62 D81 H26 K41 K42
    Date: 2019–12–18
  13. By: Anders Jensen
    Abstract: This paper shows how the increase in information trails through the long-run transition from self-employment to employee-jobs explains the rise of the modern income tax system. I construct a new database which covers 100 household surveys across countries at different income levels and 140 years of historical data within the US (1870-2010). Using these data, I first establish four new stylized facts: 1) within country, the share of employees increases over the income distribution, and increases at all levels of income as a country develops; 2) the income tax exemption threshold moves down the income distribution as a country develops, tracking employee growth; 3) the employee share above the exemption threshold is maximized and remains constantly high; 4) decreases in the exemption threshold are strongly associated with increases in tax collection. These findings are consistent with a model where a high employee share is a necessary condition for effective taxation and where the rise in income covered by information trails through increases in employee share drives expansion of the income tax base. To provide a causal estimate of employee share on income tax systems, I study a state-led US development program implemented in the 1950s-60s which increased the level of employee share. The identification strategy exploits within-state changes in court-litigation status which generate quasi-experimental variation in the effective implementation date of the program. I find that the exogenous increase in employee share is associated with an expansion of the state income tax base and an increase in state income tax revenue.
    Keywords: Economic Growth
    Date: 2019–10

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