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

  1. Statutory, Effective and Optimal Net Tax Schedules in Lithuania By Nerijus Cerniauskas; Alain Jousten
  2. Sham Litigation, Delayed Tax Payment and Evasion: The Role of Informal Credit Market By Sugata Marjit; Suryaprakash Mishra; Sandip Mitra
  3. Fiscal Consolidation and Automatic Stabilization: New Results By Mathias Dolls; Clemens Fuest; Andreas Peichl; Christian Wittneben
  4. The Employment Effects of the Social Security Earnings Test By Alexander M. Gelber; Damon Jones; Daniel W. Sacks; Jae Song
  5. Tax Housing or Land? Distributional Effects of Property Taxation in Germany By Rafael Barbosa; Simon Skipka
  6. Environmental Taxes and Productivity: Lessons from Canadian Manufacturing By Akio Yamazaki
  7. Taxation of Digital Platforms By Marko Köthenbürger
  8. Pensions and household savings: cross-country heterogeneity in Europe By Roger, Muriel; Savignac, Frédérique; d’Addio, Anna
  9. RUSMOD -- A Tool for Distributional Analysis in the Russian Federation By Matytsin,Mikhail; Popova,Daria; Freije-Rodriguez,Samuel
  10. Where Does Multinational Profit Go with Territorial Taxation? Evidence from the UK By Dominika Langenmayr; Li Liu
  11. Can Taxes Help Ensure a Fair Globalization ? By Langot,Francois; Merola,Rossana; Oh,Samil
  12. Ring-fencing Digital Corporations: Investor Reaction to the European Commission’s Digital Tax Proposals By Daniel Klein; Christopher A. Ludwig; Christoph Spengel
  13. Substitution across Profit-Shifting Methods and the Impact on Thin Capitalization Rules By Wolfgang Eggert; Gideon Goerdt
  14. Trust to Pay ? Tax Morale and Trust in Africa By Kouame,Wilfried Anicet Kouakou

  1. By: Nerijus Cerniauskas (Bank of Lithuania, Vilnius University); Alain Jousten (University of Liège, IZA and NETSPAR)
    Abstract: We estimate effective and optimal net income tax schedules and compare them to estimated statutory rates for the case of Lithuania in the period 2014-2015. Values of effective net tax rates are estimated from the survey of EU Statistics on Income and Living Conditions, the statutory net tax rates are estimated with the European tax-benefit simulator Euromod, while optimal net taxes are calculated via Saez (2002) methodology. We find that the three net tax schedules are similar for employees in the middle of the income distribution. At the bottom of the income distribution, optimal net tax schedules suggest higher in-work benefits. The net tax schedules diverge substantially for the self-employed. At the top of the income distribution, where the majority of self-employed are concentrated, the self-employed are required to pay 15 cents less net taxes per euro than employees - and they effectively pay 29 cents less.
    Keywords: Optimal tax schedule, effective tax schedule, statutory tax schedule, taxes, transfers, employees, self-employed, Lithuania
    JEL: H2 H21
    Date: 2020–02–07
  2. By: Sugata Marjit; Suryaprakash Mishra; Sandip Mitra
    Abstract: We model the interaction between the informal credit market and the act of tax collection by the government; in presence and functioning of the informal credit market, the agents (the tax paying firms) engage in false or sham litigation and deferred tax payments. During the litigation period they earn higher return, higher than the punishment rates charged by the government. Proportion of false claims increases with size. In this context we get a result that contradicts conventional wisdom in tax evasion literature whereby higher tax rate actually leads to greater compliance and tax rate acts as a policy instrument even when in the standard case it does not affect evasion. We propose part-payment of the disputed amount by the tax paying firm to the government as a possible solution to the problems of excessive litigation against the government, delayed tax payments and evasion; it also has a positive impact on the tax collection of the government. Finally, we also attempt to explain as to why and how the government policies may be intentionally designed to foster the informal sector.
    Keywords: delayed tax payment, evasion, sham litigation, informal credit market
    JEL: H25 H26 H32 K34 K41 K42
    Date: 2019
  3. By: Mathias Dolls; Clemens Fuest; Andreas Peichl; Christian Wittneben
    Abstract: We analyze how the combined effect of automatic stabilizers and discretionary changes in tax-benefit systems have affected the cushioning of income shocks in the Euro zone and the EU-27 in the period 2007–2014. We propose a new summary measure of the combined effect of automatic stabilizers and discretionary policy changes based on micro data and counter-factual simulation. Discretionary fiscal policy supported the effects of automatic stabilizers in the years 2008 and 2009 but then became much more restrictive. For the Euro zone as a whole, the share of income shocks absorbed by the tax and transfer system declined from 48 percent in 2008 to 24 percent in 2011. For some of the countries most affected by the crisis, the stabilization effect was even negative in some years of the crisis, implying that the tax and transfer system amplified income shocks. We also compare our measure of stabilization to estimates based on macro data.
    Keywords: automatic stabilizers, fiscal consolidation, fiscal policy
    JEL: E63 E62 H31
    Date: 2019
  4. By: Alexander M. Gelber; Damon Jones; Daniel W. Sacks; Jae Song
    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: 2020–01
  5. By: Rafael Barbosa; Simon Skipka
    Abstract: Despite its theoretical merits, Land Value Taxation (LVT) is not a common policy instrument in most countries. One of the main reasons is uncertainty regarding its distributional impacts. This uncertainty has not been settled by the literature, due to a lack of appropriate data at the household level. We overcome this obstacle by the construction of a unique household level dataset for a sample of German homeowners in 2017. The data collected allows us to study the differences in distributions of land and property values and the resulting distributional effects of implementing a LVT compared to a standard property tax. Our results are as follows. First, we find revenue neutral LVT rates to be around 0.6% in our sample. Second, we find the share of land value in property value on average to be 33% with considerable household heterogeneity, both within and between regions. Third, we find a LVT to be equally progressive if implemented at the federal level, but less progressive if implemented at the regional level, since, although land values are more concentrated than property values, they are not as strongly correlated with income. Quantitatively a revenue-neutral reform from a standard property tax to a LVT at the regional level would increase the average tax burden of the lowest income quintile of homeowners by 25%.
    Keywords: land, housing, land value taxation, property taxation, distributional assessment
    JEL: H20 H71 R20
    Date: 2019
  6. By: Akio Yamazaki (National Graduate Institute for Policy Studies, Tokyo, Japan)
    Abstract: This paper investigates how environmental taxes affect manufacturing productivity by examining British Columbia’s revenue-neutral carbon tax. I develop a new hypothesis, the “Productivity Dividend Hypothesis,†to show that environmental taxes can positively affect productivity by recycling tax revenues to reduce corporate income taxes. This revenue-recycling increases investment and could raise productivity more than environmental taxes lower productivity by diverting resources from production. I evaluate this hypothesis using detailed confidential plant-level data. I find that the carbon tax lowers productivity, although this is offset to some extent by the revenue-recycling. For some plants, the policy generates a net gain in productivity.
    Date: 2020–02
  7. By: Marko Köthenbürger
    Abstract: Tech giants such as Google and Facebook generate significant amounts of advertising income, which is mainly reported in low-tax countries. This has created a policy discussion of how to re-align the location of value creation and taxation. The success of the business model of these digital platforms relies on the existence of indirect network effects, which are the prime reason why platforms exist and generate advertising income. To account for these effects, conventional tax policy needs to be adjusted. This includes an adjusted concept of nexus that should rely on the location of users, which generate the relevant indirect network effects. The recent EU proposal of a digital service tax goes in this direction and constitutes a policy option for other countries.
    Date: 2020
  8. By: Roger, Muriel; Savignac, Frédérique; d’Addio, Anna
    Abstract: We address the question of whether the heterogeneity in savings is partly due to differences in pension wealth across individuals and across countries, using a European harmonised wealth survey (HFCS) combined with estimates of pension wealth (OECD). First, we find significant displacement effects of mandatory pension wealth on non-pension financial wealth at the mean, and a statistically significant crowd-out estimate on the probability of owning real estate property. Second, there is heterogeneity in the mean savings offset depending on age, risk attitudes and country. Third, the offset follows different patterns along the non-pension wealth distribution across countries. JEL Classification: D31, D91, H55
    Keywords: life cycle, pensions, social security, wealth
    Date: 2020–02
  9. By: Matytsin,Mikhail; Popova,Daria; Freije-Rodriguez,Samuel
    Abstract: The purpose of this paper is to introduce applications of RUSMOD -- a microsimulation model for fiscal incidence analysis in the Russian Federation. RUSMOD combines household survey micro-data and fiscal policy rules to simulate the Russian tax-benefit system: the size and distribution of taxes collected and benefits paid, and the impact of the system on different population groups. Microsimulation models, such as RUSMOD, are habitually used in developed countries, and can be versatile budgetary policy tools. Using this model, the current tax-benefit system in Russia is examined. The impact of the system is measured across the income distribution, age groups, family types, localities, as well as across time. One of the applications of RUSMOD this paper aims to assess is the role of the tax-benefit system in explaining the incidence of informal employment in Russia. The paper investigates whether the existing system creates disincentives for formalization in terms of reducing disposable incomes and increasing poverty and inequality, and whether a hypothetical tax reform would be able to reduce the opportunity costs of formalization for informal workers, improve distributional outcomes, and increase fiscal revenues.
    Date: 2019–09–03
  10. By: Dominika Langenmayr; Li Liu
    Abstract: In 2009, the United Kingdom abolished the taxation of profits earned abroad and introduced a territorial tax system. Under the territorial system, firms have strong incentives to shift profits abroad. Using a difference-in-differences research design, we show that profits of UK subsidiaries in low-tax countries increased after the reform compared to subsidiaries of non-UK multinationals in the same countries, by an average of 2.1 percentage points. The increase in profit shifting also leads to increases in measured productivity of the foreign affiliates of UK multinationals of between 5 and 9 percent.
    Keywords: profit shifting, territorial tax system, multinational firms
    JEL: H25 H87 F23
    Date: 2020
  11. By: Langot,Francois; Merola,Rossana; Oh,Samil
    Abstract: This paper analyzes whether taxation can be successfully used to reduce the incidence of labor informality and achieve higher equality in a globalized economy. To this purpose, it develops a two-area model: a developed country and an emerging country. The two areas differ according to the size of the informal sector, which is characterized by a more flexible labor market and lower productivity. To illustrate the potential role of taxation in achieving a more fair income distribution, the paper introduces a trade shock to simulate the effects of trade liberalization. Trade expansion has often been blamed for leading to an expansion of the informal sector and a widening of wage income disparities. In this context, the paper analyzes whether a budget-neutral tax reform -- switching the tax burden from payroll taxes paid by firms operating in the formal sector to a consumption tax -- can mitigate possible adverse effects of trade liberalization and support labor formalization. The effects of taxation are seen in the context of the trade-offs between growth, labor formality and equity. The analysis suggests that small improvements in formalization, resulting from the tax reform, come at the cost of widening income inequality. To reduce the incidence of low-quality jobs, tax policy interventions should go hand in hand with more effective social protection systems and labor laws.
    Keywords: International Trade and Trade Rules,Labor Markets,Public Finance Decentralization and Poverty Reduction,Macro-Fiscal Policy,Taxation&Subsidies,Economic Adjustment and Lending,Public Sector Economics,Employment and Unemployment,Rural Labor Markets
    Date: 2019–08–12
  12. By: Daniel Klein; Christopher A. Ludwig; Christoph Spengel
    Abstract: We study the effect of digital tax measures on firm value. By employing an event study methodology, we analyze investor reaction to the European Commission’s proposals on the taxation of digital corporations. Examining the stock returns of potentially affected corporations surrounding the draft directives’ release, we find a significant abnormal capital market reaction of -0.692 percentage points. The investor reaction is more pronounced for firms that engage more actively in tax avoidance, have a higher profit shifting potential, and for those with higher exposure to the EU. The market value of digital and innovative corporations decreased by at least 52 billion euro in excess of the regular market movement during the event window. Overall, our study reveals that expectations about ring-fencing digital tax measures impact firm values.
    Date: 2019
  13. By: Wolfgang Eggert; Gideon Goerdt
    Abstract: Thin capitalization rules limit firms’ ability to deduct internal interest payments from taxable income, thereby restricting debt shifting activities of multinational firms. Since multinational firms can limit their tax liability in several ways, regulation of debt shifting may have an impact on other profit shifting methods. We therefore provide a model under which a multinational firm can shift profits out of a host country by issuing internal debt from an entity located in a tax haven and by manipulating transfer prices on internal goods and services. The focus of this paper is the analysis of regulatory incentives, (𝑖) if a multinational firm treats debt shifting and transfer pricing as substitutes or (𝑖𝑖) if the methods are not directly connected. The results provide an explanation for why hybrid thin capitalization rules are used. These insights can add to the existing literature since the results explain why hybrid rules can result in improvements in welfare if multinational firms treat methods of profit shifting as substitutes.
    Keywords: thin capitalization rules, profit shifting methods, substitution
    JEL: H70 H20 K30
    Date: 2020
  14. By: Kouame,Wilfried Anicet Kouakou
    Abstract: Although low tax morale hits developing countries hardest, little is known about its determinants in those countries. This paper examines the impact of trust in public institutions and the neighborhood on individual tax morale in four African countries: Algeria, Ghana, Morocco, and Nigeria. First, the paper provides theoretical foundations of such a relationship. Further, the paper uses the World Value Survey to estimate the effects of trust in public institutions and the neighborhood on individual tax morale. The identification strategy employs the instrumental variables method and relies on historical data on the slave trade and the literature on the cultural heritage of trust. The paper finds that trust in public institutions and the neighborhood are largely associated with tax morale in the African countries under consideration. The findings are robust to an alternative identification strategy, additional controls, and a falsification test.
    Keywords: Tax Law,Educational Sciences,International Trade and Trade Rules,Culture in Sustainable Development,Literature&Folklore,Culture and Cultural Practice,Artisans,Arts&Music,Cultural Policy,Cultural Heritage&Preservation
    Date: 2019–08–06

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