nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒03‒09
eleven papers chosen by
Thomas Andrén

  1. Incidence of Capital Income Taxation in a Lifecycle Economy with Firm Heterogeneity By Chung Tran; Sebastian Wende
  2. Optimal Redistributive Wealth Taxation When Wealth Is More Than Just Capital By Max Franks; Ottmar Edenhofer
  3. Shadow effect from Laffer tax allergy: New tax policy tool to fight tax evasion By DOMBOU T., Dany R.
  4. Demography and Provisions for Retirement - The Pension Composition, a Behavioral Approach By Bernard M.S. van Praag; J. Peter Hop
  5. Limitation of holding structures for intra-EU dividends: A blow to tax avoidance? By Maarten van 't Riet; Arjan Lejour
  6. Tax knowledge diffusion via strategic alliances By Müller, Jens; Weinrich, Arndt
  7. Dutch Shell Companies and International Tax Planning By Arjan Lejour; Jan Möhlmann; Maarten van 't Riet; Thijs Benschop
  8. Heterogeneous expectations, housing bubbles and tax policy By Martin, Carolin; Schmitt, Noemi; Westerhoff, Frank H.
  9. Are Large Deficits and Debt Dangerous? By Michael J. Boskin
  10. VAT Compliance Incentives By Maria-Augusta Miceli
  11. The Distributive Impact of Taxes and Expenditures in Colombia By Jairo,Nunez; Olivieri,Sergio Daniel; Parra,Julieth; Pico,Julieth

  1. By: Chung Tran; Sebastian Wende
    Abstract: We study the incidence of capital income taxation in a dynamic general equilibrium model with heterogeneous firms and lifecycle households. In this incomplete market setting, marginal excess burdens of three capital taxes, namely corporate income, dividend and capital gains taxes, are vastly different due to heterogeneous responses of firms and households, and heterogeneous effects of general equilibrium adjustments. It is indeed important to account for firm heterogeneity in productivity and investment financing as well as household heterogeneity in age and skill. Overall, taxing capital with a corporate income tax at the firm level results in higher excess burden than taxing capital with dividend and capital gains taxes at the household level. Given the existing U.S. tax treatment for capital income, reforms that shift tax burden from the firm to household side potentially result in efficiency gains and overall welfare improving. However, the welfare benefits of the tax reforms are quite different across households and generations over transition time, depending on skill, age-cohort and budget balancing tax instruments. In particular, majority of currently alive households, especially retirees, experience welfare gains under moderate corporate income tax cuts, but suffer from welfare losses under more radical tax cuts.
    Keywords: Excess burden; Tax incidence; Distributional eects; Overlapping generations; Dynamic general equilibrium
    JEL: D21 E62 H21 H22 H25
    Date: 2020–03
  2. By: Max Franks; Ottmar Edenhofer
    Abstract: We show how normative standpoints determine optimal taxation of wealth. Since wealth is not equal to capital, we find very different welfare implications of land rent-, bequest- and capital taxation. It is mainly land rents that should be taxed. We develop an overlapping generations model with heterogeneous agents and calibrate it to OECD data. We compare three normative views. First, the Kaldor-Hicks criterion favors the laissez-faire equilibrium. Second, with prioritarian welfare functions based on money-metric utility, high land rent taxes are optimal due to a portfolio effect. Third, if society disapproves of bequeathing, bequest taxation becomes slightly more desirable.
    Keywords: optimal taxation, social welfare, wealth inequality, land rent tax, Georgism
    JEL: D31 D63 E62 H21 H23 Q24
    Date: 2020
  3. By: DOMBOU T., Dany R.
    Abstract: This study is inspired by the Laffer curve to develop and formalize a concept around optimal tax policy considering asymmetric information. This is the "Shadow effect". This theory states that when the tax burden is high, producers tend to inflate their fictitious expenses in order to reduce their declared profit (in order to avoid paying a high tax). The theoretical developments show that the propensity of producers to the Shadow effect is positively related to the square of tax rate. The relationship is non-linear. They also show that there is an inverse and non-linear relationship between the tax rate and the level of production. In addition, producers' sensitivity to the Shadow Effect can be influenced by fluctuating the tax burden. This study provides to governments a new fiscal policy tool. For instance, a numerical application has shown that if the Cameroonian government wants to encourage production in such a way that it could reach 50% more, it should reduce the corporate tax rate down ceteris paribus, to 16.19%.
    Keywords: Tax evasion; Tax burden; Laffer Curve; Shadow effect.
    JEL: D8 H21 H26
    Date: 2018–11
  4. By: Bernard M.S. van Praag; J. Peter Hop
    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 J10 J26
    Date: 2020
  5. 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.
    JEL: H25 H26 H32 F23
    Date: 2019–12
  6. By: Müller, Jens; Weinrich, Arndt
    Abstract: This study examines strategic alliances as channels for tax knowledge diffusion between firms. Although strategic alliances are primarily expected to foster their main business purposes, we focus on whether tax knowledge potentially diffuses as a second order effect of peer-to-peer cooperation. To tease out diffusion of tax knowledge, we investigate changes in the tax planning behavior of high-tax firms in strategic alliances with low-tax firms in comparison to high-tax firms in strategic alliances with other high-tax firms. Our results suggest an economically meaningful decrease of high-tax firms' cash effective tax rates when cooperating with low-tax firms. Additionally, we find that this adjustment occurs within two years of a strategic alliance's initiation. We apply textual analysis to control for the strategic alliances' main business purposes in our analyses. Because these activities do not appear to drive our findings, we argue to identify tax knowledge diffusion as a second order effect and conjecture that strategic alliances are not intended to be tax planning investments. Finally, we test whether partner characteristics intensify or mitigate the identified effects. Overall, our results provide robust evidence for tax knowledge diffusion via strategic alliances.
    Keywords: Corporate Tax Planning/Avoidance,Knowledge Diffusion,Network,Strategic Alliance
    JEL: C31 G34 H26
    Date: 2020
  7. By: Arjan Lejour (CPB Netherlands Bureau for Economic Policy Analysis); Jan Möhlmann (CPB Netherlands Bureau for Economic Policy Analysis); Maarten van 't Riet (CPB Netherlands Bureau for Economic Policy Analysis); Thijs Benschop (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: This paper uses the financial statements of special purpose entities (SPEs) for explaining the origin and destination of dividend, interest, and royalty flows passing the Netherlands. We find that Bermuda is the most important destination for royalty flows. These flows come from Ireland, Singapore and the United States. For dividend and interest payments the geographical pattern is more widespread. We find a substantial tax reduction for royalties by using Dutch SPEs compared to a direct flow between the origin and destination country. However, we cannot find such tax savings for dividends and interest with an approximation based on statutory tax rates. This Discussion Paper reports research on the financial flows already presented in the CPB Policy Brief of 24 January 2019: Conduit country the Netherlands in the spotlight.
    JEL: G32 H25 H32
    Date: 2019–06
  8. By: Martin, Carolin; Schmitt, Noemi; Westerhoff, Frank H.
    Abstract: We integrate a plausible expectation formation and learning scheme of boundedly rational investors into a standard user cost housing market model, involving a rental and a housing capital market. In particular, investors switch between heterogeneous expectation rules according to an evolutionary fitness measure, given by the rules' past profitability. We analytically show that our housing market model may produce endogenous boom-bust dynamics. Furthermore, we demonstrate that policy makers may use our model as a tool to explore how different tax policies may affect the housing market's steady state, its stability and out-of-equilibrium behavior.
    Keywords: housing markets,bubbles and crashes,heterogeneous expectations,bounded rationality and learning,tax policy,steady state and stability analysis
    JEL: D84 H24 R31
    Date: 2020
  9. By: Michael J. Boskin
    Abstract: The Traditional View (TV) of large deficits and debt is they have large economic costs, save in a recession and early recovery, because they crowd out investment and lower future income, and taken to extremes, can cause inflation and even a financial crisis. The TV has been challenged, most fundamentally in Olivier Blanchard’s 2019 AEA Presidential Address, an elegant extension of Peter Diamond’s OLG model to account for risk in an expected utility framework. He concludes they may have no fiscal cost and increase welfare. I present evidence of looming large deficit and debt/GDP increases and their effects on recovery from recession, interest rates and long-run growth. I discuss several substantive issues with the “no fiscal cost” view that limit its applicability, including accounting neither for the effect of increasing debt on interest rates and growth nor the pre-existing primary deficit, debt and their projected evolution; disputable readings of the data; strong assumptions and parameter values driving the results; and a political economy of deficits and debt likely to lead to even larger debt ratios. Acknowledging uncertainties, the evidence still suggests that large increases in the debt ratio could lead to much higher taxes, lower future incomes and intergenerational inequity.
    JEL: E62 H6 H62 H63 H68
    Date: 2020–02
  10. By: Maria-Augusta Miceli
    Abstract: In this work I clarify VAT evasion incentives through a game theoretical approach. Traditionally, evasion has been linked to the decreasing risk aversion in higher revenues (Allingham and Sandmo (1972), Cowell (1985) (1990)). I claim tax evasion to be a rational choice when compliance is stochastically more expensive than evading, even in absence of controls and sanctions. I create a framework able to measure the incentives for taxpayers to comply. The incentives here are deductions of specific VAT documented expenses from the income tax. The issue is very well known and deduction policies at work in many countries. The aim is to compute the right parameters for each precise class of taxpayers. VAT evasion is a collusive conduct between the two counterparts of the transaction. I therefore first explore the convenience for the two private counterparts to agree on the joint evasion and to form a coalition. Crucial is that compliance incentives break the agreement among the transaction participants' coalition about evading. The game solution leads to boundaries for marginal tax rates or deduction percentages, depending on parameters, able to create incentives to comply The stylized example presented here for VAT policies, already in use in many countries, is an attempt to establish a more general method for tax design, able to make compliance the "dominant strategy", satisfying the "outside option" constraint represented by evasion, even in absence of audit and sanctions. The theoretical results derived here can be easily applied to real data for precise tax design engineering.
    Date: 2020–02
  11. By: Jairo,Nunez; Olivieri,Sergio Daniel; Parra,Julieth; Pico,Julieth
    Abstract: Colombia has reduced extreme poverty in the past 16 years by almost half, moderate poverty by 22 percentage points, and made more than four million Colombians jump the threshold of multidimensional poverty. However, it remains one of the most unequal countries in the region, after Brazil and Panama. Fiscal policy is one of the instruments that allow governments to speed up the decline in inequality levels and reduce poverty. This study presents an exhaustive and comprehensive analysis of the distributional impacts of taxes and expenditures in Colombia in 2017. It makes a methodological comparison with the Commitment to Equity, which was previously implemented, and includes multiple improvements in the methodology. The results suggest that the combined effect of taxes and social spending in Colombia contributes to poverty reduction between 0.3 and 2.6 percentage points for US$5.5 and US$3.2 per day per person respectively, while inequality is reduced by almost one Gini point. Taxes and direct transfers, as well as indirect transfers, are progressive and pro-poor, while indirect taxes are regressive and contribute to an increase in inequality. Finally, transfers in-kind for education and health services are progressive and contribute to the reduction of inequality.
    Date: 2020–03–03

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