nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒05‒04
ten papers chosen by
Thomas Andrén

  1. Estimating the elasticity of taxable income when earnings responses are sluggish By Trine Engh Vattø
  2. The effectiveness of social protection for long-term care in old age: Is social protection reducing the risk of poverty associated with care needs? By Tiago Cravo Oliveira Hashiguchi; Ana Llena-Nozal
  3. The marginal (opportunity) cost of public funds By Geir H. M. Bjertnæs
  4. Redistribution with Performance Pay By Pawel Doligalski; Abdoulaye Ndiaye; Nicolas Werquin
  5. The Ability Gradient in Bunching By Waldenström, Daniel; Bastani, Spencer
  6. Effects of Gentrification on Homeowners: Evidence from a Natural Experiment By Lei Ding; Jackelyn Hwang
  7. Neither Punishments nor Rewards: Fostering Tax Compliance through the Rawlsian Veil of Ignorance in a Laboratory Experiment By Klaudijo Klaser; Luigi Mittone
  8. Evaluating the Success of President Johnson's War on Poverty: Revisiting the Historical Record Using a Full-Income Poverty Measure By Richard V. Burkhauser; Kevin C. Corinth; James Elwell; Jeff Larrimore
  9. Real Estate Taxes and Home Value: Winners and Losers of TCJA By Wenli Li; Edison Yu
  10. A myth of soft budget constraints in socialist economies By Popov, Vladimir

  1. By: Trine Engh Vattø (Statistics Norway)
    Abstract: Estimates of the elasticity of taxable income (ETI) is conventionally obtained by “stacking” three-year overlapping differences in the estimation. In effect, this means that the ETI estimate is an average of first-, second-, and third-year effects. The present paper draws attention to this implication and suggests that if there is gradual adjustment the analyst should rather estimate the ETI by a dynamic panel data model. When using Norwegian income tax return data for wage earners over a 14-year period (1995−2008) in the estimation, an ETI estimate of 0.15 is obtained from the dynamic specification, compared to 0.11 for the conventional approach. Importantly, the conventional approach fails to render a long-term elasticity estimate by increasing the time span of each difference.
    Keywords: elasticity of taxable income; time frame; tax reform; earnings dynamics
    JEL: H24 H31 J22
    Date: 2020–04
  2. By: Tiago Cravo Oliveira Hashiguchi (OECD); Ana Llena-Nozal (OECD)
    Abstract: As people grow old and their health deteriorates, they are likely to require help with everyday activities that were once second nature; they need what is commonly termed long-term care (LTC). With demand for LTC in old age expected to grow, OECD countries face significant challenges in balancing financial sustainability with the provision of effective social protection against the financial risks associated with developing LTC needs – the cost of care can far exceed median incomes and its duration can be many years. This report provides a novel set of comprehensive and internationally comparable estimates of the adequacy, equity and efficiency of public social protection systems for LTC in old age in OECD countries and EU Member States. Using a set of “typical cases” of LTC need to ensure comparability, including different levels of severity and different ways in which needs can be met, this report shows cross-country and regional variations in the total costs of LTC services, the degree of public coverage, the out-of-pocket costs that care recipients face, and the associated poverty risks. The quantitative results are discussed in the context of how different countries design LTC benefits and schemes, including cost-sharing mechanisms. Finally, to illustrate the policy relevance of the analyses, the distributive effects of actual and hypothetical policy scenarios are simulated, including an international free personal care policy, and possible reforms in Ireland and England.
    JEL: H53 H75 I31 I38
    Date: 2020–04–28
  3. By: Geir H. M. Bjertnæs (Statistics Norway)
    Abstract: Several studies show cases where the Samuelson rule holds, or where the marginal cost of public funds (MCF) equals one within optimized tax systems. The conditions for the original Samuelson rule to hold in these studies are quite restrictive, and MCF measures employed are not consistent with MCF measures employed within real-world cost-benefit tests. The aim of the present study is to remove such restrictive conditions, and to construct a MCF measure designed for real-world costbenefit tests. The study shows that such a MCF exceeds one within optimized tax systems. Hence, the optimal supply of public goods is below the supply obtained by the Samuelson rule. The study further shows that income taxation below optimum requires an even higher MCF to prevent that public goods provision crowd out social security transfers with a higher marginal welfare gain
    Keywords: Marginal cost of public funds; The Samuelson rule; Optimal taxation; Social security transfers
    JEL: H21 H23 H41
    Date: 2020–04
  4. By: Pawel Doligalski; Abdoulaye Ndiaye; Nicolas Werquin
    Abstract: Half of the jobs in the U.S. feature pay-for-performance. We study nonlinear in- come taxation in a model where such contracts arise in private labor markets that are constrained by moral hazard frictions. We derive novel formulas for the incidence of arbitrarily nonlinear reforms of any given tax code on both the mean of earnings and their sensitivity to performance. We show theoretically and quantitatively that, follow- ing an increase in tax progressivity, the higher performance-sensitivity caused by the crowding-out of insurance provided by firms is almost fully offset by a countervailing "performance-pay effect" driven by labor supply responses. As a result, earnings risk is hardly affected by policy. We then turn to the normative analysis of a government that levies taxes and transfers to redistribute income across workers with different lev- els of uninsurable productivity. We find that setting taxes without accounting for the endogeneity of private insurance is close to optimal. Thus, the common concern that standard models of taxation underestimate the cost of redistribution is, in the context of performance-based compensation, overblown.
    Date: 2020–04–27
  5. By: Waldenström, Daniel (Research Institute of Industrial Economics (IFN)); Bastani, Spencer (Department of Economics and Statistics)
    Abstract: We analyze the relationship between cognitive ability and bunching in the context of a large and salient kink point of the Swedish income tax schedule. Using population-wide register data from the Swedish military enlistment and administrative tax records, we find that high-ability individuals bunch more than low-ability individuals. This ability gradient is stronger for the self-employed, but is also present among wage earners. We also use high-school GPA and math grades to analyze gender differences, finding a stronger ability gradient among men.
    Keywords: Bunching; Ability; Skills; Complexity; Optimal Taxation
    JEL: H21 H24 J22 J24
    Date: 2020–04–22
  6. By: Lei Ding; Jackelyn Hwang
    Abstract: A major overhaul of the property tax system in 2013 in the city of Philadelphia has generated significant variations in the amount of property taxes across properties. This exogenous policy shock provides a unique opportunity to identify the causal effects of gentrification, which is often accompanied by increased property values, on homeowners’ tax payment behavior and residential mobility. The analysis, based on a difference-in-differences framework, suggests that gentrification leads to a higher risk of delinquency on homeowners’ tax bills on average, but there was no sign of a large-scale departure of elderly or long-term homeowners in gentrifying neighborhoods within five years after adoption of the new policy. While tax delinquencies were somewhat inflated by appeals for reassessments, programs designed to provide tax relief for long-term homeowners help mitigate the risk of tax delinquencies and displacement. Findings from this study help researchers, policymakers, and practitioners better understand the mechanisms through which gentrification may impact long-term homeowners and the effectiveness of policies to mitigate these tax burdens and displacement.
    Keywords: property tax; tax delinquency; residential mobility; gentrification
    JEL: R51 H31 H20 H71
    Date: 2020–04–16
  7. By: Klaudijo Klaser; Luigi Mittone
    Abstract: It is well known that different deterministic mechanisms (like formal audits and material punishments) can stem free riding behaviour in social dilemmas. The behaviouralist literature identified then several other environmental and psychological variables which can influence agents’ attitude to cooperate. By means of a repeated tax compliance game run in an experimental laboratory, our study measures the effects of a Rawlsian veil of ignorance on cooperation over time. In particular we found that in our experimental design the (laboratory) veil of ignorance has an effect both on the ex-ante distribution of votes concerning the adoption of a specific tax regime and on the ex-post tax compliance level between treatments, but not on compliance across rounds, which shows to be decreasing.
    Keywords: Experimental Economics, Inequality, John Rawls, Tax Compliance, Veil of Ignorance
    JEL: D63 C91 H26
    Date: 2020
  8. By: Richard V. Burkhauser; Kevin C. Corinth; James Elwell; Jeff Larrimore
    Abstract: We evaluate progress in President's Johnson's War on Poverty. We do so relative to the scientifically arbitrary but policy relevant 20 percent baseline poverty rate he established for 1963. No existing poverty measure fully captures poverty reductions based on the standard that President Johnson set. To fill this gap, we develop a Full-income Poverty Measure with thresholds set to match the 1963 Official Poverty Rate. We include cash income, taxes, and major in-kind transfers and update poverty thresholds for inflation annually. While the Official Poverty Rate fell from 19.5 percent in 1963 to 12.3 percent in 2017, our Full-income Poverty Rate based on President Johnson's standards fell from 19.5 percent to 2.3 percent over that period. Today, almost all Americans have income above the inflation-adjusted thresholds established in the 1960s. Although expectations for minimum living standards evolve, this suggests substantial progress combatting absolute poverty since the War on Poverty began.
    Keywords: Tax credits; In-kind transfers; Poverty; Income measurement
    JEL: D31 H24 I32 J30
    Date: 2020–01–31
  9. By: Wenli Li; Edison Yu
    Abstract: In this paper, we examine the impact of changes in the federal tax treatment of local property taxes stemming from the implementation of the Tax Cuts and Jobs Act (TCJA) in January 2018 on local housing markets. Using county-level house price information and IRS tax data, we find that capping the federal tax deduction of real estate taxes at $10,000 has caused the growth rate of home value to decline by an annualized 0.8 percentage point, or 15 percent, in areas where real estate taxes as shares of taxable income exceeded the national median. Additionally, these areas with a high real estate tax burden suffered from reductions in market liquidity after the reform. Fewer houses were transacted either in absolute numbers or as shares of total listings, houses stayed on the market longer before being sold, and more houses were listed with price cuts. Importantly, we find that the housing market slowdown was accompanied by declines in local construction employment growth as well as multi-family building permits. Furthermore, on net more people moved out of these areas after the reform. Finally, we show that the act has already had political consequences. In the 2018 midterm Senate elections, more voters voted for Democratic candidates in areas with high real estate tax burden than they did for Republican candidates.
    Keywords: real estate tax; home value; housing liquidity
    JEL: G1 R2 R0
    Date: 2020–04–01
  10. By: Popov, Vladimir
    Abstract: Most of the time the budget constraints in the socialist economies were harder than in developing countries and no less hard than in developed countries. The soft budget constraints (SBC) in socialist economies were not pervasive, as most authors believe, but selective, i.e. involved subsidization of some enterprises/industries at the expense of the other. This type of selective subsidization is a classic case of industrial policy: it may be good or bad, leading to success (China, Vietnam) or failure (USSR, Eastern Europe), but cannot be regarded as an intrinsic feature of the socialist centrally planned economy and an example of pervasive SBC. Pervasive SBC should be associated with permanent government budget deficit, debt accumulation, high inflation and other forms of macroeconomic populism. In the Soviet Union in the post-war period (after the monetary reform of 1947 and until the Gorbachev financial and monetary expansion that started in 1987) budget deficit and debt were very low, open and hidden inflation was less than several percent a year – a better record than in most Western countries. But in the 1990s in Russia, other former Soviet republics and most East European countries budget constraints were weakened dramatically and inflation increased to hundreds and thousands percent a year. SBC is just one type of this populist macroeconomic policy that was rare in socialist countries, but is found in abundance in many developing countries (especially Latin America and Sub-Sahara Africa) and transition economies (especially FSU states).
    Keywords: Soft budget constraints, socialist economies, industrial policy
    JEL: H60 O25 P34 P35 P40 P43
    Date: 2020–04–21

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