nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒06‒08
twelve papers chosen by
Thomas Andrén

  1. Entrepreneurship, Agency Frictions and Redistributive Capital Taxation By Corina Boar; Matthew Knowles
  2. Discrete Labor Supply: Empirical Evidence and Implications By Kosonen, Tuomas; Matikka, Tuomas
  3. The Impacts of Profit-Based Royalties in Early-Stage Mineral Exploration By Emilio Castillo
  4. Financial Disincentives to Formal Employment and Tax-Benefit Systems in Latin America By Deza Delgado, María Cecilia; Jara Tamayo, Holguer Xavier; Oliva, Nicolás; Torres, Javier
  5. Special Pensions in the EU By Per Eckefeldt; Anda Pătărău
  6. A comparable series of Tax Revenue Foregone By Khera, Reetika; Somanchi, Anmol
  7. Who knows whom we pay taxes to? Tax visibility in a decentralized country: The case of Spain By Julio López-Laborda; Fernando Rodrigo; Eduardo Sanz-Arcega
  8. On tax competition, international migration,and occupational choice By Yutao Han; Patrice Pieretti
  9. The Effect of Changes in Alcohol Tax Differentials on Alcohol Consumption By Gehrsitz, Markus; Saffer, Henry; Grossman, Michael
  10. Do Welfare State Taxes and Transfers Reduce Gender Income Inequality? Evidence from Eight European Countries By Avram, Silvia; Popova, Daria
  11. Does Labor Income React more to Income Tax or Means-Tested Benefit Reforms? By Michaël Sicsic
  12. Unemployment insurance, Recalls and Experience Rating By Julien Albertini; Xavier Fairise; Anthony Terriau

  1. By: Corina Boar (New York University); Matthew Knowles (University of St Andrews)
    Abstract: We study optimal capital taxation in a model with financial frictions, where the distribution of wealth across heterogeneous entrepreneurs affects how efficiently capital is used in the economy. The government sets linear taxes on wealth, consumption, capital and labor income to maximize the steady state welfare of workers, who own no wealth. In our setting, capital income taxes are particularly costly, because these taxes lead to a more inefficient allocation of capital and, ultimately, lower aggregate total factor productivity. We model financial frictions as arising endogenously as a result of an asymmetric information problem and find that the tightness of financial frictions is affected by tax rates. In our setting, optimal tax rates can be written as simple closed-form functions of pre-tax prices and parameters. We find that the optimal total tax burden on entrepreneurs should be zero, even though the government cares only about workers’ welfare.
    Keywords: Optimal Taxation, Capital Taxation, Entrepreneurship, Financial Frictions
    JEL: E44 H21 D31 D82
    Date: 2020–05–27
  2. By: Kosonen, Tuomas; Matikka, Tuomas
    Abstract: We provide novel evidence of discrete labor supply responses to tax incentives and study the broader implications of discrete rather than continuous labor supply. We utilize an income notch and a reform that shifted the location of the notch in order to study the labor supply mechanisms. We find transparent evidence of discrete labor supply responses, revealing that wage earners even in the part-time labor market can face significant restrictions in their available labor supply choices. As an implication of discrete labor supply, we show that the conventional differencesin-differences and bunching elasticity estimates can be downward-biased when labor supply is discrete.
    Keywords: labor supply, discrete choices, tax elasticity, Social security, taxation and inequality, Labour markets and education, H21, H24, J22,
    Date: 2020
  3. By: Emilio Castillo (Division of Economics and Business, Colorado School of Mines)
    Abstract: The impact of public policy on the mineral industries is difficult to measure due to little short-term responsiveness to policy changes by companies already investing in known fixed deposits. Nevertheless, early-stage (or grassroots) exploration has been suggested to provide early signals. Among mineral policies, taxation has received plenty of attention in theoretical analysis and simulation studies, but little empirical evaluation. Royalties should affect early-stage exploration by decreasing the expected value of a discovered deposit. The empirical approach here uses a difference-in-difference strategy, analyzing the Chilean mining royalty changes of 2004 and 2010. The first tax change is argued to be exogenous as it happened due to the political cycle and before a major increase in commodity prices and the later modification occurred as a result of a major earthquake. Results indicate a surprisingly small average impact on grassroots exploration. However, the effect is clearly heterogeneous as smaller companies decreased their budget and were more likely to leave the country than larger companies. Results are robust to the specification as the average and heterogeneous effects are confirmed by a synthetic control evaluation. The absence of geographical spillovers not only supports these estimated effects but also suggests that neighboring countries do not need to engage in harmful tax competition.
    Keywords: mineral policy, mineral exploration, mining taxation, royalties
    JEL: L72 Q32 Q38
    Date: 2020–05
  4. By: Deza Delgado, María Cecilia; Jara Tamayo, Holguer Xavier; Oliva, Nicolás; Torres, Javier
    Abstract: The aim of this paper is twofold. First, it provides a comprehensive assessment of the financial cost informal workers would incur if they entered formal employment in five Latin American countries: Bolivia, Colombia, Ecuador, Peru, and Venezuela. Then, it analyzes the extent to which formalizing informal workers would contribute to increase fiscal capacity. Our results show a wide variation in formalization tax rates ranging between 8.5 percent in Venezuela and 65 percent in Colombia. Formalization costs are particularly high for self-employed informal workers, and mainly driven by the burden associated to social insurance contribution payments. Interestingly, potential formalization of informal workers with the highest probability of being formal would allow capturing a substantial share of the additional tax revenue lost due to informality and would reduce inequality. The comparative analysis highlights the possibility of adopting strategies to reduce the financial burden to formalization of certain population groups in the region.
    Date: 2020–05–18
  5. By: Per Eckefeldt; Anda Pătărău
    Abstract: Most EU countries have special pensions, alongside their general pension systems. Generally, special pensions are granted to beneficiaries with a special status, such as state employees of all branches of government (legislative, executive, judiciary), security and defence forces, including some civil professions, and people that work under difficult conditions. In most countries, special pensions were introduced long ago. Hallmarks of special pensions usually include a lower retirement age, contributory periods counted more favourably, or higher benefits. However, recent national reforms indicate that such preferential schemes are being phased out, especially in the case of security and defence workers and state employees. This raises questions on the rationale for continuing with special pension schemes in the future. On the one hand, certain special pension categories seem justified, such as those involving occupational risks that can harm workers’ health and safety. This includes people working under difficult conditions and professions for which physical condition is crucial for carrying out one’s duties, such as security and defence forces, civil aviation or air traffic controllers. However, compensation for these categories of workers could take the form of higher wages and/or employers’ contribution rates, rather than pensions, as these factors would automatically lead to higher pension benefits. On the other hand, special pensions for state employees and employees of (former) state-owned enterprises are more controversial in terms of social equity and administrative efficiency. The remaining categories of special pensions fall somewhere in between. Even when compensation for some groups experiencing negative externalities or inequalities appears justified, special pensions may not necessarily be the most suitable form of social transfer.
    JEL: H55 J1 J18 J26
    Date: 2020–04
  6. By: Khera, Reetika; Somanchi, Anmol
    Abstract: The estimate of tax revenue foregone by the government crashed in 2015-16 after steadily rising over the previous decade. This was, however, on account of substantive methodological revisions rendering the estimates incomparable across years. Reconstructing the series accounting for these revisions reveals that the crash entirely disappears. In absolute nominal terms, the tax revenues foregone have not increased and the share of direct revenues foregone (in the total) has increased. With significant changes to the overall tax architecture (e.g., the move from VAT to GST), it is unclear how useful the current method of calculating the tax revenue foregone series remains for an assessment of tax expenditures or latent fiscal space.
    Date: 2020–05–19
  7. By: Julio López-Laborda; Fernando Rodrigo; Eduardo Sanz-Arcega
    Abstract: A necessary condition for the efficiency gains that the theory of fiscal federalism assigns to decentralization to be effective is that citizens know the costs and benefits of public action. However, surveys show that most Spaniards are unable to correctly identify the taxes received by the various levels of government. Exploiting the 2015 wave of the Spanish Institute for Fiscal Studies’ Fiscal Barometer, this paper empirically determines the profile of citizens who are best able to identify the allocation of taxes among levels of government. On the basis of these characteristics, the paper proposes a number of recommendations to improve citizens' fiscal visibility: a better definition and simplification of the allocation of expenditure powers between levels of government, strengthening of regional tax powers, highlighting the link between taxes and expenditure, and improvement of the population's educational level.
    Date: 2020–05
  8. By: Yutao Han (University of International Business and Economics, Beijing, CH); Patrice Pieretti (Department of Economics and Management, Université du Luxembourg)
    Abstract: The aim of the paper is to analyze tax competition with inter- nationally mobile individuals who make occupational choices. Two types of migration are distinguished, namely entrepreneur and worker migration. When the competing jurisdictions put a sufficiently high valuation on public good expenditures, entrepreneurship migration increases joint welfare relative to autarky. However, in case of labor migration, tax competition can decrease joint welfare independently of how much the jurisdictions value public expenditures.
    Keywords: migration, tax competition, occupational choice, social Welfare
    JEL: F22 H24 H73 J24 J61
    Date: 2020
  9. By: Gehrsitz, Markus (University of Strathclyde); Saffer, Henry (National Bureau of Economic Research); Grossman, Michael (CUNY Graduate Center)
    Abstract: We show that tax-induced increases in alcohol prices can lead to substantial substitution and avoidance behavior that limits reductions in alcohol consumption. Causal estimates are derived from a natural experiment in Illinois where spirits and wine taxes were raised sharply and unexpectedly in 2009. Beer taxes were increased by only a trivial amount. We construct representative and consistent measures of alcohol prices and sales from scanner data collected for hundreds of products in several thousand stores across the US. Using several difference-in-differences models, we show that alcohol excise taxes are instantly over-shifted by a factor of up to 1.5. Consumers react by switching to less expensive products and increase purchases of low-tax alcoholic beverages, thus all but offsetting any moderate, tax-induced reductions in total ethanol consumption. Our study highlights the importance of tax-induced substitution, the implications of differential tax increases by beverage group and the impacts on public health of alternative types of tax hikes whose main aims are to increase revenue.
    Keywords: health, alcohol, excise taxes, sin taxes, externalities, difference-in-differences
    JEL: I12 H21 D12 D62
    Date: 2020–04
  10. By: Avram, Silvia; Popova, Daria
    Abstract: We complement the institutional literature on gender and the welfare state by examining how taxes and transfers affect the incomes of men and women. Using microsimulation and intra-household income splitting rules, we measure the differences in the level and composition of individual disposable incomes of men and women in eight European countries covering various welfare regime types. We quantify the extent to which taxes and transfers are able to close the gender gap in earnings, as well as which policy instruments contribute most to reducing the gap. We find that with the exception of old-age pensions, taxes and transfers – both contributory and means-tested – significantly reduce gender income inequality but cannot compensate for high gender earnings gaps. The equalizing effect of benefits is higher than that of taxes but varies significantly not only across countries but also across groups with different demographic characteristics.
    Date: 2020–05–28
  11. By: Michaël Sicsic
    Date: 2020
  12. By: Julien Albertini (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Xavier Fairise (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université); Anthony Terriau (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université)
    Abstract: In the US, almost half of unemployment spells end through recall. In this paper, we show that the probability of being recalled is much higher among unemployment benefit recipients than nonrecipients. We argue that a large part of the observed difference in recall shares is accounted for by the design of the unemployment insurance financing scheme characterized by an experience rating system. We develop a search and matching model with different unemployment insurance status, endogenous separations, recalls and new hires. We quantify what would have been the labor market under alternative financing scheme. In the absence of the experience rating, the hiring and separations would have been higher in the long run and more volatile. Experience rating system contributes significantly to the difference in recalls between the recipients and the nonrecipients.
    Keywords: Search and matching,Layoffs,Recalls,Experience rating,Unemployment insurance
    Date: 2020

This nep-pbe issue is ©2020 by Thomas Andrén. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.