nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒02‒17
thirteen papers chosen by
Thomas Andrén

  1. Reducing the income tax burden for households with children: An assessment of the child tax credit reform in Austria By Christl, Michael; De Poli, Silvia; Varga, Janos
  2. Capital income taxation under full loss offset provisions of a prospect theory investor By Hlouskova, Jaroslava; Tsigaris, Panagiotis
  3. Demography and Provisions for Retirement: The Pension Composition, a Behavioral Approach By van Praag, Bernard M. S.; Hop, J. Peter
  4. Tax-induced earnings management and book-tax conformity: International evidence from unconsolidated accounts By Eichfelder, Sebastian; Jacob, Martin; Kalbitz, Nadine; Wentland, Kelly
  5. The Employment Effects of the Social Security Earnings Test By Alexander M. Gelber; Damon Jones; Daniel W. Sacks; Jae Song
  6. How can compulsory levies be used to promote social justice By Jean-Marie Monnier
  7. Using Labor Supply Elasticities to Learn about Income Inequality : The Role of Productivities versus Preferences By Bergstrom,Katy Ann; Dodds,William
  8. Money for Nothin’ – Digitalization and Fluid Tax Bases By Blix, Mårten
  9. Taxing Tobacco in Georgia : Welfare and Distributional Gains of Smoking Cessation By Fuchs Tarlovsky,Alan; Gonzalez Icaza,Maria Fernanda
  10. Pension Reform and the Efficiency-Equity Trade-Off: Impacts of Removing an Early Retirement Subsidy By Andersen, Asbjørn Goul; Markussen, Simen; Røed, Knut
  11. The Swedish NDC Scheme : Success on Track with Room for Reflection By Palmer, Edward; Könberg, Bo
  12. Bridging Partner Lifecycle Earnings and Pension Gaps by Sharing NDC Accounts By Klerby,Anna; Larsson,Bo; Palmer,Edward
  13. The Norwegian NDC Scheme : Balancing Risk Sharing and Redistribution By Stølen, Nils Martin; Fredriksen, Dennis; Hernæs, Erik; Holmøy, Erling

  1. By: Christl, Michael; De Poli, Silvia; Varga, Janos
    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 longrun macroeconomic effects depend crucially on how the government compensates the missing tax revenues after the reform. Accounting for these feedback effects at the micro level with a new methodology, 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: 2020
  2. By: Hlouskova, Jaroslava (Institute for Advanced Studies, Vienna, Austria and Thompson Rivers University, Kamloops,BC, Canada); Tsigaris, Panagiotis (Thompson Rivers University, Kamloops,BC, Canada)
    Abstract: In this paper we examine capital income taxation of a reference dependent sufficiently loss averse investor in a two period portfolio choice model under full loss offset provisions. Capital income taxation with loss offset provisions has been found to stimulate risk taking in expected utility models under certain assumptions about attitudes towards risk but would such effect be found under prospect theory type of preferences? We observe that the impact of capital income taxation depends on investors’ reference levels relative to their endowment income and thus we explore capital income taxation for different types of loss averse investors in terms of their ambition. We consider the less ambitious investors to be the ones with relatively low reference levels (they avoid relative losses in both periods) and more ambitious investors to be those with relatively high reference levels. We analyze two types of more ambitious investors: investors with higher time preference (who experience relative losses only in the second period under the bad state of nature) and investors with lower time preference (who experience relative losses only in the first period). We observe that capital income taxation stimulates current consumption in most cases which encourages risk taking, although the final outcome would depend on the investors’ degree of risk aversion, the rate of time preference and the tax rate in relation to certain thresholds. Current consumption could be discouraged for some ambitious type of investors that have relatively high second period reference levels but not necessary first period reference levels. In summary, to determine the impact of capital income taxation on the decision variables the reference levels in relation to endowment income play the most significant role. Ignoring reference depended preferences can lead to different conclusions for investors reaction to capital income taxation. We also find certain type of investors whose happiness level increases with capital income taxation under full loss offset provisions.
    Keywords: Prospect theory, loss aversion, consumption-savings decision, capital income tax
    JEL: G02 G11 H2 E20
    Date: 2020–01
  3. By: van Praag, Bernard M. S. (University of Amsterdam); Hop, J. Peter (University of Amsterdam)
    Abstract: Pensions may be provided for in a modern society by a mix of several methods, namely by voluntary individual savings, mandatory fully-funded occupational pension systems, mandatory social security financed by pay-as-you-go, and old-fashioned hoarding in cash. Here, we call the specific mixture of the four systems the pension composition. We assume that individual workers decide on their own individual savings, that the fully-funded occupational system is decided upon by the age cohort of the median worker (MW), and that the social security is decided upon by the median voter (MV). In this behavioral approach we distinguish between several social groups, where individuals belong to several groups simultaneously and where the interests of the different groups are only partly coinciding. For a given demography and interest rate, the joint result of the decisions of the different age cohorts is a Pareto equilibrium. For ease of exposition we assume that individual and collective pension savings are the only sources of capital supply. When capital supply equals demand from industry there is equilibrium in the capital market with a corresponding equilibrium interest rate. In this paper we assume a demography with one hundred age brackets and we investigate how changes in the birth rates, survival rates, and the retirement age affect the pension composition and the capital market equilibrium. Our conclusion is that the demographic effects are considerable not only for the resulting pension composition but also for macro-economic variables such as the wage rate, the interest rate, and the capital-income ratio. It follows that the pension composition in general and social security in particular is determined by the demography and cannot be modified at will as a long-term political instrument. We find that this is relevant for the present century, where birth and mortality rates in most western countries are steeply declining.
    Keywords: demography, funded pensions, unfunded pensions, social security, interest rate, overlapping generations, individual savings
    JEL: H55 H75 J1 J26
    Date: 2020–01
  4. By: Eichfelder, Sebastian; Jacob, Martin; Kalbitz, Nadine; Wentland, Kelly
    Abstract: We quantify the degree of tax-induced earnings management associated with statutory tax rates and examine whether greater book-tax conformity alters this particular type of earnings management. We first validate a new empirical approach for examining tax-induced earnings management using European unconsolidated financial and ownership information over 2005-2013. We provide robust evidence of significant tax-induced earnings management in both domestic and multinational firms. In particular, the results suggest that a 10 percentage point increase in the corporate tax rate relates to an 8.2 percent decrease in pre-tax book income. We then document that firms in countries with greater book-tax conformity engage in additional tax-induced earnings management. This is important given that it contrasts with prior literature, which does not find an effect for book-tax conforming transactions with a change in conformity.
    Keywords: tax-induced earnings management,book-tax conformity,conforming tax avoidance
    JEL: H25 H26 M41
    Date: 2020
  5. By: Alexander M. Gelber (Wharton School, University of Pennsylvania; National Bureau of Economic Research); Damon Jones (University of Chicago - Harris School of Public Policy); Daniel W. Sacks (Indiana University - Kelley School of Business - Department of Business Economics & Public Policy); Jae Song (U.S. Social Security Administration)
    Abstract: We investigate the impact of the Social Security Annual Earnings Test (AET) on the employment decisions of older Americans. The AET reduces Social Security benefits by one dollar for every two dollars earned above the exempt amount. Using a differences-in-differences design, we find that the employment rate of those predicted to become subject to the AET decreases substantially relative to those not predicted to become subject to it. The point estimates suggest that the AET reduces the employment rate of Americans aged 63-64 by at least 1.2 percentage points.
    JEL: H55 J22 J26
    Date: 2020
  6. By: Jean-Marie Monnier (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The aim of this brief contribution is to study the extent to wich compulsory levies are likely to contribute to social justice and in particular to the welfare system. The study of the tax structure of some OECD countries highlights the wide diversity of sources of tax revenue in the tax system of these countries. They differ in particular on the relative share of direct taxation of household income and VAT. It is recalled that the French experience of the VAT illustrates the weakly redistributive character of it. The French experience also shows that the income tax cannot be conceived without thinking about social justice in the welfare state. Finally we also show that conflicts over the impact of the adopted devices can emerge from antagonistic justice criteria.
    Abstract: L'objectif de cette brève communication est d'examiner et d'évaluer dans quelle mesure les prélèvements obligatoires sont susceptibles de participer à la justice sociale et en particulier au système de protection sociale. L'étude de la structure fiscale de quelques pays de l'OCDE permet de souligner la grande diversité des sources de recettes fiscales dans les pays composant cet échantillon. Ils se différencient notamment sur l'importance relative de la part de la fiscalité directe des revenus des ménages et de la TVA. On rappelle que l'expérience française de la TVA illustre le caractère faiblement redistributif de celle-ci. Cette même expérience française montre que la fiscalité des revenus ne peut être pensée sans réflexion sur la justice sociale au sein du système de protection sociale. Cette expérience montre aussi que des conflits quant à l'impact des dispositifs adoptés peuvent émerger de critères de justice antagoniques. Abstract The aim of this brief contribution is to study the extent to wich compulsory levies are likely to
    Keywords: Taxation,social justice,French tax system,redistribution of income,Prélèvements obligatoires,justice sociale,Système fiscal français,redistribution
    Date: 2019–04–11
  7. By: Bergstrom,Katy Ann; Dodds,William
    Abstract: This paper argues that labor supply elasticities encode information about the determinants of income inequality. In the theoretical framework, individuals choose labor supply conditional on productivities and preferences for consumption relative to leisure. The paper shows that reduced-form labor supply elasticities allow one to isolate the components of income due to productivities versus preferences. The paper then investigates what labor supply elasticities imply about the importance of productivities versus preferences in the United States. Estimates from the literature imply productivities drive most of income inequality. Larger income effects and larger differences between income and hours worked elasticities imply preferences play an increasingly important role.
    Date: 2020–01–06
  8. By: Blix, Mårten (Research Institute of Industrial Economics (IFN))
    Abstract: Technology and digitalization are transforming economic activity, but tax policies are lagging behind. The development also encompasses a broad shift in value-creation, with less emphasis on physical production and more on soft knowledge/intangibles, notably copyrights, firm-specific processes, data and software. We discuss what these changes imply, and we outline the economic factors of scale- and network effects that magnify existing economic trends. A key concern is that the distortionary effects of taxation will become more severe and that tax bases will erode. As factors of production are becoming more fluid and mobile, multinational corporations have been able to shift their profits to low-tax jurisdictions, so called base erosion profit shifting (BEPS). To counter this possibility, a number of governments in 2019 began to unilaterally impose taxes aimed specifically at digital firms. Unless a broad agreement can be reached within the nexus of the more than 130 countries in the OECD/BEPS framework, the existing multinational rule-based order for corporate tax could begin to crumble. On the domestic front, the tax challenges for labour income are, if possible, even more extensive. Although the labour market changes are slower, their key role in public finances imply that even minor reductions result in significant funding challenges. To ensure we get money for somethin’, we conclude that a new comprehensive tax reform is urgent.​
    Keywords: Digital tax; OECD/BEPS; Digitalization; Taxation
    JEL: H21 H25 H26 H27 O33
    Date: 2020–02–05
  9. By: Fuchs Tarlovsky,Alan; Gonzalez Icaza,Maria Fernanda
    Abstract: This paper analyzes the welfare and distributional impacts of increasing taxes on cigarettes in Georgia. Increasing taxes on tobacco is an effective measure to reduce smoking. According to some estimates, increasing tobacco taxes could save more than GEL 3.6 billion and 53 thousand lives over a 15-year period. However, concerns over potentially regressive effects on the poor are often raised. An Extended Cost Benefit Analysis (ECBA) is applied to simulate the welfare and distributional impacts of raising prices on cigarettes. Decile-specific price elasticities of demand are estimated to account for heterogenous behavioral responses of different income groups. Empirical estimations confirm that poorer households in Georgia tend to reduce consumption more intensely when faced with higher tobacco prices. The estimated magnitude and distribution of elasticities are comparable to peer countries. The simulations based on household survey data suggest that the long-term net distributional effects of increasing taxes on cigarettes in Georgia are likely progressive. Incorporating the indirect benefits of reduced smoking -- reductions in medical expenses and earnings from adverted premature deaths -- could bring small, albeit positive, income gains for large sectors of the population. The magnitude of those benefits is most significant among lower-income households, potentially contributing to lift them out of poverty.
    Date: 2020–01–29
  10. By: Andersen, Asbjørn Goul (Ragnar Frisch Centre for Economic Research); Markussen, Simen (Ragnar Frisch Centre for Economic Research); Røed, Knut (Ragnar Frisch Centre for Economic Research)
    Abstract: We provide empirical evidence that the removal of work disincentives embedded in retirement earnings tests can increase old-age labor supply considerably, but it does so at the cost of more income inequality. Causal effects are identified based on a reform of the Norwegian early retirement program, which entailed that adjacent birth cohorts were exposed to completely different work incentives from age 62. The reform removed a strict retirement earnings test such that pension wealth was redistributed from early to late retirees. Given the pre-existing employment and earnings patterns, this implied a considerable rise in old-age income inequality. In principle, this could have been offset by changes in the labor supply. We estimate that the reform triggered a 42% increase in hours worked during the ages covered by early retirement options. However, as the labor supply responses were of similar magnitudes across the earnings distribution, they did little to offset the rise in inequality. As measured by the Gini coefficient, inequality in overall old-age income rose by approximately 0.03 (17%).
    Keywords: pension reform, inequality, labor supply
    JEL: H55 D31 J22 J26
    Date: 2020–01
  11. By: Palmer, Edward; Könberg, Bo
    Abstract: Sweden?s reform began with a published sketch in 1992 and developed into nonfinancial defined contribution (NDC) legislation in 1994. This paper discusses the underpinnings of the Swedish NDC scheme?s financial stability, factors influencing the adequacy of benefits, and its interplay with other components of the pension system: the public financial defined contribution scheme, the minimum pension guarantee, and the occupational schemes. The paper also includes information on the December 2017 broad six-party political agreement on forthcoming legislation. It concludes with recommendations for additional improvements in the overall old-age pension system, based on the analysis of financial stability, adequacy, and differences in outcomes, and the interaction of the NDC scheme with the guarantee benefits and the occupational schemes.
    Keywords: Pensions&Retirement Systems,Population&Development,Demographics,Economic Growth,Disability
    Date: 2019–04–01
  12. By: Klerby,Anna; Larsson,Bo; Palmer,Edward
    Abstract: Sweden?s gender pension gap is about 33 percent at retirement, reflecting the gender earnings gap ? itself a reflection of a structural gender difference in low-pay jobs for women and men and career advancement opportunities. The individual nonfinancial defined contribution (NDC) account data examined show that the allocation of time to informal care work in the home versus formal market work is the main determinant of the gaps. A case is presented for sharing accounts as the default, making the cost of women?s time in home care explicit and negotiable, reducing the minimum guarantee pension?s role as an implicit tax-financed spousal subsidy. The paper also analyzes the likelihood of needing a guarantee and the effect of sharing under various circumstances.
    Keywords: Educational Sciences,Social Development&Poverty,Pensions&Retirement Systems,Gender and Development,Labor Markets
    Date: 2019–04–01
  13. By: Stølen, Nils Martin; Fredriksen, Dennis; Hernæs, Erik; Holmøy, Erling
    Abstract: The main goals of reforming the Norwegian old-age pension system toward nonfinancial defined contributions (NDC) in 2011 were to improve long-run fiscal sustainability and labor supply incentives. Maintaining much of the redistributive effects of the former public pension system was also an important concern. Econometric analyses reveal the 2011 reform?s significant effects on postponing retirement. Results from a dynamic microsimulation model show that the reform is expected to have substantial effects on old-age pension expenditures in the long run without any large negative distributional effects. Macroeconomic analyses indicate that the reform is likely to make a great fiscal impact in the long run, and higher employment plays an important role in this aspect.
    Keywords: Pensions&Retirement Systems,Population&Development,Access of Poor to Social Services,Economic Assistance,Services&Transfers to Poor,Disability,Rural Labor Markets,Labor Markets,Macro-Fiscal Policy,Economic Adjustment and Lending,Public Finance Decentralization and Poverty Reduction,Public Sector Economics
    Date: 2019–04–01

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