nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒01‒20
fifteen papers chosen by
Thomas Andrén

  1. Corporate Tax Cuts and Economic Growth By Suzuki, Keishun
  2. Evaluating State and Local Business Tax Incentives By Cailin R. Slattery; Owen M. Zidar
  3. Did Tax Cuts and Jobs Act Create Jobs and Stimulate Growth? Early Evidence Using State-Level Variation in Tax Changes By Anil Kumar
  4. Tax preference for different payout methods over a period of tax reform in South Africa By Rudie Nel
  5. A model of the optimal allocation of government expenditures By FAN Simon,; PANG Yu,; PESTIEAU Pierre,
  6. Fiscal Illusion and Progressive Taxation with Retrospective Voting By Abatemarco, Antonio; Dell'Anno, Roberto
  7. The Within-system Redistribution of Contributory Pensions Systems: a Conceptual Framework and Empirical Method of Estimation By Carlos Grushka
  8. Tax evasion and unaccounted incomes: A theoretical approach. By Sapre, Amey
  9. Optimal Capital Taxation in an Economy with Innovation-Driven Growth By Ping-ho Chen; Angus C. Chu; Hsun Chu; Ching-chong Lai
  10. Political Costs of Tax-Based Consolidations By Chuling Chen; Era Dabla-Norris; Jay Rappaport; Aleksandra Zdzienicka
  11. The Intergenerational Dimension of Fiscal Sustainability By Pedro Arévalo; Katia Berti; Alessandra Caretta; Per Eckefeldt
  12. Optimal Taxation under Regional Inequality By Sebastian G. Kessing; Vilen Lipatov; J. Malte Zoubek
  13. Capital income taxation in endogenous fertility model By Watanabe, Minoru; Miyake, Yusuke; Yasuoka, Masaya
  14. Oil Revenues vs Domestic Taxation: Deeper insights into the crowding-out effect By Michael Keller
  15. Complementing Tax-financed Long-term Care with Private Insurance By Määttänen, Niku; Valkonen, Tarmo

  1. By: Suzuki, Keishun
    Abstract: Empirical evidence on the effect of corporate income tax on economic growth is mixed. This paper explores the ambiguous mechanism of corporate income tax by using a Schumpeterian growth model with heterogeneous innovators and endogenous market structure. Our main findings are as follows: (i) Corporate tax cuts do not necessarily enhance innovation. (ii) Corporate tax cuts are likely to have a positive growth effect when the research and development (R&D) productivity across firms is heterogeneous. (iii) R&D tax deduction increases the growth rate. (iv) Based on our calibration, the corporate tax cut in 2018 had a negative effect on economic growth and welfare in the U.S. economy.
    Keywords: Corporate income tax, R&D tax deduction, Innovation, Heterogeneity, Endogenous entry, Market competition
    JEL: H21 H25 O31
    Date: 2019–12
  2. By: Cailin R. Slattery; Owen M. Zidar
    Abstract: This essay describes and evaluates state and local business tax incentives in the United States. In 2014, states spent between $5 and $216 per capita on incentives for firms in the form of firm-specific subsidies and general tax credits, which mostly target investment, job creation, and research and development. Collectively, these incentives amounted to nearly 40% of state corporate tax revenues for the typical state, but some states' incentive spending exceeded their corporate tax revenues. States with higher per capita incentives tend to have higher state corporate tax rates. Recipients of firm-specific incentives are usually large establishments in manufacturing, technology, and high-skilled service industries, and the average discretionary subsidy is $178M for 1,500 promised jobs. Firms tend to accept subsidy deals from places that are richer, larger, and more urban than the average county, and poor places provide larger incentives and spend more per job. Comparing “winning” and runner-up locations for each deal in a bigger and more recent sample than in prior work, we find that average employment within the 3-digit industry of the deal increases by roughly 1,500 jobs. While we find some evidence of direct employment gains from attracting a firm, we do not find strong evidence that firm-specific tax incentives increase broader economic growth at the state and local level. Although these incentives are often intended to attract and retain high-spillover firms, the evidence on spillovers and productivity effects of incentives appears mixed. As subsidy-giving has become more prevalent, subsidies are no longer as closely tied to firm investment. If subsidy deals do not lead to high spillovers, justifying these incentives requires substantial equity gains, which are also unclear empirically.
    JEL: H2 H25 H71 R11 R3 R5
    Date: 2020–01
  3. By: Anil Kumar
    Abstract: The Tax Cuts and Jobs Act (TCJA) of 2017 is the most extensive overhaul of the U.S. income tax code since the Tax Reform Act of 1986. Existing estimates of TCJA’s economic impact are based on economic projections using pre-TCJA estimates of tax effects. Following recent pioneering work of Zidar (2019), I exploit plausibly exogenous state-level variation in tax changes and find that an income tax cut equaling 1 percent of GDP led to a 1 percentage point higher nominal GDP growth and about 0.3 percentage point faster job growth in 2018.
    Keywords: Taxes and Economic Growth; Tax Cuts and Jobs Act
    JEL: E62 H30
    Date: 2020–01–03
  4. By: Rudie Nel (Stellenbosch University)
    Abstract: Tax reform in South Africa has been extensive since 2011, with the amendment of ?dividend? as defined, followed by the introduction of dividends tax and consecutive increases in the applicable tax rates. Extant literature predominantly focuses on periods prior to these reforms and understates the role of taxes in a choice between dividends and share repurchases. The purpose of this article is to enunciate the increased role of taxes in a preference for different payout methods a result of tax reform. An exploratory study was performed in which the nominal after-tax value of a R100 of different payout methods was calculated for an individual, corporate and fund investor over a period of tax reform. A tax differential was then calculated to quantify the magnitude of changes over the different periods. Evidence of higher tax differentials from tax reform in 2011, which also resulted in certain tax-induced preferences for dividends and share repurchases. The change in tax-induced preferences is submitted as an indication of the increased role of taxes as a result of the reform. It is submitted that a corporate shareholder is the most affected by the tax reform based on the category taxpayer with the highest tax differentials since the tax reform in 2011.
    Keywords: Tax preferences; tax differential; dividends; share repurchases; tax reform, dividends tax
    JEL: H24 H25
    Date: 2019–10
  5. By: FAN Simon, (Lingnan University); PANG Yu, (Macau University of Science and Technology); PESTIEAU Pierre, (Université de Liège, CORE, and Toulouse School of Economics)
    Abstract: Government expenditures can be used for various socio-economic objectives, including public education, consumption of public goods and services, and social protection. This paper analyzes the optimal allocation of public expenditures among these competing functions. We establish an overlapping generations model with heterogeneous individuals in which the government optimally chooses income tax, transfer payment, educational spending, and public consumption. Our model characterizes the transitional dynamics and the steady state of each function with and without a pay-as-you-go international contract. We also conduct a simulation illustrating that the presence of an intergenerational contract may raise public consumption and social welfare in the ssteady state.
    Keywords: government spending,public education,public consumption,individual heterogeneity
    JEL: H20 H31 H50
    Date: 2019–11–27
  6. By: Abatemarco, Antonio; Dell'Anno, Roberto
    Abstract: We consider the tax progressivity decision of a rent‐maximizing government when voters’ perceptions of the tax price of public goods are biased by cognitive anomalies (i.e., fiscal illusion), and the electorate opts for re‐appointing or for dismissing the incumbent according to a retrospective voting logic. Given electoral and constitutional constraints, we show that the design of the tax system can be sensibly affected by fiscal illusion within the population of voters. Specifically, we find that (i) the tax system is more (less) progressive when taxes and public expenditures are perceived less (more), and (ii) an increase in the median voter’s income may positively or negatively affect tax progressivity depending on the nature (pessimistic or optimistic) of fiscal illusion. The impact of fiscal illusion on tax progressivity is validated by econometric analysis.
    Keywords: fiscal illusion; tax progressivity; median voter; cognitive anomalies
    JEL: D63 D72 E62 H23 H3
    Date: 2019–09–12
  7. By: Carlos Grushka (Universidad de Buenos Aires)
    Abstract: When discussing the distributional impacts of pension systems, the difference between the underlying rationale for considering them as tax-transfers or deferred wage schemes is critical. The way that benefits are determined (usually with decreasing replacement rates by income level) plays a significant role to determine within-system redistribution. However, to evaluate the overall effective redistribution it is crucial to incorporate the effects of coverage or “selectivity”, and the funding or financing of the benefits under payment. The within-system redistribution is highly affected by the changing rules along time, the specific ways that they apply in each country, the different approaches for data definition (on revenue, expenditure, and coverage) and data availability. After analyzing in detail the case of Argentina and all the variables involved, we propose a simplified redistribution index, defined as the difference of gross substitution rates by education levels (proxy of lifetime income). This index can be estimated from cross-sectional income surveys and works as an excellent complement--or as a reasonable proxy--for the extent of redistribution within contributory pensions systems in different countries and periods.
    Keywords: social security and public pensions, personal income distribution, economics of the elderly, Argentina
    JEL: H50 H55 D31 J14
    Date: 2019–11
  8. By: Sapre, Amey (National Institute of Public Finance and Policy)
    Abstract: This paper analyzes the problem of tax evasion by incorporating a simple game theoretic framework wherein an individual is confronted with the decision of declaring income for taxation. The model is a re-formulation of Allingham Sandmo (1972) and Srinivasan (1973) original single period decision making problem and extends it to to a repeated game involving a tax payer and a tax authority. The game theoretic results shows that probability of audit and penalty rate are inversely related and that beyond a threshold penalty rate, the tax payer has no incentive to evade. In an infinitely repeated game setting, first, the threat of audit in all future periods acts as a deterrent to evasion and second, the result provides some intuitive understanding of the role of patience and equilibrium strategies in a long repetitive engagement that supports cooperation and prevents deviations.
    Keywords: Tax evasion ; Repeated game ; Public Finance
    JEL: C73 H26
    Date: 2019–12
  9. By: Ping-ho Chen; Angus C. Chu; Hsun Chu; Ching-chong Lai
    Abstract: This paper investigates optimal capital taxation in an innovation-driven growth model. We examine how the optimal capital tax rate varies with externalities associated with R&D and innovation. Our results show that the optimal capital tax rate is higher when (i) the "stepping on toes effect" is smaller, (ii) the "standing on shoulders effect" is stronger, or (iii) the extent of creative destruction is greater. Moreover, the optimal capital tax rate and the monopolistic markup exhibit an inverted-U relationship. By calibrating our model to the US economy, we find that the optimal capital tax rate is positive, at a rate of around 11.9 percent. We also find that a positive optimal capital tax rate is more likely to be the case when there is underinvestment in R&D.
    Keywords: Optimal capital taxation, R&D externalities, innovation
    JEL: E62 H21 O31
    Date: 2019–09
  10. By: Chuling Chen; Era Dabla-Norris; Jay Rappaport; Aleksandra Zdzienicka
    Abstract: This paper studies the impact of tax-based consolidations on reelection outcomes. Using a granular database of tax-based consolidations for a panel of 10 OECD countries over the last 40 years, we find that tax reforms are politically costly but some reforms are costlier than others. Measures aimed primarily at reducing existing deficits and debt are costlier than tax consolidation policies for improving long-term growth prospects. Electoral costs are particularly high for broad-based indirect tax and corporate tax reforms. Voters tend to penalize governments less if tax consolidations are announced early in the government’s term or if the government has a strong political mandate. Favorable economic conditions increase public support for tax-based consolidations. Personal income tax reforms are electorally salient if the reforms are frontloaded, announced during recessions, and in less progressive tax systems.
    Date: 2019–12–27
  11. By: Pedro Arévalo; Katia Berti; Alessandra Caretta; Per Eckefeldt
    Abstract: Most countries, among which EU Member States, use public finances to redistribute resources from the working-age population to the old and the very young so as to smoothen resources over the life cycle of individuals. As the EU is confronted with population ageing, this societal model is facing challenges. This is particularly the case in light of public spending on pension and health care in the EU currently accounting for almost 20% of GDP and expected to remain major public spending items going forward. As such, and against the background of a rising dependency ratio, age-related public spending could lead to increasing tax burdens on future generations. This raises questions of intergenerational equity that cannot be measured by standard budgetary indicators, nor by traditional fiscal sustainability metrics (including the European Commission's fiscal sustainability gap indicators). Generational accounting allows calculating the present value of total net tax payments to the government (taxes paid minus transfers received) over the remaining lifetime of a cohort born in a specific year. Relying on harmonised data and the European Commission projections, including the Ageing Report, this paper estimates the lifetime fiscal burden and its distribution between current and future-born generations for all EU countries, disentangling the underlying determinants. Based on the generational accounts, two indicators measuring intertemporal and intergenerational imbalances are provided, the Intertemporal Budget Gap (IBG) and the AuerbachGokhale-Kotlikoff (AGK) indicators. The paper concludes that public finances in the EU face long-term fiscal sustainability challenges based on current policies and that there are intergenerational issues, entailing a larger adjustment for future generations.
    JEL: E62 H3 H5 H55 H6 I1 I3 J1 J21
    Date: 2019–09
  12. By: Sebastian G. Kessing; Vilen Lipatov; J. Malte Zoubek
    Keywords: Optimal taxation, redistribution, regional inequality, migration, multidimensional screening, delayed optimal control
    JEL: H11 J45 R12
    Date: 2019
  13. By: Watanabe, Minoru; Miyake, Yusuke; Yasuoka, Masaya
    Abstract: We build a standard overlapping generations model with endogenous fertility and involuntary unemployment. Being different from a log utility function, the capital income tax affects saving at the model of constant relative risk-averse utility function (CRRA function). In the parameter condition, to have the case of non-substitution between consumption in different periods, the capital income tax raises saving to compensate for consumption in the future. Then, results show that a capital income tax improves fertility and unemployment with no social security system.
    Keywords: capital income tax, fertility, unemployment
    JEL: J13 J60
    Date: 2019–12–20
  14. By: Michael Keller (Department of Economics, University of Sussex, Falmer, United Kingdom)
    Abstract: This paper exploits the 2000s commodity price boom to identify the impact of oil revenues on domestic taxation in oil exporting countries. It estimates the average effect of oil revenues on non-resource taxation for 19 oil exporting countries using synthetic control methodology and finds that non-resource tax per capita is on average 14% lower in oil exporting countries because of the 2000s commodity price boom compared to a scenario without price shock. This result confirms the existing literature concerning the resource revenues vs domestic taxation debate. Additional knowledge is derived from the synthetic control method showing that the effect is heterogeneous and occurs only in oil exporting countries with a low level of institutional quality, which are highly oil dependent and prefer the use of tax instruments rather than non-tax instruments. Furthermore, the dynamics of the effect differs in countries with a state-owned oil sector compared to a private-owned oil sector. These findings are new within the debate and contribute to our understanding of the effect of natural resources on domestic taxation. Policy makers concerned by a crowding-out effect should invest the oil dividend to improve their tax administration to avoid the negative consequences accompanying low domestic taxes such as the resulting dependency on a volatile income stream from oil, difficulty in achieving non-fiscal objectives, and lack of positive externalities from taxes such as transparency and better governance.
    Keywords: Natural resources, oil, oil revenue, tax revenue
    JEL: H2 Q33 Q38
    Date: 2019–12
  15. By: Määttänen, Niku; Valkonen, Tarmo
    Abstract: Abstract Many elderly people in Finland could increase they standard of living and receive more freedom of choice regarding long-term care by releasing part of their housing equity. The possibility to purchase reasonably priced life annuities and long-term care insurance would increase the benefits of housing equity release. However, there is virtually no market for such insurance in Finland. This report illustrates the benefits of life annuities and long-term care insurance, provides example of actuarially fair insurance pricing, and describes the conditions for this market to emerge. It argues that the government should support the emergence of an insurance market by clarifying the public welfare promise related to old age care and by promising not to seize private pension and long-term care insurance payouts e.g. via higher user fees for publicly provided long-term care.
    Keywords: Long-term care insurance, Life annuities, Ageing
    JEL: H24 G22
    Date: 2020–01–15

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