nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒03‒16
ten papers chosen by
Thomas Andrén

  1. Use it or Lose it: Efficiency Gains from Wealth Taxation By Fatih Guvenen; Gueorgui Kambourov; Burhanettin Kuruscu; Daphne Chen; Sergio Ocampo
  2. Long-run inheritance tax and capital income tax with rational altruism By Pascal Belan; Erwan Moussault
  3. 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
  4. Taxation with Representation: The Political Economy of Foreigners’ Voting Rights By Gonnot, Jérôme
  5. Distributional Effects of Tobacco Taxation : A Comparative Analysis By Fuchs,Alan; Gonzalez Icaza,Maria Fernanda; Paz,Daniela Paula
  6. How to better align the U.K.’s corporate tax structure with national objectives By Peter Spencer; Peter Smith; Paulo Santos Monteiro
  7. Double Tax Avoidance and Tax Competition for Mobile Capital By Leibrecht, Markus; Rixen, Thomas
  8. The Effects of Corporate Taxes on Small Firms By Harju, Jarkko; Koivisto, Aliisa; Matikka, Tuomas
  9. Public Pensions and Low Income Dynamics in Canada By Mayssun El-Attar; Raquel Fonseca Benito
  10. Tax Competition and Inequality: The Case for Global Tax Governance By Rixen, Thomas

  1. By: Fatih Guvenen; Gueorgui Kambourov; Burhanettin Kuruscu; Daphne Chen (Econ One); Sergio Ocampo (University of Minnesota)
    Abstract: How does wealth taxation differ from capital income taxation? When the return on investment is equal across individuals, a well-known result is that the two tax systems are equivalent. Motivated by recent empirical evidence documenting persistent heterogeneity in rates of return across individuals, we revisit this question. With such heterogeneity, the two tax systems have opposite implications for both efficiency and inequality. Under capital income taxation, entrepreneurs who are more productive, and therefore generate more income, pay higher taxes. Under wealth taxation, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the tax base, shifts the tax burden toward unproductive entrepreneurs, and raises the savings rate of productive ones. This reallocation increases aggregate productivity and output. In the simulated model parameterized to match the US data, replacing the capital income tax with a wealth tax in a revenue-neutral fashion delivers a significantly higher average lifetime utility to a newborn (about 7.5% in consumption-equivalent terms). Turning to optimal taxation, the optimal wealth tax (OWT) in a stationary equilibrium is positive and yields even larger welfare gains. In contrast, the optimal capital income tax (OCIT) is negative—a subsidy—and large, and it delivers lower welfare gains than the wealth tax. Furthermore, the subsidy policy increases consumption inequality, whereas the wealth tax reduces it slightly. We also consider an extension that models the transition path and find that individuals who are alive at the time of the policy change, on average, would incur large welfare losses if the new policy is OCIT but would experience large welfare gains if the new policy is an OWT. We conclude that wealth taxation has the potential to raise productivity while simultaneously reducing consumption inequality.
    Keywords: Wealth taxation; Capital income tax; Rate of return heterogeneity; Power law models; Wealth inequality
    JEL: E21 E22 E62 H21
    Date: 2019–09–24
  2. By: Pascal Belan; Erwan Moussault (Université de Cergy-Pontoise, THEMA)
    Abstract: We consider a two-period overlapping generation model with rational altruism à la Barro. The government finances public spending with taxes on labor income, capital income and inheritance. We show that, in the long-run, inheritance tax and capital income tax are generally different from zero, even if the optimal tax policy leads to the modified Golden-rule.
    Keywords: inheritance tax, capital income tax, altruism.
    JEL: D64 H21 D91
    Date: 2020
  3. 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, both on micro and macro level. First, we assess the fiscal and distributional impact of this reform using EUROMOD. Second, we estimate labour supply impacts of the reform based on a structural discrete choice framework. Third, we evaluate the macroeconomic impacts, by calibrating and shocking the DSGE model QUEST, with the micro-based results. We show that the reform reduces inequality, lowers the poverty rate for households with children. Overall the reform has a positive impact on labour supply, especially for women. On the macro-level (and in the long-run), our model suggests a small but positive impact on employment, investment, consumption and GDP. Additionally, using the macro impact of the reform, we show that accounting for those behavioural responses at the micro level is important to asses the long-run impact of tax reforms, especially on the income distribution.
    Date: 2020–02–27
  4. By: Gonnot, Jérôme
    Abstract: This paper examines natives’ decision to grant political rights to foreign residents based on their contribution to a redistribution mechanism that finances a private and a public good. We propose a model where agents’ redistributive preferences are determined by their skill level and their cultural beliefs about public spending, which vary by skill and nationality. Contrary to a commonly held view in the political economy literature, we show that low-skill natives are willing to enfranchise relatively skilled foreigners as long as these foreigners have sufficiently liberal beliefs towards public spending. Moreover, we establish that the political rights that low-skill natives are prepared to grant to foreign residents is a nonmonotonic function of immigration’s skill level and cultural support for public expenditure. In particular, low-skill natives favor greater political integration for less-skilled or more liberal foreigners if and only if these foreigners’ average relative preferences for the private and the public good are sufficiently close to their own. We provide empirical support for some of the theoretical predictions of the model using an original municipality-level dataset of Swiss referenda about non-citizen voting rights. Our results indicate that municipalities where a higher share of natives received social transfers were more likely to support immigrant voting and that this effect was greater where foreigners were poorer and emigrated from less economically conservative countries.
    JEL: H41 H53 J68 D72
    Date: 2020–02
  5. By: Fuchs,Alan; Gonzalez Icaza,Maria Fernanda; Paz,Daniela Paula
    Abstract: Tobacco taxes have positive impacts on health outcomes. However, policy makers often hesitate to use them because of the perception that poorer households are affected disproportionally more than richer households. This study compares the simulated distributional effects of tobacco tax increases in eight low- and middle-income countries. It applies a standardized extended cost-benefit analysis methodology and relies on comparable data sources across countries. The net effect of raising taxes on cigarettes encompasses the direct negative price shock to household budgets and the long-term benefits of improved health outcomes. The distributional incidence is assessed by estimating decile-specific behavioral responses and relative income gains. The comparative results do not support the claim that tobacco taxes are necessarily regressive. Although welfare losses from the first-order price shock disproportionally affect the poor, these negative shocks are attenuated by greater price-responsiveness among lower-income groups and further offset by higher long-term relative gains through reduced medical expenditures and additional years of productive life as taxes dissuade smoking. In several countries, increasing the price of cigarettes is pro-poor and welfare improving for a large share of the population. Along with raising taxes, policy should aim at encouraging responsiveness to price changes and target tobacco-related medical expenses that disproportionally burden the poor.
    Date: 2019–04–08
  6. By: Peter Spencer; Peter Smith; Paulo Santos Monteiro
    Abstract: Successive Chancellors have been keen to lower corporation tax to help UK business and attract inward direct investment. Starting with Nigel Lawson in his budget of 1984, the mainstream corporation rate has been progressively lowered and tax breaks for investment and other expenditures progressively withdrawn. However, it is now clear that these reforms have had untoward effects. They removed a bias towards investment but left a strong bias towards debt finance, which was accentuated by Gordon Brown’s abolition of Advance Corporation Tax (ACT) in the 1997 Budget. They have favoured service industry at the expense of capital-intensive manufacturing industry and so added to the imbalances in the economy caused by globalisation. Moreover, the latest literature on economic growth, reviewed in the Appendix, suggests that effect of industrial investment on productivity has been seriously underestimated. That is because the conventional analysis upon which these reforms have been based, focuses on the return on investment for the individual firm and neglects the benefits for the wider economy and in particular the gains from knowledge spillovers. These spillovers largely stem from the complementarities between R&D, innovation and investment and the way that new ideas and practices spread from organisations that invest and innovate to others. This synergy means that supporting capital investment can have the same effect on long-run growth as subsidizing R&D. However, because capital is easier to monitor than the production of intangible knowledge, supporting investment is less vulnerable to agency problems and gaming. Although the fiscal system recognises the importance of innovation for economic growth by supporting R&D, this is an argument for subsidising investment as well as research. Moreover, support for investment would help ensure that UK innovations build factories and jobs here rather than overseas. Moreover, by favouring debt over equity, the corporate tax system discourages knowledge creation. That is because intangible assets such as knowledge and expertise are difficult to finance with a corporate tax and capital structure that is tilted towards debt. Proposals for the reform of corporate taxation have aimed at achieving tax neutrality by removing the bias towards debt finance. However, these proposals neglect important innovation externalities, which mean that we should also be tilting tax relief towards investment. We would do this by using savings from reducing debt interest relief to restore capital allowances on industrial plant and machinery, which the empirical evidence shows, plays a key role in the growth of a knowledge-based economy.
    Date: 2020–03
  7. By: Leibrecht, Markus; Rixen, Thomas (Freie Universität Berlin)
    Abstract: Postprint. Please cite as: Leibrecht, Markus and Thomas Rixen (2010) Double Tax Avoidance and Tax Competition for Mobile Capital, in: Martin Zagler (Ed.): International Tax Coordination. An Interdisciplinary Perspective on Virtues and Pitfalls, Routledge, 61-97.
    Date: 2020–02–28
  8. By: Harju, Jarkko; Koivisto, Aliisa; Matikka, Tuomas
    Abstract: We study the impact of corporate taxes on firm-level investments, total output and input usage by exploiting a 4.5 percentage-point corporate tax rate cut in Finland in 2014. We use detailed administrative data and a differences-in-differences method comparing small corporations (tax rate cut) to similar partnerships (no change in tax incentives). We find no significant investment responses. However, we observe an increase in annual sales and variable costs, suggesting that corporate tax rates have an effect on business activity. The effects are driven by entrepreneurs who actively work in their firm, suggesting that the tax cut increased entrepreneurial effort.
    Keywords: corporate taxation, investments, business activity, small firms, Social security, taxation and inequality, Business regulation and international economics, G31, G38, H21, H25,
    Date: 2020
  9. By: Mayssun El-Attar; Raquel Fonseca Benito
    Abstract: This paper focuses on individuals over 50 and shows that considering persistence and low income dynamics is essential to understanding poverty. We use administrative data for Canada from the Longitudinal and International Study of Adults (LISA). The paper shows that poverty for seniors is highly persistent and strongly depends on lifetime earnings. We show that beginning to receive a public pension implies a higher probability of exit from poverty. Public pensions thereby help to explain the lower overall incidence of poverty among the elderly. These results are confirmed in a dynamic probit model, which allows to control for individuals’ unobserved heterogeneity and state dependence. While public pensions do not eliminate poverty among older adults, they help to alleviate it by reducing persistence and increasing exit for those who are most at risk.
    Keywords: Low-Income,Elderly,Poverty Dynamics,Canadian Public Pensions,
    JEL: H55 J26 I32
    Date: 2020–02–10
  10. By: Rixen, Thomas (Freie Universität Berlin)
    Abstract: Postprint. Please cite as: Rixen, Thomas (2011) Tax Competition and Inequality: The Case for Global Tax Governance. Global Governance 17 (4), 447-467.
    Date: 2020–02–28

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