nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒02‒03
eleven papers chosen by
Thomas Andrén

  1. Tax Cuts Starve the Beast! Evidence from Germany By Clemens Fuest; Florian Neumeier; Daniel Stöhlker
  2. Reducing the income tax burden for households with children: An assessment of the child tax credit reform in Austria By Michael Christl; Silvia De Poli; Janos Vargas
  3. Non-Linear Effects of Tax Changes on Output: The Role of the Initial Level of Taxation By Samara Gunter; Daniel Riera-Crichton; Carlos Vegh; Guillermo Vuletin
  4. Do Property Tax Incentives for New Construction Spur Gentrification? Evidence from New York City By Divya Singh
  5. Using Payroll Tax Variation to Unpack the Black Box of Firm-Level Production By Youssef Benzarti; Jarkko Harju
  6. Enhancing property tax compliance in Mandalay By Blake, Michael; Kriticos, Sebastian
  7. Optimal Fiscal Policy without Commitment: Revisiting Lucas-Stokey By Davide Debortoli; Ricardo Nunes; Pierre Yared
  8. Do tax incentives reduce investment quality? By Eichfelder, Sebastian; Jacob, Martin; Schneider, Kerstin
  9. The Relationship between Public Debt and Economic Growth: Nonlinearity and Country-Specificity By Kummer-Noormamode, Sabina
  10. How Individual Income Tax Policy Affects Entrepreneurship By Clingingsmith, David; Shane, Scott
  11. Productivity and Tax Evasion By Era Dabla-Norris; Mark Gradstein; Fedor Miryugin; Florian Misch

  1. By: Clemens Fuest; Florian Neumeier; Daniel Stöhlker
    Abstract: The ‘starving the beast’ hypothesis claims that tax cuts lead to lower public spending, rather than higher debt levels and higher taxes in the future. This paper uses the institutional setting of German fiscal federalism to its advantage in order to explore how fiscal policy reacts to exogenous tax revenue shocks. We use panel data from the German states covering the period from 1992 to 2011, and assess to what extent exogenous changes in tax revenues affect aggregate public expenditure as well as specific sub-categories of government spending. Applying the narrative approach pioneered by Romer and Romer (2009), we construct a measure of exogenous tax shocks. This allows us to identify the causal effect of tax changes on fiscal policy. Our results suggest that an exogenous decrease in tax revenues triggers a reduction in public spending of roughly the same amount, with a delay of two to three years. We find that a revenue decline of one Euro reduces public spending on administration and, with a larger delay, social security, by 30 to 45 cents in each case. Spending on infrastructure declines by ten cents. We find no significant effects on spending on education, legal protection and public safety, or culture.
    Keywords: taxation, fiscal policy, tax-spend, public expenditure, narrative approach
    JEL: E62 H11 H20 H62 H72
    Date: 2019
  2. By: Michael Christl (European Commission - JRC); Silvia De Poli (European Commission - JRC); Janos Vargas (European Commission – DG ECFIN)
    Abstract: This paper analyses the impact of the implementation of a child tax credit in Austria in 2019, not only on micro, but also on macro level by using a dynamic scoring methodology. First, we assess the fiscal and distributional impact of this reform using the microsimulation model EUROMOD. Second, we estimate labour supply impacts of the reform based on a structural discrete choice framework. Third, we evaluate the macroeconomic impacts of the reform, by calibrating and shocking QUEST, the DSGE model of the European Commission, with the micro-based results for the implicit tax rate, the non-participation and the labour supply elasticities. We show that the child tax credit reform in Austria reduces inequality, lowers the poverty rate in general, but by definition only for households with children. Overall the reform has a positive impact on labour supply, both on the extensive and on the intensive margin, especially for women. On the macro-level (and in the long-run), our model suggests a positive impact on employment. Additionally, we find that parts of the tax decrease can be potentially captured by the employer, meaning that gross wages would fall slightly. However, we find small but positive effects on GDP, investment and consumption, although the long-run macroeconomic effects depend crucially on how the government compensates the missing tax revenues after the reform. Accounting for these effects at the micro level, we show that the second round effects are important to take into account, because they provide insights into the medium-term distributional impact of the reform.
    Keywords: EUROMOD, tax credit, reform, DSGE, labour supply, microsimulation, discrete choice
    JEL: H24 H31 I38
    Date: 2019–12
  3. By: Samara Gunter; Daniel Riera-Crichton; Carlos Vegh; Guillermo Vuletin
    Abstract: We estimate the effect of worldwide tax changes on output following the narrative approach developed for the United States by Romer and Romer (2010). We use a novel dataset on value-added taxes for 51 countries (21 industrial and 30 developing) for the period 1970-2014 to identify 96 tax changes. We then use contemporaneous economic records to classify such changes as endogenous or exogenous to current (or prospective) economic conditions. In line with theoretical distortionary and disincentive-based arguments — and using exogenous tax changes — we find that the effect of tax changes on output is highly non-linear. The tax multiplier is essentially zero under relatively low initial tax rate levels and more negative as the initial tax rate increases. Based on a global sample, these novel non-linear findings suggest that the recent consensus pointing to large negative tax multipliers in industrial countries, particularly in industrial Europe (e.g., Alesina, Favero, and Giavazzi, 2015), (i) is not a robust empirical regularity, and (ii) is based on results mainly driven by high initial tax rates in these countries. We also show that the bias introduced by misidentification of tax shocks critically depends on the procyclical or countercyclical nature of endogenous tax changes.
    JEL: E32 E62
    Date: 2019–12
  4. By: Divya Singh
    Abstract: Recently, many cities have proposed property tax incentives on new construction to counteract rising rents. However, to date, there is little empirical evidence on their local effects. This paper uses a natural experiment in New York City to estimate the local effects of new tax-exempt residential construction. In 2006, the city government decided to make property tax incentives on new construction less generous, but only starting in 2008. Developers rushed to build and claim incentives before the deadline in response. I instrument the number of new units developed within 150 meters from a rental building by the baseline number of vacant parcels available within the same distance. Using a new dataset of rents and investment at the level of a building, I find that the existing rental buildingâs rent increased by 2.3% in response to an additional tax-exempt unit built within a 150 meters radius. I provide evidence consistent with the hypothesis that new residential investment rendered neighborhoods more desirable by attracting affluent households and facilitating the entry of businesses and consumption amenities. Overall, the results indicate that tax-exempt new construction spurred gentrification.
    JEL: R31 H23 H71 H30
    Date: 2020–01–20
  5. By: Youssef Benzarti; Jarkko Harju
    Abstract: This paper uses quasi-experimental variation in payroll taxes to estimate their incidence and investigate how firms use their input factors. We find that higher payroll tax rates lead to large employment responses and have no effects on employee earnings. As payroll taxes increase, firms substitute away from low-skilled, routine and manual workers towards more productive workers and also reduce investments. Our results imply that, contrary to the canonical tax incidence model, firm-level production and input factor choices are affected by payroll taxes.
    JEL: H20 H22 H23
    Date: 2020–01
  6. By: Blake, Michael; Kriticos, Sebastian
    Abstract: This brief discusses several policy options that could improve tax compliance and tax administration in Mandalay – helping the city to escape its low-tax and underfunded services trap. Increasing the perceived benefits of paying tax – by communicating the link between tax and infrastructure – would likely encourage compliance, so long as the government can facilitate ease of payment through effective approaches to tax collection. To be effective at using such policies, cities first need strong foundations for tax administration. In particular, Mandalay could look to update its systems for property identification and assessment. The brief suggests several different approaches to do this and their associated trade-offs.
    JEL: E6
    Date: 2019–03–29
  7. By: Davide Debortoli; Ricardo Nunes; Pierre Yared
    Abstract: According to the Lucas-Stokey result, a government can structure its debt maturity to guarantee commitment to optimal fiscal policy by future governments. In this paper, we overturn this conclusion, showing that it does not generally hold in the same model and under the same definition of time-consistency as in Lucas-Stokey. Our argument rests on the existence of an overlooked commitment problem that cannot be remedied with debt maturity: a government in the future will not tax on the downward sloping side of the La er curve, even if it is ex-ante optimal to do so.
    Keywords: public debt, optimal taxation, fiscal policy
    JEL: H63 H21 E62
    Date: 2020–01
  8. By: Eichfelder, Sebastian; Jacob, Martin; Schneider, Kerstin
    Abstract: This paper examines the effect of tax incentives in the form of bonus depreciation on the quality of investment. Using the expiration of tax incentives via bonus depreciation in East Germany and a representative panel of West German establishments, we show that bonus depreciation significantly lowers the quality of investment. The average quality of investments, measured by the responsiveness of future sales to current investment, reduces by 22.6-34.6%. This adverse effect of tax subsidies is greater for jurisdictions with higher tax rates as well as for large or high-productivity firms. Overall, while increasing investment quantity, as shown by prior literature, tax incentives such as bonus depreciation substantially reduce the quality of investments.
    Keywords: bonus depreciation,tax incentive,investment incentive,investment quality
    JEL: G11 H25 H32 M41
    Date: 2020
  9. By: Kummer-Noormamode, Sabina
    Abstract: After having tested whether public debt GDP ratio and real GDP per capita are cointegrated by means of the bounds testing procedure, the possible nonlinearity in the relationship between public debt GDP ratio and economic growth is examined for 17 OECD countries taken separately over the 1970-2014 period. The corresponding debt-value threshold is endogenously estimated following Hansen (1996, 1999)'s methodology, while simultaneously controlling for additional growth determinants. The findings reveal that the impact of the public debt ratio on economic growth, cointegration and nonlinearity between these two variables, as well as the debt-value thresholds are all country-specific. Thus, analyzing the link between public debt ratio and economic growth for one country individually is revealed to be essential for governments to shape appropriate fiscal policy guidelines.
    Keywords: Public Debt; Economic Growth; Cointegration; Endogenous; Threshold, Nonlinearity
    JEL: C24 C32 E62 H63 O40
    Date: 2018–06–29
  10. By: Clingingsmith, David (Case Western Reserve University); Shane, Scott
    Abstract: We review the empirical literature on the effects of individual income tax policy on entrepreneurship. We find no evidence of consensus, even on relatively narrow questions such as whether individual income tax rates deter or encourage entrepreneurial entry. We believe the absence of consensus reflects both the complexity of mechanisms connecting tax policy to entrepreneurial decision making and the infeasibility of employing the most reliable empirical methods, such as experiments, in this domain.
    Date: 2017–12–13
  11. By: Era Dabla-Norris; Mark Gradstein; Fedor Miryugin; Florian Misch
    Abstract: The extent of tax compliance has important implications for revenue yield, efficiency and the fairness of any tax system. Tax evasion undermines revenue collection, distorts competition, and undermines a country’s development prospects. In this paper, we investigate whether higher productivity causally leads to lower tax evasion. We first present stylized facts consistent with this view and develop a model that illustrates one potential transmission channel. Second, we test the model predictions at the firm level using the self-reported share of declared income as proxy for tax evasion for a large sample of emerging and developing economies. Our results suggests that productivity improvements by firms can lead to lower tax evasion.
    Keywords: economic development, firm productivity, tax evasion
    JEL: D20 H26 O47
    Date: 2019

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