nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒03‒23
eight papers chosen by
Thomas Andrén

  1. Policy Implications of Non-linear Effects of Tax Changes on Output By Gunter,Samara; Riera-Crichton,Daniel; Vegh Gramont,Carlos Alberto; Vuletin,Guillermo Javier
  2. Optimizing Tax Administration Policies with Machine Learning By Pietro Battiston; Simona Gamba; Alessandro Santoro
  3. On the Non-Existence of a Zero-Tax Steady State with Incomplete Asset Markets By Tomoyuki Nakajima; Shuhei Takahashi
  4. The impact of labor income tax progressivity on the fiscal multipliers in the context of fiscal consolidation programs By Santos, Mariana
  5. Income Taxation and the Diversity of Consumer Goods: A Political Economy Approach By Renaud Bourlès; Michael Dorsch; Paul Maarek
  6. Optimal Taxation and Investment-Specific Technological Change By Nóbrega, Valter
  7. Toward a Comprehensive Tax Reform for Italy By Emile Cammeraat; Ernesto Crivelli
  8. Cigarette Taxes and Teen Marijuana Use By Anderson, D. Mark; Matsuzawa, Kyutaro; Sabia, Joseph J.

  1. By: Gunter,Samara; Riera-Crichton,Daniel; Vegh Gramont,Carlos Alberto; Vuletin,Guillermo Javier
    Abstract: An earlier paper titled"Non-linear effects of tax changes on output: The role of the initial level of taxation,"estimated tax multipliers using (i) a novel dataset on value-added taxes for 51 countries (21 industrial and 30 developing) for the period 1970-2014, and (ii) the so-called narrative approach developed by Romer and Romer (2010) to properly identify exogenous tax changes. The main finding is that, in line with existing theoretical distortionary and disincentive-based arguments, the effect of tax changes on output is highly non-linear. The tax multiplier is essentially zero under relatively low/moderate initial tax rate levels and more negative as the initial tax rate and the size of the change in the tax rate increase. This companion paper first shows that these findings have important policy implications, given that the initial level of taxes varies greatly across countries and thus so will the potential output effect of changing tax rates. The paper then turns to some specific policy applications. It focuses on the relevance of the arguments for revenue mobilization in countries with low levels of provision of public goods and social and infrastructure gaps, as well as in commodity-dependent countries. The paper then considers some practical implications for the standard debt sustainability analysis. Lastly, it evaluates the implications of the findings for the Laffer curve.
    Keywords: Macro-Fiscal Policy,Taxation&Subsidies,Economic Adjustment and Lending,Mining&Extractive Industry (Non-Energy),Commodity Risk Management,Public Finance Decentralization and Poverty Reduction,Public Financial Management,Public Sector Economics,Industrial Economics,Economic Theory&Research,Economic Growth
    Date: 2019–01–28
  2. By: Pietro Battiston; Simona Gamba; Alessandro Santoro
    Abstract: Tax authorities around the world are increasingly employing data mining and machine learning algorithms to predict individual behaviours. Although the traditional literature on optimal tax administration provides useful tools for ex-post evaluation of policies, it disregards the problem of which taxpayers to target. This study identifies and characterises a loss function that assigns a social cost to any prediction-based policy. We define such measure as the difference between the social welfare of a given policy and that of an ideal policy unaffected by prediction errors. We show how this loss function shares a relationship with the receiver operating characteristic curve, a standard statistical tool used to evaluate prediction performance. Subsequently, we apply our measure to predict inaccurate tax returns issued by self-employed and sole proprietorships in Italy. In our application, a random forest model provides the best prediction: we show how it can be interpreted using measures of variable importance developed in the machine learning literature.
    Keywords: policy prediction problems, tax behaviour, big data, machine learning
    JEL: H26 H32 C53
    Date: 2020–03
  3. By: Tomoyuki Nakajima (Faculty of Economics, University of Tokyo); Shuhei Takahashi (Institute of Economic Research, Kyoto University)
    Abstract: Previous analyses suggest that a government can finance its expenditure by only using its asset income without taxes in the long run. We show that uninsured idiosyncratic earnings risk may overturn this result. In an Aiyagari-type model, we theoretically show that increasing government assets eventually decreases the interest rate below zero, suggesting an upper bound on government asset income. Hence, when government expenditure exceeds a threshold, there exists no zero-tax steady-state equilibrium, and the zero-tax policy is infeasible. Quantitatively, a government can raise small revenues without taxes. Increasing government assets may also generate rational asset price bubbles.
    Keywords: Government assets, Equilibrium existence, Zero taxes, Bubbles, Incomplete markets, Heterogeneous agents
    JEL: D52 E62 H63
    Date: 2020–03
  4. By: Santos, Mariana
    Abstract: Fiscal multipliers depend on several structural characteristics of each economy. In this work project it is argued that labor income tax progressivity lowers fiscal multipliers of fiscal consolidation programs. By calibrating a model with incomplete-markets and overlapping generations for the United States, for different values of the labor income tax progressivity, it is shown that as progressivity increases, the recessionary impacts of fiscal consolidation programs are lower in the case of consolidation through decrease of government spending and are more recessionary in the case of consolidation financed with tax hikes. The first case is explained through the positive relationship between labor tax progressvity and the percentage of borrowing constrained agents in the economy. In the second case the results are linked to the distortionary effects in the economy of increasing tax progressivity.
    Keywords: Fiscal Multipliers; Labor Income Tax Progressivity; Government Spending; Taxation
    JEL: H30
    Date: 2020–01–06
  5. By: Renaud Bourlès (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Michael Dorsch (CEU - Central European University); Paul Maarek (LEMMA - Laboratoire d'économie mathématique et de microéconomie appliquée - UP2 - Université Panthéon-Assas - Sorbonne Universités)
    Abstract: After‐tax income inequality has risen since the mid‐1990s, as increases in market income inequality have not been offset by greater fiscal redistribution. We argue that the substantial increase in the diversity of consumer goods has mitigated mounting political pressures for redistribution. Within a probabilistic voting framework, we demonstrate that if the share of diversified goods in the consumption bundle increases sufficiently with income, then an increase in goods diversity can reduce the political equilibrium tax rate. Focusing on OECD countries, we find empirical support for both the model's micro‐political foundations and the implied relation between goods diversity and fiscal policy outcomes.
    Keywords: Redistribution,Probabilistic voting,Variety,Non-homothetic preferences,Panel data
    Date: 2019–07
  6. By: Nóbrega, Valter
    Abstract: In this paper, we look at the relationship between Investment Specific Technological Change (ISTC) and optimal level of labor income progressivity. We develop an incomplete markets overlapping generations model that matches relevant features of the US economy and find that the observed drop in the relative price of investment since the 1980's leads optimal progressivity to increase. This result hinges on ISTC increasing the wage premium through an increase in the variance of the permanent component of labor income. This result is supported by recent findings in the literature that highlight the increasing role of the permanent component of labor income in the observed increase in income inequality.
    Keywords: Optimal taxation; Technological Change; Income Inequality
    JEL: E21 H21 J0
    Date: 2020–01–22
  7. By: Emile Cammeraat; Ernesto Crivelli
    Abstract: This paper evaluates elements of a comprehensive reform of the Italian tax system. Reform options are guided by the principles of reducing complexity, broadening the tax base, and lowering marginal tax rates, especially the tax burden on labor income. The revenue and distributional implications of personal income and property tax reforms are assessed with EUROMOD, while a microsimulation model is developed to evaluate VAT reform options. Simulations suggest that a substantial reduction in the tax burden on labor income can be obtained with a revenue-neutral base-broadening reform that streamlines tax expenditures and updates the property valuation system. In addition, a comprehensive reform would benefit low- and middle-income households the most, by lowering significantly their overall current tax liability, which results in increased progressivity of the tax system.
    Date: 2020–02–21
  8. By: Anderson, D. Mark (Montana State University); Matsuzawa, Kyutaro (San Diego State University); Sabia, Joseph J. (San Diego State University)
    Abstract: The spillover effect of cigarette taxes on youth marijuana use has been the subject of intense public debate. Opponents of cigarette taxes warn that tax hikes will cause youths to substitute toward marijuana. On the other hand, public health experts often claim that because tobacco is a "gateway" drug, higher cigarette taxes will deter youth marijuana use. Using data from the National and State Youth Risk Behavior Surveys (YRBS) for the period 1991-2017, we explore the relationship between state excise taxes on cigarettes and teen marijuana use. In general, our results fail to support either of the above hypotheses. Rather, we find little evidence to suggest that teen marijuana use is sensitive to changes in the state cigarette tax. This null result holds for the sample period where cigarette taxes are observed to have the largest effect on teen cigarette use and across a number of demographic groups in the data. Finally, we find preliminary evidence that the recent adoption of state e-cigarette taxes is associated with a reduction in youth marijuana use.
    Keywords: cigarette taxes, teen marijuana use, e-cigarette taxes, youth risky behavior
    JEL: I12 I18 K42
    Date: 2020–02

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